Health care is not the only factor that promotes good health. Other determinants of good health include good diet, plenty of exercise and personal hygiene. Some economists like to think of individuals as deliberately combining all these factors to produce good health. An example is the health production model which assumes that individuals or households invest in health inputs to produce a return of healthy days (Grossman 1972, 2004).
For example, it is known that lack of exercise is bad for the health: among other things, it raises the risk of coronary heart disease. People who work in offices often do not get much exercise in their work. Some of them decide to take-up some form of exercise, perhaps running or swimming. Economists might refer to this action as investing in human capital. This is because the exercise programme is seen as an investment (the person is investing time and money) in health. When a firm increases or improves its machinery it is said to be investing in capital. Households or individuals, when they increase their skills or health, are said to be investing in human capital.
Seven assumptions underlie the health production model:
• people value their health (along with other things);
• people produce health using health inputs;
• neither health production nor other activities are without cost;
• individuals have fixed incomes;
• there is diminishing marginal utility for health and other activities (i.e. the healthier a person becomes the less they value each additional increase in health);
• there is diminishing marginal product of health inputs (i.e. the more a person invests in health the less they gain from each successive input);
• education increases the efficiency of health production (i.e. an educated person gets more health gain from a given health input than a less educated person).
Activity 7.3
According to the health production model, how might inequalities in health be addressed?
Feedback
The model suggests that as an individual’s income increases so their health increases because they will be buying more health inputs. But as income increases by x per cent, health will increase by less than x per cent. This is because of the assumption that there is diminishing marginal product. (Diminishing marginal product is believed by economists
to be present for all inputs and all production functions.) This has consequences for the distribution of income. Suppose you take some money from one individual and give it to an individual on a lower income. It happens that the loss of health to the first individual will be less than the gain in health to the poorer individual. This means that redistribut- ing income will not only reduce health inequality but will also increase the average health of the population.
Subsidies of health inputs for poorer people would be another effective way of reducing health inequality according to the model. Lower input prices result in a substitution to health inputs and therefore an increase in health for the individuals incurring the lower prices.
Finally, the assumption that education means that people will be able to use health inputs more effectively implies that, as a proportion of income, educated individuals will spend less on health inputs but will be healthier. This means that, in theory, health inequality can be reduced through health education programmes and through improving the education of the population.
All of these strategies involve the use of additional resources. While they may be effective at reducing health inequality, the additional cost means that there is a cost in terms of reduced efficiency. Whether policy makers decide to go ahead with any of these policies or not will depend on how much weight they place on equal- ity of health. You will look at the issues surrounding equality and fairness in more detail in Chapter 12.
Activity 7.4
Do you perceive any inconsistency between the investment model and the agency model of health demand?
Feedback
There is a paradox concerning the assumptions that each model makes about the information available to consumers of health. The agency model assumes that people have little information about how to improve their own health. Alternatively, the health production model assumes that people know how to use health inputs to improve their health.
The contradiction may not be so great when you remember that the agency model concerns only health care whereas the production model is concerned with all types of health inputs. It is possible that people may have a greater awareness of the effectiveness of other health inputs than they have with regard to health care. For example, most people are aware that smoking is detrimental to health, that too much fatty food is detrimental, that too little exercise is detrimental. Few people, however, would know exactly what is the best way of treating hypertension.
Like many economic models, the health production model is largely theoretical.
You should therefore treat such models with caution as empirical studies have failed to find strong evidence of the relationship between education and health production postulated by the model.
Summary
You have learned why people take out health care insurance, the role of health care professionals as agents and the reasons why they may not function as perfect agents. You have also seen how models may help to describe and explain economic relationships though they remain theoretical until empirical evidence can be prove them right.
References
Culyer AJ (1988) Inequality in health services is, in general, desirable, in Green DG (ed) Accept- able inequalities. London: Institute of Economic Affairs.
Culyer AJ (1989) The normative economics of health care financing and provision. Oxford Review of Economic Policy 5:34–58.
Donaldson C and Gerard K (2005) Economics of health care financing. The visible hand (2nd edn).
Basingstoke: Palgrave Macmillan.
Evans RG (1984) Strained mercy: the economics of Canadian medical care. Toronto: Butterworth.
Grossman M (1972) On the concept of health capital and the demand for health. Journal of Political Economy 80:223–55.
Grossman M (2004) The demand for health, 30 years later: a very personal retrospective and prospective reflection. Journal of Health Economics 23:629–36.
Mooney G (1994) Key issues in health economics. Hemel Hempstead: Harvester.
Williams A (1988) Priority setting in public and private health care: a guide through the ideological jungle. Journal of Health Economics 7:173–83.