Price Elasticity of Demand and Health Care

4 April 2017

Running Heading: Price Elasticity and Health Care Price Elasticity of Demand and Health Care Table of Contents I. II. Introduction III. Measure of Health Care Demand IV. Price Elasticity of Demand for HealthCare V. RAND Study VI. Health Care Trends in 2007 VII. Summary Introduction The Health Care System in the U. S continues to be a topic of debate as the cost for health care continue to grow. Many Americans are being forces to change the way they use the health care system as the costs rising faster than their income. More than 6 in 10 Americans with ealth insurance coverage indicate that the costs they are responsible for paying under their plan have increased in the past year. This paper examines the elasticity of demand for health care services. Measure of Health Care Demand The demand for health care is often measured by the quantity of services used such as the number of doctor visits, prescriptions filled or inpatient hospital stays. The demand is also measured by the total costs of the services. The cost of health care for the consumer usually depends on the amount of premiums, deductible, and coinsurance or copayments that they are required to contribute.

The amounts can vary and this can make it difficult to estimate the price elasticity of demand for health care services. In order to gage the effect of price changes, the researcher would need to determine the effective price that a consumer is willing to pay for an additional unit of health care services. Elasticity of Demand for Health Care The price elasticity of demand measures the percentage change in quantity demanded resulting from a 1 percent change in price. The elasticity of demand for a product or service will vary depending on the level of price and quantity at which it is evaluated.

Price Elasticity of Demand and Health Care Essay Example

The elasticity of demand can vary depending on the different combinations of price and quantity demanded. As the norm, the price elasticity of demand will always be negative. This indicates that the consumer will demand less of the service or good as the price increase all other factors held constant. The demand for health care has been consistently found to be price inelastic due to the few close substitutes for medical services. The range of price elasticity it tends to be around – 0. 17, meaning that a 1 percent increase in the cost of health care will lead to a 0. 17 percent eduction in health care expenditures. Studies show that the demand levels decrease as the levels of cost sharing decrease. Some types of services such as pharmacy and preventative care benefits are tend to have higher price elasticities since there are other goods or services that can serve as substitutes. As a result, the consumer is able to move toward substitute services or goods as the price increases. The demand for health care is also considered to be income inelastic. The estimates of income elasticity of demand are in the range of 0 to 0. 2. This measure indicates that as income ncreases, the demand for health care services increase as well. The demand for health care can also be affected by the services being offered by a particular health plan. The variation of out-of- pocket expenses for services or premiums can impact the number of plan enrollees and the demand for health care services paid for by that plan. RAND Study Between 1974 and 1982, the government, funded a social insurance experiment referred to as the RAND Health Insurance Experiment (HIE). The experience was intended to answer some question pertaining to the demand for health care.

Families in six sites were randomly placed into different insurance plans. The plans had different levels of cost-sharing, deductible amounts and out-of-pocket maximums. Although the HIE was conducted decades ago, the results of the studies are considered the “gold standard” for health demand elasticity estimates. The HIE studies compared health care use among individuals in different insurance plans. The studies indicated that use of health care services in the HIE was not affected by the out-of-pocket maximums. For coinsurance rates between 0 and 25 percent, the price elasticity of medical expenditures was found to be –0. 17.

Consistent with the patterns seen in observational studies, the demand for health care was found to be somewhat more price sensitive as the coinsurance rate increased. In the HIE, coinsurance rates between 25 and 95 percent yielded elasticity estimates of –0. 22. The health care system has changed over the years since the experiment was conducted. There have been significant advances in medical technology and the pharmaceutical market. Healthcare Trends in 2007 Health care costs were estimated to 16. 2% of the U. S. gross domestic product (GDP) in 2007. The 2007 Health Confidence Survey (HCS) is conducted annually to get feedback from

Americans regarding the health care system in the U. S. The survey was conducted within the United States between May 17 and June 10, 2007, through 20-minute telephone interviews with 1,000 individuals ages 21 and older. Random digit dialing was used to obtain a representative cross section of the U. S. population. The results show that rising health care costs are affecting the way that consumers use the health care system. Although some positive changes have been made, some consumers are delaying going to the doctor or not filling prescriptions due to the high cost. Some of the trends identified in the survey are: . 63 percent of Americans with health insurance coverage reported they experienced an increase in The costs they are responsible for paying under their plan in the past year. Of these, a large percentage says the increased costs have caused them to try to take better care of themselves (81 percent in 2007; 71 percent in 2005), talk to the doctor more regarding treatment options and costs (66 percent in 2007; 57 percent in 2005), go to the doctor only for serious conditions or symptoms (64 percent in 2007; 54 percent in 2005), delay going to the doctor (50 percent in 2007; 40 percent in 2005), and not fill or skip doses of heir prescribed medications(28 percent in 2007; 21 percent in 2005). • Those consumers that incurred cost increases are also likely to report that these increases have negatively affected their household finances. For some, the increase resulted in a decrease in contributions to retirement (30 percent) and other savings (52 percent) and difficulty paying for basic necessities (29 percent) and other bills (36 percent). • Three-quarters of those with employment-based health coverage (76 percent) state they would prefer $7,500 in employment-based health benefits to an additional $7,500 in taxable income. Six in 10 rate the health care system as fair (29 percent) or poor (30 percent). Many consumers feel the health care system needs a complete overhaul (24 percent) or requires major changes (47 percent). • While half of Americans (51 percent) remain satisfied with health care quality, less than 2 in 10 are satisfied with the cost of health insurance (18 percent) or with costs not covered by insurance (16 percent). Many consumers believe they have no impact or no influence on the overall health care costs. Due to the rising health care costs, many American consumers are concerned about how the costs nd 15% view health care as a critical issue. While that is a small percentage, the dissatisfaction with the American health care system is widespread. Summary As the life expectancy has increased over the years, the demand of health care has increased. The cost of health care has also continued to increase, however, there will always be a demand for health care services. The demand for health care will be affected by economic variables such as plan design, income, and risk preferences. Overall, the price elasticity of demand for heath care is relatively low. References The Kaiser Family Foundation (2007, September).

Trend in Health Care Costs and Spending Retrieved November 30, 2007 from http://www. kff. org/insurance/upload/7692. pdf Employee Benefit Research Institute (2007, November) Notes: 2007 Health Confidence Survey: Rising HealthCare Costs Are Changing the Ways Americans Use the Health Care System. Retrieved December 3, 2007 from http://www. ebri. org. Ringel, Hosek, Vollaard, and Mahnovski. (2005) The Elasticity of Demand for Health Care: A Review of the Literature and Its Application to the Military Health System. Retrieved December 5, 2007 from http://www. rand. org/pubs/monograph_reports/2005/MR1355. pdf.

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