A Model of Demand for Effective Care
Published In: Journal of Health Economics, v. 14, no. 2, June 1995, p. 231-238
Posted on RAND.org on January 01, 1995
Presents a simple model intended to understand the potential gains of reducing ineffective care. "Effective care" is defined as care that improves health, without regard to economic trade-offs. All other care is unnecessary or harmful. In the model, informed consumers with generous insurance may buy effective care, even if its value to them is less than the cost of producing it. Partially informed consumers, regardless of insurance status, may buy ineffective care because they cannot tell in advance whether it will be effective or not. If ineffective care is harmless, then the impact of reductions of ineffective care on the net value of care depends solely on the cost of quality improvement. If a blend of effective and ineffective care costs the same to produce as does producing just the effective portion, then quality improvement has no effect on net value of health care, even though higher quality reduces the quantity of care consumed. However, if it is cheaper to produce just the effective portion than the blend, then the net value of care goes up. The model demonstrates that both economic incentive and quality improvement reformers have ideas that could lead to beneficial changes. Their efforts can complement each other in improving the efficiency and effectiveness of health care.
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