Offering Discretionary Healthcare Services with Medical Consumption

Abstract

This study studies discretionary healthcare services with consumption of medical goods (e.g., tests, drugs). Specifically, we focus on a setting where the service provider obtains revenue from the medical consumption, and the perceived service value improves while the amount of medical consumption decreases in the service time (e.g., due to more thorough inquiry and examination). We find that the equilibrium service and demand rates both decrease if the service provider’s share of revenue from the medical consumption decreases, or if the medical goods become more expensive. Moreover, the consumption of goods can reverse some well‐known results in models without goods: the service provider may reduce the service time when the perceived service value depends more heavily on the service time. From a policy perspective, we find that service price caps—often put in place to control medical costs—can lead to shorter service times and increased medical consumption. This effect is more severe when the service provider retains less revenue from the medical goods or when they are less expensive. Furthermore, without service price caps, facing a smaller market size, the service provider generally offers a longer service time inducing less medical consumption; however, this can be reversed with service price caps. Thus, in discretionary healthcare services accompanied by medical goods, price regulations may lead to wasteful consumption; extra attention is needed for certain market scenarios.