Ah 511: Income, Risk and Consumer Demand for Healthcare

Income, Risk and Consumer Demand for Healthcare

AH 511—Health Service Management

Lindsey Simmons

Grantham University

1. Why is the depreciation of capital good a cost of society? In what ways does a person’s health depreciate?

Capital goods is defined as any tangible asset that is used in an organization to produce goods or services through office’s, equipment, and machinery with the end result being consumer goods. The idea of depreciation is to spread the cost of that capital asset over the period of its useful life to the entity. Capital goods depreciate because of physical wear and tear or technological advances.  Unfortunately, the depreciation rate increases with age or an individual’s health status similar to any instrument or technology.  Due to the aging process, it is more difficult to maintain the same level of health capital over time.   The marginal benefit of the health stock also decreases with age which reflects a decrease in the optimal health stock.

1. Why might older people’s healthcare expenditures increase in the Grossman model even though their desired health stocks may be lower?

In Grossman's model, the optimal level of investment in health occurs where the marginal cost of health capital is equal to the marginal benefit. In Grossman’s model, the optimal health stock is impacted by factors like age, wage, and education (Folland, Goodman, and Stano; 2001).  When you single out the age factor, you know that health depreciation is going to increase in relation to age, making it more costly to attain the same level of health capital or health stock when we get older. As a consequence of this process, the optimal health stock and the marginal benefit of the healthcare would decrease, lowering the demand of treatment.

1. List at least three factors that might increase an individual’s marginal efficiency of investment in health capital.

Some factors that might increase an individual’s marginal efficiency of investment in health capital are education, wage rate, preventive care, exercise, and dieting.

1. The deductible feature of an insurance policy can affect the impact of moral hazard. Explain this in the context either of probability of treatment and/or amount of treatment demanded.

Coinsurance, co-payments, and deductibles reduce the risk of moral hazard by increasing the expenses paid out of pocket by the consumer. With an increase in out of pocket charges, the consumer should be more conscious of how they use their insurance and what is being claimed, because they are responsible for part of the cost upfront.  In return, there is a financial incentive to less claims filed.

1. Describe the benefits to society from purchasing insurance. Describe the costs. Define and discuss the welfare gains from changes in insurance coverage.

Purchasing insurance will benefit the population as a whole. It protects businesses financially from many forms of risks. If people or companies get insured, the companies providing the insurance would be relief from the potential concerns they have regarding how would cover the cost of the insured risks. With insurance individuals or companies are willing to take risks when investing money towards different types of business, knowing that there are risk factors and unfavorable outcomes but that their investment would not be a total loss. This is extremely important for all parts; the insurance company which obtains the revenues based on no claims from the individual or corporation insured, and knowing that a successful insurance business makes a healthy economy. Insurance facilitates businesses continuity and at the same time it contributes to economic growth through its investments. As the cost of health services continues to increase above the revenue of average working class salary, they would not be making enough to cover their living expenses plus health services if there was not insurance that helps alleviate some of the financial stress that paying the full cost of health services would bring if the individual was not insured.