The Elasticity of Demand for Health Care
A Review of the Literature and Its Application to the Military Health System
This report reviews the economic literature on the elasticity of demand for health care to provide a framework for understanding the effects of changes in the Military Health System benefit structure on the demand for healthcare services paid for by the DoD. Despite the wide variety of empirical methods and data sources used in the literature, the demand for health care is consistently found to be price inelastic, with values centering around -0.17. The demand for some specific medical services such as preventive care or pharmacy, however, is found to be more price sensitive with values around -0.30. Changes in the price of health care affect health plan enrollment choices as well as the demand for services. Studies show that consumers may be induced to switch between insurance plans in response to changes in their relative prices. The report concludes with a discussion of the potential effects of four aspects of the FY2001 National Defense Authorization Act.