Demand for Medical Care
Demand for Medical CareDemand for Medical Care
The demand for medical care is derived from our demand for good health. Michael Grossman was the first to do econometric research on this topic. �Grossman�s work established two approaches for consideration. In the first, medical care is viewed as an input in the production function for health, and in the second, as an output produced by medical care providers (Henderson, p.142).� There are two main factors that determine the demand for medical care. The first is the patient factor. This includes a patient�s health status, demographic characteristics and economic status. The second is the physician factor. This is an interesting topic because it introduces the principal (patient)-agent (physician) problem. We are faced with the problem of diminishing marginal returns for health. At a certain point, we can only produce so much health. The question we need to ask ourselves is what is the optimal budget for medical care? This is a question that can not be easily answered due to our changing demand for medical care. If we get sick we demand more medical attention. Or, if we choose to live more dangerously this will also increase the demand. Therefore, who should pay for these increased costs for medical insurance? �Medical care spending is not the only thing that improves health. Other factors affecting health status, such as life-style, environmental pollution, and technological developments, will shift the total product curve (TV).� Figure 4.1, on the next page graphically shows that health status obeys the Law of diminishing productivity. The graph below the total product curve is the marginal product curve. The derivative of the total product curve is the marginal product curve. This curve represents the marginal change in health status. You can see this curve is negatively sloped and can be negative. The maximum point on the total product curve is the total amount of health that we can get out of life. You may know from calculus that the slope of a line at a maximum or minimum is zero. If you look down on the corresponding point on the marginal product curve it lies on the x-axis. All medical treatment after this point is negative. What does this mean? Yes, medical treatment can be harmful to your health if too much is applied. A good example of this is an X-ray. The radiation from multiple X-rays is extremely dangerous. This negative area is called iatrogenic disease. The marginal contribution of health that you get when you allocate more of your resources into medical care is very small. This is a moral question that we need to answer is when do you stop? Thomas McKeown (1976) noticed that there was a secular decline in mortality rates. The quality of life was one of the major factors....
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