QUESTION

 Health Research Methods    

PART 1

2.1 The demand for health

2.1.1 The nature of demand

The demand for a good is influenced by price.  Some laws are made to protect us, like “no speeding” or “no driving after drinking,” while other laws are “natural” laws that are observed as behaviour in various physical and social settings. One such natural law is the law of demand, which relates the price of a good to the quantity of that good demanded.  In Module 1, we reflected on how – as the price of a good increases then the demand for that good falls.  This is not universally true, but for the vast majority of goods and services this relationship holds.  As well as price, economists typically identify four other determinants of demand:

1. The consumer’s income
2. The price of substitute goods
3. The price of complimentary goods
4. Tastes or preferences

In this sub-section we will consider how each of these factors affects demand individually and in combination.

Income: An individual with lower income is more likely to reduce their demand for a good in the face of rising prices than an individual with a higher income. For example, lower income families may be more likely to reduce their consumption of take-out food in the face of rising prices than more affluent families. People with higher income can buy more of everything, so that demand for most goods and services will rise with higher incomes and fall with lower incomes. In some instances, those with higher income buy more of particular goods, but in some cases they may buy less as they switch to better quality alternatives.

Substitutes: If there are goods with similar attributes to the one that has increased in price then consumers may switch their purchase choice to that good if it has become relatively cheaper. For example, if the price of going to the movies increased and the costs of movies delivered via the internet did not (or increased by relative less than movie theatre tickets) it is likely that consumers will choose to watch more movies on-line and visit movie theatres less. The effect of income applies both at the individual level and across individuals – an overall rise in the income of a country is usually associated with more demand for goods and services.

Complements: There is a category of goods whose consumption depends on the consumption of other goods: salad and salad dressing being an example. These goods are said to be complements and the demand for them is linked. Unlike the case of substitute goods where the quantities demanded move in opposing directions when prices change, the demand for complementary goods tend to move in the same direction. As the price of salad falls consumers demand more and the quantity of salad dressing demanded also increases at any given price.

Preferences: Tastes will also affect demand. If, for example, a consumer really enjoys Chinese take-out food then they will be less willing to decrease their consumption than someone who enjoys it less. Also, because consumers are faced with a limited budget their preferences for alternative uses of their resources are also important.

Figure 1

In practice these effects do not happen in isolation, so using the framework of linear demand and supply curves lets us look in a bit more detail at what might happen when the price of a good increases. (Remembering that in our idealised world the choices of the one consumer we are considering would not affect the decisions of suppliers). For almost all goods when their prices increase the quantity demanded falls.

Figure 1 describes the case where a consumer is faced with a choice of two goods: cookies and cake. A consumer with a fixed budget can buy varying quantities of either and these combinations are shown on the graph (ignore the plausibility of purchasing fractions of cookies!). So with a $200 budget, cookies priced at $1.70 and cake at $3.40 our consumer could spend all their income on cake and buy 34 portions or buy no cookies and 117 cookies. They could also buy, or example as shown on the graph,  17 portions of cake and 58.82 cookies.

Figure 2

The choice of how many cookies and how many pieces of cake they would buy would depend on their relative preferences for cake and cookies.  Recalling the indifference curves from the previous module that describe all the combinations of two goods that a consumer derives the same benefit from the optimal level of consumption can be plotted.  The further the distance from the origin the greater the level of benefit (or utility) the consumer derives from their consumption.

Figure 2 shows this is when the indifference curve I is furthest away from the origin and still touching the budget constraint. Curve I’ describes the impossible situation where consumption levels are beyond the consumers budget.  Curve I” is a sub-optimal level of consumption where the consumer is not spending all of their income.

Let us now consider what would happen if the price of one good rose independently of the other.  In this example the price of cake rises to $4.00.  The effect on the consumer’s budget constraint would be to reduce the amount of cake that they are able to afford.  Figure 3 shows how in response to an increase in the price of cake the budget constraint shifts from B0 to B1, reflecting that less cake can be bought and the quantity of cookies that can be afforded has not changed.  In response to this change in price the indifference curve I0 moves inward toward the origin to I1.  Reading of the X and Y axis it can be seen that the quantities of both cake and cookies have fallen in response to an increase in the price of cake.  The changes in demand can be decomposed into income effect and substitution effect. 

Figure 3

The substitution effect is the change due to the relative price change only.  We can isolate the effect this has by answering the question: What combination would make the consumer just as happy as before the price change, but if they had to make their choice faced with the new prices? To do this we imagine a budget curve reflecting the new budget constraint that would allow the consumer to stay on the indifference curve I0. A line parallel to B1 but touching I0 which would show a drop in the amount of cake purchased and increase in the number of cookies purchased.  The income effect is the move from this hypothetical point to X1,Y1 reflecting the fact that in real terms the consumer has become worse off.

                        2.2 The supply of healthcare

In this section the theory of supply is explored in more detail.  The factors that affect a firm or individuals decision are considered in general terms before the specific issue of supply of health care is discussed.

 2.2.1 Supply of goods and services

In the previous module production possibility frontier curves were introduced.  These describe all possible combinations of goods that could be produced given a finite set of resources efficiently used.  In this subsection the nature of supply is described in more detail.  As with demand, there are number of factors that determine willingness to supply:

• The price of a good
• If prices rise a firm is more likely to supply more of it
• The price of inputs used to produce the good 
• As the costs of raw materials rise a firm might supply less 
• The price of related goods
• As with compliments and substitutes and demand the prices of other goods can affect decisions to supply
• Expected future prices
• If prices are expected to fall in the future a firm may be less willing to supply
• The number of other suppliers
• A competitive market might make it more difficult for a firm to increase supply
• Technology
• Technical innovations might mean that a firm can produce the same level of output for a given cost. Technically this would shift the supply curve to the right on the diagrams introduced in the previous module. 
• Opportunity cost
• What alternate uses a firm could put its resources to will determine supply of a good.

Most of the discussion in this subsection focuses on costs. Costing is an important aspect of economic evaluation: a topic visited in a later module. Costs of production are often categorised as either fixed or variable. A fixed cost is a cost that does not vary with immediate changes in output, for example factory rent. A variable cost is one that does vary with output, for example raw materials used in the production of the finished good. The marginal cost and marginal product describe the cost of an additional unit of output and the additional output from one additional unit.

Figure 4

This subsection ends with a description of the law of marginal returns.  Firms typically face the situation where the additional cost to produce a single unit of additional output falls as output increases.  This happens as they realise economies of scale as average costs fall.  However, as illustrated by Figure 4, there comes a level of production where marginal costs rise start to rise as each unit of output becomes more expensive to produce.

2.2.2 The supply of health care 

Economies of scale and scope apply to health care as they do to the supply of other goods and services. Economies of scale refers to falling average long term costs, which in health care provision would refer to the example of the average cost of doing ten hip replacements being less than the average cost when only two procedures are undertaken.  An economy of scope refers to the ability to provide additional services because of the existence of other services.  For example, it becomes possible to offer intra-arterial therapy for ischemic stroke if a hospital has the mix of services (imaging facilities, anaesthetists, interventional radiologists and neurologists) already in place primarily engaged in other activities.

However there are significant differences between the supply of health care and other types of good.  The assumption that there is perfect competition and that supplier’s sole aim is to maximise profits is not valid for health care provision because almost everywhere the producers of health care include government agencies and non-profit organisations as well as profit making firms. Even when all producers are private there is still government intervention such as subsidies, price regulation and public finance.   Unlike manufactured goods, health care is provided by groups of professionals who provide training, regulations, and ethical governance.

Finally, health care tends to be a heterogeneous product, with patients receiving a unique bundle of services that make up their treatment.  It is also difficult to measure all the inputs and outputs of health care.  In a later module how health outputs can be measured will be considered in more detail, but subjective measures such as quality are particularly challenging.

2.2.3 Summary of Demand Shifters

Summary of what can shift the demand curve. After all, in real life, different forces affect our demand for different goods and services and some of these may act as what economists call Demand Shifters.

There are five factors that we listed above that can indeed shift the demand curve to a new position on the grid. 

Simple use and analysis of demand curves yields four very useful predictions that will apply to most goods and services, including many health goods and services.

If you want to increase the demand for a good or service, you can:

1. Lower its price (this would not shift the demand curve! It only would move the demand towards the right, along the initial curve);
2. Lower the price of a complement;
3. Increase the price of a substitute;
4. Increase tastes for the good or service.

……..And just do the opposite if you want to reduce the demand for a good or service.

Demand for Health Services ‐ Examples

Studies from several countries have been analyzed in efforts to compare the elasticity of demand for different kinds of goods and services. These are summarized in the table

below:

Clearly, households’ demand for foreign travel is highly price‐elastic, and this confirms with reports by the travel industry that people take far fewer holidays abroad at times of slow economic growth or recession. Conversely, demand for hospital care is highly inelastic, confirming that when people need curative care—especially at times of serious illness or injury—they are far less likely concerned about the price of the service. Much more useful at the country level, however, are price elasticities that differentiate households or individuals (the customers) by important characteristics such as:

• Income;
• Gender;
• Provider of the service.

This will be illustrated in the case of Peru and then of Pakistan.

Case Study of Pakistan

In the data presented for Peru below, it is clear that the price elasticity of demand for health care by different providers is about twice as large for low‐income individuals as it is for high‐income individuals. This implies that a policy to increase prices will impact relatively low‐income individuals about twice as much as relatively high‐income individuals. In this case, we see that the price elasticity of demand for private doctors is lower than for a consultation at a hospital outpatient clinic or a visit to the health clinic.

Those knowing the situation in Peru are likely to point out that quality of care is a deciding factor here, and that when individuals decide to see a private doctor they feel they are getting better value for their money (better service, available drugs) and are thus more accepting of higher prices.

Case Study of Pakistan

Look at the data in the following table for Pakistan and try to answer the four questions to this exercise.

2.3 Summary and conclusion 

In this module the concepts of supply and demand have been explored with particular reference to health and healthcare. A model of the demand for health and health care was introduced. Grossman’s model provides a framework for looking at how individuals make decisions about their health.

Grossman’s model is important as it provides a framework in which individuals trade-off health in the future and health now for other goods. The module concludes with a short piece of reading that predates the Grossman model and provides a context to the discipline of health economics.

The development of health economics as a discipline began in the 1960s and its origins can be traced back to a paper by the economist Kenneth J Arrow. Arrow pointed out there were issues about health and health care that meant the market could never be efficient. For example, the equilibriums between supply and demand defining the optimal resource usage in terms of prices of goods and quantities supplied and demanded.

Health economics is a fairly new discipline and one that is evolving. The following papers are a historical overview of health economics so do not be concerned by the date of these documents.

QUESTION FOR PART 1

Answer – 200 words.

The Grossman model of health and health care has some interesting conclusions about health inequalities.

1. The rewards of being healthy are greater for high income earners
2. Health can be generated at less cost for a more educated person

In terms of the model can you think why the above statements are true?

We suggest you read to the end of this module and other ‘reading’ documents before answering this question

PART 2

QUESTION FOR PART 2

Answer – 100 words.

Discussion 2.1 – Conducting a basic search” in Module 2 for details of this activity.

On this discussion board:

Share your search terms, the number of searches you conducted, and the number of results your searches yielded with your fellow students on the discussion board. If you had any trouble with this task you can add this to your post, as someone else may have advice to help you.

This discussion does not form part of Assessment 4 – however,  sharing your searches will help you to get feedback that can improve your Assignment 2 Literature review.

Conducting a basic search —– Some basic examples.

Adjust automatic marking as read setting

Initially a search was conducted with multiple ‘MeSH term’ (as identified in the above table) and one ‘Other Term’ (Community Paramedicine). This yielded only 1 result, so the search was broadened and the final search term was: ((Community Paramedicine[Other Term]) OR (Community Paramedic[Other Term]))

This yielded 37 results which included 6 – Clinical Trials/RCT’s, 5 – Systematic Reviews, 1 – Literature Review, and 25 – other texts. 14 of the 37 results included associated data.

The reason for the limited results is due to the lack of evidence and research into this relatively new area of Paramedicine. PubMed has not indexed Community Paramedicine as a MeSH term therefore must be searched as an Other Term. Inclusion of any MeSH term only limits the available texts for review.

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