Demand and Supply in Health Care

Demand and Supply in Health Care

Concept of Demand in Health Care

• Definition: Demand in economics refers to the quantity of a good or service that consumers are willing and able to purchase at a given price and time.
• In health care, demand is special because:
• It is often derived demand (people demand health services not for their own sake but for better health outcomes).
• Consumers (patients) may lack complete information and rely on providers (doctors).
• Government and insurance systems play a big role.

Law of Demand

• Law: “Other things being equal, the demand for a commodity increases when its price falls and decreases when its price rises.”
• Application in Health Care:
• Not straightforward, because:
• Life-saving services are often price inelastic (demand does not fall much with higher prices).
• Insurance coverage shields consumers from the direct price effect.
• In emergencies, demand becomes urgent and compulsory.

Factors Affecting Demand for Health Care

1. Price of Health Services – Higher costs may discourage use, unless life-threatening.
2. Income of Consumers – Higher income → more spending on quality and preventive care.
3. Price of Related Goods – Availability of substitutes (e.g., generic drugs vs. branded).
4. Population Demographics – Aging population → more demand for chronic care.
5. Epidemiological Factors – Disease outbreaks increase demand.
6. Health Insurance Coverage – Lowers effective cost, raising demand.
7. Cultural and Social Beliefs – Traditional healing vs. modern medicine.
8. Awareness and Education – Higher literacy → more preventive check-ups.
9. Accessibility of Health Facilities – Distance, infrastructure, doctor availability.
10. Government Policies – Subsidies, free schemes, and public health programs.

Demand of Services in Health Care

• Types of Health Services:
• Preventive (vaccination, health checkups).
• Curative (treatment, surgeries, medicines).
• Rehabilitative (physiotherapy, counseling).
• Promotive (nutrition, lifestyle programs).
• Demand is not only price-driven but also based on need and urgency.

Structure and Characteristics of Health Care System

• Structure:
• Public sector (government hospitals, PHCs, health programs).
• Private sector (clinics, corporate hospitals, diagnostic labs).
• NGOs & Charitable Institutions.
• Characteristics:
• Dual nature (public + private).
• Asymmetry of information – providers know more than patients.
• Uncertainty – illness occurrence is unpredictable.
• Externalities – vaccination benefits society as well as the individual.
• Government intervention – regulations, subsidies, insurance.

Price System in Health Care

• Unlike normal goods:
• Prices are not always market-determined (government subsidies, insurance, regulation).
• Many services are non-market based (public health services provided free).
• Third-party payers (insurance, government schemes) distort the direct price-demand relationship.

Demand for Health vs. Demand for Medical Care

• Demand for Health:
• Refers to desire for better health status, longevity, well-being.
• Health is a final good.
• Demand for Medical Care:
• Health care services demanded as an input to achieve health.
• It is a derived demand from the demand for health.

Determination of Demand for Medical Care

• Influenced by:
• Medical need (severity of illness).
• Physician’s decision (doctor-induced demand).
• Insurance status (reduces effective price).
• Income & education.
• Government supply (free medicines, subsidized treatment).
• Technology (availability of new diagnostics and treatments).

Supply in Health Care – Introduction

• Definition: Supply is the quantity of a good/service that producers (hospitals, doctors, pharma companies) are willing and able to provide at a given price and time.
• In health care, supply is affected by limited trained manpower, infrastructure, and long training periods for specialists.

Law of Supply

• Law: “Other things being equal, the higher the price of a commodity, the greater is the quantity supplied, and vice versa.”
• Application in Health Care:
• Supply of hospital beds, doctors, and medicines increases when prices/revenue are higher.
• But supply is inelastic in short term (cannot instantly increase number of doctors).

Determinants of Supply in Health Care

1. Price of Services – Higher fees motivate more supply.
2. Cost of Inputs – Equipment, medicines, staff salaries.
3. Technology – Reduces cost and increases availability.
4. Government Policies – Licensing, subsidies, taxation.
5. Infrastructure – Number of hospitals, labs, medical colleges.
6. Time factor – Training health professionals takes years, making supply inelastic.
7. Epidemics/Disasters – Sudden increase in demand pressures supply.

Theory of Demand and Supply in Health Care

• Equilibrium occurs where demand = supply.
• In health care:
• Market failures are common.
• Equilibrium may not ensure equity or accessibility.
• Government often intervenes (price caps, free distribution, universal coverage).

Demand and Supply Schedule

• Demand Schedule: shows how demand varies with price.
• Supply Schedule: shows how supply varies with price.
• In health care:
• Demand schedule may be flat for emergencies (inelastic).
• Supply schedule is often steep (capacity limits).

Elasticity of Demand for Health Care

• Elasticity of Demand: responsiveness of demand to changes in price/income.
• In Health Care:
• Life-saving services: highly inelastic (patients will pay at any cost).
• Elective procedures (cosmetic surgery, wellness): relatively elastic.
• Preventive care (checkups, screenings): moderately elastic.

Price Elasticity of Demand in Health Care

• Formula: % Change in Quantity Demanded ÷ % Change in Price.
• Determinants in health care:
• Urgency of need (emergency vs. elective).
• Insurance coverage (reduces elasticity).
• Availability of substitutes (generic vs. branded drugs).
• Proportion of income spent (high-cost surgeries vs. low-cost drugs).

Basic Human Needs and Health Care

• Maslow’s Hierarchy of Needs:
• Health falls under basic physiological and safety needs.
• Why health care is a basic need:
• Essential for survival and productivity.
• Necessary for achieving higher-level needs (education, self-actualization).
• Governments treat health care as a merit good (society benefits from universal access).

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