A nonparametric investigation into the health care crisis
Abstract
Over the past three decades the growth in health care prices has been greater than the overall inflation rate, and at the same time, the real per capita consumption of health care services has grown steadily. As a result, an increasing fraction of Gross National Product (GNP) has been allocated to the provision of health care services. This cannot persist indefinitely. A majority of health care spending is financed by third party payments. This paper attempts to investigate if the means of financing affects the gross price elasticity of demand for health care services. Since households do not finance most of their health care consumption from out-of-pocket, when health care prices increase, there may not be the same incentives to economize on health care spending as there would be if a higher fraction of consumption was financed from out-of-pocket. Previous studies that were conducted on this issue, were done with parametric estimators. However, these estimators are not robust to specification error. This paper investigates the relationship between the price elasticity of aggregate demand for health care and the means of financing. In particular, we try to determine if a lower coinsurance rate (i.e. the ratio of out-of-pocket payments to total payments) reduces the absolute value of the elasticity of demand. We design a nonparametric estimator for a single equation in a system of structural equations, and we use this estimator to estimate the aggregate demand for health care services. This nonparametric estimator is robust to specification error. When we look at total aggregate demand, we find that the price elasticity of demand for health care is not significantly different from zero. When we look at privately financed consumption, we find that the price elasticity of private aggregate demand for health care services will not be significantly different from zero for average private coinsurance rates below 50%. Yet, for average private coinsurance rates above 50%, the price elasticity of demand is significantly different from zero. We also find evidence that the growing fraction of people over 65 years old is an important factor behind the growing consumption of health care resources.
Subject Area
Economics
Recommended Citation
Bradley, Ralph, "A nonparametric investigation into the health care crisis" (1992). Dissertations available from ProQuest. AAI9227621.
https://repository.upenn.edu/dissertations/AAI9227621