Corey Crismon Demand and Elasticity HCA-530 Deborah Conway 1) Write the formula for price elasticity of demand

and describe what it means. The formula for price elasticity of demand (PED) is percent change in the quantity of health care demanded divided by percent change in price of health care or E = Q / P. Price elasticity of demand refers to how responsive the quantity demanded for a good or service is to the change in its price. When the percentage of change in quantity demanded is more than the percentage of change in price then the demand for this good or service is considered elastic. For example, if the price of wellness exam fell 20 percent and the quantity of these screenings paid for rose 30 percent, then according to the PED formula which looks like this, 30% (Q) /-20% (P) = -1.5% (E), then this example would be considered elastic. The demand is considered inelastic when the percentage of change in quantity demanded is less than the percentage of change in the price of the good or service. For example, if the price of an eye exam rose by 10 percent and the quantity purchased declined by 5 percent, then according to the PED formula which looks like this, -5% (Q) / -10% (P) = -0.5% (E), then this example would be considered inelastic. As a rule if elasticity occurs when E is greater than 1 and inelasticity occurs when E is less than 1.

2) How would you expect the price elasticity of demand for health care to vary with health status?

I would expect the price elasticity of demand for health care to vary with health status depending on what services the patient is seeking. For the most part experts believe that demand for health care is inelastic. For instance, the RAND Health Insurance Experiment found that the price elasticity of medical expenditures is -0.2 (Shafrin, 2009). In general, when a health status of a patient is declining, the patient is not sensitive to the price of type care performed. In addition, substitutes play a role in price elasticity because substitutes provide more options for a patient. For instance, if more substitutes are available for a patient to use to improve their health status, then as the price rises, patients are able to seek different service to improve their health. For patients seeking care to improve their health status using inpatient, outpatient services, etc. there are no substitutes thus demand for health care is inelastic. If a patient were seeking preventative care or pharmaceutical goods (which both have numerous substitutes) to improve their health status, then the price elasticity would be considered inelastic. As the price for these preventative care and pharmaceutical goods rise, the patients can seek substitutes at lower costs. 3) Would the demand for health care increase or decrease with an improvement in educational attainment in the community? The demand for health care would decrease with an improvement in educational attainment in the community. Many studies have shown there is an inverse association between education and the demand for health care. The higher education levels a person attains, the healthier the person becomes thus the less demand there is for health care. Paul Feldstein is a Professor and Robert Gumbiner Chair in Healthcare Management at the Graduate School of Management, University of California-Irvine. According to Feldstein, as education attainment increases, individuals are likely to be more adept at

recognizing the early symptoms of illness, resulting in a higher likelihood that they will obtain early treatment or even change their lifestyles to avoid disease or illness (Feldstein, 2006). In addition, the higher the educational attainment the less likely individuals are to smoke and the more likely they are to exercise and drink in moderation. According to the Robert Wood Johnson Foundation Commission to Build a Healthier America (2009), greater educational attainment has been associated with healthpromoting behaviors including increasing consumption of fruits and vegetables and other aspects of healthy eating, engaging in regular physical activity, and refraining from excessive consumption of alcohol and from smoking.

4) Studies using macroeconomic data indicate higher income elasticity for health care. Does that make health care an inferior, normal, or superior good? Explain. Using macroeconomic data, the higher income elasticity makes health care a superior good. A superior good is a good that when income increases it causes demand for the good to increase and income elasticity of demand (IEoD) is positive and greater than one. A normal good has IEoD of less than or equal to one and greater than zero. A superior good and normal good are very similar in that when there is an increase in income there is a shift to the right on the demand curve. The difference between a superior good and a normal good is the distinction that income elasticity of demand is greater than one. Individuals purchase a substantial amount more of a superior good as their income increases than on a normal good as is the case with health care. Economist Robert Fogel explains, The main factor is that the long-term income elasticity of the demand for health care is 1.6, for every 1 percent increase in a family's income, the family wants to increase its expenditures on health care by 1.6 percent (Fogel, 2009).

5) Describe the components of time cost in health care. Is time less costly for patients with higher wage rates? Explain. The time cost in healthcare includes time traveling to a doctor (higher cost for rural patients), wait time to see a physician, exams and treatment, taking medication, obtaining medical care for others, and paying doctors bills. These factors are all opportunity costs of time. Opportunity costs are defined as the cost of an alternative that must be forgone in order to pursue a certain action (Investopedia, 2013). For example, the opportunity cost of making a visit to the doctors office is the money you would have earned if you have not missed work for the appointment. On the one hand, you lose a few hours of pay while visiting the doctor; on the other hand, you hope to prolong your life to offset the lost wages. No, time cost is not less costly for patients with higher wages in the short-term. In fact, time cost is more costly because patients with higher wages have a higher opportunity cost of time. For example, each minute the patient waiting or driving to see the physician is a minute the patient is earning a wage. When a patient earns $25 dollars per hour or $.42 per minute compared to a patient earning $10 per hour or $.17 per minute, the time cost to the patient with the higher wage is two and a half times more than the time cost of the patient with the lower wage.

References: Feldstein, P. (2006). Health care economics (6th ed.). Thomas Belmar Learning. Clifton Park, NY.

Fogel, R. (2009). Forecasting the Cost of U.S. Healthcare. The American. Retrieved from: http://american.com/archive/2009/september/forecasting-the-cost-of-u-shealthcare/ Opportunity cost. (n.d.). Investopedia. Retrieved from: http://www.investopedia.com/terms/o/opportunitycost.asp Robert Wood Johnson Foundation Commission to Build a Healthier America. (2009). Education Matters for Health. Retrieved from: http://www.commissiononhealth.org/PDF/c270deb3-ba42-4fbd-baeb2cd65956f00e/Issue%20Brief%206%20Sept%2009%20-%20Education%20and %20Health.pdf Shafrin, Jason. (2009). Is Health Care Demand Elastic?. Healthcare Economist. Retrieved from: http://healthcare-economist.com/2009/07/22/is-health-care-demand-elastic/