Demand for Medical Care

Updated November 1, 2018
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Demand for Medical Care The demand for medical care is derived from our demand for good health. Michael Grossman was the first to do econometric research on this topic. Grossmans work established two approaches for consideration. In the first, medical care is viewed as an input in the production function for health, and in the second, as an output produced by medical care providers (Henderson, p.142).

There are two main factors that determine the demand for medical care. The first is the patient factor. This includes a patients health status, demographic characteristics and economic status. The second is the physician factor. This is an interesting topic because it introduces the principal (patient)-agent (physician) problem.

We are faced with the problem of diminishing marginal returns for health. At a certain point, we can only produce so much health. The question we need to ask ourselves is what is the optimal budget for medical care? This is a question that can not be easily answered due to our changing demand for medical care. If we get sick we demand more medical attention. Or, if we choose to live more dangerously this will also increase the demand. Therefore, who should pay for these increased costs for medical insurance? Medical care spending is not the only thing that improves health.

Other factors affecting health status, such as life-style, environmental pollution, and technological developments, will shift the total product curve (TV). Figure 4.1, on the next page graphically shows that health status obeys the Law of diminishing productivity. The graph below the total product curve is the marginal product curve. The derivative of the total product curve is the marginal product curve. This curve represents the marginal change in health status. You can see this curve is negatively sloped and can be negative.

The maximum point on the total product curve is the total amount of health that we can get out of life. You may know from calculus that the slope of a line at a maximum or minimum is zero. If you look down on the corresponding point on the marginal product curve it lies on the x-axis. All medical treatment after this point is negative.

What does this mean? Yes, medical treatment can be harmful to your health if too much is applied. A good example of this is an X-ray. The radiation from multiple X-rays is extremely dangerous. This negative area is called iatrogenic disease. The marginal contribution of health that you get when you allocate more of your resources into medical care is very small. This is a moral question that we need to answer is when do you stop? Thomas McKeown (1976) noticed that there was a secular decline in mortality rates.

The quality of life was one of the major factors. There was an increase in income as well as education. The living standards and nutrition chipped in as well. The public health authorities improved sanitation. Which in return all lead to a decrease in diseases. An increase in technology also helped the cause.

Diseases like cancer where slowed due to Chemotherapy and stricter regulations directed to corporations on dumping waste. (Henderson p.145) Genetics also play a major role in determining our health. Half of your genes come from your father and the other half from your mother. There are two factors that play a critical role in determining the health of an individual: the risk of exposure to a particular disease and the ability of the individual to resist the disease (and recover from its consequences) once exposed (Henderson p.144). If your father has high blood pressure then his siblings are susceptible to high blood pressure too. Now we will look at the determinants in the demand for medical care.

Henderson defines demand as the sacrifice an individual is willing to make in order to obtain a given amount of a particular good or service. In other words you cant always get what you want. Need rarely equals demand. Need is almost always greater than demand.This excess want is what is called moral hazard. The demand for medical care has a consumption component and an investment component. The consumption component is the part that you expect to use lets say on a yearly basis.

You probably go to the doctors office about once a year for a checkup. The investment component is the part that you hope doesnt happen but just in case you will be able to finance for the occasion. Individuals who are willing to invest in a college education are the same individuals who are willing to spend time and money on improving their health (Henderson p.150). One of the most efficient ways to produce health is to educate oneself. The more knowledge you know about your own health the less you will have to go to the physicians office. Education has been proven statistically to lower demand for healthcare.

The Elasticity for education is approximately equal to one-tenth (Weiss Lecture 9/9/99). This means for every ten-percent increase in medical care there is a one- percent increase in health. A proper diet and daily exercise are also important to improving ones health. Both of these factors have produced positive elasticity measures as well.The are two factors that affect the demand for medical care.

The first is the patient factor. The patient factor is composed of three variables. A patients health status, demographic characteristics and economic status are the three variables that are the most efficient way to produce health. Patients most often seek treatment for a medical condition Their demand is triggered by an onset of an episode or illness (Henderson p.151).

Age is the number one demographic factor that increases demand. A patients economic status is another major variable in determining the demand for medical care. Physician factor is the other variable that affects the demand for medical care. This is often called supplier-induced demand, where in this case the supplier is the physician. Even though only 20 percent of all medical spending goes to physicians services, physicians determine the vast majority of total spending (Henderson). Physicians have been accused of creating a greater demand, which push up costs.

Physicians are able to increase the demand by referring patient to other specialist. Rising incomes affect the demand in an increasing manor on the macro level. This is the characteristic of a luxury good. Is medical care a luxury? The elasticity of the demand function becomes more inelastic when your income rises creating a moral hazard.

I believe that higher premiums should be charged to the wealthy to cover these increased expenses. As medical care spending continues to escalate, the search for alternatives to slow its growth has focused on the supply side of the market. Modifying provider behavior is seen as the only way to control run-away spending. By ignoring the demand side of the market, we may be foregoing one of the most powerful forces available for cost-control, individual self-interest (Henderson p.149). The most important aspect we need to get control of is the patient factors, which include health status, demographics and economic status. Educating the general public has proven to be an effective way of battling the rising costs of medical care!

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