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Income Elasticity Of Health Care Demand Economics Essay

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Published: Mon, 5 Dec 2016

The concept of ‘Elasticity’ has an important role in economics. The understanding of income elasticity of healthcare demand and expenditure is important to understand the health economics of the country and to guide policy making. United States and United Kingdom are the pioneers in research in health economics and it gained importance through many of their research only since the past two decades. The scope of studies is still been confined only to certain areas to cover a particular aspect scattered over a period of time in India. The World Development Report (WDR) of 1993 views health as a basic human right and stress the necessity of providing cost effective healthcare for the poor and that it can contribute towards alleviating poverty (11, 5). Hence understanding of health economics is essential for policy makers and for those guiding them.

Income elasticity – Definition

Elasticity in economics refer to the response in demand or supply in response to the price or income. The Income Elasticity of Demand measures the rate of response of quantity demanded due to an increase (or decrease) in consumer income(18) The higher income elasticity, the more sensitive demand for a good is to changes in income. High income elasticity suggests that when a consumer’s income rises, consumers will purchase much more of that good. Negative income elasticity means that the good is inferior, and an increase/decrease in income would decrease/increase the demand for that good. Positive income elasticity means the good is normal, and an increase/decrease in income would increase/decrease the demand for that good.

Healthcare demand

The types of health care services offered vary widely and we expect that the elasticity of demand for specific service types would vary as well. There might be a differential demand for inpatient services, outpatient services, acute and preventive care, lab work, office visits, pharmaceuticals, x-rays, and a variety of other goods and services. This heterogeneity in healthcare demand suggests that it would we more informative if separate demand elasticities for each category of health services is estimated (3).

Healthcare is a luxury good?

The Economist magazine stated this as a conventional wisdom in 1993, writing: “As with luxury goods, health spending tends to rise disproportionately as countries become richer….´ (quoted in Blomqvist and Carter, 1997, p. 27) (19). Since the seminal papers by Kleiman (1974) and Newhouse(1977), much emphasis has been given to the role of income in determining health care expenditure (1, 4, 6, 26). The debate is still open on whether health care is a luxury or a necessity good, namely, if income elasticity of expenditure is above or below unity (7, 19, 20, 21, 27, 25). However recent studies prove that it is not a luxury good after further analysis and considering biases (2)(28). A study reconsidering the long-run economic relationship between health care expenditure and income using a panel of 20 OECD countries observed health care as a necessity good over the period 1971-2004 (6) (9).

Income elasticity in Healthcare demand

Contrary to many earlier studies in rural India, as with studies in many other countries, demand for healthcare was found to be price and income inelastic(17). Products and services can be classified as necessity or discretionary. Necessity goods are expected to be relatively income inelastic, while that for discretionary goods is expected to be relatively responsive to income changes. However, it is difficult to classify health care services in general as necessity or discretionary (3). Because of the high income elasticity of demand for healthcare services in India, the demand increased disproportionately with the rise in income making the cost of operating such systems not sustainable (15). Such studies estimating elasticities of demand for healthcare services and that of health insurance are only very few (12). Elasticity can themselves vary with income. For example, a good that is a necessity for the rich can be a luxury for the poor. Yet another study with OECD countries showed income elasticities are higher at low-income levels and lower at higher income levels (16).

Income elasticity and health insurance

When consumers have the benefit of free access to healthcare, changes in their income does not have an effect on their ability to obtain such care (8). Two studies done by Marquis and Long (1995) and Marquis et al. (2004) shows that the all else being equal, the demand for health insurance does not significant change with personal or family income. The estimated income elasticities in the two studies were in the range of 0.01 to 0.15 and 0.03 to 0.04 respectively with health insurance (12, 22, 23). In both these studies, family income was measured relative to the federal poverty level.

Income elasticity and User fee

There are several studies to show that that the out-of pocket expenditure is quite large as people prefer to visit private facilities rather than public for curative care. (11, 24, 30). The utilization of healthcare services by the poorer and needy sections is affected by the implementation of user fees possibly due to its regressive nature. This argument presupposes that the poor are more price sensitive for health services than the rich are. And regarding the elasticities, the demand of these poorer section lies on the elastic segment of the demand curve of the community.

Income Elasticity and Ageing

The future cost of health care will increase in ageing societies with population ageing being a key driving force(13). Part of this is because of the fact that the forecasters assume that the health care cost will raise as fast as the GDP. But they do not consider that technological change will continue to push up health care expenses as societies adapt to newer treatment modalities. Elderly have a higher health care demand and are informed too. In most developed countries including Japan where it is an aged population, health care is heavily subsidized along with long-term care insurance(14). Because of this, an increase in household income would not increase the demand for healthcare. This is one reason for low income elasticity in developed countries including United states. However, in developing countries like India where the population of elderly are increasing in both proportion and absolute numbers, the scenario will be alarming. Besides GDP, some of the other factors contributing to the rise in healthcare expenditure include higher life expectancy, female labor participation and decreasing fertility rate (10).

Conclusion

It is of the view that the services that are highly sensitive to prices and income and that would generate large positive externalities and those life saving measures which are income sensitive should be provided free or at a subsidized price to those who deserve. More research on health economics is needed and if not taken into account, are likely to provide policy makers with misleading results.(6)


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