Pricing, Demanders, and the Supply of Health Care

Abstract

This paper is divided into three substantive sections. In the first section the conventional neoclassical paradigm is augmented by consideration of the agency relationship in which the physician is considered not only as the agent who controls the supply of health care, but also as the decision maker who articulates demand because patients forego this role and rely on “expert” advice. The next section is concerned with the effects of pricing on consumer demand and draws on the available empirical evidence to present estimates of price elasticity, cross elasticity, and other characteristics of the choice process. This analysis is completed by integrating the agency relationship into the discussion and arguing that if the policy objectives are expenditure containment and greater efficiency in resource utilization, the price mechanism should be used to affect the behavior of the primary demander and the supplier: the physician. In the final section the implications of this analysis are discussed in the contexts of two competing perspectives: the liberal market perspective and the collective “needology” perspective, and an attempt is made to distinguish some of the characteristics of the two views of the world.