RobertLee_2019_Chapter7TheDemandForH_EconomicsForHealthcar.pdf
CHAPTER
109
7THE DEMAND FOR HEALTHCARE PRODUCTS
Learning Objectives
After reading this chapter, students will be able to
• calculate sales and revenue using simple models,• discuss the importance of demand in management decision making,• articulate why consumer demand is an important topic in healthcare,• apply demand theory to anticipate the effects of a policy change,• use standard terminology to describe the demand for healthcare
products, and• discuss the factors that influence demand.
Key Concepts
• The demand for healthcare products is complex. • When a product’s price rises, the quantity demanded usually falls.• The amount a consumer pays directly is called the out-of-pocket price
of that good or service.• Because of insurance, the total price and the out-of-pocket price can
differ markedly.• Multiple factors can shift demand: changes in consumer income,
insurance coverage, health status, prices of other goods and services, and tastes.
• Demand forecasts are essential to management.
7.1 Introduction
Demand is one of the central ideas of economics. It underpins many of the contributions of economics to public and private decision making. Analyses of demand tell us that human wants are seldom absolute. More often they
demandThe amounts of a product that will be purchased at different prices when all other factors are held constant.
Lee.indd 109 1/2/19 3:15 PM
Copyright 2019. Health Administration Press.
All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law.
EBSCO Publishing : eBook Academic Collection (EBSCOhost) – printed on 1/12/2023 10:24 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUSAN: 2144510 ; Robert Lee.; Economics for Healthcare Managers, Fourth EditionAccount: s4264928.main.eds
Economics for Healthcare Managers110
are conditioned by questions: “Is it really worth it?” “Is its value greater than its cost?” These questions are central to understanding healthcare economics.
Demand forecasts are essential to management. Most managerial deci-sions are based on revenue projections. Revenue projections in turn depend on estimates of sales volume, given prices that managers set. A volume esti-mate is an application of demand theory. Understanding the relationship between price and quantity must be part of every manager’s tool kit. On an even more fundamental level, demand forecasts help managers decide whether to produce a certain product at all and how much to charge. For example, if you conclude that the direct costs of providing therapeutic mas-sage are $48 and that you will need to charge at least $75 to have an attrac-tive profit margin, will you have enough customers to make this service a sensible addition to your product line? Demand analyses are designed to answer such questions.
7.1.1 RationingOn an abstract level, we need to ration goods and services (including medical goods and services) somehow. Human wants are infinite or nearly so. Our capacity to satisfy those wants is finite. We must develop a system for deter-mining which wants will be satisfied and which will not. Market systems use prices to ration goods and services. A price system costs relatively little to operate, is usually self-correcting (e.g., prices fall when the quantity supplied exceeds the quantity demanded, which tends to restore balance), and allows individuals with different wants to make different choices. These advantages are important. The problem is that markets work by limiting the choices of some consumers. As a result, even if the market process is fair, the market outcome may seem unfair. Wealthy societies typically view exclusion of some consumers from valuable medical services, perhaps because of low income or perhaps because of previous catastrophic medical expenses, as unacceptable.
The implications of demand are not limited to market-oriented sys-tems. Demand theory predicts that if care is not rationed by price, it will be rationed by other means, such as waiting times, which are often inconvenient for consumers. In addition, careful analyses of consumer use of services have convinced most analysts that medical goods and services should not be free. If care were truly costless for consumers, they would use it until it offered them no additional value. Today this understanding is reflected in the public and private insurance plans of most nations.
Care cannot really be free. Someone must pay, somehow. Modern healthcare requires the services of highly skilled professionals, complex and elaborate equipment, and specialized supplies. Even the resources for which there is no charge represent a cost to someone.
market system A system that uses prices to ration goods and services.
quantity demanded The amount of a good or service that will be purchased at a specific price when all other factors are held constant.
Lee.indd 110 1/2/19 3:15 PM
EBSCOhost – printed on 1/12/2023 10:24 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to https://www.ebsco.com/terms-of-use
Chapter 7: The Demand for Healthcare Products 111
7.1.2 Indirect Payments and InsuranceBecause the burden of healthcare costs falls primarily on an unfortunate few, health insurance is common. Insurance creates another use for demand analy-ses. To design sensible insurance plans, we need to understand the public’s valuation of services. Insurance plans seek to identify benefits the public is willing to pay for. The public may pay directly (through out-of-pocket pay-ments) or indirectly. Indirect payments can take the form of health insur-ance premiums, taxes, wage reductions, or higher prices for other products. Understanding the public’s valuation is especially important in the healthcare sector because indirect payments are so common. When consumers pay directly, valuation is not important (except for making revenue forecasts). Right or wrong, a consumer who refuses to buy a $7.50 bottle of aspirin from an airport vendor because it is “too expensive” is making a clear state-ment about value. In contrast, a Medicare patient who thinks coronary artery bypass graft surgery is a good buy at a cost of $1,000 is not providing us with useful information. The surgery costs more than $30,000, but the patient and taxpayers pay most of the bill indirectly. Because consumers purchase so much medical care indirectly, with the assistance of public or private insur-ance, assessing whether the values of goods and services are as large as their costs is often difficult.
7.2 Why Demand for Healthcare Is Complex
The demand for medical care is more complex than the demand for many other goods for four reasons.
1. The price of care often depends on insurance coverage. Insurance has powerful effects on demand and makes analysis more complex.
2. Healthcare decisions are often challenging. The links between medical care and health outcomes are often difficult to ascertain at the population level (where the average impact of care is what matters) and stunningly complex at the individual level (where what happens to oneself is what matters). Forced to make hard choices, consumers may make bad choices.
3. This complexity contributes to consumers’ poor information about costs and benefits of care. Such “rational ignorance” is natural. Because most consumers will not have to make most healthcare choices, it makes no sense for them to be prepared to do so.
4. The net effect of complexity and consumer ignorance is that producers have significant influence on demand. Consumers naturally turn to
out-of-pocket payment Money a consumer directly pays for a good or service.
Lee.indd 111 1/2/19 3:15 PM
EBSCOhost – printed on 1/12/2023 10:24 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to https://www.ebsco.com/terms-of-use
Economics for Healthcare Managers112
healthcare professionals for advice. Unfortunately, because they are human, professionals’ choices are likely to reflect their values and incentives as well as those of their patients.
Demand is complicated by itself. To keep things simple, we will first examine the demand for medical goods and services in cases where insur-ance and professional advice play no role. The demand for over-the-counter pharmaceuticals, such as aspirin, is an example. We will then add insurance to the mix but keep professional advice out. Finally, we will add the role of professional advice.
7.3 Demand Without Insurance and Healthcare Professionals
In principle, a consumer’s decision to buy a particular good or service reflects a maddening array of considerations. For example, a consumer with a head-ache who is considering buying a bottle of aspirin must compare its benefits, as the consumer perceives them, to those of the other available choices. Those choices might include taking a nap, going for a walk, taking another nonprescription analgesic, or consulting a physician.
Economic models of demand radically simplify descriptions of con-sumer choices by stressing three key relationships that affect the amounts purchased:
1. the impact of changes in the price of a product,2. the impact of changes in the prices of related products, and3. the impact of changes in consumer incomes.
This simplification is valuable to firms and policymakers, who cannot change much besides prices and incomes. This focus can be misleading, however, if it obscures the potential impact of public information campaigns (including advertising).
7.3.1 Changes in PriceThe fundamental prediction of demand theory is that the quantity demanded will increase when the price of a good or service falls. The quantity demanded may increase because some consumers buy more of a product (as might be the case with analgesics) or because a larger proportion of the population chooses to buy a product (as might be the case with dental prophylaxis). Exhibit 7.1 illustrates this sort of relationship. On demand curve D1, a price reduction from P1 to P2 increases the quantity demanded from Q1 to Q2.
demand curve A graph that describes how much consumers are willing to buy at different prices.
Lee.indd 112 1/2/19 3:15 PM
EBSCOhost – printed on 1/12/2023 10:24 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to https://www.ebsco.com/terms-of-use
Chapter 7: The Demand for Healthcare Products 113
Exhibit 7.1 also illustrates a shift in demand. At each price, demand curve D2 indicates a lower quantity demanded than demand curve D1. (Alterna-tively, at each volume, willingness to pay will be smaller with D2.) This shift might be due to a drop in income, a drop in the price of a substitute, an increase in the price of a complement, a change in demographics or con-sumer information, or other factors.
Demand curves can also be interpreted to mean that prices will have to be cut to increase the sales volume. Consumers who are not willing to pay what the product now costs may enter the market at a lower price, or current consumers may use more of the product at a lower price. Demand curves are important economic tools. Analysts use statistical techniques to estimate how much the quantity demanded will change if the price of the product or other factors change.
Substitution explains why demand curves generally slope down, that is, why consumption of a product usually falls if its price rises. Substitutes exist for most goods and services. When the price of a product is higher than that of its substitute, more people choose the substitute. Substitutes for aspirin include taking a nap, going for a walk, taking another nonprescrip-tion analgesic, and consulting a physician. If close substitutes are available, changes in a product’s price could lead to large changes in consumption. If none of the alternatives are close substitutes, changes in a product’s price will lead to smaller changes in consumption. Taking another nonprescription analgesic is a close substitute for taking aspirin, so we would anticipate that consumers would be sensitive to changes in the price of aspirin.
Substitution is not the only result of a change in price. When the price of a good or service falls, the consumer has more money to spend on
shift in demand A shift that occurs when a factor other than the price of the product itself (e.g., consumer incomes) changes.
substituteA product used instead of another product.
complement A product used in conjunction with another product.
Quantity
Price
Q1 Q2
P1
P2
D1
D2
EXHIBIT 7.1A Shift in Demand
Lee.indd 113 1/2/19 3:15 PM
EBSCOhost – printed on 1/12/2023 10:24 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to https://www.ebsco.com/terms-of-use
Economics for Healthcare Managers114
all goods and services. Most of the time this income effect reinforces the substitution effect, so we can predict with confidence that a price reduction will cause consumers to buy more of that good. In a few cases, things get murkier. A rise in the wage rate, for example, increases the income you would forgo by reducing your work week. At first blush, you might expect that a higher wage rate would reduce your demand for time off. At the same time, though, a higher wage rate increases your income, which may mean more money for travel and leisure activities, increasing the amount of time you want off. In these cases empirical work is necessary to predict the impact of a change in prices.
Two points about price sensitivity need to be made here. First, a gen-eral perception that use of most goods and services will fall if prices rise is a useful notion to keep tucked away. Second, managers need more precise guidance. How much will sales increase if I reduce prices by 10 percent? Will my total revenue rise or fall as a result? To answer these questions takes empirical analysis. Fleshing out general notions about price sensitivity with estimates is one of the tasks of economic analysis. We also need an agreed-on terminology to talk about how much the quantity demanded will change in response to a change in income, the price of the product, or the prices of other products. Economists describe these relationships in terms of elastici-ties, which we will talk more about in chapters 8 and 9.
7.3.2 Factors Other Than PriceChanges in factors other than the price of a product shift the entire demand curve. Changes in beliefs about the productivity of a good or service, pref-erences, the prices of related goods and services, and income can shift the demand curve.
Consumers’ beliefs about the health effects of products are obviously central to discussions of demand. Few people want aspirin for its own sake. The demand for aspirin, as for most medical goods and services, depends on consumers’ expectations about its effects on their health. These expecta-tions have two dimensions. One dimension consists of consumers’ beliefs about their own health. If they believe they are healthy, they are unlikely to purchase goods and services to improve their health. The other dimension consists of their perception of how much a product will improve health. If I have a headache but do not believe that aspirin will relieve it, I will not be willing to buy aspirin. Health status and beliefs about the capacity of goods and services to improve health underpin demand.
Demand is a useful construct only if consumer preferences are stable enough to allow us to predict responses to price and income changes and if price and income changes are important determinants of consumption
Lee.indd 114 1/2/19 3:15 PM
EBSCOhost – printed on 1/12/2023 10:24 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to https://www.ebsco.com/terms-of-use
Chapter 7: The Demand for Healthcare Products 115
decisions. If on Tuesday 14 percent of the population thinks aspirin is some-thing to avoid (whether it works or not) and on Friday that percentage has risen to 24 percent, demand models will be of little use. We would need to track changes in attitude, not changes in price. Alternatively, if routine advertising campaigns could easily change consumers’ opinions about aspirin, tracking data on incomes and prices would be of little use. Preferences are usually stable enough for demand studies to be useful, so managers can rely on them in making pricing and marketing decisions.
Changes in income and wealth usually result in shifts in demand. In principle, an increase in income or wealth could shift the demand curve either out (more consumption at every price) or in (less consumption at every price). Overall spending on healthcare clearly increases with income, but spending on some products falls with income. For example, as income increases, retir-ees reduce their use of informal home care (Tsai 2015). For the most part, however, consumers with larger budgets buy more healthcare products.
Changes in the prices of related goods also shift demand curves. Related goods are substitutes (products used instead of the product in ques-tion) and complements (products used in conjunction with the product in question). A substitute need not be a perfect substitute; in some cases it is simply an alternative. For example, ibuprofen is a substitute for aspirin. A reduction in the price of a substitute usually shifts the demand curve in (reduced willingness to pay at every volume). If the price of ibuprofen fell, some consumers would be tempted to switch from aspirin to ibuprofen, and the demand for aspirin would shift in. Conversely, an increase in the price of a substitute usually shifts the demand curve out (increased willingness to pay at every volume). If the price of ibuprofen rose, some consumers would be tempted to switch from ibuprofen to aspirin, and the demand for aspirin would shift out.
7.4 Demand with Insurance
Insurance changes demand by reducing the price of covered goods and ser-vices. For example, a consumer whose dental insurance plan covers 80 per-cent of the cost of a routine examination will need to pay only $10 instead of the full $50. The volume of routine examinations will usually increase as a result of an increase in insurance coverage, primarily because a higher proportion of the covered population will seek this form of preventive care. The response will not typically be large, however. Most consumers will not change their decisions to seek care because prices have changed. But man-agers should recognize that some consumers will respond to price changes
Lee.indd 115 1/2/19 3:15 PM
EBSCOhost – printed on 1/12/2023 10:24 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to https://www.ebsco.com/terms-of-use
Economics for Healthcare Managers116
caused by insurance. (We will develop tools for describing responses to price changes and review the evidence on this score in the next chapter.)
Exhibit 7.2 depicts standard responses to increases in insurance. An increase in insurance (a higher share of the population covered or a higher share of the bill covered) rotates the demand curve from D1 to D2. As a result, the quantity demanded may rise, the price may rise, or both may occur. To predict the outcome more precisely we will need the tools of supply analysis that we will develop in chapter 10.
For provider organizations, an increase in insurance represents an opportunity to increase prices and margins. The rotation of D2 has made it steeper, meaning that demand has become less sensitive to price. As demand becomes less sensitive to price, profit-maximizing firms will seek higher margins. (Higher margins mean that the cost of production will represent a smaller share of what consumers pay for a product.) Higher prices and increased quantity mean that the expansion of unmanaged insurance will result in substantial increases in spending.
Demand theory implies that having patients pay a larger share of the bill (usually termed increased cost sharing) should reduce consumption of care. Does it? A classic study by the RAND Corporation tells us that it does (Manning et al. 1987). The RAND Health Insurance Experiment randomly assigned consumers to different health plans and then tracked their use of care (see exhibit 7.3). Its fee-for-service sites had coinsurance rates of 0 per-cent, 25 percent, 50 percent, and 95 percent. The health plans fully covered expenses above out-of-pocket maximums, which varied from 5 percent to 15 percent of income. Spending was substantially lower for consumers who
cost sharing The general term for direct payments to providers by insurance beneficiaries. (Deductibles, copayments, and coinsurance are forms of cost sharing.)
out-of-pocket maximum A cap on the amount a consumer has to pay out of pocket.
Quantity
Price
D2
D1
EXHIBIT 7.2The Impact of Insurance on
Demand
Lee.indd 116 1/2/19 3:15 PM
EBSCOhost – printed on 1/12/2023 10:24 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to https://www.ebsco.com/terms-of-use
Chapter 7: The Demand for Healthcare Products 117
shared in the cost of their care. Increasing the coinsurance rate (the share of the allowed fee that consumers pay) from 0 percent to 25 percent reduced total spending by nearly a fifth. This reduction had minimal effects on health.
Costs were lower because consumers had fewer contacts with the healthcare system. The experiment went on for years, and the suspicion that reducing use of care would increase spending later was not borne out. Because of the results of this study, virtually all insurance plans now incorpo-rate some form of cost sharing for care initiated by patients.
coinsurance A form of cost sharing in which a patient pays a share of the bill, not a set fee.
allowed feeThe maximum amount an insurer will pay for a covered service.
Coinsurance Rate Spending
Any Use of Care
Hospital Admission
0% $750 87% 10%
25% $617 79% 8%
50% $573 77% 7%
95% $540 68% 8%
Source: Manning et al. (1987).
EXHIBIT 7.3Effect of Coinsurance Rate
MinuteClinic
Mentioning a nationwide shortage of primary care providers, millions of patients newly insured
through the Affordable Care Act, and an aging population, Andrew Sussman, MD, president of CVS’s MinuteClinic division, said, “Minute-Clinic can help to meet that demand, collaborating with local provider groups, as part of a larger health care team” (Nesi 2014).
MinuteClinic started in 2000 and as of late 2017 had more than 1,000 locations (CVS 2017). Its clinics are staffed by nurse practitioners and physician assistants, rather than physicians. The clinics are open seven days a week and appointments are not needed. The nurse prac-titioners and physician assistants diagnose, treat, and write prescrip-tions for a variety of common illnesses. MinuteClinics show customers the prices of care (typically less than the prices in a physician’s office) and usually accept insurance. Most clinics are in CVS pharmacies, although an increasing number are in other sites and some have con-nections with local health systems.
Case 7.1
(continued)
Lee.indd 117 1/2/19 3:15 PM
EBSCOhost – printed on 1/12/2023 10:24 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to https://www.ebsco.com/terms-of-use
Economics for Healthcare Managers118
7.5 Demand with Advice from Providers
Consumers are often rationally ignorant about the healthcare system and the particular decisions they need to make. They are ignorant because medical decisions are complex, because they are unfamiliar with their options, because they lack the skills and information they need to compare their options, and because they lack time to make a considered judgment. This ignorance is rational because consumers do not know what choices they will have to make, because the cost of acquiring skills and information is high, and because the benefits of acquiring these skills and information are unknown.
Consumers routinely deal with situations in which they are ignorant. Few consumers really know whether their car needs a new constant velocity joint, whether their roof should be replaced or repaired, or whether they should sell their stock in Cerner Corporation. Of course, consumers know they are ignorant. They often seek an agent, someone who is knowledgeable and can offer advice that advances the consumer’s interests. Most people with medical problems choose a physician to be their agent.
agent A person who provides services and recommendations to clients (who are called principals).
In late December 2017, CVS Health announced an agreement to buy the health insurer Aetna. Some have suggested that this move could
reshape the healthcare industry by integrating insurance with a pro-vider organization (Abelson and Thomas 2017).
Discussion Questions• For what products is MinuteClinic a substitute?
• For what products is it a complement?
• How would continued expansion of MinuteClinics affect revenues of primary care practices?
• What attributes other than prices would make MinuteClinics attractive to patients?
• Is the supply of primary care physicians large enough to meet current levels of demand?
• Would you expect expansion of MinuteClinics to increase or decrease spending? Why?
• What are the implications of Aetna’s sale to CVS?
• A common criticism is that MinuteClinics locate in well-to-do areas. Is this a concern?
Case 7.1(continued)
Lee.indd 118 1/2/19 3:15 PM
EBSCOhost – printed on 1/12/2023 10:24 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to https://www.ebsco.com/terms-of-use
Chapter 7: The Demand for Healthcare Products 119
Using an agent reduces, but does not eliminate, the problems associ-ated with ignorance. Agents sometimes take advantage of principals (in this case, the ignorant consumers they represent). Taking advantage can range from out-and-out fraud (e.g., lying to sell a worthless insurance policy) to simple shirking (e.g., failing to check the accuracy of ads for a property). If consumers can identify poor agent performance, fairly simple remedies fur-ther reduce the problems associated with ignorance. In many cases, an agent’s reputation is of paramount importance, so agents have a strong incentive to please principals. In other cases, simply delaying payment until a project has been successfully completed substantially reduces agency problems.
The most difficult problems arise when consumers have difficulty distinguishing bad outcomes from bad performance on the part of an agent. This problem is fairly common. Did your house take a long time to sell because the market weakened unexpectedly or because your agent recom-mended that you set the price too high? Was your baby born via cesarean section to preserve the baby’s health or to preserve your physician’s weekend plans? Most contracts with agents are designed to minimize these problems by aligning the interests of the principal and the agent. For example, real estate agents earn a share of a property’s sale price so that both the agent and the seller profit when the property is sold quickly at a high price. In similar fashion, earnings of mutual fund managers are commonly based on the total assets they manage, so managers and investors profit when the value of the mutual fund increases.
Agency models have several implications for our understanding of demand. First, what consumers demand may depend on incentives for pro-viders. Agency models suggest that changes in the amount paid to providers, the way providers are paid, or providers’ profits may change their recom-mendations for consumers. For example, consumers may respond to a lower price for generic drugs only because pharmacists have financial incentives to recommend them. Second, provider incentives will affect consumption of some goods and services more than others. Provider recommendations will not affect patients’ initial decisions to seek care. And where standards of care are clear and generally accepted, providers are less apt to change their recom-mendations when their incentives change. When a consensus about standards of care exists, providers who change their recommendations in response to financial incentives risk denial of payment, identification as a low-quality provider, or even malpractice suits. Third, patients with chronic illnesses are often knowledgeable about the therapies they prefer. When patients have firm preferences, agency is likely to have less effect on demand. In short, agency makes the demand for medical care more complex.
Agency is one of the most important factors that makes managed care necessary. (The other main factor is that insurance plans must protect
principalThe organization or individual represented by an agent.
Lee.indd 119 1/2/19 3:15 PM
EBSCOhost – printed on 1/12/2023 10:24 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to https://www.ebsco.com/terms-of-use
Economics for Healthcare Managers120
consumers from virtually all the costs of some expensive procedures, reducing out-of-pocket costs to near zero.) If all the parties in a healthcare transaction had the same information, expenditures could be limited simply by changing consumer out-of-pocket payments. In many cases, though, provider incen-tives need to be aligned with consumer goals. (Of course, health plans also have an agency relationship with beneficiaries, and nothing guarantees that plans will be perfect agents.) Most of the features of managed care address the agency problem in one way or another. Bundled payments for services and capitation are designed to give physicians incentives to recommend no more care than is necessary. Primary care gatekeepers are supposed to monitor recommendations for specialty services (from which they derive no financial benefit).
7.6 Conclusion
Demand is one of the central ideas of economics, and managers need to understand the basics of demand. In most cases, consumption of a product falls when its price increases, and studies of healthcare products confirm this generalization. An understanding of this relationship between price and quantity is part of effective management. Without it, managers cannot pre-dict sales, revenues, or profits.
To make accurate forecasts, managers also must be aware of the effects of factors they do not control. Demand for their products will be higher when the price of complements is lower or the price of substitutes is higher. In most cases, demand will be higher in areas with higher incomes. We will explore how to make forecasts in more detail in chapter 8.
The demand for healthcare products is complex. Insurance and profes-sional advice have significant effects on demand. Insurance means that three prices exist: the out-of-pocket price the consumer pays, the price the insurer pays, and the price the provider receives. The quantity demanded will usu-ally fall when out-of-pocket prices rise but may not change when the other prices do. Because professional advice is important in consumers’ healthcare decisions, the incentives professionals face can influence consumption of some products. How and how much professionals are paid can affect their recommendations, and recognition of this effect has helped spur the shift to managed care. To change patterns of consumption, managers may need to change incentives for patients and providers.
Lee.indd 120 1/2/19 3:15 PM
EBSCOhost – printed on 1/12/2023 10:24 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to https://www.ebsco.com/terms-of-use
Chapter 7: The Demand for Healthcare Products 121
Exercises
7.1 Is the idea of demand useful in healthcare, given the important role of agents?
7.2 Should medical services be free? Justify your answer. 7.3 Why might a consumer be “rationally ignorant” about the proper
therapy for gallstones? 7.4 Why do demand curves slope down (i.e., sales volume usually rises
at lower prices)? 7.5 Why would consumers ever choose insurance plans with large
deductibles? 7.6 During the last five years, average daily occupancy at the Autumn
Acres nursing home has slid from 125 to 95 even though Autumn Acres has cut its daily rate from $125 to $115. Do these data suggest that occupancy would have been higher if Autumn Acres had raised its rates? What changes in nonprice demand factors might explain this change? (The supply, or the number of nursing home beds in the area, has not changed during this period.)
7.7 Your hospital is considering opening a satellite urgent care center about five miles from your main campus. You have been charged with gathering demographic information that might affect the demand for the center’s services. What data are likely to be relevant?
7.8 How would each of the following changes affect the demand curve for acupuncture?a. The price of an acupuncture session increases.b. A reduction in back problems occurs as a result of sessions about
stretching on a popular television show.c. Medicare reduces the copayment for acupuncture from $20 to
$10.d. The surgeon general issues a warning that back surgery is
ineffective.e. Medicare stops covering back surgery.
7.9 Your boss has asked you to describe how the demand for an over-the-counter sinus medication would change in the following situations. Assuming the price does not change, forecast whether the sales volume will go up, remain constant, or go down.a. The local population increases.b. A wet spring leads to a bumper crop of ragweed.
Lee.indd 121 1/2/19 3:15 PM
EBSCOhost – printed on 1/12/2023 10:24 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to https://www.ebsco.com/terms-of-use
Economics for Healthcare Managers122
c. Factory closings lead to a drop in the area’s average income.d. A competing product with a different formula is found to be
unsafe.e. A research study showing that the medication causes severe
dizziness is published.f. The price of another sinus medication drops.
7.10 A community has four residents. The table shows the number of dental visits each resident will have. Calculate the total quantity demanded at each price. Then graph the relationship between price and total quantity, with total quantity on the horizontal axis.
PriceAbe’s
QuantityBeth’s
QuantityCal’s
QuantityDon’s
Quantity
$40 0 0 0 1
$30 0 1 0 1
$20 0 1 0 2
$10 1 2 1 2
$0 1 2 1 3
7.11 A clinic focuses on three services: counseling for teens and young adults, smoking cessation, and counseling for young parents. An analyst has developed a forecast of the number of visits each group will make at different prices. Calculate the total quantity demanded at each price. Then graph the relationship between price and total quantity, putting total quantity on the horizontal axis.
PriceTeen
CounselingSmoking Cessation
Parent Counseling
$80 10 0 0
$60 15 1 0
$40 20 2 0
$20 40 4 6
$0 50 6 8
Lee.indd 122 1/2/19 3:15 PM
EBSCOhost – printed on 1/12/2023 10:24 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to https://www.ebsco.com/terms-of-use
Chapter 7: The Demand for Healthcare Products 123
7.12 The price–quantity relationship has been estimated for a new prostate cancer blood test: Q = 4,000 − 20 × P. Use a spreadsheet to calculate the quantity demanded and total spending for prices ranging from $200 to $0, using $50 increments. For each $50 drop in price, calculate the change in revenue, the change in volume, and the additional revenue per unit. (Call the additional revenue per unit marginal revenue.)
7.13 A physical therapy clinic faces a demand equation of Q = 200 − 1.5 × P, where Q is sessions per month and P is the price per session.a. The clinic currently charges $80. What is its sales volume and
revenue at this price?b. If the clinic raised its price to $90, what would happen to volume
and revenue?c. If the clinic lowered its price to $70, what would happen to
volume and revenue? 7.14 Researchers have concluded that the demand for annual preventive
clinic visits by children with asthma equals 1 + 0.00004 × Y − 0.04 × P. In this equation Y represents family income and P represents price.a. Calculate how many visits a child with a family income of
$100,000 will make at prices of $200, $150, $100, $50, and $0. If you predict that the number of visits will be less than zero, convert the answer to zero.
b. Now repeat your calculations for a child with a family income of $35,000.
c. How do your predictions for the two children differ?d. Assume that the market price of a preventive visit is $100. Does
this system seem fair? What fairness criteria are you using?e. Would your answer change if the surgeon general recommended
that every child with asthma have at least one preventive visit each year?
References
Abelson, R., and K. Thomas. 2017. “CVS and Aetna Say Merger Will Improve Your Health Care. Can They Deliver?” New York Times. Published December 4. www.nytimes.com/2017/12/04/health/cvs-aetna-merger.html.
CVS. 2017. “MinuteClinic: History.” Accessed January 18, 2018. www.cvs.com/minute clinic/visit/about-us/history.
Lee.indd 123 1/2/19 3:15 PM
EBSCOhost – printed on 1/12/2023 10:24 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to https://www.ebsco.com/terms-of-use
Economics for Healthcare Managers124
Manning, W. G., A. Leibowitz, M. S. Marquis, J. P. Newhouse, N. Duan, and E. B. Keeler. 1987. “Health Insurance and the Demand for Medical Care: Evi-dence from a Randomized Experiment.” American Economic Review 77 (3): 251–77.
Nesi, T. 2014. “CVS Aiming to Open MinuteClinics in RI This Year.” WPRI.com. Published February 19. http://wpri.com/2014/02/19/cvs-aiming-to-open -minuteclinics-in-ri-this-year/.
Tsai, Y. 2015. “Social Security Income and the Utilization of Home Care: Evidence from the Social Security Notch.” Journal of Health Economics 43: 45–55.
Lee.indd 124 1/2/19 3:15 PM
EBSCOhost – printed on 1/12/2023 10:24 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to https://www.ebsco.com/terms-of-use
