Research Paper SSRN Working Paper Series
Change matters: empirical tests of the dynamic demand for medical care
Single period models of the demand for medical care assume individuals make myopic decisions about their health. Single equation models assume that the demands for medical care and other consumption are independent. Yet theory suggests that past health and the relationship between health and wealth may be particularly important to explain the observed spending distribution. I test the hypothesis that the change in health is a significant factor in an individual's demand for medical care by estimating a system of non-linear Marshallian demands with data from the first 14 waves of the British Household Panel Survey (BHPS). A multiple correspondence analysis identifies instruments for unobservable health and price of medical care. Results are consistent with utility maximization and support the theory that the change in health matters and the assumption that health and consumption and consumption and medical care are not separable. This suggests that single-period, single equation estimates of the demand for medical care may result in biased parameter estimates, and that the change in health may explain some of the diversity of demand among individuals with similar health.