Question

Most developed countries have some form of a national health plan. A number of possible plans have been proposed in the U.S. recently with price tags of upwards of $200 billion per year (depending on the extent of coverage). An important question in choosing among such plans is how their adoption will affect demand (moral hazard). The empirical question is how large the increase in demand might be.

Estimates of the price elasticity of demand for medical services vary with –0.2 to –0.40 being a representative range. A figure in this range might be a starting point in predicting the effect of health insurance on medical demand. Of course, the above figures apply to all medical services and as we know some price elasticities are likely to differ (such as demand for hospital stays v. office visits to physicians). On the other hand, estimates of price elasticities for more discretionary services (dental care, ophthalmologic care, and psychiatric counseling) tend to be higher.

1. Interpret a price elasticity coefficient of –0.2.
2. Does the relatively high price elasticity of demand for some medical services imply that these services are not really "necessary?" Should health care planners use such elasticity estimates as a guide for the kinds of services people really need, or are there important drawbacks to basing such a judgment on people's responses to prices? How would you judge what medical services are really necessary for a person's wellbeing?
3. Isn't the use of demand concepts in the health care field inappropriate since physicians, not by the patient, determine a great deal of medical demand? Is there any reason for physicians to take the price of a service into account when deciding what to prescribe?

Answer 1

a. A price elasticity of -0.2 indicates a relatively inelastic demand for medical services. This implies that additional insurance coverage for this class of medical services would lead to a minor increase in its demand.

Such medical services tend to be for critical health conditions, implying people have to pay for these services with or without insurance to sustain their health. These conditions can range from severe heart disease to diabetes and cancer. Increasing health increase coverage by $200 billion lead to a 20% ($40 billion) increase in the demand for such medical services. however the average income of people in a country should also be kept in mind

b. increasing medical coverage on health insurance for medical services having a relatively higher price elasticity increases the demand significantly. These services tend to be optional in nature and are not generally categorised as critical health care. However this doesn't mean that there are unnecessary.

Medical medical planners using elasticity estimates to determine the prices of medical services and the amount of coverage provided by the insurance can often lead to misleading results as the urgency of search services varies from patient to patient. However, it can be used as a benchmark for medical professionals to get an idea of the adequate demand for such services in the market.

c. Physicians determining the prices of medical services take into account the costs borne by them as well as personal remuneration. The price of a service heavily depends on the education and technical skills of a medical professional. This is because the cost of obtaining such education is very high and it greatly impacts the the quality of service provided by them.