Health Economics

MEMORANDUM

To: Professor Sherry Glied

From: Shraddha Kothari

Re: Using Grossman’s model to evaluate how NYC’s new sick leave law will affect emergency room use

Date: February 10, 2015

This memorandum will use Grossman’s model of production of health to evaluate how New York City’s new sick leave law will affect emergency room use.

Grossman’s model states that a person utility is based on health (H) and other non-health related goods (Z) that the person consumes. The production possibility frontier for Grossman model shows the tradeoff between home good production (Z) and health (H). Unlike usual production possibility frontiers, an individual needs an optimal level of H to maximize consumption of Z goods.

New York City’s new sick leave allows employees who work over 80 hours a year to use accrued sick leave. Based on Grossman’s model, the new sick leave law will not only help reduce the emergency room visits but also have other positive externalities. This is further explained as:

1) In Grossman’s model, health is a capital good. With the new law, a sick day will have a lower opportunity cost for the individual to seek immediate treatment (visit a doctor) or recuperate at home as there is no loss in earnings. Empirical evidence confirms this as 85% of individuals with paid sick leave visited the doctor compared to 72% of individuals with no paid sick leave. Furthermore, seeking immediate treatment reduces the likelihood of needing an ER visit. Statistics also demonstrate that only 23.6% of individuals with paid leave required ER visits compared to 29.7% of individuals with no paid sick leave. Unlike usual production possibility frontiers, an individual needs an optimal level of H to maximize consumption of Z goods. Hence if there is a drop in the optimal level of health, the person should seek medical treatment / recuperate to maximize consumption of Z goods.

2) Grossman’s model states that an individual’s utility is based on health (H) and...