Price and Income Elasticities for Medical Care Services

Abstract

This paper develops a framework for estimating demand for medical care, expanding Grossman’s ‘investment model’ in three significant ways: multiple medical inputs are allowed in production of health, reimbursement insurance is introduced (altering the net price of care) and choice of different ‘styles’ of care is allowed. Demand curves are estimated from 1963 United States household survey data, with the analysis limited to those with positive observed quantities of service. Use of explicit parameters from insurance policies to defined net price is a unique empirical aspect of the paper. Price elasticities of demand for hospital, physician office and hospital outpatient services are found to be small, all lying below 0·2 in absolute value. Wage income elasticities are positive and non-wage income is found to have no effect on demand, both as hypothesized by the model. Insurance coverage is also shown to influence price of services used, as does wage income and the quantity of services demanded. These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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