Price and Income Elasticities for Medical Care Services

by Joseph P. Newhouse, Charles E. Phelps

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Presents a theory of the demand for medical care services that is a generalization of Michael Grossman's investment model in three ways: Medical care is not treated as a homogeneous commodity but disaggregated to hospital and physician services; the price of the provider selected and medical insurance are treated as endogenous; and variation in price per unit of services among providers is allowed for and explained. Preliminary estimates of price and income elasticities are presented using data on heads of families in the labor force from the 1963 Center for Health Administration Studies survey. These data show price elasticities to be on the order of -0.15 for hospital length of stay and physician visits and wage income elasticities to be near zero.

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