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On Having Your Cake and Eating It Too

Econometric Problems in Estimating the Demand for Health Services

by Joseph P. Newhouse, Charles E. Phelps, M. Susan Marquis

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Discusses certain methodological problems in the economics literature related to the demand for medical care. There are two principal problems examined: misspecification of how insurance affects demand, and aggregation across services or across individuals. It is shown that in both cases estimates contained in the literature are inconsistent. Where possible, the direction of the inconsistency is obtained a priori. The paper also makes estimates of the magnitude of the inconsistency; the demand elasticities estimated in the economics literature may be overstated by a factor of three or more.

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