Question

Q2. Identify a recent study in the literature which has investigated the impact of income on the demand for health care? 2.1. Give the full reference for your chosen study. 2.2. Write a short paragraph (3-4 sentences) to summarize how income is correlated with the demand for health care?

Answer 1

The report reviews the health economic research conducted at RAND and elsewhere in an effort to summarize what this research has to say about the elasticity of demand for health care and to consider how this set of results applies to the problem of estimating the demand for health care that is provided by the Department of Defense to military members, their families, and retirees.

THE ELASTICITY OF DEMAND FOR HEALTH CARE SERVICES:
There is an extensive literature in economics that seeks to estimate the elasticity of demand for health care services. Although many of the studies that will be discussed in this section also estimate elasticities for specific services, we choose to focus only on the elasticity of demand for health care services more generally at this point.

:-Methodologies Used in the Literature:
The ideal empirical data for estimating the elasticity of demand for health care would include detailed information on personal characteristics, use of medical services, and the effective price paid for an additional unit of health care. The second category of studies of the elasticity of demand for health care is quasi-experiments. These studies are similar to experiments in that there are treatments and outcome measures; however, in quasi-experiments individuals are not randomly assigned to treatment and control groups The final category in the literature is observational studies of the elasticity of demand for health care. These studies are often based on survey or administrative data. In such cases, econometric models are used to estimate the demand for health care. The effect of price on the demand for health services is identified from the variation in price across health plans and over time.

:-Income Elasticity of Demand for Health Care:
Although there is a wide literature on the income elasticity of demand, we have chosen to provide only a brief summary of the key findings. For the purposes of considering policy changes, income is an important variable, but it cannot be easily manipulated. Theoretically, the effect of income on the demand for health care should be small, if not zero, under full insurance. If consumers have access to free care, changes in income should not affect their ability to obtain medical services. The empirical estimates in the literature are consistent with theory.

A. HEALTH INSURANCE:
Most early studies of income elasticity concluded that it was not significantly different from zero—that is, the demand for health insurance neither rises nor falls significantly with a change in personal or family income, all else being equal.

B. HEALTH CARE SERVICES:
Among consumers who have access to free care, changes in income would not affect their ability to obtain medical services. It follows that, among consumers with full insurance, the income elasticity would be very small, if not zero .

C. SUMMARY:
The consensus of the limited literature estimating the income elasticity of demand for either health insurance or health services is that both are income-inelastic. However, because few studies actually observe an exogenous change in consumers’ levels of income, nearly all studies that estimate income elasticity are based on observational data. These studies suggest that as income increases, the demand for health insurance and health services also increases, but the magnitude of the increase is relatively small: the estimates of income elasticity are consistently in the range of zero 0.2 with respect to health care services, and zero to 0.1 with respect to health insurance.