The Grossman model of health demand is a model for studying the demand for health and medical care outlined by Michael Grossman in a monograph in 1972 entitled: The demand for health: A theoretical and empirical investigation. The model based demand for medical care on the interaction between a demand function for health and a production function for health. Andrew Jones, Nigel Rice, and Paul Contoyannis call the model the “founding father of demand for health models”.
In this model, health is a durable capital good which is inherited and depreciates over time. Investment in health takes the form of medical care purchases and other inputs and depreciation is interpreted as natural deterioration of health over time. In the model, health enters the utility function directly as a good people derive pleasure from and indirectly as an investment which makes more healthy time available for market and non-market activities.
The model creates a dynamic system of equations which can be cast as an optimization problem where utility is optimized over gross investment in health in each period, consumption of medical care, and time inputs in the gross investment function in each period. In this way, the length of life of the agent is partially endogenous to the model.
Dynamic optimization problems are often optimized using comparative statics, setting partial derivatives of the outcome function of interest, in this case the utility function, equal to zero. When the partial derivative of the utility function with respect to health consumption is assumed to equal zero, the resulting sub-model is the investment model. Solutions to the problem of this sub-model generally show that the rate of return on health capital must equal the opportunity cost of said capital. Thus, increases in the depreciation rate over time cause the optimal stock of health to decrease. If the marginal efficiency of capital curve is inelastic, gross investment grows over time. In practical terms, this model thus predicts that older people will have more sick time and time spent on increasing health and have higher medical expenditures than younger people. Another implication is that since increases in wages shift the marginal efficiency of capital curve to the right and increases the curve’s slope, an increase in wage will increase the demand for health capital.
The Grossman model was extended in a number of directions. Among the first to include uncertainty in the model were Charles Phelps and Maureen Cropper.
The relationship between education and health was expanded in the model by Isaac Ehrlich. Regarding the relationship between education and medical care demand, one important question is whether the marginal efficiency of capital elasticity with respect to education is less than or greater than one. If the curve is elastic (elasticity greater than one), education will increase medical care demand. On the other hand, if the curve is inelastic, education will decrease medical care demand.
Jan Acton expanded the time constraint by including travel and waiting time in health care.
Important empirical studies into these components include the RAND Health Insurance Study led by Joseph Newhouse in the 1970s, 1980s, and 1990s. This study sought to estimate income, money price, and time price elasticities of demand for medical care. Another important study was the Oregon Health Insurance in the late 2000s and also estimated the role of public health provision on healthcare demand and was led by Katherine Baicker and Amy Finkelstein.
In the model, health is neither a pure investment good nor a pure consumption good, but health stock benefits the agent in two ways, directly increasing utility and second by increasing healthy time available for other activities. One early criticism is that framing health as a dichotomous concept is intuitively wrong in that health is simultaneously both and health provides both alternatives simultaneously.
- ^ Jump up to:ab c d e Jones, Andrew M. Rice, Nigel, and Contoyannis, Paul. The Dynamics of Health in Jones, Andrew M., ed. The Elgar companion to health economics. Edward Elgar Publishing, 2012. p15
- ^Grossman 1972
- ^Phelps, Charles E. “Demand for reimbursement insurance.” In The role of health insurance in the health services sector, pp. 115-162. NBER, 1976.
- ^Cropper, Maureen L. “Health, investment in health, and occupational choice.” Journal of Political Economy 85, no. 6 (1977): 1273-1294.
- ^Ehrlich, Isaac. On the interaction between education and health and the concept of human capital. Mimeo., Jan, 1978.
- ^Acton, Jan Paul. “Nonmonetary factors in the demand for medical services: some empirical evidence.” Journal of Political Economy 83, no. 3 (1975): 595-614.
- ^ Jump up to:ab Grossman 1982
- ^Manning, Willard G., Joseph P. Newhouse, Naihua Duan, Emmett B. Keeler, and Arleen Leibowitz. “Health insurance and the demand for medical care: evidence from a randomized experiment.” The American economic review (1987): 251-277.
- ^Finkelstein, Amy, Sarah Taubman, Bill Wright, Mira Bernstein, Jonathan Gruber, Joseph P. Newhouse, Heidi Allen, Katherine Baicker, and Oregon Health Study Group. “The Oregon health insurance experiment: evidence from the first year.” The Quarterly journal of economics 127, no. 3 (2012): 1057-1106.
- ^Muurinen, Jaana-Marja. “Demand for health: a generalised Grossman model.” Journal of Health economics 1, no. 1 (1982): 5-28.
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder of TBIL.co STATX Fund.