DEMAND AND SUPPLY

Demand and Supply

Demand and Supply

Introduction

Health economics is widely understood to encompass the study of the demand and supply for medical services that include physician services, services provided in hospitals and independent laboratories, pharmaceuticals, etc. and for health insurance, as well as comparative studies of different health care systems. It is observed through various studies that United States has great consumer demand for health care services that includes the study of the determinants of demand for health itself, global public health problems, and the nonmedical inputs into health, such as a decent living standard, education, physical and social environment, and personal lifestyle choices, to the extent that they are exogenous (e.g., independent of one's health status). Although the nonmedical factors are increasingly realized to be important in achieving a healthy community at an affordable level of expenditure, most courses in health economics are primarily concerned with the provision of medical care and with health insurance that primarily covers medical care. This chapter will adhere to that tradition since expenditure on medical care, insurance, and research represents such a high proportion of gross domestic product (GDP), especially in the United States, and a proportion that is increasing in all high-income industrialized nations. We also focus on medical care as an input into health because it provides no benefits other than its contribution to health, unlike diet, recreation, and exercise.

Discussion

Medical care's demand and supply differs from most other expenditures in the United States, even those that we think of as human capital investments, because much of it occurs as a result of negative shocks to health that is largely unanticipated. It is the combination of the degree of uncertainty about one's future health state and the high cost of medical care relative to household budgets that makes the transferring of risk to a third-party payer through insurance such an important phenomenon in the market for health care. For this reason, the role of health insurance will be discussed before the analysis of markets for other health care services. (Johnson-Lans, 2006)

Cost-Benefit and Cost-Effectiveness Analysis

Cost-benefit analysis is a strategy for comparing benefits with costs in Health care consumer industry. It compares marginal benefits and marginal costs and employs the rule that one should devote resources to a use until the extra or incremental cost of the last unit just equals the incremental benefit of that unit. This rule assumes that marginal benefits are declining and marginal costs are either constant or rising in the health care consumer industry. The underlying assumption is that people are rational and thus want to maximize benefits relative to costs. This approach is used to answer whether an activity is worth undertaking or continuing. It can be used only if we can measure both costs and benefits in the same metric. We can only decide whether the cost of a medical treatment is worth it if we can establish a monetary value for the benefit. For example, when considering whether to undergo heart surgery, the probable effects of the ...