Chapter 9 - The Economics of Health and Healthcare, 7/E

Chapter 9 – Consumer Choice and Demand Key Ideas This chapter begins by linking Chapter 9 to Chapter 7 (health capital) with a short piece on time preference, using indifference curves. Consumers with a preference for the future (low rate of time preference) choose more health investment than those with preference for the present (high rate of time preference). The standard demand analyses start with the prices of care. We add the unusual features of coinsurance rates, which lower prices, and time costs, which raise prices. Empirical analyses indicate that consumers react similarly to health care demand incentives they do to other goods. Fractional coinsurance tends to increase aggregate expenditures because purchasers are not facing the full prices for what they buy. Teaching Tips Time costs may seem strange to some students. Ask them whether they would be willing to travel across town free of charge (but taking time) to take advantage of a bargain. If not, why not? This is a good place to review price and income elasticities, perhaps with reference to chapters 2 and 3. One may want to emphasize the welfare losses due to excess consumption from insurance. Note that the loss reflects the difference between the cost in providing the good and the valuation that the individual puts on it. Material on Page 184 alludes to a natural experiment studied by Tilford and colleagues. They examined the response of previously uninsured school children in the Mississippi Delta region of Arkansas to the implementation of widespread health insurance. The straightforward “before-and-after” design is typical of research using natural experiments. What would the children (or really their parents) do when they suddenly had coverage? Would there be “pent-up” demand, with greater than normal health expenditures, until old problems had been cared for and cured where possible? Or would there be lower than average use, showing perhaps that the same reasons their parents had chosen to remain uninsured were still in operation? These researchers found little support for the “pent-up” hypothesis. Health care increased in the four years following the introduction of insurance; at the end of the study period, these children were consuming health care fairly typical of other insured children. This actual pattern suggested that the children took some time to change old patterns of use or even nonuse of health care. Instructors and their classes may wish to examine the advantages and disadvantages of looking at natural experiments? Chapter 9 – Consumer Choice and Demand - Multiple Choice A low rate of time preference means that: we value the future highly compared with the present.* we value the present highly compared with the future. we prefer not to spend time producing health care. health care entails time costs of production. Consumers with high rather than low rates of time preference, choose to: spend relatively more on consumption because consumption goods provide immediate utility.* spend relatively more on health investment because health investment will provide more goods in the future. Are more likely to smoke because smoking addresses immediate (addictive) needs. answers (a) and (c) are correct. * When a good’s price falls, we typically buy more because: the marginal utility per dollar increases. the effective income rises. preferences change. answers (a) and (b) are correct. * We have different sets of indifference curves when sick than when well because: we do not use certain health-related goods when well.* insurers mandate that we spend on health care. drugs are too expensive. consumers are not rational when ill. If Ellen can earn $20/hour and each visit takes 1.5 hours of her time, then the time costs of a visit are: $10. $20. $30.* $40. Suppose (in addition to problem 5) that Ellen must also pay $20 per visit out-of-pocket. Her full price is: $30. $50.* $70. $90. Suppose that with the parameters of questions (5) and (6), that Ellen makes 10 visits per year. If the full visit prices rise from $20 to $30 out of pocket, and her number of visits falls from 10 to 9, then the full price elasticity is approximately. 0.0. –0.6.* –1.2. –6.0. Suppose that with the parameters of questions (5) and (6), that Ellen makes 10 visits per year. If the full visit prices rise from $20 to $30 out of pocket, and her number of visits falls from 10 to 5, then the full price elasticity is approximately. 0.0. –0.8. –1.6.* –2.4. Figure 9-5 shows two sets of indifference curves. This suggests that: consumer demand for health care is not stable. it is necessary to account for an individual’s health status when examining demand.* health care is a normal good. health care is an inferior good. If Ellen does not work outside the home, her time price: is zero because her time has no value. is positive, but probably less than the wage she could have earned if she was working. reflects the cost that it would take to hire someone to watch her children. answers (b) and (c) are correct.* A reduction in the number of visits may mean: less care per patient more effective care per patient. different types of care per patient. answers (a), (b) and (c) are correct.* Some drug rehabilitation programs often offer free care (0 out-of-pocket charges). Demand for care may not be high, however, because: clients do not want treatment travel and waiting time costs are high.* employers do not want employees to get treatment. answers (a) and (c) are correct. Education may be an important determinant of health care demand because: better education means that people know which goods are better or worse for them.* people must buy less health care in order to get more education. people must earn more money to get more health care. people must know to avoid illegal drugs. Suppose that a state or local government increases the tax on cigarettes. Comparing the quantity demand after the tax is imposed with the quantity demanded before the tax was imposed describes a: controlled experiment. stratified experiment. laboratory experiment. natural experiment.* Suppose in Figure 9-7 (in the text) that P1 = 20, Q1 = 20, and Q1 = 30. The welfare loss due to insurance is: $0. $50.* $100. $200. Suppose in Figure 9-8 (in the text) that P0 = 60, V0 = 10, P1 = 90, and V1 = 15. The welfare loss due to insurance is: $0. $50. $75. more than $75.* If the price elasticity of demand for visits is –0.2, then a 10% increase in price leads to a ____ in quantity demanded. 2% increase 2% decrease* 20% increase 20% decrease If the price elasticity of demand for visits is –0.2, then a 10% increase in price leads to a _____ in expenditures. 2% increase 2% decrease 8% increase* 20% decrease If a researcher finds that the price elasticity for visits to a particular hospital is -3.0, this means: all hospitals could raise their prices and raise their profits. the hospitals serve as complements for each other. the hospitals serve as good substitutes for each other.* the hospitals are normal goods. Suppose the income elasticity of demand for visits is +0.7. A consumer was spending $100 on visits and her income doubles. She will now spend: $107. $170.* $270. $700. Researchers have found that income elasticities of health care demand are less than ____ at the individual level, but generally greater that ____ at the national level: 0; +0.5. +0.25; +0.5 +1.0;+1.0.* +1.0; 2.0. Suppose a country has an income elasticity of demand of +1.2. If income ___, then the share of GDP going to health care _________. rises; will fall. rises; will stay constant. falls; fall.* there is not enough information to answer. Suppose a country has an income elasticity of demand of +0.8. If income ___, then the share of GDP going to health care _________. rises; will fall.* rises; will stay constant. falls; fall. there is not enough information to answer. If a 10% income increase leads to an 15% increase in health expenditures, then the share of income going to health expenditures: rises.* stays constant. falls. there is not enough information to answer. Insurance can impact the per unit price of health care because: people may negotiate the prices with their providers. there may be deductibles that force people to pay the entire price over some ranges.* hospitals may charge more to subsidize the care for the uninsured. answers (b) and (c) are correct. Fractional coinsurance _____ the price elasticity of demand by _____ the out-of-pocket cost. increases; decreasing. decreases; increasing. increases; decreasing. decreases; decreasing.* If the coinsurance rate increases from 0.10 to 0.15, this raises the effective money price by ____. 0.05 percent. 5 percent. 25 percent. 50 percent.* Compared to men, women have ____ health expenditures earlier in their lives ___ and ____ health expenditures later in their lives. lower; lower. higher; lower.* lower; higher. higher; higher Low income Americans are found to receive worse care than others as evaluated by 15 of 20 core measures. This difference can be explained by: lower income. worse access to care. different care-seeking behaviors. answers (a) – (c) are correct.* Increased health insurance since World War II explains about ____ percent of the increase in expenditures per capita: 10.* 20. 30. 40.