1. NUR 751:
Healthcare Economics
for the DNP
The Demand for Healthcare
Dewar, D. (2010). Essentials of health economics. Sudbury, MA:
Jones & Bartlett Learning Co.
Tony Umadhay, PhD., CRNA
Barry University

2. The Demand for Health Care
• The effect of education on the demand for health
care is not predictable
– If education makes a person more efficient in
producing health, an increased awareness of
the value of good nutrition and prevention of
disease will reduce the quantity of health care
required to produce a given stock of health

3. The Demand for Health Care
– Education can also increase the demand for
health itself
• The more educated will demand more
health, but less health care, if the effect of
education on the productivity of inputs into
health outweighs the shift in health care
demand
• The effect of age on the demand for health care
has been found to vary by type of health care
required
• Health insurance influences the demand for
health care

4. Need or Demand
• In analyzing the demand for health care, it is
important to take into account the concept of
need when considering both the characteristics
of health policy and an individual’s consumption
of health care
– Needs and demands can therefore be
regarded as two very different ways of viewing
matters

5. Information and
Imperfect Agent
• Information is itself an economic good
• The relationship between doctor and patient is
often presented as a principal-agent problem
– The doctor is the agent acting on behalf of a
principal, who is the patient, in making
decisions about what health care to purchase
• If doctors made these decisions in a
manner fully consistent with patients’
preferences, unaffected by the
consequences for themselves, they would
be acting as perfect agents

6. Information and
Imperfect Agency
–the hypothesis of supplier-induced
demand (SID) purports that doctors
engage in some persuasive activity
to shift the patients’ demand curve
in or out depending on the
physicians’ self-interest
–Empirical evidence shows that
physicians do respond to financial
incentives and they do appear to
influence demand and do so partly
in response to self interest

7. Price Elasticity of Demand
for Health Care
• Elasticities / Responsiveness
• We measure the responsiveness of consumers
demand to changes in the price of a good or
service by the price elasticity of demand
• Almost always negative (-)
• percentage change in quantity demanded in
response to a percent change in price
• In general, goods and services which are close
substitutes have higher price elasticities, and
complementary goods and services have lower
price elasticities.

8. Price Elasticity of Demand for
Health Care
• The highest price elasticity estimates observed
are for those demanding hospital outpatient
services and for nursing home services
• The lower number of substitutes for hospitals
make the elasticity for hospital services lower
than that for physician services
– However, once a physician is chosen, this
also limits the number of hospitals that the
patient can utilize as well due to the limits on
admitting privileges of physicians

9. Time Costs and Price Elasticities
• The time cost is the value of time used in a given
activity
• Estimates of the price elasticity of demand for any
good or service that requires time will tend to be
biased if one does not take into account the time
and money costs as well
• The time cost of consuming a healthcare service
would be the time involved in waiting for the
appointment, as well as the travel time
– The total cost of services that require time will be higher
for patient with higher wage rates because they have a
higher opportunity cost of time
• Any factor that increases the value of time will
increase the opportunity cost of time

10. Aggregate Demand for Health
Care
• It is clear that there is a positive relation
between income and the demand for
health care: the richer the country, the
greater the demand for health care

11. Income Elasticities
• measures the responsiveness of the
demand for a good to a change in the
income of the people demanding the good
• ratio of the percentage change in demand
to the percentage change in income

12. Healthcare: A Normal, Superior,
or Inferior Good?
– If income increases by a given percentage,
the quantity of the good consumed increases,
but at a lower percentage than associated
with the income increase: normal good (0-1)
– If the percentage increase in the quantity
consumed is greater than the associated
percentage increase in income: superior
good (>1)
– demand falls as consumer income increases:
inferior good

13. Healthcare: A Normal, Superior,
or Inferior Good?
• The answer to whether health care is a normal, superior,
or inferior good, differs depending on whether we look at
studies based on individual responses or those utilizing
aggregate data
– Studies in the 1960s through 1990s provides
estimates of income elasticities for health care based
on survey data derived from individual responses
• These studies show consensus that most health
care services have coefficients of income elasticity
that are positive and in the r range of 0–1, and can
be classified as normal goods.
– Studies using macroeconomic data do yield
considerably higher income elasticity coefficients for
health care
• A wide range of studies have generally found
health care to be a superior good

14. Summary
• The demand for health care depends on age, education,
income, and health status
• The demand for health care is generally sensitive to price
and income
– Price elasticities
– Income elasticties
– Health care for which substitutes exist have higher
price elasticities than those with fewer substitutes, such
as an acute care hospitalization
• The association between income and the amount of health
care utilized shows that health care can be a normal good
when studies are based on individual responses
– Macroeconomic data that compare country-wide
aggregates in income and healthcare spending show
that health care is a superior good