NOTE: This article is the second in a series of 10 articles and is part of our Health Economics 101 course. You can find a course overview and links to all 10 course modules here:

Demand and Supply of Health Care

Understanding the demand and supply of health care is central to the study of health economics. Unlike typical consumer goods, health care presents unique challenges due to its complexity, information asymmetries, and the critical nature of the service provided. The interaction of demand and supply shapes how health care is accessed, delivered, and financed, and has far-reaching implications for efficiency, equity, and policy design.

Demand for Health and Health Care

In health economics, it is essential to distinguish between the demand for health and the demand for health care.

The demand for health is rooted in the concept of health as a durable capital stock, as articulated by Michael Grossman’s seminal model (1972). In this framework, individuals invest in their health through various inputs—such as medical care, nutrition, exercise, and education—to improve or maintain their health stock over time. Health is valued for its intrinsic utility (well-being) and for its instrumental value in increasing productivity and reducing time lost to illness.

In contrast, the demand for health care is derived from the demand for health. Health care is not consumed for its own sake but because it can improve or maintain health. However, the effectiveness of health care in producing health varies, and often, patients may not be fully informed about what type or amount of care is necessary, leading to challenges in rational decision-making.

Factors Influencing Health Care Demand (Income, Prices, Insurance)

Three of the most influential determinants of health care demand are income, prices, and insurance coverage.

Income

Health care is generally considered a normal good—its consumption tends to increase with income. As income rises, individuals are more likely to afford both preventive and curative care. In many settings, rising income is associated with increased expectations regarding quality and access to services, including elective procedures and specialized care. However, in low-income populations, even essential health services may remain inaccessible without financial assistance.

Prices

The price of health care plays a central role in shaping demand, though its effect is often mediated by third-party payers such as governments or private insurers. When individuals are exposed to the full cost of care (e.g., in out-of-pocket systems), higher prices typically reduce demand. However, due to the urgency and emotional salience of health care decisions, some types of care are relatively price-insensitive.

Insurance

Health insurance dramatically alters the price individuals face at the point of care, often reducing or eliminating out-of-pocket costs. This moral hazard—where insured individuals consume more care than they would if they bore the full cost—can lead to over-utilization. Nevertheless, insurance also facilitates access to care that might otherwise be unaffordable, improving health outcomes and financial protection. The RAND Health Insurance Experiment (1980s) remains a landmark study showing that cost-sharing reduces the quantity of health care demanded, particularly for minor conditions, without significantly harming overall health for most people.

Elasticity of Demand for Health Services

Price elasticity of demand measures how sensitive the quantity of health care demanded is to changes in price. Health services are typically considered price inelastic—a 1% increase in price results in less than a 1% decrease in demand. However, elasticity varies by type of service:

  • Emergency services tend to be highly inelastic due to urgency
  • Preventive care and elective procedures are more price-sensitive
  • Low-income populations often exhibit greater price sensitivity than higher-income groups

Elasticity also interacts with insurance coverage. When services are fully covered, patients are less sensitive to price, potentially leading to over-utilization. Policymakers must balance access, cost-containment, and efficiency in setting co-payments and deductibles.

Supply of Health Services and Market Structures in Health Care

The supply of health services refers to the availability of inputs (e.g., providers, facilities, technology) and the willingness of producers to offer services at given prices. The supply side of health care is influenced by both market forces and regulatory frameworks.

Key characteristics of health care supply include:

  • Barriers to entry, such as licensing and accreditation
  • Provider-induced demand, where physicians may influence patient decisions, especially under fee-for-service models
  • Capital intensity and time lags in training health professionals and building infrastructure

Market Structures

Health care markets deviate significantly from the model of perfect competition. The predominant structures include:

  • Monopolistic Competition: In outpatient services, many providers offer similar but differentiated services (e.g., general practitioners)
  • Oligopoly: In specialized or high-cost areas (e.g., cardiac surgery, oncology), a few providers dominate local markets
  • Monopoly: In rural or underserved areas, a single hospital or provider may have exclusive control
  • Public Sector Provision: In many countries, governments are the primary or sole providers of care (e.g., UK’s NHS)

These market structures impact pricing, access, and efficiency. Policymakers often intervene to correct for market failures through regulation, subsidies, public provision, and insurance schemes.

Conclusion

The demand and supply of health care are governed by economic principles but are shaped by the unique characteristics of the health sector. Understanding the factors that influence demand—such as income, price, and insurance—and the market dynamics affecting supply is essential for designing policies that enhance access, improve efficiency, and promote equity. As health systems evolve, health economists will continue to play a critical role in analyzing and optimizing the interplay between demand and supply.

References

  1. Grossman, M. (1972). On the Concept of Health Capital and the Demand for Health. Journal of Political Economy, 80(2), 223–255.
  2. Manning, W. G., et al. (1987). Health Insurance and the Demand for Medical Care: Evidence from a Randomized Experiment. American Economic Review, 77(3), 251–277.
  3. Phelps, C. E. (2017). Health Economics (6th ed.). Routledge.
  4. Drummond, M. F., et al. (2015). Methods for the Economic Evaluation of Health Care Programmes (4th ed.). Oxford University Press.
  5. Zweifel, P., Breuer, M., & Manning, W. G. (2006). Health Economics. Springer.

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