PREPARED BY

JMBarcelo

OBJECTIVES
At the end of the discussion, students are expected to: 1. Enumerate the characteristics of the Health Care Market 2. Differentiate demand for health from demand for health care 3.Compare Grossmans Investment Model of Health and Consumption Model of Health 4. Identify factors which affect investment in health 5. Illustrate effects of factors which affects investment in health using Grossmans Model and Consumption Model

Characteristic s of the Health Care Market

Characteristics of the Health Care Market

1.

Uncertainty and Imperfect Information

Inequality of knowledge Risk of lawsuits Choice of medical care Cost of medical care

INSURANCE

Characteristics of the Health Care Market

2. Externality
(effect of transaction on outsiders)

- spill-over

effect

positive (+) externality negative (- ) externality

Characteristics of the Health Care Market

3. Subject to Government Intervention

- highly regulated - SUBSIDY on heath care and health insurance

Demand for Health and Health Care

Demand for Health vs. Demand for Health Care

Demand for HEALTH Demand for Health Care

Demand for Health

Demand for Health Care

Demand for health care is very high because people are willing to pay for it.

Demand for Health vs. Demand for Health Care

HEALTH PRINCIPLES
Health is PRICELESS.
Having more does NOT reduce the value

of health. Quality, not Quantity Matters. Health Risks are more Public than Private. Lifestyle matters more than medicine.

Michael Grossmans Investment Model of Health

1.

Investment in health is a form of human capital. (Gary Becker and Michael Grossman) (input) (output) HEALTH CARE STOCK OF HEALTH

* gross investment COST + UPKEEP * Capital provides services + monetary value + utility

Michael Grossmans Investment Model of Health

2. Demand for health is affected by a. cost of health capital and; b. rate of depreciation of health stock
Marginal Efficiency of Capital (MEC) measure of how much extra output can be produced with an extra unit of input

COST OF CAPITAL

MEC curve is subject to diminishing marginal returns

C+d

STOCK OF HEALTH CAPITAL

COST OF CAPITAL

An increase in wage causes shifting of MEC curve.

C+d

STOCK OF HEALTH CAPITAL

Consumption Model of Health

Health

An individual has chosen the combination of consumer goods and health investment that puts him or her on the highest indifference curve attainable with that budget.

E
Budget line

The Consumption Good

Factors Affecting Investment in Health Health FACTOR: AGE Principles:

age, resources to obtain/ maintain health, price for E most consumer goods

B1
E

SUBSTITUTION EFFECT CAUSES DECREASED DEMAND FOR CONSUMER GOODS

Consumption Good

Other Factors that Affect the Investment in Health EDUCATION

Education

Inputs to Production of Health

Having education increases the demand for health.

Other Factors that Affect the Investment in Health

LIFESTYLE

EFFECTS OF WEALTH

Wealth

Health

Net Effect: Shifting of MEC Curve to the Left

Other Factors that Affect the Investment in Health

CHEMICAL DEPENDENCY
Chemical Dependency Health

Chemical Dependency causes shifting of MEC curve to the left.