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Economics in Healthcare

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What is the relationship between quality, consumption and demand for health care services?

What are the key components in the costs of health care services?

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What I will do here is give you a rough outline on the basic theories and approaches to this question. You can do what you want with the information and references. The relationships in the literature are controversial and tentative. Since health care is a unique part of the economy, many of the typical economic laws do not apply. This makes the topic difficult.

Quality of health care is not uniform. There are three attributes of quality: the structure of the resources, the medical process itself and finally, the outcome. Quality is related to price, and price contains a utility function. High-tech medical care can be very expansive, and, depending on the severity of the problem and the attitude of the patient, it might be avoided in favor of older, more traditional treatment. Nevertheless, there seems to be no correlation between expenditures and outcomes (Liebowitz, 1994).

There are at least two issues here. First, there is a theory that, because health is such a fundamental good, most consumers will get the care they need regardless of cost increases. This may be true up to a point. Health care is not infinitely elastic, with the possible exception of very serious conditions. Economically speaking, this would make health care unique. The fact is that consumers have very little control over what procedures they need, their costs and their ability to pay (Ginsburg, 2002). Second, there is the issue of substitution. Minor problems do not need to be cared for by a doctor. Plenty of home remedies exist. Only middle level or catastrophic level problems require a physician. In these cases, there is no substitute (Jacobs and Rapoport, 2004).

One assumption is that, as medical care prices fall (and that of related goods) demand will increase. In this case, people will be more willing to see a physician if the prices are lower. Demand in this case can be split into personal and aggregate demand. Personal demand is based on income and utility, but market demand might be based on an increase in population, a shift in local incomes or a shortage of doctors ...

Solution Summary

Economics in healthcare are examined. The key components in the cost of health care services are determined.