Yesterday’s Senate rejection of the public option for healthcare is bringing the issue into sharper focus. Whether you are pro or con healthcare reform, it is an interesting topic to apply to economic theory.
When discussing price elasticity, or rather, own price elasticity of demand in healthcare we are looking for the change in demand, i.e. will people seek less or more healthcare, as the price of obtaining healthcare changes incrementally.
Now there are some externalities that affect the concept. For example, some people go to the doctor all the time because they have really great health insurance and are either very sick, or have münchausen syndrome. Others never go to the doctor unless something is falling off or they run out of blood. So removing these outliers from the argument and focusing on those utilizing essential services only (and I recognize that the in-between population is a big piece of the whole healthcare debate but for purposes of this academic exercise, please bear with me) basic economic theory indicates that when the price of a widget goes up, demand for the widget goes down. Over time as demand drops, prices will adjust downward in search of equilibrium. That type of consumer behavior would be said to have high price elasticity.
However, healthcare is not widgets and there are several clues that indicate the elasticity of healthcare. For bona-fide health issues the question is whether consumers will seek healthcare at approximately the same rate as before, regardless of change in cost. In other words, if a person is dying, will that person pay whatever price is asked for healthcare? If the answer is yes meaning the percentage change in demand does not follow a percent change in the cost then the service is price inelastic. Another clue is that inelastic products never go on sale (Tufte Chapter 3 lecture). So in the example of healthcare, I would say that healthcare is price inelastic and the demand curve would be curved due to unequal percentage changes in slope.
The elasticity of a commodity is always changing because of natural behavior of market forces. So let’s re-introduce the outlier population, those who would purchase more healthcare when it is cheaper and less when it is more expensive. What that produces is a demand curve with two inflection points and inverse elasticities at the extremes. What would the demand curve look like that included non-essential healthcare consumers in the model?