Permission from JPGSPH

CoE-UHC

Nahid Akhter Jahan

Director Institute of Health Economics

University of Dhaka

7 June 2013

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Health Health can be defined in many different ways. Usually

health is defined simply as the lack of illness in terms of physical and mental disorders. World Health Organization defines health as “a state of complete physical, mental and social well-being and not merely the absence of disease and infirmity” [WHO(1947)].

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Healthcare Health care is one of many determinants of health

and, from an economic perspective it is simply an input into the production of health. Health care is generally defined to encompass those goods and services whose primary purpose is to improve or prevent deterioration in health.

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Demand for Health Care

In economics, demand is the desire to own anything, the ability to pay for it, and the willingness to pay.

Health care is one of many determinants of health and, from an economic perspective it is simply an input into the production of health.

Demand for health care is derived demand (for health).

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The Consumer’s Equilibrium The depiction of consumer choice requires two

elements:

The consumer’s preferences-described by a set of indifference curve.

The consumer’s budget constraint- described by the straight budget line.

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The consumer’s equilibrium is at point E, a point tangency between the highest indifference curve attainable and the budget line.

Physician visits

Other

goods

E

Indifference curve

Budget line

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Derivation of the Demand Curve Other goods

Price of visits

Visits Visits

P1

P2

P3

V1 V2 V3

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Demand Curve

The demand curve shows the relationship between the price of a good or service and the quantity demanded of that good or service.

Price and quantity demanded are inversely related

Changes in price – movement along the curve

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Determinants of demand for health care

• Income • Price of related commodities

– price of complementary commodities (example: penicillin and syringes)

– Price of substitutes (example: post operative recuperation time in the hospital versus home care)

• Health status • Educational level • Age • Gender • Awareness • Travel time and travel cost

Shift in Demand

D’’ D D’

Physician visits

Physician

Fee

Price Elasticity of Demand for Health Care

The concept used to measure quantity (Q) responsiveness to direct price (P) changes is the concept of price elasticity of demand.

pricein change percentage

demandedquantity in change percentage demand of elasticity Price

The Relationship between the Price Elasticity of Demand and Total Expenditure (PxQ)

When demand is price elastic: For small increases in price total expenditure will fall.

When price elasticity is 1 (unitary elastic): For small changes in price total expenditure will remain constant.

When demand is price inelastic: For small increases in price total expenditure will rise.

Implications for Pricing Policy Revenue generation through price increase depends on

the price elasticity of demand

Due to scarcity of resources the developing countries are experimenting with various cost recovery schemes. Success of these cost recovery schemes is largely influenced by the consumer’s behaviour – the demand curve and its elasticity.

Need and Demand for Health Care In analyzing the demand for health care, it is

important to take account the concept of need.

The health policies in most countries aim for utilization of health services according to need, rather than demand –

Equity in health

Equity in access

Equity in financing

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Need for Health Care Experts define need as capacity to benefit, which

means the capacity for a client to benefit from health care.

Individual’s perception about needs depend on their knowledge of health and health care, and their expectations about the health status.

In practice, there might be need where there is no demand. If health services respond only to demand, there will be unmet need.

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Need and Demand for Health Care

Utilization of Health Care

Price

O A

C

D

D

D’

N

D’

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B

Steps towards Universal Health Coverage

Increasing demand for health care

Conditional cash transfer/voucher schemes

Improvement in quality of care

Health education/awareness program

Reducing travel time/travel cost

Reducing need for health care

Preventive program

Healthy life style

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The Agency Relationship

An agency relationship is formed whenever a principal delegates decision-making authority to another party, the agent. In the physician-patient relationship, the patient (principal) delegates authority to the physician (agent). The perfect agent physician chooses the health services as the patient himself would choose if only the patient possessed the information that the physician does.

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Imperfect Agency and Supplier-Induced Demand (SID)

Supplier-induced demand (SID) refers to the phenomenon of physicians deviating from their agency responsibilities to provide care for their self-interests rather than their patient interests. SID represents one of the major intellectual and policy controversies in health economics.

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Reinhardt Fee Test of Inducement

Q1 Q2 Q3 Q4

P4

P1

P3

P2

Utilization of Healthcare

Price of Healthcare

D1

D2

D3 S1

S2

Arguments for SID

SID is supported by three well-documented phenomenon (Folland et al.1997):

Attempts to impose physician fee controls have often led to increases in utilization.

Wide geographic variations in utilization, in part, due to inducement.

Evidences show that physician’s clinical decisions can be influenced by financial incentives.

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References: Philip Jacobs (1991), The Economics of Health and

Medical Care. Third Edition, Aspen Publishers Inc.

S. Folland, A.C. Goodman and M. Stano (2000), The Economics of health and health Care, Macmillan, 3rd edn.