How much will the effective price of care increase as a result of AIDS? Box figure 4.3 demonstrates how the approximate size of these increases can be estimated for a hypothetical country with elasticities of demand and supply for health care of 0.8 and 0.5 and a government policy to subsidize half of the cost of care. The two solid lines show the amount of health care that is demanded and supplied at each price prior to an HIV epidemic. (The demand curve is drawn with an elasticity of only 0.4 in order to incorporate the effect of the government subsidy on consumers.) The figure is constructed so that the market equilibrium occurs at a price of 10 currency units per unit of health care, at which a total of 10 units of care are delivered. Total health care expenditure in this hypothetical country is thus 10 times 10 or 100 currency units in the absence of the AIDS epidemic.
Box Figure 4.3 The impact of a five percent infection rate on the quantity and price of health care.
Note: The demand and supply curves are constructed so that the price elasticities at the point (10, 10) are 0.8 and 0.5 respectively. The impact of AIDS is illustrated by shifting the demand curve to the right by 25 percent at every price and the supply curve up by 10 percent at every quantity. See the text for an explanation of these assumptions
Now assume there is an HIV/AIDS epidemic that levels off at a constant seroprevalence of 5 percent of the adult population. The arguments in the chapter suggest that the amount of health care demanded at every price is likely to increase by 25 percent, while the cost of purchasing any given amount of care of a given quality will increase by 10 percent. These two impacts of the AIDS epidemic are illustrated by a rightward shift of the demand curve by 25 percent (to the dashed, downward-sloping line) and an upward shift of the supply curve by 10 percent (to the dashed, upward-sloping line). The impacts on the equilibrium price and quantity can be read from the figure. The price of a unit of health care will increase about 30 percent, and the amount of care provided will increase about 10 percent. Total national expenditure, the price per unit of care times the number of units, will increase 43 percent to 143 currency units (since 13 x 11 = 143).
We have seen that a third-party payment, such as insurance or a government subsidy for treatment, makes people less sensitive to changes in cost of health care. By reducing the price elasticity of demand, such third-party payments make the demand curve steeper, both before and after the introduction of AIDS.
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