Health Care Economics Assignment

This Health Care Economics Assignment discusses the concept of organ shortage, demand and supply of organs, and the Grossman model of healthcare demand. It also explores the impact of winning a lottery on the health status of a hypochondriac.

Running Head: HEALTH CARE ECONOMICS
Health Care Economics
Assignment

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Question 1
A) (i) Why do you think these shortages exist?
Health is a state which can be improved by the purchase of healthcare facilities
(Huber, Knottnerus, Green, & Smid, 2014). Healthcare is a tradable commodity but it lacks a
market. The responsible reasons can be the incentive problem. The donors lack incentive to
donate since the market for organ is illegal. Also, the people resort to their beliefs and lack
of knowledge and trust in the medical sector which prevents them from donation. The
number of patients facing kidney and other organ failure has been increasing over the years
and this increases the demand for organ transplant since the dialysis is not a dependable
option in the longer run. A person is added to the national list of transplant every 10
minutes in US while 20 persons die due to organ shortage each day. A healthy donor can
contribute life to 8 people on an average (UNOS, 2018). Despite the safe and improved
technology, people are not willing to donate.
A) (ii) Suppose quantity demanded of organs (e.g. kidney) goes up with price. Can you
think of a reason why demand for organs would defy the Law of demand? If organ was
available in a free market, how would the shortage be reflected in a supply-demand
framework, where demand for an organ is upward sloping? Explain using an appropriately
labeled diagram.
Price and quantity demanded have a negative relationship. If the price of a
commodity decreases, the demand for the good tends to extend and when the price of the
commodity increase, the quantity demanded tends to contract. This is also referred to as
the law of demand (Periyasamy, 2016).

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There are exceptions to the law of demand which may include giffin goods and
veblen goods (articles of distinction or prestige) (S, 2016). Ignorance of the consumer,
necessities and the expected increase in the price of the commodity or speculative demand
are other exceptions.
Given the situation, price has a positive effect on the quantity demanded. In case of
organ demand and supply, organs are conspicuous necessities. They are essential for the
survival and are purchased even at higher prices. People may also be ignorant about the
prices and may purchase the organs at high prices. People tend to take higher priced good
with higher quality and standards. Also, people may expect the future prices to rise even
further. This induces them to purchase the commodity even at high prices. All the above
mentioned factors can contribute to the positive slope of the demand for organs.
Figure 1: Solving incentive problem by free market.
Price (Organs)
Quantity (Organs)
Supply Curve
Positively sloped
Demand Curve
E
Q2Q1
P1
P2
Shortage (Organs)
O

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In case of free market for donation, the incentive problem will be solved and there
will be an efficient allocation of organs. The donors will get higher price P2 compared to
previous price P1. Now the donors will have an opportunity cost of not donating.
A) (iii) Continuing with this hypothetical case (of a market for organs), do you expect the
market demand curve for organs to be price elastic or price inelastic? What about the
supply curves? Explain why.
In the given scenario, the demand curve is positively sloped in the free market. The
price elasticity of demand will be inelastic (<1) because organs are a necessity. People will
purchase it despite the high price. The waitlists are quite long and the average years
between the wait listing and being chosen for donation is 3-5 years (National Kidney
Foundation, 2017). On the other hand, the supply curve will be elastic (>1) because with the
increase in compensation, the donations will increase by huge quantities.
B) “We should allow a market for human organs where purchase and sale of organs for
transplant surgery can be conducted just like any other economic goods.” Do you agree or
disagree? Justify your stance from an ethical point of view or an efficiency point of view.
A free market of organ there is interaction of demand and supply. These market
forces determine the equilibrium price and quantity (Read, 2015). The equilibrium price on
one hand provides incentives for the producers to produce and on the other hand is
affordable to larger population. The equilibrium quantity allocated the resources efficiently
(Arunwarakorn, Suthiwartnarueput, & PongsaPornchaiwiseskul, 2017).
Free market in the organ donation will help achieve efficiency and will increase
donation level. If not live donation, people will be tempted to go for cadaveric and deceased

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donations. A cadaveric donation includes the donation of organs like lungs, kidneys, heart,
pancreas and liver from brain or heart dead people (P J van Diest1, 2010). Many countries
have opt-out and opt-in options to increase the donation in the economy (Willis & Quigley,
2014). Increased knowledge about the transplantation will increase the number of donors in
any nation (Sugumar, Padhyegurjar, & Padhyegurjar, 2017).
Donation will tend to increase with the free market where the price of organs will
increase (V & Block, 2011). This will lead to organ transplant of a large portion of wait-listed
people. Their survival rate and years will increase with the increased chances of
transplantation. The death rate due to lack of organ donation will fall sharply. There will be
no waiting lists and shortages of organs (Epstein, 2009). Free market leads to increase in
surplus of both the parties (Ajefu & Barde, 2015).
Before the free market, only few people were able to access the markets even when
they could afford higher prices for transplant. Some of them resorted to illegal or black
markets. Absence of free market often leads to black market formation.
Free market will solve the issue of black market. Black market leads to efficiency.
Since there will be higher price paid in the free market, people will choose to donate freely
rather than opting for other illegal means.
Question 2
A) How would this affect her optimal level of health? Explain your answer in the light of
the three roles that health plays in the model. Use appropriate diagrams to facilitate your
explanation.

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People with hypochondriasis have a mental disorder in which they preoccupy
themselves in the misinterpretations of some underlying somatic symptom (Taylor &
Asmundson, 2012). Hypochondriacs like people with health anxiety, have a disease phobia
(Starcevic, 2013). They face health anxiety and perceive small changes in their body as major
illness. They invest their time in the assessment of their body, illness and associated
symptoms. They engage most of their time in anxiety and depression rather than consulting
a doctor. Today, a large number of people rely on internet as a source of information for
their health and medical issues.
Grossman model tries to explain the consumer demand for healthcare. He explains the
reasons behind the better health of the educated and the declining health at the time of
ageing. He observes health as ‘chosen’ than something we inherit. Healthcare demand like
any other commodity is based on the price of healthcare. Grossman model regards health as
having three roles which are as follows:
 Health as a good of consumption
 Health as an input into the process of production
 Health as investment or a form of capital or stock
I. Health as a good of consumption:
Health enters the utility function directly as consumption good (Zweife, 2012). It can
be regarded as utility at a point of time. The model takes health care into account
implicitly where staying healthy provides utility but not getting vaccinated. The time
constraint related to health creates a trade-off. Income increases the affordability of
healthcare utility but the time spent being sick reduces the time for utility increasing

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activities. There is a trade off in the work and leisure. Staying healthy increases the
availability of productive time.
A hypochondriac spends his productive time on the worrying over health. He instead of
contributing to his health adds on to its deterioration. Not only his mental health is affected
in the process of over-analysing but also his physical health by taking non-prescribed
medicines and increases his time being sick.
II. Health in production function:
Health enters the production function as an input (Jones, Laporte, Rice, & Zucchelli,
2014). Having a good health is inversely proportional to the time spent being sick
and increases the availability of productive time. This time can be invested into
health and other chores.
A hypochondriac instead of adding to his ‘healthy’ time contributes to the ‘sick’ time.
The productive time is compromised by spending energy and time on petty symptoms and
issues. The time is contributed to the depreciation of health.
III. Health as investment or a form of capital or stock:
A rational person values both present and future health. Grossman considers health
as a stock (Fayissa & Traian, 2015). Health depreciates over time. When the health is
low, there are high returns to the productive time with small investments. There is a
trade of between investing money in health and other activities. Health can be built
up with the increase in the level of investment and vice versa (Laporte, 2015). Model
also explains that education increases the efficiency of health investment at each
level (Bijwaard & Kippersluis, 2016).

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A hypochondriac invests his time and money in the hope to improve his health. He
spends money on unnecessary treatments and medicines. They do not contribute to a
better health of the individual but to its depreciation. The process of depreciation is
accelerated with the stress and anxiety.
Rate of
Return
r= Foregone Interest rate
𝛿= rate of depreciation
r+γ
MEC
Hmin H* Health Stock
Figure 2: Health as an Investment (Grossman Model)
Rate of
Return
MECC = College Graduate
MECH = High School Dropout
r+γ
MECH
Hmin H*H Health Stock
Figure 3: Health Investment Efficiency and MEC
MECC
H*C

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B) Now imagine this hypochondriac suddenly wins a mega jackpot lottery of $1 million.
How does this exogenous income shock change decisions about her health status?
When a hypochondriac wins a lottery, his lifestyle might change drastically. There will be
following changes in his lifestyle and attitude:
1. Switch working hours: When a hypochondriac wins a lottery his wealth increases. He
can reduce his working hours and enjoy leisure time. The time earlier he spent
working and earning income to improve his investment on healthcare can be
switched to other activities. Being a hypochondriac, he will switch that time by
investing on finding symptoms for other health issues. He does not have to worry
about the income generation process for the survival.
2. Wrong investments: A rational person insures his life through various policies which
provide him compensation at the time of any adversity. Increase in wealth of a
rational person will lead to increase I investment in health insurance and other
Rate of
Return
r+ γ Hmin
r+ γ1
r+ γ0
MEC
Hmin H1* H0 Health Stock
Figure 4: Health Depreciation

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medical claim policies. Instead of investing in his health and medical insurance, a
hypochondriac will use that money to discover new symptoms in his body. He will
not invest his money in profitable ventures.
3. Reduction in physical activities: The time and energy saved by not working will not
be spent on other activities. He will not invest his energy and time on physical
activities to improve his immunity, stamina or health but on collecting information
from friends and other people regarding different types of diseases and their
symptoms. Physical activity is important for improvement of health and potential of
an individual.
As he has more money to spend, his daily routine will be affected and so will the amount
of physical activity. With the lottery money, he can increase his household and other helps.
This will reduce his individual effort at any task and will make him lazy.
4. Purchase drugs: He will use the money acquired to purchase various medicines. He
will increase the purchase of various kinds of medicines and drugs in the hope to
improve upon his condition. He will surf the internet and find different types of drugs
and medicines which may be illegal to purchase for individual consumption. The
money will help him get access to those drugs which were beyond his reach earlier.
These drugs might have negative effects on his health leading to deterioration of
health and loss of appetite.
5. Lack of knowledge: He will use his incomplete knowledge and skill to treat his ailing
body. The lack of proper knowledge will lead to other health issues and
complications. The condition might worsen with stress and depression. Since there is

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no diseases in actual, taking medicines can lead to side-effects and development of
serious health issues. This will lead to a cycle of diseases.
6. Affect the lives of people around: A hypochondriac might choose to spread his
insufficient knowledge with his close friends and relatives. He might give them
suggestions and medicines to improve their health. As he is not a skilled practitioner,
his ideas will be dangerous for other people’s health. He might influence the lives of
people around him. Some of them might develop the symptoms of hypochondriasis
just like him.
7. Increased depression and anxiety: Having acquired a lot of money, a hypochondriac
may increase his level of stress trying to use this money judiciously. His level of
anxiety will increase from the resource allocation. He will try to spend most of it on
health instead of making some profitable investments. Soon the whole money will
be spent and he will return to his original income level with an expensive and
unaffordable lifestyle.
Question 3
A) Is there any scientific evidence to validate this claim? (Cite at least two authentic
journal articles).
There was no relation between the suicides and lunar cycles. The suicidal or other
behavior can be attributed to the religious beliefs of holy periods (Taktaka, et al., 2016).
Many people believe to reach heaven if their die on a festival or religious day. They believe
to find nirvana or liberation in the days of festivals or religious importance. The tendency
has no link to the lunar cycles but the beliefs and practices. Rate of suicides increases
because of the religious beliefs of the people. Thus, this relationship between suicides and

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lunar cycle is a myth. Also, there are no evidences found for the relationship between the
lunar cycle and rate of admissions in the hospital (Margot, 2015). There was no evidence
found in the collected data and its analysis. The relationships found by some researchers
can be attributed to the erroneous conclusions and cognitive biases.
B) If the claim is valid, explain why there might be a higher incidence of suicide on full
moon. If not, what behavioral bias is responsible for such views? Explain.
The claim is false and there could time discounting bias which is multifaceted in
nature. There are links between health related behavior and the preference of time. It is
also known as temporal or delay discounting. People attach rewards to different time
periods based on their preferences and behaviors. They discount the values attached to the
future rewards. With the delay length, the factor increases. The other possible reason could
be the present bias. It measures the declining impatience in degrees. It is found to be
directly related to unhealthy behaviors in naive patients who are oblivious of their self-
control issues (Kang & Ikeda, 2016). People attach higher value or pay-offs to the present
time and the events that are closer. There is a trade-off between the two time periods.
Another reason could be the confirmation bias where people look for evidences to justify
their claim.
C) Briefly discuss another example in healthcare where such bias may be present.
Another example for the confirmation bias in the health care could be when the
people discover a symptom and based on their judgment, they relate it to a disease. Their
beliefs are made stronger with the help internet which shows two sides of each coin and the
people choose the one they relate to. Similarly, time discounting bias can be found in the

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day to day lifestyle of the people in terms of healthcare choices they make. When a person
catches cold, he/she does not go to a doctor or take prescribed medicines in the hope that
they body will cure itself. It is later that the condition becomes worse that they realize it’s a
viral infection and finally consult a doctor. Thus, it can be found that there are biases
involved in every person’s life when they make decisions about their health. There are
biases found in case of doctors and practitioners as well.
D) What role does “present-bias” play in patients’ health-related choices? Provide an
example that has not been already discussed in class.
Lifestyle:
Present bias refers to the situation where people give higher weights and pay-offs to
the present time and the events in the near present. They assign lesser values to the far-off
incidences. They prefer present over future and make choices and decisions that are
convenient in the present. There is a tendency to give over-value to the immediate rewards
at the stake of intentions in the long-run. These traits are found to have big implications in
the future.
Present bias can be related to the lifestyles of the people. There are people who are
hard-core drinkers and smokers. Despite the given statutory warnings on the packs of
cigarettes, people choose to consumer them. They know that it is going to spoil their lungs
and damage the alveoli in the lungs. It also leads to lung cancer in the patients. The
treatment for such dangerous diseases is either not available or extremely expensive. It is
not affordable by most of the people who engage in smoking. Thus, despite the complete

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knowledge of adversities, they attain utility from present. They are least bothered about the
future consequences and engage in life threatening activities.
Similar observations can be found in alcoholics. Consumption of alcohol in the long-
run can lead to liver disease and chronic liver inflammation. Despite being aware of the
consequences, they choose to drink on a regular basis. This could be because of personal
preferences or peer pressure. The present bias makes the people engage in present
activities which might be dangerous in the future.
Instead of living a healthy lifestyle, people choose to consume unhealthy food. They
not only consume high in carbohydrates and fat foods but also reduce the physical activities.
They are tempted to consume delicious and unhealthy foods and not exercise. The
consequences could be obesity and health issues which will have to be dealt with in the
future.

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