Lecture 1 (31-08-2021)
Example multiple choice questions:
• (1) In OECD-countries, health spending as a percentage of GDP is expected to increase in the
coming decades due to:
o (A) Advancing medical technology and decreasing health insurance coverage.
o (B) Decreasing welfare and ageing of populations.
o (C) Baumol’s cost disease and a shift towards chronic diseases.
o (D) Expanding health insurance coverage and lacking incentives for efficiency.
• (2) Baumol’s cost disease implies that:
o (A) the productivity of workers in health care increases at a faster pace as compared to
the productivity of workers in other industries.
o (B) Wages of workers in health care typically increase at a faster pace as compared to
wages of workers in other industries.
o (C) Health care becomes increasingly less expensive relative to product of other
industries.
o (D) Product of other industries become increasingly less expensive relative to health care.
The correct answers are: 1C and 2D.
Lecture 2 (31-08-2021)
What is different about health care demand? Demand for health care is derived from the demand for
health. Health care is not only a consumption, but also an investment good. Health care demand is not
independent from health care supply; the consumer is not always able to assess the quality of health care
and therefore relies on a health care provider. In that sense, doctors can shift the demand curve for health
care, which is referred to as supplier-induced demand. Even though traditional economic models cannot
adequately explain the demand for health care, they are still useful tools to analyze health care demand.
Three models that determine the demand for health care are the following:
• The medico-technical model; the doctor is in the lead, acting as a perfect agent.
• The neo-classical model; the patient or consumer is in the lead, having perfect information.
• The imperfect agency model; demand is determined by both doctors and patients as information
is part of the transaction.
Price elasticities are an important tool for measuring the impact of price on health care demand.
Consumers typically pay only part of the price, because health insurers (or the government) cover most
of the costs. The problem that arises is that price elasticities based on what consumers pay out-of-pocket
(such as co-payments) may be biased due to selection effects (people select different levels of co-
payments). How to deal with selection bias?
• Correct for relevant background variables.
• Quasi experimental methods.
• Randomized controlled experiments.
,Price elasticities found in the so-called RAND experiment varied across health services, with a mean price
elasticity of -0.2. This would imply that if you raise co-payments for health services by 10%, health care
demand would decrease by 2%. But what if physicians would react to the increase in co-payments? How
would co-payments affect their income and how could they anticipate to this? They might attempt to
prescribe somewhat more care to its patients to compensate for the drop in demand and income, or they
might search for other ways to influence the patient’s demand for health care. Then, the overall impact
on demand may be less than predicted by the RAND experiment.
Price elasticities can be measured at different levels of aggregation. For instance, you can measure the
impact of a price change on the total demand of physician services or on the demand for services of an
individual physician. Would these price elasticities differ in magnitude? Yes. Imagine that every physician
increases the price for its services, then patients do not have another physician to go to for a lower price.
But if an individual physician is changing its price, then patients can easily go to another physician.
Therefore, the price elasticities of demand are larger for individual physicians than for all physicians at the
aggregate level.
Income elasticities are an important tool for measuring the impact of income on health demand. Income
elasticities indicate how important a good or service is for consumers. If you really need something, your
income elasticity will be very low. The income elasticity of the most important goods will even be negative;
these are the goods you will buy first when you earn some money. If you earn more income, you have
already bought these important goods and you may substitute them for superior alternatives. So, the
things you find most important (like basic food and shelter) typically have low income elasticities and are
called inferior goods. If the income elasticity gets higher, you call it either necessities (income elasticity
between 0 and 1) or luxury goods (income elasticity above 1). For health care demand, income elasticities
at the individual and at the country level may differ substantially.
Empirical studies often find that the income elasticities of health care demand at the country level are
larger than 1. This means that if a country earns additional money, they spend proportionally more of this
money on health care. In that sense, health care can be seen as a luxury good at the country level. In
countries with generous health insurance, income elasticities of health care demand are more relevant at
the country level. When people have a generous health insurance and they earn more money, they will
not spend that much on health care because much of their health expenditures are already covered by
the generous health insurance (even though people really value their health). So, if you really want to
know the effect on income on health care demand, individual income elasticities in the presence of health
insurance do not tell you that much. The broader coverage you have, the closer the income elasticities
will be to zero. For those things for which the insurance coverage is less, which is often the case for dental
care, you observe higher income elasticities at the individual level. Then people have to pay it out of their
pocket so if their income increases they can go to the dentist more often. A country itself is not insured,
so the income elasticities of health care demand are more relevant at the country level.
In high-income countries, the government or an insurance company often covers most health
expenditures. Therefore, people in these countries are not that likely to spend much more on health when
their income increases. In low-income countries, on the other hand, people often need to pay their health
expenditures by themselves as there is no generous health insurance. If people in low-income countries
earn money, they are more likely to spend additional money on health. Hence, in low-income countries,
individual income elasticities of health care demand are likely to be higher than in high-income countries.
, Example multiple choice questions:
• (1) Which demand curve reflects the medico-technical model?
o (A) A vertical line
o (B) A downward-sloping line
o (C) A horizontal line
• (2) Healthy individuals are likely to choose higher co-payments.
o (A) True
o (B) False
• (3) Due to selection bias, out-of-pocket price elasticities are likely to:
o (A) Overestimate the true price effect on demand for care.
o (B) Underestimate the true price effect on demand for care.
• (4) If physicians are paid fee-for-service, a price increase of physician services may have:
o (A) More impact on demand than predicted by the RAND experiment.
o (B) Less impact on demand than predicted by the RAND experiment.
• (5) Price elasticities for the total demand for physician services are typically:
o (A) Smaller than the price elasticities of demand for individual physicians.
o (B) Larger than the price elasticities of demand for individual physicians.
o (C) Equal to the price elasticities of demand for individual physicians.
• (6) Income elasticities of health care demand at the country level are typically:
o (A) Negative
o (B) About zero
o (C) Between 0 and 1
o (D) Larger than 1
• (7) In countries with generous health insurance, income elasticities of health care demand are:
o (A) More relevant at the individual level.
o (B) More relevant at the country level.
o (C) Equally relevant at the individual and the country level.
• (8) In low-income countries, individual income elasticities of health care demand are more likely
to be:
o (A) Smaller than in high-income countries.
o (B) Higher than in high-income countries.
o (C) Equal to high- and low-income countries.
The correct answers are: 1A, 2A, 3A, 4B, 5A, 6D, 7B and 8B.
Explanations of the answers:
• (1) In the medico-technical model the quantity demanded is solely determined by the physician
and is independent of price, people’s preferences, or income. Hence, price does not play any role
in determining the demand for health care. In other words, health care demand is completely
inelastic, which is reflected by a vertical demand curve (Q is the same irrespective of P).
• (2) Healthy individuals have lower expected health care costs and are therefore more likely to opt
for a higher co-payment in return for a lower premium.
• (3) The difference in use of health services at different out-of-pocket prices is partly due to
differences in health. That is because healthy individuals are likely to opt for higher co-payments.
