Question

In the RAND study, two plans had full coverage for spending within the hospital, but one had a $150 deductible for ambulatory care. The plan with the ambulatory care deductible had a lower probability of hospital admission (0.115) per year than did the plan with full coverage for everything (0.128), even though both plans fully covered hospital care.

a. Based on this result, are hospital care and ambulatory care substitutes or compliments? Do they have a positive or negative cross-price elasticity? Use the definitions of substitutes and compliments to explain how you know.

b. Considering just this result, what can we say about the impact of an ambulatory care deductible on total combined spending on ambulatory and hospital care? Please explain.

Answer 1

(a). The RAND study tested whether hospital and ambulatory care are complementary or substituted goods. First to evaluate this point we should know about the difference between complementary or substitute goods.

In economics, complementary goods are those goods which completes the demand for each other . For example - car and petro. Car cannot be used without petrol and similarly petrol is useless without car.

Substitute goods are those goods which can be replaced by each other or which can be used in place of other are called substitute goods. For example - tea and coffee. Tea can be replaced by coffee and similarly tea can be used in place of coffee.

Hospital care and ambulatory care are complements because their are typically consumed together. They have negative cross price elasticity of demand as if the price of ambulatory care increases the demand for hospital care decreases and if the price of ambulatory care decreases the demand for hospital care increases.

(b). Raising cost sharing for ambulatory care among elderly patients may have adverse health consequences and may increase total spending on health care. Considering this , we can say that the ambulatory care costs high to patients and increase the total combined spending on health care and ambulatory care.