1. Health as a fundamental Commodity
• economy is like the human body
• Ceterius Parabus, better health will raise an individuals marginal product
in the market and has a better payoff in the form of increased wage
• Health is a commodity combined with
◦ Own time
◦ Market Purchased inputs
◦ Public sector provided inputs
• Beneficial market inputs- ie. good housing, diet, and HEALTH CARE
• Ability to produce good health depends on :
◦ Income
◦ Access to info and education
◦ Characteristics of your body production function, genetically
determined for the most part
• Many inputs have a detrimental effect of health however can offer positive
utility to many, bc individuals are utility maximisers not longevity
maximisers
• Grossman’s model:The body as a depreciating capital good
◦ In any period of time, individuals have a health stock of Hs
◦ Stock faces a depreciation rate (§) because of ageing
◦ Gross investment in health stock in period takes place when beneficial
inputs(B) - Detrimental (D) is greater than 0 ( B-D>0)
◦ Net investment occurs when B-D>§ and Hs rises
◦ Net disinvestment occurs when B-D<§ and Hs falls
◦ Death occurs when health stock falls below survival minimum
• Individuals are seen as being able to choose their state of health at all
times as they have the capacity and information
• Policy Implications of the Health Capital Model
◦ The model has a number of implications for public policy to improve the
efficiency and equity of the provision of health care
‣ Providing people with the information about the beneficial inputs
and what the detrimental effects are
‣ How to combine them efficiently
• Like in the human body, you would like the to see depreciation
at consistent rates throughout
• You want to choose activities that will result in constant
depreciation rates
‣ Policy implications: Health care inputs which are supposed to be
seen as beneficial inputs can be swamped by detrimental inputs
• Ie. Nurses smoking outside hospitals
‣ Through health care consumption, this can increase income, which
will therefore achieve the desired degree of equity
‣ Tends to mean that longevity data doesn’t have much meaning
2. Criticisms of the Model
• Nobody can for certain know what an individuals health stock is
• We don’t know for sure what the current depreciation rate is
• We don’t know the precise production function for a particular individuals
health improvement
• Grossman tried to introduce a prob distribution to cover depreciation rates
• Claims that people can choose their own life span is overstated
◦ however it is strong statement because we are utility maximisers
• These observations don’t seem to be consistent with debates regarding the
health care production
◦ Public vs private health care systems
3. Health Care Insurance Issues
• Risk averse: stick with the certain option, doesn’t take risks
• economy is like the human body
• Ceterius Parabus, better health will raise an individuals marginal product
in the market and has a better payoff in the form of increased wage
• Health is a commodity combined with
◦ Own time
◦ Market Purchased inputs
◦ Public sector provided inputs
• Beneficial market inputs- ie. good housing, diet, and HEALTH CARE
• Ability to produce good health depends on :
◦ Income
◦ Access to info and education
◦ Characteristics of your body production function, genetically
determined for the most part
• Many inputs have a detrimental effect of health however can offer positive
utility to many, bc individuals are utility maximisers not longevity
maximisers
• Grossman’s model:The body as a depreciating capital good
◦ In any period of time, individuals have a health stock of Hs
◦ Stock faces a depreciation rate (§) because of ageing
◦ Gross investment in health stock in period takes place when beneficial
inputs(B) - Detrimental (D) is greater than 0 ( B-D>0)
◦ Net investment occurs when B-D>§ and Hs rises
◦ Net disinvestment occurs when B-D<§ and Hs falls
◦ Death occurs when health stock falls below survival minimum
• Individuals are seen as being able to choose their state of health at all
times as they have the capacity and information
• Policy Implications of the Health Capital Model
◦ The model has a number of implications for public policy to improve the
efficiency and equity of the provision of health care
‣ Providing people with the information about the beneficial inputs
and what the detrimental effects are
‣ How to combine them efficiently
• Like in the human body, you would like the to see depreciation
at consistent rates throughout
• You want to choose activities that will result in constant
depreciation rates
‣ Policy implications: Health care inputs which are supposed to be
seen as beneficial inputs can be swamped by detrimental inputs
• Ie. Nurses smoking outside hospitals
‣ Through health care consumption, this can increase income, which
will therefore achieve the desired degree of equity
‣ Tends to mean that longevity data doesn’t have much meaning
2. Criticisms of the Model
• Nobody can for certain know what an individuals health stock is
• We don’t know for sure what the current depreciation rate is
• We don’t know the precise production function for a particular individuals
health improvement
• Grossman tried to introduce a prob distribution to cover depreciation rates
• Claims that people can choose their own life span is overstated
◦ however it is strong statement because we are utility maximisers
• These observations don’t seem to be consistent with debates regarding the
health care production
◦ Public vs private health care systems
3. Health Care Insurance Issues
• Risk averse: stick with the certain option, doesn’t take risks
