Demand for Health Care

In order to determine the medical care demand curve, it is necessary to confirm the relationship between quantity of medical services and utility. Each increment of health improvement results in smaller increases in utility. Medical care increases health, which results in a higher total utility.

The utility-maximizing rule explains that total utility is highest when the consumer receives the maximum amount of goods for each dollar spent. It can also be looked at in mathematicl terms:

MU1/P1 = MU2/P2
MU1 represents marginal utility from the last purchased unit of medical care, and MU2 equals the marginal utility gained from the last unit of all other goods.

external image utility-dmr.gif

Price, income, prices of available substitutes and complements, and time costs can all have an affect on the demand for medical care. There are also many noneconomic factors to consider, which inlclude quality of care and tastes and preferences.

How does insurance affect demand?

The demand for medical care has been impacted greatly by the growth of health insurance. Studies have shown that the demand for medical care decreases as the out-of-pocket price increases. Consumers try to reduce their expenses by visiting their health care providers less frequently. It was also found that deductibles decreased the demand for medical services. There would be an increase in the amount of health care consumed if the rate of coinsurance or deductibles go down.

What is a fuzzy demand curve?

A fuzzy demand curve is a result of health care providers disagreeing about the treatment for different medical problems. Another issue involves the consumers lack of knowledge. Many people do not possess the information to make an educated decision. Due to this, people heavily rely on medical professionals to make decisions about necessary treatment. Another thing to consider is the fact that it is not possible to measure medical care accurately. All of these factors combined make the relationship between price and quantity demanded fuzzy. A gray band, rather than a line, would be a good representation of this relationship.

Questions

1. When looking at the relationship between utility and medical care
a. utility decreases at an increasing rate
b. utility stays the same
c. utility increases at a steady rate
d. utility increases at a decreasing rate
Answer: D

2. Insurance causes a(n) ___ in the demand for medical care.
a. increase
b. decrease
c. no change
Answer: A

3. Give an example of a fuzzy demand curve.
Answer: An example could involve the relationship between an illness, such as cancer and the determination by a medical professional if surgery is necessary. It is often hard for a physician to determine which cases should have surgery and which should not, resulting in a fuzzy demand curve.

4. What can a consumer do to generate more utility if MU1/P1 > MU2/P2?
Answer: They can increase the total utility by purchasing less amounts of other goods and increase the amount of units of medical care purchased.

Sources
Santerre, R.E., & Neun, S.P. (2007). //Health economics:  Theories,
     insights, and industry studies// (4th ed.). Mason, OH: Thomson
     South-Western.
 
 
http://en.wikipedia.org/wiki/Insurance




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