The Demand for Healthcare Services

The Demand for Healthcare Services

Demand is one of the central ideas of economics. Demand forecasts are essential to management. Most management decisions are based on revenue projections. Revenue projections, in turn, depend on estimates of sales volume, given prices that managers set. The implications of demand are not limited to market-oriented systems, however. Demand theory predicts that if care is not rationed by prices, it will be rationed by other means, such as waiting times, that are often inconvenient for consumers.

Why the Demand for Healthcare is Complex

The demand for medical care is more complex than the demand for many other goods for four reasons:

1. The price of care often depends on insurance coverage.
2. Healthcare decisions are typically quite perplexing.
3. This complexity contributes to consumer’s poor information about costs and benefits of care.
4. The net effect of complexity and consumer ignorance is those producers have a significant influence on demand.

Demand with Insurance

Insurance changes demand by reducing the price of covered goods and services. For example, a consumer whose dental insurance plan covers 80 percent of the cost of a routine examination will need to pay only $10 instead of the full $50. The volume of the routine examination will usually increase as a result of an increase in insurance coverage, primarily because a higher proportion of the covered population will seek this form of preventive care.

The response will not typically be large, however. Most consumers will not change their decision to seek care because prices have changed. But managers should recognize that some consumers will respond to price changes caused by insurance.

Demand with Advise from Providers

Consumers are often rationally ignorant about the health care system and the particular decisions they need to make. They are ignorant because medical decisions are complex, because they are unfamiliar with their options, because they lack the skills and information they need to compare their options, and because they lack time to make a considered judgment. This ignorance is rational because consumers do not know what choices they will have to make, because the cost of acquiring skills and information is high, and because the benefits of acquiring these skills and information are unknown. Most people with medical problems choose a physician to be their agent. Using an agent reduces but does not eliminate, the demand for healthcare services.

Demand is one of the central ideas of economics. Demand forecasts are essential to management. Most management decisions are based on revenue projections. Revenue projections, in turn, depend on estimates of sales volume, given prices that managers set. The implications of demand are not limited to market-oriented systems, however. Demand theory predicts that if care is not rationed by prices, it will be rationed by other means, such as waiting times, that are often inconvenient for consumers.

Why the Demand for Healthcare is Complex

The demand for medical care is more complex than the demand for many other goods for four reasons:

1. The price of care often depends on insurance coverage.
2. Healthcare decisions are typically quite perplexing.
3. This complexity contributes to consumer’s poor information about costs and benefits of care.
4. The net effect of complexity and consumer ignorance is those producers have a significant influence on demand.

Demand for Insurance changes demands by reducing the price of covered goods and services. For example, a consumer whose dental insurance plan covers 80 percent of the cost of a routine examination will need to pay only $10 instead of the full $50. The volume of a routine examination will usually increase as a result of an increase in insurance coverage, primarily because a higher proportion of the covered population will seek this form of preventive care.

The response will not typically be large, however. Most consumers will not change their decision to seek care because prices have changed. But managers should recognize that some consumers will respond to price changes caused by insurance.

Demand with Advise from Providers

Consumers are often rationally ignorant about the health care system and the particular decisions they need to make. They are ignorant because medical decisions are complex, because they are unfamiliar with their options, because they lack the skills and information they need to compare their options, and because they lack time to make a considered judgment. This ignorance is rational because consumers do not know what choices they will have to make, because the cost of acquiring skills and information is high, and because the benefits of acquiring these skills and information are unknown. Most people with medical problems choose a physician to be their agent. Using an agent reduces but does not eliminate, the problems associated with ignorance. Agency models have several implications for our understanding of demand:

1. What consumers demand may depend on incentives for providers.
2. Provider incentives will affect the consumption of some goods and services more than others.
3. Patients with chronic illness are often quite knowledgeable about the therapies they prefer.

In short, the agency makes the demand for medical care more complex. Also, to change patterns of consumption, managers may need to change incentives for patients and providers.e problems associated with ignorance. Agency models have several implications for our understanding of demand:

1. What consumers demand may depend on incentives for providers.
2. Provider incentives will affect the consumption of some goods and services more than others.
3. Patients with chronic illness are often quite knowledgeable about the therapies they prefer.

In short, the agency makes the demand for medical care more complex. Also, to change patterns of consumption, managers may need to change incentives for patients and providers.