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.

Discarded Topic#1

Update: Possible Topic#1 is now Discarded Topic#1. Supervisor didn't agree, on the basis that 'they have been written for too many times. Oh, well.

Possible topic#1 - Health, Nutrition and Rural Household Welfare

Some motivations for looking at the link between health, nutrition and the welfare of rural households:

• Health and nutrition are important aspects of basic needs, while one of the main goals of economic development is to expand the capacity to obtain basic needs, especially for the poor people.
• The productivity of low-income people is strongly correlated with improved health and nutrition.
• Improving health and nutrition are important means in itself, as well as an instrument for improving welfare.

Behrman and Deolalikar in Handbook of Development Economics (1988) provided a good framework to start with. It is a modified household-farm decision making model, which was based on earlier works by Barnum and Squire (1979) and Singh, Squire and Strauss (1986).

Based on this, I intend to look at three specific issues:

1. Household demand function and income elasticity of nutrient (calorie).
2. Estimating the return of improved nutrient intake (calorie) and health status (Body Mass Index, anthropometric measures), evaluated in terms of: a) farm profit, b) individual wages, and c) output/productivity
3. Estimating the impact of healthy environment (clean water, improved sanitation) on children health status (as a proxy for human capital accumulation).

Why health and development economics?

Having studied economics as an undergraduate at the University of Indonesia, I learned how people respond to incentives in making their personal choices. That includes choices in fertility preference, health behavior and risky decision (ranging from dietary to sexual behaviors). Then, having a Master’s degree in Public Administration/International Development from Harvard, I learned further that privately optimal decisions may not be socially optimal. In the context of developing world, this situation is translated in underinvestment in human capital (too many children, lack of nutrition and education).

My professional experiences have facilitated me to understand more about public health problems in the developing countries through empirical works. Before coming to Harvard, I worked as an economic researcher in an Indonesian research institute. I focused on poverty, income distribution and social policy issues. After receiving my Master’s degree, I worked for the Poverty team in the Indonesian office of the World Bank. I have never specifically focused on health policy issues. But I found close relations between income poverty and poor health conditions. Poor people are lacking of access to basic health services, clean water and sanitation; and poor health results in low productivity which in the end leads to poverty.

Finally, being a parent of a one-year old baby girl means a real world application of the theories about health decisions: from immunization and nutrition decision to household decision making (how my wife and I bargain on who do the babysitting or how to raise her), and changing pattern of household spending (given the same level of income we should sacrifice our expenses for movies, coffees and dinner out). For the next few years, she will be my own ‘real world (but non-random) experiment.’

This particular question especially motivates me to do Ph.D. research in health and development economics: how to improve the quality and accessibility of health care for poor people in developing countries. It is a challenging as well as interesting issue, as it lies on the intersection of economics, health, demography and public policy in the context of economic development, particularly in Indonesia where I am most familiar with.

Quality and accessibility of health care is one big problem in a developing country like Indonesia. The country’s maternal mortality rate is three times that of Vietnam and six times of China and Malaysia, with 28 percent of births are accompanied by unskilled or traditional birth attendants. Malnutrition rates are also high. About a quarter of children under five are malnourished. On the other hand, although public health spending has been increasing, it is getting les pro-poor. Forty percent of health budget is allocated to subsidies for government hospitals (secondary care). However, most of the Indonesia poor do not use hospitals but go to primary care (community health care, midwives, immunization or village nutrition centers).

Reforming the country’s health care system should achieve two big goals: i) providing greater public investment for primary health care which are used mainly by the poor, and ii) increasing the utilization of secondary healthcare among the poor. To achieve the goals, three policy area should be prioritized. First, increase the budget for, as well as improve the quality and targeting of, primary healthcare provision. That includes also tackling the absenteeism problem among paramedics. Second, invest in demand-side activities that increase the access of the poor to secondary care, through schemes such as health card. And third, invest in the training of private paramedics and subsidize them through voucher schemes, especially in rural areas where the poor have little access to services.

Welcome

Welcome to this blog, and thanks for coming.

The idea behind this blog is to document the progress of my dissertation from the very early stage. That includes what ideas for topic I encounter, methods, other general knowledge I learn, articles or books I read, and even some random stuffs that might appear. Some of the ideas I found in the way may end up being not what I want or can write. But they still may be too good to be trashed.

The title of this blog, as you can see, is Health and Development Economics. That reflects the field I am intending to work, and specialize, on.