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V. INCOME ELASTICITY OF DEMAND FOR HEALTH INSURANCE AND SERVICES

In addition to price, personal income may affect decisions to purchase insurance coverage,

choose among health plans, and use health care services. Unlike price, income is not generally

viewed as a policy lever to alter the demand for health insurance or health care services.19 As a

result, the empirical research on income elasticity with regard to either health insurance or

services is scant, and it is predominantly observational. Most studies simply compare demand

among populations by income or poverty status.

A. HEALTH INSURANCE

Most early studies of income elasticity concluded that it was not significantly different from

zero—that is, the demand for health insurance neither rises nor falls significantly with a change

in personal or family income, all else being equal. In general, this result comports with a

hypothesis of constant absolute risk aversion (Marquis and Long 1995).20

However, two (more recent) studies investigating price elasticity in the non-group market

(where consumers face the full price of insurance and are unlikely to have unobservable

alternative offers of coverage) found significant, though small income effects on the decision to

purchase individual coverage among families without group coverage. Marquis and Long (1995)

19 It is more feasible for policymakers to change eligibility for public programs than to change the incomes of target families, and expansions of Medicaid, SCHIP, and state-initiated coverage in the 1980s and 1990s provided excellent natural experiments for analysis. These expansions motivated a number of studies of the crowd-out effect of insurance coverage—reflecting the cross-price elasticity of demand for private insurance (reviewed in chapter III), when the cost of public coverage is reduced relative to private insurance options. Once covered by the public program, the price of health care to enrollees is reduced to nearly zero, affecting their demand for health care services (reviewed in chapter IV).

20 Constant absolute risk aversion refers to a class of utility functions that assume as wealth increases, individuals hold the same dollar amount in risky assets. Hence, the demand for health insurance (which is designed to reduce the risk of a large, unforeseen medical expenditure) would not change significantly with income.

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