Price Elasticity

Price elasticity is the economist’s rigorous way of quantifying the effect of a change in price on the change in quantity demanded. It is simply the percentage change in quantity divided by the percentage change in price. It has the advantage of being independent of the units in which the price or the quantity is measured. Health services generally have a price elasticity of about −0.2. This means that a 10 percent increase in the out-of-pocket price reduces the use of services by about 2 percent. However, the effects of changes in price differ rather substantially across types of health services. Ambulatory mental health visits, for example, traditionally have been much more price sensitive than physician visits. Dental care exhibits a large transi- tory effect not seen with other services, and hospital care is much less price responsive than physician services. Moreover, people with different oppor- tunity costs of time have different responses to changes in out-of-pocket charges. These differences in elasticities explain much of the difference in the structure of health benefits.