Thursday, December 16, 2010

Demand Curve for Healthcare in Massachusets

Here's another post pulling from my assignments at Stern...

A subsidy can be thought of as a negative tax in that it is a payment from the government, either to the consumer or to the supplier of a good, that reduces the price the consumer actually pays below the price the supplier is actually selling.  The Patient Protection and Affordable Care Act of 2010 (PPACA) provides for subsidies to small businesses to encourage them to offer health insurance coverage to their employees, and direct subsidies to individuals who are neither in a government insurance program nor offered insurance by their employer.  You can read more about this on Wikipedia here.  Taken together, these subsidies are likely to have the classic economic effect on the price and quantity of healthcare delivered in the US (see Wikipedia  here for a more in depth discussion on the effects of subsidies).

When the government intervenes in a market to provide subsidies to the consumers of a good, the consumers experience a lower price and demand increases.  At the same time the suppliers receive a higher price and hence they supply more.  The economic benefit of the subsidy is shared between consumers and suppliers, but not necessarily equally.  The elasticities of supply and demand determine how it is shared. 

In Massachusetts they enacted a subsidy similar to PPACA back in 2006, offering an opportunity to measure the price elasticity of demand for healthcare.  The Medical Expenditure Panel Survey (MEPS) for 2005, 2006 and 2007 for Massachusetts, show the number of individuals with a healthcare expense (a proxy for quantity demanded) and their mean out-of-pocket healthcare expense (a proxy for the price).  In the chart below I plot these points to show the downward sloping demand curve.  I also show the price elasticity of demand between 2005 and 2006 to be -1.95 or relatively elastic, and the the price elasticity of demand between 2006 and 2007 to be -0.18 or relatively inelastic.  

But because 2006 was the year of implementation for the Massachusetts subsidy it might not be a good year to measure the effects.  So in a separate calculation I compared 2005 (the year before Massachusetts subsidized healthcare) with 2007 (the year after) and found the price elasticity of demand to be -0.56. Again, relatively inelastic. 

Inelastic demand means a steeper demand curve, which implies a larger benefit from the healthcare subsidy should flow to consumers relative to suppliers.  Drawing from this example, one might expect a similar effect for PPACA at the US level, and more of the benefit of the proposed healthcare subsidy should accrue to the consumers of healthcare versus the payors, providers, physicians, pharma and other suppliers of healthcare.

By design or by accident?