Topic 4: Determinants of Health and Demand for Health

Health versus Health Care

Remember that: Health is a state of complete physical, mental and social well-being, and not merely the absence of disease or injury (W.H.O.). Health enters peoples utility functions affecting both their quality of life and their life expectancy Health care is a commodity/good/service which mostly affects utility/happiness only through its effect on health In this lecture we will focus on:
The production and determinants of health The demand for health capital

Future lecture topics will focus on health care and

demand for health care

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How health is produced by individuals and populations

Production of Health
A production function summarizes the relationship

between inputs and outputs. Most health economists assume a theoretical health status production function for the population similar to: These are the inputs
Output = f is read as is a function of

Health Status = f (Health Care, Age, Income, Education, Environment, Genetics, Life Style etc.)
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This means the marginal product of health care is how much health status changes per unit of health care consumed

Health Care as an input

If we concentrate on the first input listed, health care: It is critical to distinguish between total and marginal contributions of health care to health. It may turn out that although the total contribution may be substantial, the marginal contribution may be very small Why do we care? Because many decisions are made at the margin. When considering the marginal benefits versus the marginal costs, additions to the amount spent on health care may not be worth it. from last slide Total Product: HS = f (HC, A, I, Ed, Env, G, LS)
Marginal Product: MPHC = DHS/DHC=slope of HS
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An Example of Total versus Marginal Product

HC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 HS 63.1 67.6 70.4 72.5 74.1 75.5 76.6 77.7 78.6 79.4 80.2 80.9 81.5 82.2 82.7 83.3 83.8 84.2 84.7 85.1 MPHC 4.5 2.8 2.1 1.6 1.4 1.2 1.0 0.9 0.8 0.8 0.7 0.7 0.6 0.6 0.5 0.5 0.5 0.5 0.4

Total and Marginal Products of Health Care on Health TPHC (HS) MPHC 90.0 5

80.0
70.0 60.0 50.0 40.0
All but HC are shift factors of the curve HS = f (HC, A, I, Ed, Env, G, LS)

4.5

4
3.5 3

2.5
2 1.5
For instance, increasing education or stopping smoking may shift the Total Product curve upward
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30.0 20.0
10.0 0.0 0 5

1
0.5 TP of HC 0 10 15 Health Care (HC) 20MP of
HC

Typical Properties of TP and MP

In the previous example you can see that total

product of health care can be high (health status is between 60 and 90 units) even though the marginal product of health care in the same range is generally less than 2 units. The first few units of health care (HC) add substantially to health status (HS) but the increments to HS diminish as HC is increased (diminishing marginal productivity) and eventually the total product curve becomes flat and the marginal product approaches zero
This is true because we assume that the most effective health care units are used first
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Incidence rates measure the number of NEW cases of a disease that arise in a population. Prevalence rates measure the proportion of people in a population who have a specific condition

Measures of Health Status

Some popular measures of health status are: Adult death/mortality rates (infant/neonate deaths) Number of Healthy days Accurate and Length of Stay in Hospitals very important to the populace. Number of Doctor Visits Also the easiest to determine and Morbidity/illness rates interpret. Self-assessed health status Quality of Life (QALYs) Remember: It may be critical to distinguish between total and marginal contributions, since low marginals may accompany high totals.
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Morbidity Consistent with Mortality

The Social Gradient in Health, whereby those of higher soci0-economic status are healthier on average, persists in all societies and extends throughout the range of social status.

Determinants of Health
The following factors are theoretically and empirically linked to causes and correlations of health: Income is a flow and can Income/Wealth be thought of as an hourly wage or a yearly salary Education salary. Wealth is a stock such as an inheritance or Genetic Factors money saved in the bank Environmental (ex. pollution) and Life Style (ex. exercise) Public Health and Nutrition Social Status Health Care We will discuss each in turn and will also discuss findings from real world data on these topics
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Income -> Health

Low income may directly cause poorer health status (ex. cannot afford proper nutrition) or low income and low health status may both be correlated to a third different, but driving factor (such as education) If there is a causal relationship then public policy might consider income transfers to those in poor health. If the relationship is simply a spurious correlation then income transfers are likely to have little effect on their own. Income and wealth increase access to care Examples: Now can afford transit, can afford time off work to attend appointments, can afford prescriptions Improved access to care results in improved health

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At the end of this topic you will be presented with evidence that has been found that income also has a causal impact on the health status of the older population (but not for young or middle aged adults).

Income: Empirical Findings

Findings are often contradictory: Pappas et al. (1993) find that mortality rates for those with incomes less than $9,000 were significantly higher than those for Americans earning more than $25,000. Deaton and Paxson (2001) find a substantial decline in mortality rates in the U.S. and U.K. since 1950 but attribute it to technological advances rather than rising incomes It is likely that a basic income is required to meet the

necessities of basic health (decent food and shelter etc.) but that additional income beyond this amount matters little. Ex. High income earners have a high opportunity cost of time and often eat fast food although they could afford more (and this might keep them from reaching higher HS)
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Time preferences and discount rates will be discussed more in section 2 of this topic

There are two main ways education is theorized to affect health

Education -> Health

Causal Correlation (Grossman, 1972): Educated people produce health more efficiently. They following directions better and are better informed on access to care. If so, this is a causal pathway and it may make sense to transfer resources from medical care to education. 2. Spurious Correlation (Fuchs, 1982): Education is an investment with a long time horizon. So is health! Since individuals with long time horizons (i.e. people who put a lot of emphasis on the future rather than the present in their lives and so have low discount rates or low rates of time preference) will tend to invest both in education and health, so the two will be spuriously correlated. In this case, the relationship is not causal, so resource transfers to education are not expected to improve health
1.
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Recently, Binswanger and Carman (2010) find support for Fuchs spurious correlation hypothesis estimating that up to 44% of the correlation between wealth and health is spurious

Education: Empirical Findings

Berger and Leigh (1989): Find schooling directly

improves health but not from unobservables like time preference/horizons [causal pathway] Behrman and Wolfe (1989): Estimated positive causal effect of womans schooling on health Does education of parents also affect childrens health?
Wolfe and Behrman (1987) look at children from sisters

with different education levels in Nicaragua. After controlling for childhood/family background, a mothers education was found to have no significant effect on her childrens health status
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Later in topic 9 I will show some evidence that the effect of pollution on primary care health utilization in Ontario is equivalent to having heart disease.

Genetic, Environmental and Lifestyle Factors

A hereditary (genetic) component is suspect in many different illnesses and disorders Ex. Genetic factors may account for approximately 10% of all colorectal and breast cancers Environmental factors are often important to health Ex. Population density might influence the rate of infectious disease and Pollution causes many respiratory illnesses Lifestyle choices often have large impacts on health Ex. Cigarette smoking causing lung cancer
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Environmental: Empirical Findings

Cropper et al. (1997) find with data from New Delhi in the

early 1990s that a reduction of pollution levels by about one-third would reduce deaths by about 2%. A similar study by Schwartz and Dockery (1992) for Philadelphia found that the same reduction in pollution would result in a reduction of deaths by more than 6% (approx. 10% for the elderly) Why the difference? People in the U.S. live longer so more people live long enough to become part of the population most effected by respiratory problems from environmental pollution. Conclusion: Public policy can affect health by controlling emissions

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Lifestyle: Empirical Findings

Fuchs (1974) found excess death rates in Nevada

compared to Utah to be attributable to environment and lifestyle differences related to higher rates of cigarette and alcohol consumption and higher rates of geographic and marital instability
Table 5-6: Excess of Death Rates in Nevada Compared with Utah, Average for 1959-1961 and 1966-1968
Age Group Less than 1 1 - 19 20 - 39 40 -49 50 - 59 60 - 69 70 - 79 Males (%) 42 16 44 54 38 26 20 Females (%) 35 26 42 69 28 17 6

Source: Reprinted from Victor R. Fuchs, Who Shall Live? Health, Economics, and Social Choice, Expanded Edition, Singapore: World Scientific Publishing Company, 1195, p. 52, with permission from the author and World Scientific Publishing.

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Individual patterns of variation are amazingly similar in both regions below, something in the social and economic context of Chicago causes males to kill at much higher rates. The factors that drive variation within a population (sex and age) can be quite different from factors that drive variation across populations (gun regulation, culture). The same idea applies to other determinants of health.

Within vs. Across Populations Example

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Social Gradient in Health

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The Whitehall Study of English civil servants shows quite a social gradient. Even the lowly Other workers earn decent wages. Also Both the Professional and Administrative occupations are highly educated. More is going on here. This social gradient likely has to do with social hierarchies, the stresses associated with various positions in a social hierarchy, our bodies responses to such stresses, and the health consequences associated with these responses.

Deeper into the Social Gradient

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Role of Public Health and Nutrition

McKeown (1976) attributes the following major sources to

mortality rates declines in Europe and North America from 1750 until now (up until 1750 the world population rose and fell without any upward trend): Better living standards (nutrition, housing) Intervention of public health authorities to improve sanitary conditions in urban centres (water purification and sewage treatment) These resulted in a decline of waterborne (ex. cholera) and airborne diseases (ex. bronchitis) Most of the mortality reduction occurred before medical interventions were discovered (modern medicine: 1940-present).
This was very unexpected. Does this mean that medicine is not very important?
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McKeowns Aggregate Data

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McKeown Examples
McKeown presented a series of graphs for death rates from leading causes of death showing that clinical modern medicine could not possibly have been responsible for most historical health improvements. [Ex. Below you can see most the the health improvements in fighting tuberculosis occurred before modern medicine cured it. Therefore most health improvements due to nutrition and public water/waste improvements made before 1940]

History shows that once we eliminate diseases making up the leading causes of death amongst the lowest social status, new ones emerge.

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Is Medical Research Important?

Bunker, Franzier, and Mosteller (1994) find that

medical interventions (surgeries etc.) are: 1. Disappointing in preventive health care 2. Effective in treating pain, discomfort and the gains to quality of life Is medical research useless?
NO !!! Can provide disease origins

Can address specific diseases

Moreover, just because marginal impact isnt big, it

doesnt mean that the total impact isnt big.

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Empirical Findings on Health Care

The Rand Health Insurance Experiment (RHIE):
Remember, this U.S. study found that the more people had to

pay for their health care, the less health care they purchased (and the lower their health status?)

Two studies of the RHIE data use a unique measure of health

status -> work days lost per employee per year

1. Newhouse et al. (1993) found that a 40% increase in health

services for people on the free health care plan had little or no effect on health status of the average adult (see next slide) 2. Valdez et al. (2005) found that children with parents with little or no insurance in the RHIE used up to one-third less care but the impact on their health status was not significant.
Free health care to children may be justified on equity grounds but it may not be justifiable on the basis of benefits to health
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RHIE Empirical Findings

Work Loss Days per Employed Person per Year, by Plan
Plan Free Intermediate (25%, 50%) Individual Deductible Family Deductible (95%) Mean 5.47 4.82 4.54 4.82 Standard Deviation/Error .42 .37 .36 .53 Confidence Interval 4.65 6.29 4.09 5.55 3.83 5.25 3.78 5.86 Number of Persons (n = sample size) 1136 983 787 600

Source: Reprinted from Free for All? Lessons from the RAND Health Insurance Experiment by Joseph P. Newhouse, Cambridge, MA: Harvard University Press, 1993. RAND Corporation.

Notice how this table from the study mentioned on the previous slide shows the raw findings. While the average (mean) work loss days are different between the different pay plan categories, looking at the confidence interval shows that all of the categories overlap (ex. 5.0 work loss days can be found in all intervals). Therefore there is no significant differences. Ex. All categories are not different from 4.65 for example, or different from 5.25 for that matter.

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This 40% is the total health product for historical data, what is the marginal productivity of improvements in cardiovascular and low-weight infant care now?

Empirical Findings on Health Care

Is health care worth it? Cutler (2004) finds that 40% of the gain in life expectancy between 1950 and 2000 were due to medical improvements in 2 areas: low-weight infant care and cardiovascular disease treatment.
Previous investments in these areas cannot be questioned

Based on estimates conducted by Hadley (1982,1988) a 10% increase in 1997 health expenditures would result in an estimated increase life expectancy of 0.76 years of the average American citizen. Because of the additional productivity gained by this extra lifespan, this would prove fairly cheep
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Causation vs. Correlation

We have already considered that regression analysis results generally show correlation between variables, not necessarily causation
We have also considered that multiple regression analysis can be used to show how a variable relates to another variable independent from other variables in the multiple regression

We must be careful since in some contexts all we are interested in is correlation (usually when we are interested in predicting or forecasting absolute values) and in other contexts the only thing we are in is causation (usually when we are interested in estimating the effects of some policy intervention)

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Summary: When two variables are correlated, say X and Y, it could be that X is causing Y, or that Y is causing X or that some other variable Z is causing both X and Y. To estimate the causal effect of X on Y (say education on health) we must account for the independent effect of Z on X and remove all possibility of reverse causation from Y on X.

Causation vs. Correlation (Example)

To estimate causation you generally must do two things: Include all relevant explanatory variables in your regression in order to make sure you identify the contribution of a variable independent from all others

Ex. Remember Fuchs theory of education and health? To disprove it one would likely need independent variables on education, income and some notion of discount rate (time preference) of each individual

A technique must be used to eliminate the possibility of

reverse causation

Ex. If y=health status and x=education level then education level might be endogenous meaning that it is possible that health status might also affect education level (in addition to the other way around) 29

Causation vs. Correlation (Example) II

The endogeneity (reverse causation) problem is often solved by finding an instrumental variable that is correlated with education but which is not affected by health status Because it is difficult to find good instruments economists must find other ways to fix the problem The work by Buckley et al. (2004a/b) that looks at

health transitions can illustrate how these concepts work and provide an alternative example
The work uses Statistics Canadas National Population

Health Survey from 1996-1998 on Canadians older than 50 (those younger than 50 were not found to have their health status systematically affected by income and education etc.)

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First some simple cross tabulations showing income correlations

Source: Buckley et al. (2004a)

Income, Health Correlations (Ex.)

More high income people with top health status

Higher income is correlated to better health status

Higher fatality rates among low income people

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First some simple cross tabulations tabulations showing education correlations

Source: Buckley et al. (2004a)

Education, Health Correlations (Ex.)

Higher education is correlated to better health status

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Since this is from simple cross tabulations and not from regressions, the correlation between income and health is not independent from the effect of education and it could be that education drives both income and health (or some other factor like age drives both)

Buckley et al. (2004a) Findings

High income is found to be correlated to high health

status
There is only evidence so far for correlation not

causation. Does lower income cause poorer health or does poorer health cause lower income (since you cant go to work with major illnesses)?

Higher education level is found to be correlated to high health status There is only evidence so far for correlation, not causation. Does lower education cause poorer health or does poorer health cause lower education (since you cant go to school with major illnesses)?
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The method used in this separate paper estimates the causal relationship because it measures the effects of initial income and education on subsequent health failings of people who start in good health

Buckley et al. (2004b) Model

In order to investigate the causal relationship between income and education (separately) on health this second study focuses on health transitions of people that all start in good health. The study asks, if someone starts out in good health Eliminates (excellent, very good or good HS), what is the probability possibility of that person staying in good health and not of reverse causation transitioning to poor health (fair, poor, deceased HS) in in data the next 2 years and how is this probability of staying in good health affected by initial levels of income, education and other relevant factors? The regression analysis uses this probability (of staying in good health) as a dependent variable. Income, education, age etc. are independent/explanatory variables 34

This is the effect of each independent variable on the probability of staying in good health

Income is found to have

an independent causal effect on health Education is found to have an independent causal effect on health Age is found to have an independent causal effect on health Only approx 8% of health transitions are explained.
So while the effects found are valid, there are many other factors that cause changes in health status
Getting separated/divorced only has significant impact for males, not females

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The Grossman model of demand for health capital

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Background to Grossman Model

Grossman (1972) was concerned with how individuals

allocate their resources to produce health The model goes beyond traditional demand analysis and has been extremely influential in health economics It utilises the idea of the individual as a producer of health (not simply a consumer) by removing the artificial separation between consumption and production It also introduces the idea of investing in health (human capital) like one would invest in capital machinery by comparing the marginal cost of investment with the marginal benefits of investment
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Key Concepts of Grossman Model

Demand for health care is derived
from a demand for health (few people want health care for

its own sake, needles hurt!) Demand for health is derived from the demand for utility (e.g. healthy days in which to participate in leisure and work) Individuals are not passive consumers of health but active producers who spend time and money on the production of health Health can be seen as lasting over time periods.
It depreciates (perhaps at a non-constant rate) and can

therefore be analysed as a capital good (like other investments! Ex. You can brush your teeth once and it will last you a certain number of hours/days until your dental health deteriorates
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Because this effect states that health benefits derive purely from utility effects, an individuals rate of time preference will be important in its determination (Most individuals exhibit a preference for receiving benefits now rather than in the future)

The Demand for Health

Individuals value health but do not value it above all else (if

they did, they would not over-eat, smoke, drink too much, or drive too fast) Individuals have limited incomes and time with which to finance health and other activities, and neither is costless According to Grossman, health demand consists of two elements: (1) Investment effects: Health increases the number of healthy days available to participate in work and non-market activities

(2) Consumption effects:

Health yields direct utility i.e. you feel better when you are healthier
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2 Main Models of Health Demand

Based on these assumptions introduced by

Grossman, we have two main models of demand for health (we will cover them in order):
1. 2.

Labour-leisure trade-off model Investment Demand for Health capital model using MEI (marginal efficiency of investment)

These models of demand for health are based solely on the Investment Effect on the last slide and they ignore the Consumption Effect. However, remember that because of this consumption effect people are willing to give up some consumption of regular goods and services in order to increase their health (than if they only had an invest. effect)
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Model 1: Labour-leisure trade-off model

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Time Spent Producing Health

T (Total time available) = Time Constraint TH(improving health)+TC(leisure goods)+ TL(loss to illness) + TW(working) This is a time constraint that is a type of budget constraint It says that the time spent improving health (TH), using leisure goods (TC), lost to illness (TL) and working (TW) must add up to the total amount of time available (T, i.e. 365 days a year or 24 hours a day etc.) TH and TL are interconnected since more time spent on improving health will lower the time lost to illness. This relationship is variable, and increasing TH may lead to a relatively larger, smaller or equal reduction in TL .

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Labour-Leisure Trade-Offs
Rearranging the time-constraint we find that the maximum amount of time for work (TW) or leisure (TC) is: Grossman uses the standard consumer utility maximization framework: Standard world with 2 goods Utility=U(Leisure time, Income) Maximum possible leisure time, TC, is TC = T TH TL (assuming you do not work at all, TW=0) Each hour of leisure can be traded-off for work time at the wage rate (your income per day or hour) In a two good world with leisure time and income, the budget constraint is the line through TC = T TH TL with a slope equal to the negative of the wage rate (each decrease in one unit of leisure time results in an increase in income by the unit (daily/hourly) wage rate).
TW + TC = T TH TL

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Preferences: Leisure vs. Labour

Income (Y)

Budget Constraint
Indifference Curve (Utility with standard Shape for two goods) Equilibrium (Optimal Utility Maximizing Chosen Point)

Y1

Slope = -Wage rate 0 TC1 W 365 - TH - TL Leisure Time (TC)

Maximum leisure time is at point W, going to the left represents more time spent working

Segment 0 to TC1 represents leisure time (TC) and segment TC1 to W represents work time (TW)

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Analysis Example

It is also possible that the net effect is negative (more time is spent improving health than is gained in reducing time lost to illness), in which case the opposite will happen.

How to use the labour/leisure model to answer questions: Suppose the person increases time spent on health producing activities (TH is increased):
This will directly reduce time available for leisure or work
This will also reduce time lost to illness and so will increase time

available for leisure or work

Let us assume that the net effect is a gain in available time

(so assuming the increase in TH is less than the decrease in TL), this will cause the budget constraint to shift to the right since more time is now available for leisure or work
[next slide] The person will increase utility by moving to point

B. Therefore, increasing investment into health (increasing TH) has lead to both higher income and more leisure!
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Effect of Increasing TH
Income

Assuming an overall net benefit (so |DTL| |DTH|> 0)

Increasing time invested in health will shift the budget line to the right (assuming that there is a net benefit between TL and TH), resulting in greater income and leisure time and the person is better off since he/she can move to an indifference curve further from the origin

B
A

Leisure Time (TC) 365 TH2 TL2

365 TH1 TL1

On a different note, what do you think this model would predict if the wage rate increased?
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Model 2: Investment Demand for Health capital model using MEI (marginal efficiency of investment)

47

Investing in Health Capital

INPUTS
Health Capital Stock over time

OUTPUT

Health Care
Diet Exercise Environment Income

PRODUCTION PROCESS

HEALTHY DAYS Physical and Mental Health

Time

The analysis is based on human capital theory which shows how individuals invest in themselves e.g. through training or education, to increase their productivity The optimal amount of investment in human capital is determined by the relative Costs and Benefits Usually the Costs occur in the short-term while the Benefits accrue in the future in the form of enhanced job opportunities
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H means Health

Health as a Capital Good

Think of depreciation and investment in health like a car

H Stockt = H Stockt-1 depn (d) + inv. in H (I)

A person is born with an initial endowment of H, which

they add to by investment. The rate of H production will depend on the efficiency of investment in H (this efficiency may depend on factors such as education level) There will be depreciation in the value of the stock of H through age, accident, carelessness, sudden disease. In addition to depreciation, an additional cost of holding this capital good is the opportunity cost of the capital (that is the interest rate, r, forgone now that an extra resource is spent on health rather than saved)

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Optimal Choice of Investment

Optimal investment involves making investments for which

the marginal benefit of investment is greater than the marginal cost of investment and to continue to do so while MB>MC until eventually MB=MC (and to remove investment if MC>MB)). We just discussed that the marginal cost will be composed of a opportunity cost of capital (the interest rate, r) plus the depreciation rate (d) Marginal cost = r + d (this is constant) The marginal benefit is the rate of return on the investment and is often called the Marginal Efficiency of Investment (MEI=value of an extra healthy day). Marginal benefit = MEI (MEI decreases as investment increases, diminishing rates of return since most productive investment made first)

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Meaning of the Terminology

The Grossman model applies the general methodology of analyzing investments to analyzing health: = Notation General Terminology = Health Interpretation
Marginal Cost r Opportunity cost of capital Interest/discount rate Depreciation rate of capital Marginal Benefit MEI Marginal efficiency of investment/capital Rate of return Value from healthy days derived from working more and increased consumption of market and non-market goods The value of what you could have done with the time/money you devote to health Value of natural health decline

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Demand for Health Capital

At point X: marginal cost = marginal benefit

$ Cost/benefit of capital

marginal cost of health capital

r+d
X

This standard diagram of the MEI curve shows diminishing returns between health investment and health as the level of health capital stock increases (i.e. the production function is the normal shape). This is because it is increasingly difficult to generate health from inputs (the best ones are used first).
MEI

marginal benefit of health capital

H*

Health Stock
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If the marginal cost of health capital is r+ d then find this level on the left of the graph and follow it across until you hit the MEI curve at X (this is where MC=MB), then follow it down to find the optimal health stock H*

The Effect of Aging

What happens to optimal health stock when people get older?
$ Cost/benefit of capital

MC=r + d1

Age

MC=r + d

Depreciation increases (d to d1) as people get older (not necessarily at a constant rate) since they experience a greater natural health decline, therefore MC rises, we move up and left along the MEI curve and hence demand for health capital falls
MEI

H1

H*

Health Stock

However, if people increase their valuation of healthy days as they age (increasing the MEI curve), this may somewhat offset the predicated health stock decline. This assumption is debatable however.
53

Changes in the Wage Rate

What happens if the wage/income increases?
An increase in wage/income rate raises the returns on healthy days (any particular level of health stock will now generate higher return or MEI). The MEI curve shifts upward and the optimal level of health stock is thus higher (given fixed r+ d).
Notice this model explains only the effects of the investment motives of health and does not show the effects of the consumption motive of health (i.e. that good health makes people feel good).

$ Cost/benefit of capital

r+d

Wage

MEI2 H1 H2 MEI1 Health Stock

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Education may also cause people to produce health more efficiently and so not as much health care is needed to attain a given (or maybe even a larger) level of health stock

Changes in Education
What happens if education increases? Education increases the efficiency of nonmarket production (i.e. smarter use of time) and it increases the marginal product of health inputs (i.e. better educated are better able to follow proper treatments) thereby causing MEI to shift upwards and for a fixed r+ d value causes the optimal health stock to increase.
Educ.

$ Cost/benefit of capital

r+d

MEI2 MEI1 H1 H2 Health Stock

The effect above is a supply side effect. Education may also affect the demand side since educated people are more likely to recognize the benefits of exercise and healthy eating via their affect on health.
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Comparison of (i) to (ii) shows that for young people, the more elastic the demand curve, the greater will be the decrease in optimal health capital.

Elasticity of Demand

Comparison of (i) to (iii) shows that when demand is inelastic, large increase in the depreciation rate as you age only cause the optimal health level to fall slightly (must be due to large increases in health care spending)

Comparison of (ii) to (iv) shows that when demand is elastic, large increase in the depreciation rate as you age cause large decreases in the optimal health level (health care spending is also dropping)

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Grossman Model Summary

57

Policy Implications of Grossman Model

To increase population health: Raise education amongst the poorly educated Reduce price of health care, especially to the poor Increase wages of the low paid Use policies to affect health depreciation (yearly check ups etc.) The model can be used to predict the likely effects of other policy changes:
Ex. The government may attempt to reduce wait times for surgery in

order to encourage greater utilization of health care by the poor. This will increase the MEI of both rich and poor but since the value of extra time is greater for the rich, the MEI will shift up further for this group, resulting in a greater shift in health stock for the rich thus increasing the inequality (i.e. the direct effect of the policy raises the health of the poor but has an indirect effect of changing the behaviour of the rich more than the poor which will eventually lead to greater health inequity)
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Summary of Health Benefits

People benefit from health in five important ways: 1. They feel better when well (higher direct utility) 2. They may derive greater utility from consuming leisure and other consumption goods when feeling well 3. They lose less time to illness, and hence can work more 4. They are more productive when they work and hence can earn more for each hour they work 5. They may live longer
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