Lecture 2A
Demanding health care is not for fun. It only generates utility if it improves health or quality of
life. This implies that the demand for health care is derived from the demand for health.
Health care is only one of the inputs in an individual’s health production function. Health care
is not only a consumption but also an investment good.
Determines for our demand for health care:
● The medico-technical model
○ The doctor is in the lead, acting as a perfect agent
● The neo-classical model
○ The patient/consumer is in the lead, having perfect information
● The imperfect agency model
○ Demand is determined by both doctors and patients as information is part of
the transaction
The medico-technical model:
● Consumer demand is determined by medical experts based on objective needs.
● Assumptions:
○ Health care providers act as perfect agents on behalf of their patients.
○ Patients have uniform preferences and fully comply with the decisions made
by their providers
○ Providers know with certainty the results of their decisions
● Only one determinant of health care demand → need
● Individual demand is completely (price-)inelastic → graft A.
● Critique:
○ Doctors are not perfect agents but also pursue their own interests.
○ Doctors often do not know with certainty the effect on medical treatment.
○ Consumers do not have uniform preferences for medical care, even if they
would be equally well-informed as their doctors.
○ Consumers do not fully comply with the decisions of their doctors.
○ Consumers are not insensitive to prices and income.
The neo-classical (basic economic) model:
● Consumer demand is determined only by consumers themselves, they maximize
utility subject to a budget constraint.
● Assumptions:
○ Consumers are sovereign and rational → they maximize utility and
prefer more above less.
○ Consumers have predetermined and ordered preferences.
○ Consumers know with certainty the results of their consumption decisions.
● Graft B, the price reflects the value attached to a certain service.
● Critique:
○ Consumers often are not sovereign but feel dependent on the physician’s
judgement: information is part of the transaction.
○ Consumers often do not have predetermined and well-ordered preferences
with regard to medical care.
○ Consumers do not know with certainty the results of their consumption
decisions: demand for health care is not the same as demand for health.
○ Therefore, the demand curve (price) does not necessarily reflect the marginal
value of health services to the consumer.
, The imperfect agency model:
● Information is part of the transaction between doctor and patiënt.
● Demand is partly consumer-initiated and partly provider-initiated.
● Providers act as an imperfect agent on behalf of their patients and may use their
information surplus to pursue their own interest which may conflict with the patiënt’s
interests.
● As a result:
○ Patients demand curve may not reflect how they really value health services.
○ Overprovision (supplier-induced demand) or underprovision of care may
occur, depending on physicians’ preferences and incentives.
○ Different payment systems are likely to generate different outcomes.
Lecture 2B
Determinants of health care demand → utility theory:
● Consumer demand is determined by consumers who maximize utility subject to a
budget constraint.
● Assumptions:
○ Consumers always prefer more above less of the same good →
marginal utility of consumption.
○ Consumers have predetermined and ordered preferences.
○ Consumers know with certainty the results of their consumption decisions.
U0 → reflects all combinations on which the
consumer is indifferent for each of the
combinations on the curve.
The curves U1 and U2 reflect higher utilities.
Optimal consumption bundle = HC1, OG1, where an
indifference curve U is tangent to the budget
constraint B.
Key determinants of health care demand:
● Needs → health status → position of
indifference curve
● Wants → preferences → slope of
indifference curve (substitution rate)
Demanding health care is not for fun. It only generates utility if it improves health or quality of
life. This implies that the demand for health care is derived from the demand for health.
Health care is only one of the inputs in an individual’s health production function. Health care
is not only a consumption but also an investment good.
Determines for our demand for health care:
● The medico-technical model
○ The doctor is in the lead, acting as a perfect agent
● The neo-classical model
○ The patient/consumer is in the lead, having perfect information
● The imperfect agency model
○ Demand is determined by both doctors and patients as information is part of
the transaction
The medico-technical model:
● Consumer demand is determined by medical experts based on objective needs.
● Assumptions:
○ Health care providers act as perfect agents on behalf of their patients.
○ Patients have uniform preferences and fully comply with the decisions made
by their providers
○ Providers know with certainty the results of their decisions
● Only one determinant of health care demand → need
● Individual demand is completely (price-)inelastic → graft A.
● Critique:
○ Doctors are not perfect agents but also pursue their own interests.
○ Doctors often do not know with certainty the effect on medical treatment.
○ Consumers do not have uniform preferences for medical care, even if they
would be equally well-informed as their doctors.
○ Consumers do not fully comply with the decisions of their doctors.
○ Consumers are not insensitive to prices and income.
The neo-classical (basic economic) model:
● Consumer demand is determined only by consumers themselves, they maximize
utility subject to a budget constraint.
● Assumptions:
○ Consumers are sovereign and rational → they maximize utility and
prefer more above less.
○ Consumers have predetermined and ordered preferences.
○ Consumers know with certainty the results of their consumption decisions.
● Graft B, the price reflects the value attached to a certain service.
● Critique:
○ Consumers often are not sovereign but feel dependent on the physician’s
judgement: information is part of the transaction.
○ Consumers often do not have predetermined and well-ordered preferences
with regard to medical care.
○ Consumers do not know with certainty the results of their consumption
decisions: demand for health care is not the same as demand for health.
○ Therefore, the demand curve (price) does not necessarily reflect the marginal
value of health services to the consumer.
, The imperfect agency model:
● Information is part of the transaction between doctor and patiënt.
● Demand is partly consumer-initiated and partly provider-initiated.
● Providers act as an imperfect agent on behalf of their patients and may use their
information surplus to pursue their own interest which may conflict with the patiënt’s
interests.
● As a result:
○ Patients demand curve may not reflect how they really value health services.
○ Overprovision (supplier-induced demand) or underprovision of care may
occur, depending on physicians’ preferences and incentives.
○ Different payment systems are likely to generate different outcomes.
Lecture 2B
Determinants of health care demand → utility theory:
● Consumer demand is determined by consumers who maximize utility subject to a
budget constraint.
● Assumptions:
○ Consumers always prefer more above less of the same good →
marginal utility of consumption.
○ Consumers have predetermined and ordered preferences.
○ Consumers know with certainty the results of their consumption decisions.
U0 → reflects all combinations on which the
consumer is indifferent for each of the
combinations on the curve.
The curves U1 and U2 reflect higher utilities.
Optimal consumption bundle = HC1, OG1, where an
indifference curve U is tangent to the budget
constraint B.
Key determinants of health care demand:
● Needs → health status → position of
indifference curve
● Wants → preferences → slope of
indifference curve (substitution rate)
