Demand for Healthcare

Summary:
How do we define Price and Quantity?

Is Demand for Healthcare downward sloping or Vertical?
Rand-HIE Set up
Oregon Medicaid study
Rand-HIE vs Oregon Medicaid study

How to define Price and Quantity?

Measuring Quantity: A quick visit to the doctor's clinic is not equivalent to an overnight stay at the hospital. So, counting both as one unit of healthcare is not appropriate. Researchers handle this difficulty by measuring separate demand curves for different kinds of care.

Measuring Price: Price involved in healthcare is paid by third party such as insurers or government. Co-payment rate are taken as measure of price because it is proportional to the marginal cost (cost of one additional unit) faced by patients.

Is Demand for Healthcare downward sloping or Vertical?

If people care about their health above all, they must be ready to give any price for their healthcare. This means they have rather a vertical demand curve of Healthcare. 

A team of researchers at the Rand corporation led by Heath Economics Joseph Newhouse, in 1971 tried to answer this question through their one of the largest social experiment in the history of science, The Heath Insurance Experiment (HIE). The findings were: The Healthcare elasticity is not zero and the law of Demand holds.

Rand-HIE Set up:

Objectives and Questions:

How does cost sharing or membership in an High Maintenance Organization (HMO) affect use of

health services compared to free care?

How does cost sharing or membership in an High Maintenance Organization (HMO) affect appropriateness and quality of care received?

What are the consequences of health?

For this study, six downtowns in US were taken for survey: Dayton, Ohio, Seattle, Washington, Fitchburg-Leominster and Franklin and the time period taken for the study is 1974- 1982.

2700 families and 7700 individuals, all under the age of 65 were taken into study.

Oregon Medicaid study:

This study compared two groups of low-income adult Oregonians 

A. People who won a 2008 lottery to receive the opportunity to apply for public health insurance coverage through Medicaid and

B. Lottery entrants who did not win and were not given chance to apply for Medicaid.

In effect, this lottery randomly assigned insurance coverage to a subset of winners, Hence, the lottery winners tended to face lower out-of-pocket prices for care.

Rand-HIE vs Oregon Medicaid study:

The Rand-HIE and the Oregon's study are different. They were performed in different populations with different research questions and in different circumstances.

Oregon study focuses on low-income population, unlike Rand-HIE which studies a nationally representative population.

The Rand-HIE used a direct randomization of health insurance coverage, while the Oregon Medicaid experiment relied on randomization scheme that was only indirectly related to insurance coverage.

Rand-HIE's participants had multiple copayment rate, thus varying marginal cost while in Oregon's study, once selected had no marginal cost.

Oregon study included an uninsured group that was in part randomly assigned, while the Rand-HIE did not include any participants who were totally without insurance.

Different research questions and settings were employed even if both can tell us something about the demand for healthcare.