Question

One interesting result from RAND Health Insurance Experiment was that the rate of treated bone fractures per capita was higher in the group of families that had been assigned to the free insurance plan, compared to those in the high cost plan. Please describe how the Grossman model might explain the fact that people facing higher prices for health care would break bones less often.

Answer 1

SOLUTION

GROSSMAN'S MODEL- HEALTH CARE BREAK BONES LESS OFTEN

Grossman's model of health capital is considered a breakthrough in the economics of the derived demand for the medical care. In Grossman's human capital framework individuals demand medical care ( e.g invest time and consume medical goods and services ) for the consumption benefits ( health provides utility) as well as production benefits ( healthy individuals have greater earningns ) that good health provides. The model has been widely employed to explore a variety of phenomena related to health, medical care, inequality in health, the relationship between socio-economic status and health and occupational choice etc.

Yet the Grossman model has also recieved significant criticism. For example, the has been criticized for its simplistic deterministic nature, that is, for not allowing complete health repair for its formulation in which medical investments in health has constant returns which is argued to lean to an unrealistic bang-bang solution. The criticism has also led to the theoritical and empirical extensions of the model, which to a larger extend address the issues identified. However, there is one significant criticism that thus far has not satisfactory been adressed, reject the model's central proposition that the demand for medical care is derived from the demand for good health. " The notion that expenditure on medical care constitutes a demand derived from a underlying demand for health cannot be upheld because health status and demand for medical care are negatively rather than positively related" . Models prediction that the health and medical care should be positively related is consistently rejected by the data.

We then find that the Grossman model predicts a substantially different pattern of medical care over the life-time than previously was assumed. Healthy individuals initially do not demand medical care until their health has deteriorated to a certain thnreshold level given by Grossman's optimum health.