Are User Fees Regressive? The Welfare Implications of Health Care Financing Proposals in Peru

In this paper, we derive a discrete choice model of the demand for medical care from a theoretical model that implies a natural interrelation between price and income. We show that, in the context of a discrete choice model, if health is a normal good, then the price elasticity of the demand for health care must decline as income rises. This implies that the models in previous discrete choice studies which restrict the price effect to be independent of income are misspecified. The model is estimated using data from a 1984 Peruvian survey, and a parsimonious flexible functional form. Unlike previous studies, we find that price plays a significant role in the demand for health care, and that demand becomes more elastic as income falls, implying that user fees would reduce the access to care for the poor proportionally more than for the rich. Our simulations show that user fees can generate substantial revenues, but are accompanied by substantial reductions in aggregate consumer welfare, with the burden of the loss on the poor. These results demonstrate that undiscriminating user fees would be regressive both in terms of access and welfare.