Module Components

• Overview
• Assignments

Topics

• The Demand for Health and Health Care
• Determinants of Health
• Is Health Care Different? Health Care as a Derived Demand

NDNP 803 - Executive Leadership and Healthcare Economics

Module 3: The Demand for Health Care

Is Health Care Different? Health Care as a Derived Demand

So, who drives the demand for health care? In a traditional economic relationship, it is the buyer that drives the demand for a good or a service. However, in health care, often it is the provider that drives the demand in terms of requesting a specific test or medication. It may also be the payer, the insurance company allowing for payment of a specific test once a year (like a mammogram) or the use of specific medication over another. The informed consumer may have researched one specific treatment over another. In other words, the demand for health care may come from several different sources.

Elasticity: The degree to which a demand or supply curve reacts to a change in price. Elasticity varies among products because some products may be more essential to the consumer. An inelastic good or service is one in which changes in price witness only modest changes in the quantity demanded or supplied, if any at all. These goods tend to be things that are more of a necessity to the consumer in his or her daily life.
To determine the elasticity of the supply or demand, curves, we can use this simple equation:

Economists have argued that health care is relatively inelastic with respect to price for individual consumers for several reasons.

First, many consumers need health care, so they will demand a given quantity of health care goods or services regardless of the price or income if these products are necessary to sustain life or well-being.

Second, consumers frequently lack sufficient information or capability to make rational economic choices about health care (asymmetrical information). However, for most consumers, a large portion of their health care is paid by insurers or government programs rather than as a out-of-pocket expenditure, thus, many consumers are often unaware fo the cost of care. It appears that consumers are far more sensitive to the price of out-of-pockt health care than to the cost of health care paid for by insurance plans or government programs.

As healthcare providers we may be asked by our clients to explain the following insurance terms.
Insurance Terminology:

• Deductibles – fixed upfront payments the consumer must pay before the insurance pays anything
• Copayments – which are a fixed amount paid each time a health care service is used
• Coinsurance – which are payments related to quantity and costs of services used, typically expressed as a percent of total costs. For example Medicare pays 80% of part B (outpatient and provider care), the consumer is responsible for the other 20% coinsurance.
• Upper limits – annual or lifetime amounts that will be paid by the insurance company.
  

In conclusion, it is important to consider factors such as barriers to entry and imperfect information as well as derived demand that makes health economics different from other industries. On the other hand, it is essential for health professionals to understand the fundamentals of health economics, as the organizations in which they work are directly influenced by the factors that influence the quantity of health care goods and services supplied and demanded.