Question

Suppose a state is considering adding dental benefits to its Medicaid program. The benefits would include insurance coverage for routine and emergency dental care, and both types of care would come with a coinsurance rate of 20%.

a. Describe what happens to the demand curves for routine dental care and emergency dental care when this benefit is introduced. Use a graph and include a discussion of elasticity in your answer.

b. A state legislator is opposed to this law. He argues, “This new benefit means that Medicaid participants will consume too much care.” What does the legislator mean? Would his argument apply to both routine and emergency care? Explain using economic reasoning.

Answer 1

The price elasticity of demand for medical care is, in general, is relatively low due to the nature of dependence it carries most individuals lives. But other types of care can be more price sensitive. Routine dental care will have larger price elasticities since a number of other options could possibly serve as substitutes. As a result, when the price of dental care increases, consumers will be able to substitute away from routine dental (preventive) care towards other options such as taking better dental care at home by purchasing dental floss, a cheaper alternative. In addition, routine dental care may be seen more as a luxury than a necessity and, thus, may be put off when the price of such care increases. Emergency dental treatment, on the other hand, would not be price elastic due to the inherent urgency and lack of appropriate substitutes.

b. The legislator means that consumer will be visiting their dental health clinics more often to avail relatively more routine dental facilities and thus consume more care. This does not apply to emergency care since these visits cannot be planned and consumed at will. In terms of elasticities as explained above, routine dental care will be large price elasticities and emergency care will have lower price elasticities.