CHAPTER 4SOCIOECONOMIC DISPARITIES IN HEALTHBh.docx

CHAPTER 4
SOCIOECONOMIC DISPARITIES IN HEALTH
Bhattacharya, Hyde and Tu – Health Economics
IntroPreviously…Grossman modelIndividuals make choices
about their health based on time constraints, budget constraints,
and utilityOptimal amount of health (H*) changes based on
decisions about tradeoffsHow does socioeconomic status (SES)
affect health and choices about health?Does health determine
SES? Or does SES determine health?Use empirical evidence to
explore these questions
The pervasiveness of health disparities
Health disparities are everywhereHealth Disparity: (def)
differences in health --incidence, prevalence, mortality, and
burden of disease -- between specific populationsex: death rates
for all cancer types for both men and women are highest among
African Americans1Ubiquitous worldwide across races,
educational attainments, employment grades, and

incomesBroadly across all socioeconomic statuses (SES)
Health disparities are everywhereBy education:College
graduates are 25% more likely to survive to age 68 than high
school dropouts
By race:Hispanics report better health status than black
individualsWhite individuals report better health then both
Hispanic and black individualsHealth deteriorates with age
across all races, but disparities persist
Health disparities across incomeGenerally: high-income
individuals self-report a higher health status than those of lower
incomesFor most conditions, the poor exhibit more incidences
of diseaseSome exceptions like Bronchitis -- no difference Hay
fever -- the rich appear to be diagnosed with hay fever more
oftenMay be explainable if richer children visit the doctor more
often and hence, are more likely to be diagnosed
Disparities even with universal insuranceEven in countries with
universal health insurance, health disparities persist
Canada:Self-reported health status for children at high SES
better than children of low SES (Currie and Stabile 2003)
England:We discuss the Whitehall studies later

Theories to explain health disparities
Why do health disparities exist?Reasons/theoriesEarly life
eventsIncome levelsStress of being poorWork
capacityImpatienceAdherence to medical advicePolicy
importance of understanding causes of disparities before
addressing them
What causes what?Does bad health cause low SES? Does low
SES cause bad health?Are there other factors?
Hypotheses for health disparitiesEfficient producerThrifty
phenotypeDirect incomeAllostatic loadIncome inequalityAccess
to careProductive timeTime preference (The Fuchs hypothesis)
The Grossman model and health disparitiesRecall MEC
indicates the return on each additional unit of health
capitalDifferent SES groups may have different
MECsWhy?Each hypothesis posits a different reason
The efficient producer hypothesisHypothesis: better-educated

individuals are more efficient producers of health than less
well-educated individualsGrossman predicts that people who are
more efficient health producers will have higher H*
Lleras-Muney (2005) find that an additional year of schooling
caused ~1.7 year increase in life expectancy in 1920s USHence,
education improves health
The efficient producer hypothesis
Possible causal mechanismsPossible reasons for positive
correlation between health and education?Lessons in school
help students to take better care of themselvesSchooling helps
students be more patient when it comes to payoffs of
investments (like health)Better-educated more likely to adhere
to treatment regimens
The efficient producer hypothesis
Thrifty phenotype hypothesisGenetic reasons for being
inefficient at producing healthDeprivation of resources (food) in
utero and early childhood leads to activation of “thrifty” genes
that are useful for sparse environmental conditionsThese
“thrifty” genes good for scarce environments but bad in
conditions of abundanceMore likely to develop diabetes,
obesity, and other disorders later in lifeDisparities arise because
poorer individuals are more likely to have resource deprivation
early in life
The thrifty phenotype hypothesis

Thrifty phenotype hypothesisUse natural experiments to test
this hypothesisA randomized experiment that randomly deprived
some children in utero and not others would be pretty unethical!
Natural experiments use environmental shocks that naturally
create control and treatment groupsEx: earthquakes, famine,
snowstorms
Good natural experiment eliminates selection bias
The Dutch famine studyNatural experiment: Dutch famine in
WWII (Rosebloom et al. 2001)
Holland suffered a famine due to a German blockade of food
Created two baby groups:Those in utero during famineThose
conceived after famine
Two groups are similar, except for in utero deprivationSo
hopefully no selection bias!
Findings:Babies in utero during famine had higher rates of
diabetes and obesity in adulthood
The direct income hypothesisHypothesis: disparities exist
because rich people have more resources to devote to
healthRich individuals have an expanded PPF because of extra
financial resourcesExpanded PPF = higher H* that can be
obtained
The direct income hypothesis

Allostatic load hypothesisHypothesis: Prolonged or repeated
stress is unhealthy and can cause an increased rate of aging
In the Grossman model, aging is represented by rate of
depreciation of health capital δ
High stress load leads to a higher δ
The allostatic load hypothesis
The Whitehall studyWhitehall study by Marmot at al. (1978,
1991)Compares health status of British civil servantsBritish
civil servants relatively homogenous in background and share
workplace environmentsAll British citizens have the same
access to health care through the National Health Service
Findings:Disease morbidity and mortality rates highest for low-
grade civil servantsLow-grade civil servants reported more
stressful work and home environments
The Allostatic Load Hypothesis
Income inequality hypothesisHypothesis: Health disparities are
caused by an unequal distribution of incomeRelated to the
allostatic load hypothesisMore equal societies are less stressful
and therefore healthier
Policy implications? If theory is true then policy makers should
aim at reducing inequality within a communityThe health status
of a society may decline even if average income rises if income
becomes more concentrated
The Direct Income Hypothesis
*

Access to care hypothesisHypothesis: Those with high incomes
can afford more generous health insurance compared to those of
low income
But health disparities persist in countries with universal health
insuranceCanadian youth (Currie and Stabile 2003) British civil
servants (Marmot et al. 1978, 1991) both countries have equal
access to health care!
The access to care hypothesis
Productive time hypothesisSES differences are caused by
disparities in health
Bad health leads to lower productive time and therefore less
time to produce income
Oreopoulos et al. (2008) and Black et al. (2007) study siblings
growing up in same household
Those with worse health during infancy have higher mortality
rates, lower educational achievement, and lower adult earnings
The productive time hypothesis
The Fuchs hypothesisBad health does not cause low SES, and
low SES does not cause bad healthA third factor – time
preference -- causes both!
Health and SES both determined by willingness to delay
gratificationPeople who are willing to delay gratification are
more willing to invest in things like education and health
People willing to delay gratification have high discount factors
δ

The Fuchs hypothesis
ConclusionEach theory has supporting evidence and each can
explain some socioeconomic health disparitiesKey
takeaways:Better-educated people generally have better health
even with the same resourcesHealth events early in life affect
health into adulthoodStress plays an important role in creating
health disparitiesEqualizing access to care does not eliminate
health disparitiesThere is a two-way relationship between health
and SES
*
For this discussion topic please choose a natural
hazard/disaster that occurred prior to the year 1900. You should
be able to find plenty of examples online. I want you to write
this post as if you were witnessing the event and writing an
account of what happened.
Please choose an event that actually happened and use your
imagination for the details. However, please incorporate class
material into your report. Remember to also think about what
technologies were available at the time. For example, there
would not be a seismograph in 1600 or a helicopter to save
people in 1800
CHAPTER 3

DEMAND FOR HEALTH:
THE GROSSMAN MODEL
IntroPreviously…Demand for health care is downward
slopingPeople choose amount of health care they receive based
on pricePeople choose their health care, but do they choose
their own health?Is health something that happens to us? Or do
we choose it?We use the Grossman model to explore this
question
The 3 Roles of Health (H)
Health plays three roles in the Grossman model:
A consumption good
An input into production
A form of stock/capital (an investment)
Health as a consumption good
Health as a direct input into utilityHealth as a consumption
good enters directly into utilitySingle-period Utility at time t
Ut= U(Ht, Zt)Ht = level of healthZt=
“home good”Everything non-health that contributes to

utilityE.g. video games, time with friends, movie tickets
**Note: health ≠ health careHealth care is not explicitly in the
utility functioni.e. Getting vaccines does not provide utility but
staying healthy does
Time constraints in the Grossman model
In a single period, there are only 24 hours in a day to contribute
to your utility:
Θ = 24 = TW + TZ + TH + TS Divide total time Θ
between:Working TWPlaying TZImproving health THBeing sick
TS
Time constraint means time tradeoffsTime working TW
produces income Buy things that contribute to utility (H, Z) but
need to spend time in those activities (TH, TZ)Time sick TS
does not increase utilityEvery hour spent sick takes away time
to do other utility-increasing activities (loss time)
The labor-leisure tradeoffGiven levels of TS and TH, individual
chooses how to allocate time between work TW and play
TZ.Optimal point decides on indifference curvesWhen health
improves, more productive time is available for usePushes time
constraint outward (from U0 to U1)Can reach higher utilities

Health as an input into production
The three roles of health (H)
Health plays three roles in the Grossman model:
A consumption good
An input into productionOf health (H)Of productive time (TP)
Producing H and Z
Both Health and Home good Z must be produced with time and
market inputs
Ht = H (Ht-1, TtH, Mt)
Zt = Z (TtZ, Jt)
Mt= market inputs for health HEx: weights, treadmill
Jt= market inputs for home goods ZEx: video games, opera
tickets
Today’s health Ht also depends on yesterday’s health Ht-1This
is health’s third role as a stock which we discuss later
Health affects production by lowering TS

TP= Θ – TS = TW + TZ + TH
Healthier you are, the less time you spend sickTP is productive
time spent on useful activitiesIncreased productive time can be
reinvested into health (TH) or other useful endeavors (TW,
TZ)Only way to reduce sick time (TS) is to improve health
Production Possibility FrontierProduction Possibility Frontier
(PPF): the possible combinations of H and Z attainable, given
an individual’s budget and time constraints
Standard economic PPF shows H and Z as substitutesWrong!
Why?
Maximum Z is minimum HIf individual is at minimum H, they
are dead and cannot produce any Z
An INCORRECT PPF
Problem point
PPF in the Grossman modelPoint A
Hmin: no productive time
for work, play, or
improvement of health
Point B“free-lunch zone”Small improvements in health yield
large increases in productive time; can increase Z without
giving up H
A CORRECT PPF

PPF in the Grossman model
Point CMaximum Z possibleCan’t improve health without
taking away ZIf try to increase Z by shifting resources, sick
time will increase and outweigh gain in resources for ZIncreases
in health will not produce extra time to offset time spent
improving health
A CORRECT PPF
PPF in the Grossman modelPoint D“tradeoff zone”Increases in
H only yield small decreases in sick timeIncreases in H, takes
away from Z
Point ESpend all time and money on healthIgnores all home
goods
A CORRECT PPF
Choosing optimal H* and Z*Someone who values both H and Z
chooses a point between C and E in order to maximize their
utilityChooses point FU2 is unattainable given PPF
constraintsAt U0, an individual can attain more utilityAt F: U1
and PPF are tangentH* and Z* are optimal levels of health and
home goods
Exotic preferences and indifference curvesIf individual only

cares about home goods (Z)Horizontal indifference curvesH*
and Z* at point C
Cares only about Health H
Cares only about home good Z
Health as an input into productionIf individual only cares about
Health Vertical indifference curvesH* and Z* at point E
Health as an investment
The three roles of health (H)
Health plays three roles in the Grossman
Model:
A consumption good
An input into production
Lifetime of utilityOn any day, an individual considers not only
today’s utility U(H0,Z0) but all future utility as well!
Health is a stock; some of it carries over each new period
Home good Z is a flow (it lasts for only 1 period)δ =
individual’s discount rateA person values utility now more than
in the futureΩ = individual’s lifespan (total number of periods)

Health depreciates over time
Some of yesterday’s health lasts to today but not
all of it
Ht = H ( (1- γ)Ht-1, TtH, Mt )γ = rate of depreciationRecall:Ht
= health at time period tHt-1 = health from previous periodTtH
= time spent on health in period tMt = market inputs for health
(like checkups and prescription pills)
MEC curve and investments in healthMarginal Efficiency of
Capital (MEC) curve:
indicates how efficient
each unit of health capital
is in increasing lifetime
utilityWhen level of H is low, small investments have high
returns to productive time
Costs to investing in healthOpportunity costForgoes putting
money into other investmentsr = interest rate of alternative
market investmentDepreciation due to aging (γ)Health must pay
a return of at least r + γIf return is less than
r + γ, then market return beats health investment returnH*
= optimal amount of healthMarginal cost balances with marginal
benefit of health investment

Predictions of the Grossman model
The Grossman model helps explain why we
observe:
Better health among the educated
Declining health among the aging
Health and education
Well-educated individuals are more efficient producers of
healthCollege grads benefits more than a high school
dropout.Explanations?
MEC and efficiency of health investment
Better educated are
more efficient at each
level of health
investment
MECC > MECHH*C is higher than H*H
MECC = college graduate
MECH = high school dropout
Predictions of the Grossman model
The Grossman model helps explain why we

observe:
Better health among the educated
Declining health among the aging
Depreciation of healthRecall:
Ht = H ( (1- γ)Ht-1, TtH, Mt )Depreciation γ is not
constant γ increases with ageAs γ increases, costs
(r + γ) increase and it takes more resources to maintain
same level of health
As a result of increasing depreciation γ over time, optimal
health H* also declines over time!
Optimal death in the Grossman modelBecause of rising
depreciation, there are better investments in the market than the
individual’s healthH* eventually reaches HminWhy would
anyone choose Hmin?How is Hmin utility-maximizing?
ConclusionIs health something that happens to us or is
chosen?Grossman model says it is chosenIn fact, we even
choose when we dieWhile that may seem far-fetched, Grossman
model a useful tool for understanding the roles and tradeoffs of
health Next we use the Grossman model to understand empirical
findings about the relationship between socioeconomic status
and health

CHAPTER 4SOCIOECONOMIC DISPARITIES IN HEALTHBh.docx

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