Demand for Health Care

Need Want Demand

Need: What is objectively best suited to their medical

condition. Commonly judged by a doctor, but doctors are

only as good at judging need as their training, equipment
and abilities allow, and they may be influenced by factor
other than need, such as ability to pay or the views of their
patients.
Wants: are what the patient believes to be best for them
(like a fast acting drug)
Demand: is what they are willing to purchase at a given
price. This is influenced by medical opinion, commonly but
also by other factors, such as whether they can afford the
recommended treatment or whether they are convinced
by the advice offered.

Needs

Wants

Deman
ds

Our aim is to meet peoples health needs

as far as possible.
To do so we need to improve the ability of
medical staff to recognize and respond to
actual needs (through training, support,
payment systems etc)
Equally we need to influence wants and
demand so they overlap as much as
possible with needs (by public education
about treatments, like
ensuring that
appropriate treatments are accessible and
affordable.

Healthcare as an Investment
Demand for healthcare is not based solely

on the desire to feel better, but also on the

desire to increase productivity.
Consumption Component & Investment
Component.
People who invest in their health, desire to
have more healthy days available to
produce income and leisure.

Determinants of Demand
Price Factors:
Opportunity Cost
Cash Price
Patient Factors
Health Status
Demographic Characteristics
Economic Standing
Physician Factors
Supplier Induced Demand

Price Factors
Opportunity Cost:
The true cost of good or service is the cost

of other goods or services that must be

given up in order to purchase it.
Hence, the cost of making a health service
visit i.e total no of resources (cash + value
of time) expended for that visit.
Includes: price paid to medical facilities, for
medicines, to use services (direct) and in
terms of time (indirect).

(a) Transportion Cost:

Large proportion of total bill for getting medical treatment in

developing world is transportation costs.

A study in Rajasthan found that 20 % of total cash outlays
for treating child health problems in government facilities
were for transportation.
Cash price of a trip is a small part of total real cost of
transportation.
Distance is inversely proportional to use of health services.
Travel time is usually much larger percentage of the total
cost of a visit. Hence, patients at free government clinics
are more sensitive to time cost of transportation than
private clinic patients.

(b) Waiting Time:

Opportunity cost in waiting for service in a clinic.
Sick people often accompanied by another individual.
The cost to the household of consuming healthcare may

be significant in terms of foregone earnings of all people

involved in the visit.
Often after long initial visit, may come to know that
supplies or personnel are not available, so travel had to
be undertaken another day.
Lab tests might require several days, then time for drugs.
For rural people, lengthy waits force overnight stays to
complete treatments.

Cash Price:
In some cultures, healthcare is considered of a low quality if it

does not came up with a price tag. People feel health is

valuable, hence should be worth some price.
Payment methods also affects true cost to patients. Qualified
doctors require payment all at once, while quacks accepts it in
instalments. Also, you know the charges in advance for quacks
so you can budget for them, however, it is contrasted with
modern practitioners who charge for each treatment and total
cost may be unpredictable.
There are also unreported payments. Government doctors and
nurses often conduct private practices. Hence, public clinics
may be used to refer patients to after hours private
consultations. Also side payments or gifts before treatments
are accepted by them.

Patient Factors
Health status:
An
individuals demand for medical
treatment is usually triggered by the onset
of an illness.
And the desire to remain healthy increases
the demand for preventive care.
Ageing
Chronic Illness
Infectious diseases

Demographic Characteristics:
Growing population
Single parents
Working women
Later marriages
Fewer children per family
Greater mobility

All this translates into fewer opportunities for

direct family care, and a greater reliance on
medical providers.

Sex:
In early life cycle, both spend same amount on
medical care.
During child bearing years, women spend 50%
more than men do.
Women get hospitalized more often while if men
get hospitalized, they remain so 50% longer.
Men are able to substitute home healthcare,
having wife at home to take care of them.
Men suffer more frequent health losses due to
lifestyle choices, drinking, smoking and overeating

Economic Standing:
Rise in income is expected to increase the
consumption of healthcare, as the capacity to
purchase increases.
However, income may be spent on unhealthful
consumption
which
tends
to
increase
healthcare needs in longer run.
Also income level are highly correlated with
educational levels, which in turn makes a
person better consumer of medical care.
Education improves a persons ability to
recognize early symptoms, when treatment is
less expensive.
Also
better
education
has
healthier

Physician Factors
Suppose you are a buyer in a market with inadequate

information about the good / service You are at risk

Hence, you find someone who knows better than you
about the market and is willing to take decision on your
behalf, called as agent.
Agency relationship.
Clearly, agent has his own economic interest, which he
is supposed to maximize.
In many cases, interest dont conflict hence trying to
maximize clients interest Perfect Agency relationship.
So the agent is perfect if takes exactly same decision
which client would have taken if was fully informed.

But agents may be imperfect, trying to maximize

his interest even at the expense of clients interest.

A lawyer deliberately dragging your case.
An astrologer making you spend a hefty amount on
fake stones.
In healthcare, hospitals and doctors are our
agents. A perfect agent who is extremely
committed to provide quickest possible relief at
lowest possible cost.
Of 2 treatments are equally effective, physician
can choose the cheaper alternative or more
expensive one to buy a new LED for his den.

Supplier Induced Demand:

A situation when the arrival of a new supplier
automatically creates additional demand to feed on.
When a healthcare provider induces more demand in
an unethical way.
Demand and supply curve are independent of each
other. A given increase in supply results in a new
equilibrium reached by moving down a stationary
demand curve. The equilibrium price falls and more
output is purchased and supplied. The idea of SID is
that a given exogenous shift in supply cause a shift in
demand as providers advise their patients to buy
more medical care.

Beginning with demand curve D0, when supply curve S0,

equilibrium is at point A and price and quantity are P0 and

Q0.
A shift in supply to S1 would be expected to result in a new
equilibrium at point B with P2 and Q2. The new equilibrium
will be at a lower level of total spending i.e P2xQ2 <P0xQ0.
More physicians and lower overall spending translate into
lower average income unless demand shifts at the same time.
The
demand inducement hypothesis recognizes that
physicians rather than allow their incomes to fall may
recommend additional procedures, perform more surgeries
and schedule more follow-up visits All increasing the
demand for their services.
This shift in demand curve to D1 results in a new equilibrium
at point C with P1 and Q1 and an increase in total spending.

D1
D0

S0

S1
P1

P0

P2

B
Q0

Q2

Q1

Mechanisms that serve to support demand inducement

include fee splitting and referral fees that provide a means

for a referring physician to share in the service charges by
specialists and hospitals. Self-referral is another practice
where physicians have patients tested and treated in
facilities where they have financial interest. Their ownership
or commission is prevalent in diagnostic imaging and
testing labs.
We cannot expect to reduce the price of medical care by
increasing the supply of physicians, surgeons and pathology
labs. More doctors means more doctoring and higher fee.
It also explains why doctors do not move to rural areas even
when the urban market apparently gets saturated and less
attractive.

Insurance and Demand for

healthcare
Uncertain health status imposes a number of risks on
individuals:
Loss of health
Risk of incurring large financial costs associated with
medical treatments aimed at maintaining or
improving health
Health deterioration can reduce the ability to work or
productivity while working, hence lost wages.
Individuals may be less able to enjoy other form of
consumption (sport etc).
They may suffer the psychological and emotional
trauma associated with physical deterioration.

All these consequences are uncertain in both size and

occurrence.
Way to reduce it is, find somebody who will share your
risk in exchange of some price Genesis of health
insurance.
Its effect on demand for medical care:
o Availability
of insurance increases demand for
healthcare by lowering out-of-pocket payments Moral
Hazard. Hence, health insurers offer Deductibles and
co-insurance to reduce this hazard
o Deductibles: Initial amount the policy holder must pay
before insurance coverage begins paying.
o Co-insurance: Percentage of total spending the policy
holder pays.

D50
D0
D100
Po
1/2Po
0

Qo

Q1

Q2

D100 represents the demand for medical care with

no insurance, paying full price Po and demand only

Qo.
D50 is same persons curve with 50% co-insurance ,
and demands Q1 at Po.
In the case of complete insurance, demand curve
would rotate to vertical and become Do and quantity
demanded would be equal to Q2.
Insurance to a degree, has distorted the medical
market by creating a bias towards acute care
instead of preventive care; specialty care instead of
primary care and hospital care instead of home care.