Health capital and demand for health

Michael Grossman (1972)* paper is perhaps the first attempt to develop a formal model of individual demand for health. Build upon Becker's human capital framework (1964, 1965, 1967), he treated health as a form of human capital stock, which depreciates by age, but can be increased by investment. Here's the abstract of the paper:

The aim of this study is to construct a model of the demand for the commodity "good health." The central proposition of the model is that health can be viewed as a durable capital stock that produces an output of healthy time. It is assumed that individuals inherit an initial stock of health that depreciates with age and can be increased by investment. In this framework, the "shadow price" of health depends on many other variables besides the price of medical care. It is shown that the shadow price rises with age if the rate of depreciation on the stock of health rises over the life cycle and falls with education if more educated people are more efficient producers of health. Of particular importance is the conclusion that, under certain conditions, an increase in the shadow price may simultaneously reduce the quantity of health demanded and increase the quantity of medical care demanded.

*Grossman, Michael, "On the Concept of Health Capital and the Demand for Health," The Journal of Political Economy, Vol. 80, No. 2 (Mar. - Apr., 1972), pp. 223-255.

Clear diagnosis, uncertain remedy

The Economist's article on problems and obstacles in reforming health insurance system.

Possible topic#2 - Risk Preference, Time Preference and Health-related Decisions

Second attempt. So the motivations are:

• Developing countries have lower quality of health: lower life expectancy, higher infant (and adult) mortality rate, etc. Is it because of supply constraint (availability of public services)? Household budget constraint? Or because people value ‘good health’ less?
• Budget constraints causes households or individuals highly prefers today’s income than long-term human capital investment (high discount rate). This could lead to fewer amount of HH budget allocated for own and/or children’s health
• Lower valuation of future health means individuals would engage in riskier health behavior, such as smoking, less exercise, bad dietary habit, not having health insurance
• Policy relevance: a) if risk and time preference do explain less investment on health and riskier behavior, then policies that promote changes in behavior/valuation will be relevant, b) otherwise, improving income/well-being will be the more relevant approach.

Fortunately, new set of questions in IFLS-4 enables to do the analysis of individual's risk preference and discount rate. Discount rate could me measured using questions on whether the respondent prefers a lower amount of money now or a higher amount one year (five years) later. Risk preference coefficients can be calculated from hypothetical questions of a choice between a job that guarantees a certain amount of lifetime income, and another job that gives the individual a 50-50 chance of a getting a higher or lower amount than the previous one.

Once the discount rate is constructed, I can use it as one of the explanatory variables for parent's (mother's) investment in their children's health. The underlying hypothesis is higher discount rate explains lower investment in health.

There will be two main groups of individuals to analyze. The first one is pregnant women. The particular variables to analyze are: 1) number of months of elapsed pregnancy before going to the health service, 2) smoking behavior during pregnancy, and 3) utilization/number of visits to health service during pregnancy. The second group will be children aged 5-15 years, whose variables of interest are their immunization record (completion, delays), utilization of health services and anthropometric measures.

Risk preference coefficient will be used to analyze individual's health-related risky decisions. Focusing on adults, the variables of interests are smoking habit, utilization of preventive health care, access to health insurance, Body Mass Index (a proxy for health status, which is the outcome of behavior, and possibly eating habit. The underlying hypothesis is that higher individual's risk preference lead to riskier health behavior.

Update: supervisor kind of like this idea. She thought this is an interesting topic. One concern is whether I could get enough variations in the data to lead to something. We'll see.

Why medical care market is different?

Like Muskin (1958), Kenneth Arrow's 1963 paper* is also considered as a pioneer in analyzing health issues using economic perspectives. In the paper, Arrow explained some special characteristics that make medical (health) care market different from the other markets:

1. The nature of demand. Demand for medical services is irregular and unpredictable. Medical services, apart from preventive services, afford satisfaction only in the event of illness, a departure from the normal state of affairs.
2. Expected behavior of the Physician. A physician's behavior is supposed to be governed by a concern for the customer's (patient's) welfare, and regulated by a certain ethical codes, more than other profession.
3. Product uncertainty. One consumes a medical service in expectation of recovery from illness. However, when we consume a medical service, we can not predict whether it will result in a recovery (and if it does, how long will it take).
4. Supply conditions. Entry to the medical profession is restricted by licensing. It means supply is limited, hence increasing cost.
5. Pricing. The nature of medical service enables seller to effectively (and extensively) discriminate price by, among other things, consumer's income.

For sure, it doesn't mean that medical care market is the only market with special characteristics. Financial, labor, credit, and many other markets have different characteristics that depart from traditional, text-book competitive market.

*Kenneth J. Arrow, "Uncertainty and the Welfare Economics of Medical Care," The American Economic Review 53(5):940-73.

What is health economics?

Selma Mushkin's paper (1958)* is probably one of the first papers mentioning the definition of health economics, and marked the boundary of health economics as a sub-discipline:

Health economics is concerned with the optimum use of scarce economic resources for the care of the sick and the promotion of health, taking into account competing uses of these resources. The basic problems are of two kinds: the organization of the medical market, and the net yield of investment in people for health.

Moreover, Mushkin explained why health economics merits becoming an sub-field:

Consumer preferences are not an adequate guide to the optimum allocation of resourcesfor health. There are a number of reasons why this is so. For one thing, a consumer would prefer to avoid the illnesses which require use of resources for health purposes. For another, his neighbors benefit from the medical services he purchases, for example,"flu shots" during the recent influenza epidemic. Individual decisions undervalue health services, and would result in under production of these services unless supplemented by actions of private voluntary agencies and government.

Of course, the field has been developing since 1958, and the coverage of study has been largely expanding.

*Selma Mushkin, "Towards a Definition of Health Economics," Public Health Reports, 1958, 73, 785-93.