Determinants of Demand for Healthcare Services: An Economic Perspective

Why is buying healthcare so different from buying a new smartphone or a pair of jeans? When you shop for a phone, you compare features, read reviews, and hunt for the best price. You are in control. But when you’re sick or injured, the experience is completely different. You don’t “shop around” for the best deal on an appendectomy. You go where a professional tells you to go and, generally, you accept the services they say you need. This fundamental difference isn’t just a feeling; it’s the basis of healthcare economics. The demand for healthcare is one of the most unique and complex concepts in economics, driven not by desire, but by the fundamental need for health itself.

Healthcare as a ‘derived demand’: You don’t want the drill, you want the fixed tooth 🔗

The first and most important concept to understand is that healthcare is a derived demand. Nobody wakes up in the morning *wanting* to buy a hospital stay, a complex surgery, or a round of chemotherapy. What we *want* is health. Healthcare is simply the service or product we must purchase to achieve that state of health.

Think of it this way: a factory doesn’t demand electricity for the sake of having electricity. It demands electricity so it can run its machines to produce goods. The demand for electricity is *derived* from the demand for its products. In the same way, your demand for a knee replacement is derived from your desire to walk without pain or to be able to work and earn a living.

This idea was famously structured in Michael Grossman’s 1972 model, which remains a cornerstone of health economics. Grossman proposed that health is a form of “capital.”

• Health Capital: Think of your health like a machine or a factory. It’s an asset. When it’s in good working order, it produces “healthy days.”
• Healthy Days: These are the valuable output. A “healthy day” is a day you can go to work, enjoy leisure time, or take care of your family, free from illness.
• Investment & Depreciation: Just like a car, your “health capital” depreciates over time (aging, illness). You “invest” in it to slow this depreciation-through things like exercise, good nutrition, and, crucially, healthcare services.

This perspective changes everything. When you buy healthcare, you’re not a typical consumer. You are an investor making a difficult, often urgent, investment in your own “health capital.” This is why a person is willing to spend thousands, or even lakhs, on a procedure-the value isn’t in the procedure itself, but in the *healthy days* it’s expected to produce in the future.

The ‘fuzzy’ demand curve: Why prices are all over the place 🔗

In a typical market, the demand curve is a clear, downward-sloping line. If the price of apples goes down, people buy more apples. If the price goes up, they buy fewer. The relationship is predictable. In healthcare, this line isn’t a line at all-it’s a “fuzzy” grey band.

This fuzziness means two strange things happen:

1. Wild price variations for the same service. One hospital in a city might charge ₹80,000 for a specific procedure, while another hospital just a few kilometers away charges ₹2,50,000 for the exact same thing.
2. Different quantities of care at the same price. Two patients with identical symptoms (the “price” of their illness) might see two different doctors and receive vastly different amounts of care. One might get a prescription, while the other gets a prescription *plus* three diagnostic tests and a referral to a specialist.

Why is it so fuzzy? It’s because the normal rules of supply and demand are broken by three powerful forces.

Problem 1: Information asymmetry (The doctor knows best) 🔗

This is the single biggest factor. In a normal market, the buyer knows what they need. In healthcare, the seller (the doctor or hospital) tells the buyer (the patient) what to buy. You don’t go to a doctor and say, “I’d like to order one MRI scan and a course of amoxicillin.” You describe your symptoms, and the doctor, using their expert knowledge, generates the demand *for* you. This information gap puts the patient in a uniquely vulnerable position, unable to easily question the necessity or price of a service.

Problem 2: Uncertainty (You can’t plan to be sick) 🔗

You can plan to buy a car. You cannot plan to have a heart attack. The demand for most healthcare is both unpredictable and urgent. This “uncertainty of incidence” means you can’t wait for a sale or comparison shop. When the need arises, especially in an emergency, price becomes a secondary, or even irrelevant, consideration. You will pay whatever is asked to get the necessary care.

Problem 3: The third-party payer (Insurance) 🔗

When you have health insurance, you are not the one paying the full cost of the service. You might pay a small co-payment or deductible. The rest is handled by the insurer. This “moral hazard” makes you, the patient, highly price-insensitive. If your doctor suggests an expensive test and you know insurance will cover 90% of it, you’re far more likely to agree than if you were paying the full amount out of pocket. This disconnect between the user (patient) and the payer (insurer) further “fuzzies” the link between price and demand.

The crucial difference between ‘need’ and ‘want’ 🔗

In a standard market, economics doesn’t judge *why* you want something. If you “want” a luxury car you can’t afford, that’s a matter of personal preference. But in healthcare, the distinction between a ‘need’ and a ‘want’ is a matter of life, death, and economic efficiency. A healthcare ‘need’ is generally defined as the “capacity to benefit.” If a procedure will genuinely improve your health status, it’s a need. If it won’t, it’s unnecessary-even if you (or the doctor) “want” it.

This is where things get dangerous. Because of the information asymmetry, a patient’s “want” (or “perceived need”) can be directly manipulated by the provider. This is known as Supplier-Induced Demand (SID).

SID occurs when a provider, often motivated by profit, recommends more care than is medically necessary. The patient, trusting the doctor’s expertise, agrees. This is particularly prevalent in “fee-for-service” models, where a provider is paid for every test, procedure, and consultation they perform. The more they do, the more they earn.

A stark example can be seen in healthcare systems around the world, including in India. For instance, numerous reports have highlighted the alarmingly high rates of Caesarean sections (C-sections) in private hospitals compared to public ones. While C-sections are life-saving when medically necessary, their overuse suggests that non-medical factors-like higher fees for the procedure or hospital convenience-are influencing demand. This isn’t just a waste of money; it’s a reduction in patient welfare, as unnecessary surgery carries risks and drains household finances without adding to “health capital.”

Market structure: Why hospitals are not like vegetable stalls 🔗

A local vegetable market is close to a “perfectly competitive” market. All vendors sell similar products (tomatoes, onions), prices are known, and it’s easy to enter the market. Healthcare is the polar opposite. It functions as a monopolistic competition market.

In this structure, many providers (hospitals, clinics) compete, but they don’t sell identical products. They sell differentiated services. How do hospitals “differentiate” themselves?

• Reputation and Brand: A large, famous hospital chain builds a brand based on trust, success rates, and famous doctors.
• Perceived Quality: This can be tied to real things (advanced technology) or superficial ones (plush rooms, better food, shorter wait times).
• Specialization: A clinic may be the “best” for cardiac care, while another is known for oncology.

This differentiation, combined with the information asymmetry (patients can’t easily judge actual medical quality), gives each provider a small “monopoly” over its patients. The result is a steep, downward-sloping demand curve. This means that if a hospital raises its prices, it won’t lose all its customers (the way a tomato vendor would). Patients are “sticky” because they trust *their* doctor or *that* hospital brand. This gives providers significant power to set prices far above their actual costs.

Why government intervention becomes necessary 🔗

When a market has this many problems-information asymmetry, uncertainty, supplier-induced demand, and non-competitive pricing-it is said to have significant market failures. A free market for healthcare simply cannot and does not produce an efficient or equitable outcome. It would lead to massive over-provision of care for the rich (who can pay) and a critical under-provision of care for the poor (who cannot).

This is why, in nearly every country, the government intervenes heavily in the healthcare market. This intervention is not about ideology; it’s an economic necessity to correct these failures.

How governments intervene 🔗

• To fix information asymmetry: Governments enforce licensing for doctors and hospitals (like the National Medical Commission in India), mandate “plain language” for drug side effects, and run public health information campaigns.
• To manage uncertainty and equity: This is the biggest role. Governments create public insurance schemes to pool risk. India’s Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (PM-JAY) is a prime example, designed to protect vulnerable families from the catastrophic financial shock of a major illness.
• To control market power and cost: Governments can act as a single, powerful buyer (to negotiate lower drug prices) or set price caps. In India, the National Pharmaceutical Pricing Authority (NPPA) has capped the prices of essential items like cardiac stents and knee implants to stop private hospitals from charging exorbitant rates.
• To provide public goods: Some health services, like vaccinations or mosquito control, are “public goods” (they benefit everyone, not just the person who pays). The market would never provide enough of these, so the government must provide them directly.

Ultimately, the demand for healthcare will always be complicated. It’s tied to our deepest fears and our highest hopes. By understanding it as a derived demand for “health,” warped by information gaps and uncertainty, we can see why it can never be treated like a normal commodity. It is a special market that requires a careful, constant balance of private innovation and public oversight.

What do you think? Have you ever felt pressured into a medical test or procedure you weren’t sure you truly needed? Given the “fuzzy” nature of healthcare pricing, what steps do you think could make costs more transparent for patients?

References

1. https://www.nber.org/papers/w0077
2. https://www.orfonline.org/expert-speak/the-epidemic-of-c-sections-in-india
3. https://www.who.int/publications/i/item/bulletin-of-the-world-health-organization-82-2-156-163
4. https://pmjay.gov.in/about/pm-jay