Aim: By analyzing the Russian demand for medical care, we aim to highlight the practical relevance of Grossman’s health investment model, one of the most important developments in health economic theory.
Subjects and methods: We refer to the often-criticized inconsistencies between the health investment model’s theoretical implications and its empirical results. While the theoretical model implies, inter alia, that the demand for medical care increases with improving health, empirical tests show conflicting results. In order to solve this inconsistency, we specify the model’s inherent health investment production function to be of decreasing rather than constant returns to scale. Afterwards, we employ our derived structural demand function for medical care in an empirical panel analysis using data from the Russia Longitudinal Monitoring Survey for 1996–2008.
Results: In contrast to other studies, we show that even Grossman’s standard model setting generates a structural demand function for medical care that implies sick people use more medical care, provided that the functional form of the health investment production function is properly specified. Further, our empirical analysis affirms our theoretically derived implications and provides important new insights into the Russian demand for medical care