Module 3: Identifying Demand for Health

Given the characteristics that distinguish health from traditional commodities (Module 2), demand analysis utilizes the concept of need “to gain a better understanding of decisions in the health care sector.”(1) Still, even the concept of need requires further explanation.

In particular, need can be classified into “normative need,” determined professionally according to a technically-defined standard (e.g. the standard of good health), and “felt need,” determined by personal judgment. Although demand is typically described as the expression of an individual’s wants, the demand for (and ultimate consumption of) health care combines both normative and felt need. This is because health care decisions are often made based on both the influence of the supplier or physician, and personal preference. The presence of an “agency relationship” between patient and provider marks a main difference between health care and other traditional commodities.(2)

Fortunately, health care decisions are manifested in market action – or the acquisition of health services, regardless of the source of influence. As a result, we are able to identify the demand for health through the demand for health services. This demand lies at the intersection between consumer willingness to pay and ability to pay.

Valuation

Although values are typically expressed in monetary costs, health can be considered a “social service,” where prices are confounded by insurance schemes and public subsidies. If demand is a measure of willingness and ability to pay, then further economic analysis raises the question of whether health can be quantified in nonmonetary terms. Part of this valuation is using methods to determine the value or preference of desired health states.

For instance, measurement techniques used in health economics studies include the visual analogue scale (VAS), the time trade-off (TTO), the standard gamble (SG), and the person trade-off (PTO) for a range of health states. Visual analogue scale (VAS) provides a scale from 0 (poor state comparable to death) to 100 (best state imaginable), and asks for a ranking order of health states from most to least desirable if all are given the same life-expectancy. Time trade-off (TTO) identifies the trade-off between years of life and quality of health, or specifically what “number of years of ideal health [is] considered equivalent to [x] years in the given health state.”(3) Standard gamble (SG) assesses risk and quality of health, asking for a preference between “living [x] years in a given state with certainty…or…accepting a risky procedure that offered a chance at living the [x] years in ideal health but presented some risk of immediate death.”(4) Finally, the person trade-off (PTO) method identifies the valuation of health programs, asking for a preference between ensuring full health of n individuals and preventing the onset of a particular illness in a reduced number of people to improve their health states for a set time period.(5)

The various methods of assigning value to different states of health can be useful when measuring demand implications for public policy. However, these studies typically involve varying specifications to model the parameters of interest. Additionally, population studies are typically rife with variation between individual responses; this is due to a number of factors, including individual interpretation of different health states, perceptions of risk, time, distribution, or any factor affecting personal preferences, and “underlying strength of preference values assigned to the same health state.”(6)

Nevertheless, in an attempt to connect demand to the payment and use of health services, studies on the perception of health care often measure willingness to pay by the contingent valuation (CV) method. The CV method is a broad technique based on conducting surveys to interpret how much consumers are willing to pay for a good or service relative to other products.(7) Specifically, studies use the “willingness to pay” indicator as a “perception of the relevance to a specific health need and the extent to which [health resources] provide a service that people value.”(8) Although CV results may be “highly affected by measurement errors and [thus] minimize the reliability and validity of results,” the method is still considered a suitable way to assess the value of public goods or services, including health services.(9)

Case Study: The Value of Health Insurance in the United States

Health insurance is typically a private enterprise in the United States, provided to workers by employers or bought by those who can afford it. However, those who are uninsured are often the people who would most benefit from insurance, as they are generally in the poorest health, or at risk for disease. This typically includes the unemployed, ethnic minorities, those without higher education, and impoverished communities. By investing in public insurance or universal healthcare (the standard for many European countries), money is pooled for the greater population; everyone pays in according to what they can afford, and the insurance is available when a person falls ill. However, this realm of economics is complex; healthcare is difficult to value because it is uncertain. Those liable to poor health may be more willing to purchase insurance, but the prevalence of private insurance in the United States means that many go without. Those who do have insurance pay higher prices if they are deemed “high-risk”, making it difficult with people suffering from chronic illnesses to purchase affordable plans. Furthermore, medical providers may use the insurance schemes to their advantage, scheduling unnecessary appointments and medical procedures because it brings in more capital. In medical ethics, physicians should make the decisions that patients would make if they had complete information, but this is not always the case. Moreover, health insurance companies may engage in similar self-profiting behavior. One proposed solution to the current system in America is to supplement the private sector of health insurance with universal standards that can be tweaked locally or state-by-state, but which uphold a norm of accessible and effective healthcare. This solution may take on a more wide-reaching role than current public health coverage, such as an expansion upon Medicare.(10)

Current Studies on WTP

Despite concerns about biases and the reliability of measurements in the production of meaningful values, current literature on health demand still cites willingness to pay (WTP) as the “preferred approach.”(11) For instance, CV studies have recently been used to evaluate the demand for health insurance in various countries. In China, workers in the informal sector are willing to pay approximately US $4 per month for a community-based health insurance plan.(12) A study in Ghana found that 64% of respondents were willing to purchase private health insurance with reasonable premiums, and rural consumers in Iran were prepared to pay for an existing health insurance scheme used by their urban counterparts.(13) In further studies of costs associated with willingness to pay, rural Iranians stated that they would contribute an average of US $2.77 per month for health insurance, while Namibian households in the poorest quintile would pay approximately 5% of their income on this service.(14) General CV findings seem to demonstrate that young, educated males are more willing to pay for health insurance than are other subsets of the population.(15) Income and health status indicator variables do not significantly influence the decision to join health insurance plans.(16)

Case Study: Willingness to Pay in Vietnam

A recent study in Vietnam analyzed household willingness to pay (WTP) in the context of the country’s healthcare economy. The findings showed that positive and negative reactions to specific types of healthcare could be tied to income, age, medical needs, and educational status. Currently, healthcare in Vietnam is primarily paid for “out-of-pocket” on an individual or household basis, though the federal Healthcare Funds for the Poor program is active and government-provided, as is free healthcare for children under five years of age. Providing free or government-funded health insurance could mean improved health for Vietnamese people who previously did not seek medical attention due to the high costs of hospital fees. WTP can help researchers determine the monetary worth and importance that a populace attributes to healthcare. Those with large families, as well as those with prolonged and acute health problems, are more “willing to pay” higher health fees in Vietnam. Those surveyed in this study were hesitant to advocate for further public healthcare, generally because previous efforts were inaccessible and lacked necessary supplies. Increased trust between the government and the people generates the attitude that public health insurance is cost-effective and worth investing in. The Vietnamese practice of bestowing healthcare workers with presents and monetary donations to indicate satisfaction for medical procedures makes “free” healthcare a costly practice in the public perception, but this may change as there is a global shift towards universal healthcare with set standards.(17)  

Demand in Developing Countries

For low-income groups, the typical model of demand is elastic – as price increases, demand decreases. Limited physical assess or the increasing amount of time needed to obtain care also drive down demand for care.(18) In the overall demand function, the factors influencing demand for health services are difficult to account for in practice. The breadth of determinants and complex links between variables also pose challenges to the estimation of individual impact. Despite these difficulties, it is possible to develop a picture of the demand for health through valuation of willingness to pay for health services.

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Footnotes

(1) Mills, A., Hoare, G., Cumper, G., Roberts, J. Health Economics for Developing Countries: A Survival Kit. Evaluation and Planning Centre for Health Care. Department of Public Health and Policy at the London School of Hygiene and Tropical Medicine. 1998. <http://helid.digicollection.org/en/d/Jh0197e/1.html>.

(2) Ibid.

(3) Salomon, J., and C. Murray. “A multi-method approach to measuring health-state valuations.”Health Economics 13(2004): 281-290.

(4) Ibid.

(5) Ibid.

(6) Ibid.

(7) Mitchell, R. Cameron. "Using Surveys to Value Public Goods ..." Google Books. Accessed 19 September 2011. <http://books.google.com/books?id=1R75c1UxVE0C>.

(8) Mills, A., Hoare, G., Cumper, G., Roberts, J. Health Economics for Developing Countries: A Survival Kit. Evaluation and Planning Centre for Health Care. Department of Public Health and Policy at the London School of Hygiene and Tropical Medicine. 1998. <http://helid.digicollection.org/en/d/Jh0197e/1.html>.

(9) Asfaw, A. “Willingness to pay for health insurance: an analysis of the potential market for new low cost health insurance products in Namibia.” Amsterdam Institute for International Development RS 08-01/2.

(10) "The Demand and Supply of Health Insurance." Trinity University, n.d. Web. 27 Aug. 2012. <http://www.trinity.edu/eschumac/HCAI5313/On-Campus%20Session%202%20notes.pdf>.

(11) Olsen, J. “Aiding priority setting in health care: is there a role for the contingent valuation method?”Health Economics 6(1997): 603-612.

(12) Lofgren, Curt. "CERA | Full Text | People's Willingness to Pay for Health Insurance in Rural Vietnam." Cost Effectiveness and Resource Allocation. 11 Aug. 2008. Accessed 20 September 2011. <http://www.resource-allocation.com/content/6/1/16>.

(13) Ibid.

(14) Van Der Gaag, Jacques. "HEALTH CARE FOR THE WORLD’S POOREST Is Voluntary (Private) Health Insurance an Option?"2020 FOCUS BRIEF on the World’s Poor and Hungry People. Dec. 2007. Accessed 19 September 2011. <http://conferences.ifpri.org/2020Chinaconference/pdf/beijingbrief_vanderGaag.pdf>.

(15) Asfaw, A. “Willingness to pay for health insurance: an analysis of the potential market for new low cost health insurance products in Namibia.” Amsterdam Institute for International Development RS 08-01/2.

(16) Ibid.

(17) Lofgren, Curt, Nguyen X. Thanh, Nguyen TK Chuc, Anders Emmelin, and Lars Lindholm. "People's Willingness to Pay for Health Insurance in Rural Vietnam." Cost Effectiveness and Resource Allocation 6.16 (2008): n. pag. Biomed Central. 11 Aug. 2008. Web. 28 Aug. 2012. <http://www.resource-allocation.com/content/6/1/16/>.

(18) Mills, A., Hoare, G., Cumper, G., Roberts, J. Health Economics for Developing Countries: A Survival Kit. Evaluation and Planning Centre for Health Care. Department of Public Health and Policy at the London School of Hygiene and Tropical Medicine. 1998. <http://helid.digicollection.org/en/d/Jh0197e/1.html>.