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Price and the Demand for Health Services

By August 10, 2017Commentary

The price elasticity of consumer demand for any good or service refers to how much additional or reduced demand there will be as the price decreases or increases.  Like anything else, health care services and products are presumably subject to general economic laws, with some wrinkles.  A number of years the Rand organization actually conducted a randomized clinical trial in which people were assigned to various types of insurance coverage and resulting utilization of health services was examined.  A general price elasticity of around minus .2 was found meaning that for every $100 increase in the price of a health care service, there would be a 20% reduction in demand.  Health care prices are complex when people have insurance, since the real price to the consumer is not the full price paid to the provider but the cost-sharing amount paid by the patient.  A new study in the Journal of Health Economics uses variation in this cost-sharing amount to analyze price elasticity.    (JHE Article)

The authors used a commercial claims database from 2006 and 2007 and focused on the out-of-pocket spending for the patient.  They constructed price indexes and attempted to understand if the impact of price on utilization was primarily to deter the seeking of treatment, i.e., limit the number of episodes of care, or to limit utilization within an episode.  They found that the effect was almost all in regard to the number of episodes; in other words faced with higher cost sharing, patients are likely to start fewer episodes of treatment.  The underlying economic analysis of the data is quite complex, but the results are consistent with what we would expect.  What is not resolved by this kind of research is whether the patients are foregoing treatment for health issues for which seeking care would have been appropriate.

One implication of the research is that as providers raise prices to commercial plans, cost-sharing likely rises and the incentive for patients to avoid care increases.  Another implication of the research is that if make health care services “cheaper” to the consumer, i.e., eliminate cost-sharing, utilization will rise, and the patient won’t feel any constraints regarding the appropriateness of seeking the care, nor will they likely be encouraged to engage in healthier behaviors.  That is the effect of our Medicaid system for many beneficiaries.  That has to change.

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