Incentives vs. Controls in Health Policy: Broadening the Debate

By Jack A. Meyer; American Enterprise Institute for Public Policy Research | Go to book overview

6
Demand, Supply, and Information in Health Care and Other Industries

Warren Greenberg

This chapter first examines demand and supply in the health care industry and compares them with demand and supply in other industries. Second, it examines how demand and supply have been manipulated by health care providers to realize greater returns in a way similar to patterns in other industries. Finally, it illustrates how altering the supply of a single commodity, information, can affect the quality and cost of health care.


Demand and Supply in Health Care

Demand. Unlike demand in most industries, the demand for health care has two components. The first is the demand by individuals, analogous to the demand for other goods and services in the economy, such as food and clothing. Approximately one-third of health care services is purchased by individuals. Studies have shown that, at least in purchasing visits to physicians, patients behave much as they do in purchasing other commodities. That is, the lower the net price (price charged minus insurance coverage), the more visits take place. 1

The second component of demand may stem from individuals but is paid for by Medicare, Medicaid, commercial insurers, and Blue Cross-Blue Shield. The existence of these third-party insurers shifts the overall demand curves to the right in addition to lowering the net price to the individual. This shift assumes that the insurer is not actively engaged in cost containment and simply reimburses the provider for services rendered. A more active insurer that questions a physician's use of tests and procedures may be able to curtail a rightward shift of the demand curve.

Until the early 1980s most insurers were relatively passive about

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