Health is a fundamental need for human beings and each individual demands health care services to ensure maintenance of health, through preventative measures or for curative purposes. Therefore, simply claiming for health care can be raised from demand for health by individuals. The consumer theory in economics forms the basis upon which the demand for health and medical care is derived. This is based on the fact that the consumers seek to maximize their utility from consumption of health services. There are various factors affecting the demand for health such as the level of education of the consumer for the health services. The price of health care services is another determinant of demand for health care services, as well as the income of the consumer (Jacobs & Rapoport, 2004).
There are other factors affecting the demand for health care, such as the price of other related goods and the distance of the health facility from the individual, as well as availability of medicine in the health centers. This paper will evaluate the various determinants of health and medical care, as well as evaluating the agency problem that affects the demand and the issue of supplier induced demand. This will facilitate a holistic evaluation of the demand for health and medical care.
The demand for health care is affected by the education as it increases the demand of an individual. This is attributed to the fact that an educated individual is more aware of the health implication and other important aspects such as health insurance. The income of an individual also affects the demand for health and medical care. The higher income the consumer has the higher demand for health and medical care services he will require since the consumer has the ability to pay for such services. Individuals on the higher income bracket are also able to purchase health insurance, which increases their demand for the health services (Council of Europe. Committee of Ministers, 2002). However, individuals with low income have less demand for health and medical care due to the fact that the services are unaffordable to them.
According to various studies, the demand of health medical care has been found to be price inelastic. The changes in price do not significantly affect the demand for health. However, this affects the individuals with low income and the demand for health care of the poor is price elastic. There is a need for subsidization of health and medical care services to increase accessibility of these services to the poor citizens in the states. The availability of medicine in the health centers is another major determinant of demand for health. The more available medicine is, the higher demand is for health and medical care services. The distance of health care facilities is inversely related with demand of health and medical care services (Santerre & Neun, 2009). If the health facilities are located far away from the consumer, there will be less demand for the health care services.
The Agency Problem and Supplier Induced Demand
The agency problem is a common problem in the health care sector and a major cause of market failure. The agency problem arises from information asymmetry aspects in the health sector since the physician has some information that is not known to the patient. There is inaccurate information between the physician and the patient since the physician has more information about the conditions of the patient. In an ideal market, all players such as the producers and consumers have complete information about the market. However, in this case the market is not complete since the doctor or the physician has some information, which the patient does not know. For example, when the patients are purchasing health insurance from the providers, however, they actually do not have all information as it is not available to the provider (Santerre & Neun, 2009).
The supplier induced demand arises from the fact that providers of health and medical care seek to maximize profits. The aspect of information asymmetry plays an imperative role in this case where the physician may prescribe some medication to the patient, which might not be useful in the process of healing or provision of medical care. The most common case of supplier induced demand happens when the physician requires the patient to go for laboratory tests, which are not essential for the treatment of the patient (Hicks, 2012). The physician knows that the laboratory tests are not required for the patient but continues to recommend the patient to take such tests. The physician owns the laboratory and the patient will have to pay an extra charge for laboratory tests. The information asymmetry and principal agent problem lead to this problem since the physician acts as the principal agent of the patient and since the patient does not have information on his condition he purchases the induced services (Pauly, Thomas, & Barros, 2011).
In conclusion, the demand for health care is derived from demand for health as individuals utility is maximized by living health. The demand for health is affected by various factors such as price, income and education of the consumer among other factors. The health care sector faces the agency problem since the physician is the principal agent of the patient and has to direct the patients. This leads to the problem of supplier induced demand, where the physician recommends some procedures to increase their profitability.
Council of Europe. Committee of Ministers. (2002). The Adaptation of Health Care Services to the Demand for Health Care and Health Care Services of People in Marginal Situation. London: Council of Europe.
Hicks, L. (2012). Book Alone: Economics of Health & Medical Care 6e. Burlington: Jones & Bartlett Publisher.
Jacobs, P., & Rapoport, J. (2004). The Economics of Health and Medical Care. Burlington: Jones & Bartlett Learning.
Pauly, M. V., Thomas G, M., & Barros, P. P. (2011). Handbook of Health Economics, Volume 2. Amsterdam: Elsevier.
Santerre, R. E., & Neun, S. P. (2009). Health Economics: Theories, Insights, and Industry Studies. New York: Cengage Learning.