CONOMCS ELSEVIER Journal of Health Economics 21(2002)601-625 elsevier com/locate/ecobase The structure of demand for health care latent class versus two-part models Partha Deb a, * Pravin K. Trivedi a Department of Economics, IUPUl, Cavanaugh Hall516, 425 University boulevard. Indianapolis, IN 46202, USA b Department of Economics, Indiana University, Wylie Hall, Bloomington, IN 47405, USA Received I November 2000; accepted 1 January 2002 Abstra 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 hypo- thetical individuals with specific characteristics. C 2002 Elsevier Science B V. All rights reserved Keywords: Latent class model; Finite mixture model; Two-part model; Count data 1. Introduction This paper examines empirical strategies for modeling the demand for health services, measured as counts of utilization. The choice of the econometric framework has implications for a number of empirical issues of central importance in health economics, e.g. the price sensitivity of the demand for medical services, predicted use and the likelihood of being extensive users of services. The paper proposes an approach based on a finite mixture variant of the latent class model (LCM). The proposed approach is compared with the"standard two-part framework for modeling the demand for health care The literature on the demand for medical care analyzes either discrete measures, such as the number of physician or non-physician visits( Cameron et al., 1988; Pohlmeier and Ulrich, 1995; Deb and Trivedi, 1997; Gerdtham, 1997), or continuous measures such as Corresponding author. Tel:+1-317-274-5216 fax: +1-317-274-0097 E-mail address: pdeb(@iupui.edu(. Deb 0167-6296/02/S-see front matter C 2002 Elsevier Science B V. All rights reserved P:S0167-6296(02)00008-5Journal of Health Economics 21 (2002) 601–625 The structure of demand for health care: latent class versus two-part models Partha Deb a,∗, Pravin K. Trivedi b a Department of Economics, IUPUI, Cavanaugh Hall 516, 425 University Boulevard, Indianapolis, IN 46202, USA b Department of Economics, Indiana University, Wylie Hall, Bloomington, IN 47405, USA Received 1 November 2000; accepted 1 January 2002 Abstract 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 hypo￾thetical individuals with specific characteristics. © 2002 Elsevier Science B.V. All rights reserved. Keywords: Latent class model; Finite mixture model; Two-part model; Count data 1. Introduction This paper examines empirical strategies for modeling the demand for health services, measured as counts of utilization. The choice of the econometric framework has implications for a number of empirical issues of central importance in health economics, e.g. the price sensitivity of the demand for medical services, predicted use and the likelihood of being extensive users of services. The paper proposes an approach based on a finite mixture variant of the latent class model (LCM). The proposed approach is compared with the “standard” two-part framework for modeling the demand for health care. The literature on the demand for medical care analyzes either discrete measures, such as the number of physician or non-physician visits (Cameron et al., 1988; Pohlmeier and Ulrich, 1995; Deb and Trivedi, 1997; Gerdtham, 1997), or continuous measures such as ∗ Corresponding author. Tel.: +1-317-274-5216; fax: +1-317-274-0097. E-mail address: pdeb@iupui.edu (P. Deb). 0167-6296/02/$ – see front matter © 2002 Elsevier Science B.V. All rights reserved. PII: S0167-6296(02)00008-5