The Effect of Health Insurance on the Demand for Medical Care

TLDR

Using 1960 Survey of Consumer Expenditures data, the authors estimate price and income elasticities of hospitalization and physician services and then apply the resulting demand function to compute the cost of protecting against typical small losses covered by health insurance. The study finds price elasticities between –0.35 and –1.5 for hospitalization and physician services, income elasticities between 0.25 and 0.45, and that a family earning $7,000 paid 2.5 times the actuarial loss value to insure against a typical $110 loss.

Abstract

Data drawn from the 1960 Survey of Consumer Expenditures are used to estimate price and income elasticities of the demand for hospitalization and physicians' services. The price elasticity ranges from -0.35 to -1.5 for prices ranging from 20 to 80 percent of the 1960 market price. The income elasticity ranges from 0.25 to 0.45 for incomes ranging from 4,000 to 10,000. The estimated demand function is used to calculate the cost of providing protection against the highly probable, small losses typically covered by health insurance policies. A family with an income of 7,000 paid 2.5 times the actuarial value of the loss to protect itself against a highly probable 110 loss.