The structure of demand for health care: latent class versus two-part models.

We contrast the two-part model (TPM) that distinguishes between users and non-users of health care, with a latent class model (LCM) that distinguishes between infrequent and frequent users. In model comparisons using data on counts of utilization from the RAND Health Insurance Experiment (RHIE), we find strong evidence in favor of the LCM. We show that individuals in the infrequent and frequent user latent classes may be described as being healthy and ill, respectively. Although sample averages of price elasticities, conditional means and event probabilities are not statistically different, the estimates of these policy-relevant measures are substantively different when calculated for hypothetical individuals with specific characteristics.

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