Demand

Each good and service has its own characteristics that determine the quantity consumers are willing and able to [Page 134]buy. The most important influence over how much of a good or service consumers will buy is its price. Other important determinants include prices of related goods and services, income, consumer preferences, and demographic characteristics. The demand for physician visits, for example, depends on the price of visits, prices of related goods and services such as hospital outpatient services or home care services, income, age, health status, and insurance coverage. Demand analysis seeks to determine which factors are most influential in determining how much health care people are willing and able to purchase. Measures of the responsiveness of consumer demand to changes in prices and incomes represent important policy parameters. Understanding these factors help us formulate health care policies, explain variations in the use of medical services, determine effects of health insurance practices, provide more accurate forecasts of use, and assist in pricing medical services.

Consumers demand good health. It makes them feel happier and provides a return, just like an investment good, in the form of increased earnings or a decrease in sick days. Consumers produce health by purchasing medical inputs in the market as well as by devoting time to preventive measures. The demand for health care is derived from the more basic demand for health. It is a medical input used to produce health. Health care economists focus attention on the demand for health care. Analyzing the demand for health care as a derived demand provides a better understanding of factors that determine how much health care consumers will buy. This, in turn, helps in formulating health care policies.

Consider the demand for physician visits, a type of health care. A demand schedule (curve) for physician visits shows the relationship between price and quantity demanded during a particular period, all other things being unchanged. Consumers tend to purchase more physician visits at lower prices than at higher prices. This inverse relationship between the price of visits and quantity demanded is known as the law of demand. Changes in quantity of physician visits demanded in response to the change in price are reflected in movements along the demand curve.

When assessing the relationship between price and quantity of physician visits demanded, it is important to understand the true price of this service. Consumption of a health care service often requires a considerable amount of waiting and travel time. When the value of time a consumer gives up represents a significant portion of the money price of a health care service, the value of time should be taken into account when calculating the true or full price of that service.

Health care demand studies focus on the price elasticity, or the percentage change in the quantity demanded resulting from a given percentage change in price. Price elasticity values are negative because prices and quantities demanded move in opposite directions. Health care economists are interested in the magnitude of the response and often refer to these elasticity values in absolute value terms. Price elasticities are affected by the nature of the good or service, the availability of substitutes, and whether the good or service is used alone or in combination with other items. Consumers perceive few substitutes for health care, so their purchases are not very price responsive. Price elasticity values for medical care tend to be in the inelastic range, indicating, for example, that a given percentage increase in price will lead to a smaller percentage decrease in quantity demanded. Information on the responsiveness of consumers to changes in price is used to determine the effects of health insurance practices and government policies.

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