Summarize attached

58 Part II: Demand CHAPTER To derive indifference curves through the theor, or revealed , refer- 4 ence, all one has to do is observe consumer behavior over different sets of prices and income In doing so, economists make an important assumption. The bundle an individual chooses is the bundle he expects to make him vest DEMAND FOR HEALTH, INSURANCE, off. AND SERVICES Section 4 1 provides a critique of this traditional economic model by examining some of the assumptions upon which the model is based. In particular, we focus on whether consumers have sufficient information-and proper comprehension of it-to make effective decisions about health health insurance, and health services. Section 4.2 presents and discusses the demand Demand, which economists often define as how many goods and sur vices a. e for health; Section 4.3, the demand for health insurance, and Section 4.4, the purchased it as nati. e prices is the mechanism that dave: a competitive demand for health services. Section 4.4 also presents and critiques important economy. Under demand theory, people s demand for a commodity deter theoretical work by Mark Pauly and empirical work from the RAND Health le , opyright la . mines how much of it is produced and consumed. Price is also determined, Insurance Experiment. Several policy applications are discussed along the in part, by consumer demand If people s tastes change, and they want more way, with particular emphasis, in Section 4.5, on new health insurance prod- of one good and less of another, prices will change, prompting firms to adjust ucts that rely on increased patient cost sharing, and in particular, so called production. Assuming the necessary inputs for production are available, in consumer-directed health plans. the long run supply adjusts in response to demand. But traditional demand theory goes beyond this t forms the basis by which economic theory evaluates social welfare. If people demand a certain 4.1 A Critique of the Traditional Economic Model bundle of goods and services, this means they prefer that bundle to all the In Voltaire's (1759) Candide, the philosopher Dr. "angloss attempts to prove other ways they could spend their money. The things people demand are, by that the obviously fawed state of nature and society is, nevertheless, the best definition, the things that put them at the highest level of welfare. If all people of all possible worlds. Dr. Pangloss states, act in this way, then societal welfare will be maximized.! We can better understand this theory if we consider the microeconom- It is demonstrated that things car not be other . ise: for, ince everything was ics concept of revealed preference. in Chapter 2, we introduced indifference made for a puy:os. everything is nece._arily for the et pur.os.. Not. that curves but did not discuss where they came from. One way to derive them is noses were made to wear spectacles, we therefore have spectacles L.g were to ask people which bundle of goods they would prefer. This technique has clearly ue. ised to wear : reaches, and we have breeches. . . . And since pigs were two problems. First, it is difficult to imagine administering such a popula- made to be eaten we have pork all year round. Therefore, those who have main tion survey given the nearly countless possible bundles of goods from which tained that all is well have been talking nonsense: they should have maintained people can choose. Second, people may not tell the truth, and even if they do, that all is for the best. ( Voltaire : 759, 18) their responses may not predict their behavior. The concept of revealed preference, pioneered by Paul Samuelson Although some economists may not recognize it, demand theory in (1938), eliminates these problems. People are simply assumed to prefer the general and revealed preference in particular bear a striking resemblance to bundle of goods they choose to consume. If they choose to purchase one Pangloss's philosophy. By choosing a particular bundle of goods, people bundle over another they could afford, we can say they prefer the bundle they demonstrate that they prefer it to all others; consequently, it is best for them. purchased. This theory does not rely on an understanding of the psyche of And, if all people are in their best position, then society-which is simply the the individual. Rather, as Robert Sugden (1993, 1949) has noted, aggregation of all people-is also in its best position. Therefore, allowing people to choose in the marketplace results in the best of all possible eco- [T The most significant property of the rev at d pr crence approach . . . is that nomic worlds. e Jo ..ou ..ed to inquire into the . do..- why one thing is chosen rather than The purpose of this section is to demonstrate that this sort of argu- another. We do not look into the factors that go into the deliberation which leads ment is tenuous at best because it is based on assumptions that are difficult to a choice; we look only at the results of that process. to support, particularly in the healthcare sector. We will question the conven- 57 tional meaning of the demand curve where it purports to show the marginal All rights res utility consumers obtain by purchasing alternative quantities of a good. The une: amend i mean age" - un uh -.am , the 2 'n mi s a wealth ne EBSCOhost - printed on 10/4/2022 10:18 PM vis HOFSTRA UNIVERSITY. All use subject to\f\"acct/m - , Chapter 4: Demand for Health, Insurance, and Services we have no way of objectively tezting who i; the better agent fox obtaining what is best for the person We must rely on indirect methods to further our inquiry. To demonstrate that the individual is not necessarily the best juuge, consider how society oecides how to allocate latticulai goous aiiu services. Most societies set rules that are explicitly designed to thwart the sanctity of individual cho' . Below is a list of prac es that a libertarian the sanctity of individual sovereigntywould likely believe should be left to an proscribed by soc ty: a person who oelieves in individual choice rather t ~ personal use of narcotic drugs, gatnbling - riding a motorcycle without a helmet, - seeking the services of a prostitute, and ' selling one's own organs. These are all decisions that main!) affect the individual engaging in the practice rather than other people, Other illegal activities, such as requiring one's child to work rather than go to school, were left out because they have a direct negative effect on someone other than the decision maker. There are, of course, a variety of reasons such activities are often illegal. All of them, however, share one characteristic. Society views them as bad for the individual in question. The rst two, in addition, are potentially addic- tive. Perhaps most salient, however, is that all but the last provide immediate gratication rather than maaimizing longrrun uti itv Why would society abridge individual choice when consumer theory indic tes that people can make welfare ert Frank (198') suggests an interesting possibility People are overly coir cerned with their status and will make the wrong economic, social, and/or moral decisions to enhance this status. One way young people might do this is to try to "look cool,\" for instance, by smoking, using drugs, not wearing seat belts or helmets, or spending $200 on a pair of jeans or athletic shoes. Some ofthese practices are easy to outlaw, although rules against them can not nece . Status-building clothing are not beyond society's grip, Many public schools have adopted uniform requirements as a way of reducing the negative mani- fesrations of status seeking. Even adults might be lured by choices that, in the long run, are bad for them. Frank suggests that this inanifeSts itselfin shortsighted decisions to obtain quick income to spend on oStensibly statusVenhancing consumables (e.g., trendy clothing or cars or new electronic equipment). People gambling heavily are likely doing it not to make money to save for their children's colr lcge education, but rather, to go on a spending spree or pay otfdebts. iaxim'zing choices themselves? Robr rily be enforced. Even behaviors such as excessive spending on 3 ... u. mum mvsu a Part ll: Demand Do Consumers Have Enough Information to n ake Goad C..oices? But harmful status seeking does not fully ac ->unt for law ahn'dgillg personal choice. COJSIGCT selling oiie's own organs, the last example on the list Although people who do this (. iainl, in poor countries) have heart wrenching reasons, society usually views it as a bad idea, and wants to prtr tect its citizenry from making such irrevocable decisions, A study by Goyal and colleagues (LCUZ) found that four out ofevery ve people in a region of southern India who had sold a kidney regretted ioing so; ve out of s' ' reported a decline in health; anJ on '- 'erage, third Thus, another reason for paternalistic laws that limit individual choice amily income declined by one is that some decisions are bad for one's health. A related reason for paternalismgone that is frequently cited in the health eld .;5 that there are \"experts\" who know more than consumers and can thus make better choices. In this regard, 'l'ibor Scitovsky ( 1976, 149 750) has written, The economist's traditional picture of the economy reSc...ules nothing 0 much as a (4 int c rc'tauran- with its long menu (' stomers choose from what is o the .zienz; and ate assumed always to have chosen what most pleases them That assumption unrealistic not Only nfthe economy but of hinese restaurants Most ofus are unfamiliar with nine tenths ofthe entices llSth, we seem invatL ably to order either the wrong dishes or the 5 ions olJ ones Unly on o, when an expert does the ordering do we rcali .c how badly we do on our own and what good things we miss. It would seem clear, then, that society does not always judge people's decisions to be in [l'lLIl' best interests. As a result, it often acts to prevent people from engaging in some activity. Less often do we see situations in which people are told what they must do. This is certainly the ase in health. People are told, for example, that they cannot purchase pharmaceutical drugs without a prescription. However, they are not told that they must take such drugs. To determine whether people are able to make choices that are in their best interest, three other questions must be answered in the afrmati . (I) Do consumers have enough information to make good choices? (2) Do consumers know the results of their consumption decisions? and (3) Are in dividuals rational? Even if people know what they want and can pursue it in a rational manner, they ma' face another impedintentinsufcient information about various alternatnes. Information pl vs an important role in economic theory. Consumers need good information to make utilityrmaximi' iig product choices, rms need good information to choose a product niche and obtain the necessary . m1.\" .= m\usmtau- . puma u z: u: Chapter 1.: Demand for Health. Insurance. and Services - A great deal of research has been conducted in recent years on the impact of report cards, especially those prodded to employees as part oftheir annual open eniollinent decisions for health insurance (A search ofthe online database PubMed found 144 article. with \"report car \" in the title during the period from 2000 to 2008.) Ifone v ere to analy: e the literature in a sound bite, it might go like this: Report cards do have a positj re impact on a small percentage of indixiduals who read and understand them; these consumers tend to choose higlierrquality products. But most people are unaffe.ted. In fact, one study that examined how report :ards affected the quality of health insuran- ' choice among federal employees found ex ctly that. it concluded that report card ratings \"had a meaningful inuence on individuals' choices, particularly for individuals choosing a plan for the rst time. Although . . . a very small fraction of individual decisions were materially affected by the information, for those that were a ectecl the implied utility gains are substarr tial\" (Iin and Sorensen -_'006;. Findings ofinterest from other studies of report cards include the folv lowing: - Certain subgroups of the population, particularly those who are more likely to he economically and/or medically vulnerable, tend to be less responsive to report cards than others. As one group of researchers re ports, The health care system already offers many barriers and obstacles that ham- per rhese groups from obtai iing optepriate, effective and culturally sensi- t ve :are The .iarattensti *s that make I idividuals iulnerable in the health syStem .povertv, lack ofe..uc.ttion, inartitulateness lack .fl-anhsh language) .ften c_iiie t .gcther, leading to multiple cumulative problems. This VIIlnCF ability powcrlessness, and potential for additional ditfercntial dlsan-ltnnt' arising from the proliferation of report cards provide a compelling argument for further polity analysis and action (Davies, Washington, and Bindnian 1002, 394). i hese researchers suggest various strategies to help vulnerable popular tions use report cards, One issue, obviously, is that members ofthese pOpv ulations are less likely to use the Internet, where much ofthe report card information resides. It is hardly surprising, then, that studies have found that report cards are more inuential in the choices made by younger, college-educated consumers (Howard and Kaplan 2006), 0 The way information is presented in report cards is critical. Researchers have learned how graphi al format, wording, and prose can be used most effectively. For e unple, a common format where different evaluation criteria are evaluated using one, two, or three stars was not found to be ~ :u m mum mv: :x A" 5: "1.\" u my, , mama\": \"may. E Part II: Demand mmm 7 useful (Va' ma and McGlynn 2002), A study that tested seven reporting formats found that fewer than one-l ilfofrespondents ages 4575 could interpret bar graphs, and that the most successful used words such as age,\" or \"worse\" (Gerteis et al. 2007). 0 Report cards can have direct and indirect positive effects. A case in point is a s_\\ stem used in New York State, where the mortality rates ofpatients served by particular hospitals and individual surgeons are calculated and publici ed. This provides two incentives to improve quality: (1) Patients should prefer hospitals and surgeons with better rates, and (2) hospitals and surgeons should prefer not to look bad compared to their peers. Although there has been some disagreement over how much of an elf the program has had and why (Epstein 2006), most studies show that it has resulted in a substantial decrease in mortalityias much as 41 percent (Chassin 2002). \"better,\" \"ave borne research indicates that people can do better with [or informa~ tion A huge amount of information could make you less informed than a smaller amount in either oftwo ways. Jne is that you don't even begin s fting the information because the task is so daunting. 'l he other is that you do try to understand it, but because it is so complicated you learn very little. In one study of the workingrage population, hibbard and colleagues (2000) conducted a randomized controlled experiment examining how well people understood healthcare report cards. One of the experimental inter- ventions was providing a subgroup of subjects with additional information designed to help them better understand the content of the report cards, including \"inStructions on how to use the information and rationales about why the information is important\" ( 139). Curiously, the group that was given more information performed worse: They answered 84 percent of questions about a comparison chart correctly, compared to 91 percent by those who did not get the additional information. They also answered questions about plim features less accurately (84 percent correct versus 94 percent for those given less iiiiormatioii). McCormack and colleagues (2001) conducted a similar randomized controlled experiment among seniors covered by Medicare. Subjects were randomly assigned to three groups. One group was given a standard informa~ tion book that all program beneciaries rec led Mrdirurrand 72m. A second group received the book and a detailed report providing report card ratings on the quality of care provided bv Medicare managed care plans in their geographic area. A third group received a shorter version of the report (tha is, more information than the rst group and less than the second). Once again, this study found that the subgroup that received the detailed quality informAtion was less likely to use the information provided and less likely to change health plzms in the next open enrollment period than those who did not receive any information beyond the Median: and Tan handbook. 'ed, c- Ar. m my\" u my, . m.:s.=,:w=emv \f\"scone" ~ , Chapter 4: Demand for Health. Insurance. and Services old age. Fo' ma reason they may mm the \\V'ong tndeo'hqivm their turn Pn'f Erin's, betwem Llll'rL'hK consumption and 'ings for retirement. 1' :ople understand that saving more is in their best interest. Neverthe'r less, they tail to do so, in part because they do not want to face the prosper ofdiminished abilities in old age. Hence, to ensure that people will have the nancial resources to take care of themselves, society makes the decision tor themwe override indiVidual choice by taking money out of people's payA checks .vhcn they are younger. This happens in nearly all countries. Examples from the United States are the Social Secl-rity and Medicare programs. In summary when cognitive dissonance is present, there is little reason to suppose people will act in a rational manner by making decisions that truly maximize their utility. ls Social Welfare Maximized When Individual Utilities Are Maximized? This section examines proposition . . of the syllogism presented earlier, that social welfare is n aximil ~d when individuals maximize their own utility. This is another way ol'stating Assumption 5 from Table 3.1: Auumptian 5: Social welfare is solely the sum ofindividual utilities. For the time being, we will assume that society can and does redisV tribute income (in a manner that society feels will enable it to achiev~ Pareto optimality). This allows us to explicitly examine the advantages of allowing for consumer choice in the health market without worrying about issues of equity (which is the focus oliChapter 9). While the proposition that social welfare is based solely on individu als' welfare is a philosophical issue and cannot be proved true or false, two arguments question its validity The rst is from Sen (1982, 1987, 1992), who calls this philosophy 'weltarism, which \"is the view that the only things ofintrinsic value for etlncal calculation and evaluation of states ofaft'airs are individual utilities" (1987, 40). Sen's arguments, which span several books, are too lengthy to be properly summarized here. One reason he rejects the ' ' t approach is that it does not allow us to distinguish between different qualitirx of utility. He suggests that if my unhappiness gives you pleasure, that counts as much under the welfarist approach as anything else that increases your well-being. In contrast, one might believe a society should devote its wel resources to meeting somewhat more lofty desires. A second reason is that in dividual welfare does not seem to rely solely on the goods a person has; other aspects ol'life, such as freedom (and health), are also important. Frank (1985) brings up another reason to doubt that social wellare is the sum of individual welfare, noting that much of what individuals . k is Part II: Demand {I3.vhnav . n we on :7 s .... status or rank. But this is relative, my 5. ti s ri es above V'ourshyour st tus necessxrily goes down. This leads to consumption tl at does not add to the social w are For example, if] buy a :7. icy car, I get utility from the various characteristics of the ca. and lion: the fact that l have distinguished myself from you. Once you (and others like us; buy the car, the latter part of my utility is canceled out. Total utility (or social welfare) is thus lower than the sum ofour individual utilities. We consider this issue in much greater detail in Chapter 5, when we discuss negative eXternalities ofconsumption. There is strong reason to believe the welfare ofa society is more or less than the suln ofits individual components. individual welfare includes aspects a society may consider too base or selsh to want to maximize, such as wish ing ill on others, and individuals tend to emphasize status. We will argue in Chapter 5 that even though seeking status is often a good thing, societies may nevertheless wish to deemphasize it. To conclude this section, we return to the syllogism with which it began. Neither of the two premises of the syllogismisoc imized when individual utilities are maximized, and individual utilities are al welfare is maxi maximiv 'd wh 'Il people are allowed to chooseappears to hold true in the healthcare area. lhus, social welfare is not necessarily maximized when people are allowed to choose. [11 the following sections, we apply this conclusion to the three KC'V areas in demand analysis- health, health insurance, and health services. 4.2 Demand for H aalth The bulk ofdemandrrelated research in health economics has been devoted to demand for health services rather than demand for health itself. Health is not a commodity, and thus is much harder to conceive of and to measure. The issue has not been ignored, however. In Fact, because .vlichael Grossman gave the subject a thorough treatment three decades ago, many economists probably have not seen a compelling reason to revisit it. Some recent re search (not explored here because it goes beyond the scope ofthis book) has used the concept to investigate an even broader question: What causes some people to be healthier than others (Evans and Stoddart 1990; Heymann er al. \"2006)? Grossnt i's original ideas are laid out in a Journal article (1972a) and a book (1972b). They are based on (but deviate from, another economic concept, I! :mmi capital theory. That branch ofeconomic theory examines the conditions under which people choose to invest in themselve5#for example, investing in education or job training to improve their future economic pro ductivity, and thus, their wages (Becker 1964). lust as investment in capital equipment can result in greater production {or a rm, so too can investlnent in oneselfprovide a parallel result. , mm . a): m \"a; .u u nun.- m.=ha=.=K'I-:=.I'e