Demand for Health
October 19, 2006
Medical Care = M (HS, DC, ES, PF)
HS: Patient Health Status
DC: Demographic Characteristics
ES: Economic Status
PF: Physician Factors
Consumers must decide among the
available alternatives designed to satisfy
their desires for health care.
Weigh benefits against costs of a good or
Consumer must have the money to pay for
alternative goods or services.
Consumer must be able to rank alternative
goods and services.
Health status: The acute care model of
medical treatment follows an expected
pattern – a patient develops a medical
condition (illness, injury, pregnancy, etc.),
seeks out a physician,
and either dies or recovers.
Health status: Chronic illness, defined as a
condition where a complete cure is not possible,
has become a major factor in health care
spending. The condition does not go away.
Some conditions are more likely as we age
(Parkinson’s disease, CHD, Alzheimer’s disease,
arthritis, diabetes, asthma, and emphysema are
growing problems among the aged.)
Not all chronic conditions are age related: e.g. HIV
infections as well as other sexually transmitted
diseases such as Chlamydia; and respiratory
diseases such as tuberculosis and pneumonia, are
increasingly resistant to traditional methods of
A growing population
An ageing population
Sex – male or female (especially females
during child bearing years)
Men suffer more frequent health losses
due to life style choices such as drinking,
smoking and over eating.
As more women enter the labor force and
pattern themselves after men, these
differences are narrowing.
Income, Education and Expenditures on Medical
Care are positively correlated.
Education is associated with higher levels of
Education makes one a more informed
Studies show that health status and income are
closely related. The same holds for Education
and health status.
D 50 D0
0 Q0 Q1 Q2
Insurance increases the demand for health
care. In fact, the demand curve rotates to the
Docs prescribe drugs, admit patients into
hospitals, and order tests.
Principal – Agent relationship
An agency exists when an individual (the
patient, and in our case the principal)
gives someone else (the physician, the
agent) the authority to make decisions on
his or her behalf.
Problems arise when the interests of the
principal and the agent diverge.
Physician Factors (con.)
In medicine patients are relatively
uninformed concerning alternative
diagnoses and treatments.
Patients trust Docs to make choices for
them – because of the difficulty in
gathering and understanding medical
The Docs role as a supplier can create a
conflict of interest. (i.e. Patients are their
source of income)
Key idea: Docs can influence the demand
for medical care.
A doc’s ability to induce demand is enhanced
when patients have a difficult time gathering and
Given this unique position, docs can serve as
imperfect agents, serving their own interests over
those of their patients.
In other words, they have the ability to influence
the demand for the services they personally
When faced with two alternative treatments that
are equally effective, the physician can choose
the cheaper alternative and save the patient
money, or the more expensive alternative and
buy a new flat screen plasma TV for the den.
P rice o f
P h ysicia n s’ S1
Q ua ntity o f P h ysicia ns’ S ervic es
0 Q0 Q2 Q1
Principal agent problem
Traditional economics: Increase supply
and the price falls and the quantity
increases. Price falls from P0 to P2.
Supply induced demand would have
supply increasing from S0 to S1 but as a
result of the physician induced demand,
demand would shift to D1.
Principal agent problem
Fee splitting and self referrals (especially
with imaging and lab work)
Capitation and DRGs limit this practice
(DRGs diagnosis related groups)