Demand for Health Insurance

Abstract

Chapter 3 explores the scope of health insurance, and the amount of protection that individuals may seek to obtain for their health capital. This chapter describes the demand for, and consumption of, insurance by different groups in the health economy. This chapter starts with a description of the demand for health insurance that derives from the motivation for insurance described in Chap. 2 and the possible scope of health insurance described in Chap. 3. The main determinant of the amount of health insurance that individuals demand is the general economic law of demand . This economic principle states that demand is a function of price, and that individuals will respond to a compensated decrease in price by increasing their purchase of a given good or service. This law applies specifically to health insurance, where the price varies because of different quantities of coverage as well as different loading factors for different types of health insurance. The law of demand is then applied to two types of demand for health insurance—individual demand and group demand . Individual demand refers to insurance purchased in markets for individuals or households, while group demand applies to insurance purchased by employers or governments on behalf of groups of insured individuals. While group demand derives from the same source as individual demand, the need to aggregate the preferences of many different individuals may lead to different relationships between the price of insurance and demand than in the individual (nongroup) market. The two most important forms of group health insurance are employer-provided health insurance and government-provided health insurance, also known as social insurance. The different forms of demand then segue into an investigation of the supply of health insurance in Chap. 5.