Question

Use the demand-supply framework in Figure 23-2 to explain how increased cost sharing could lead to lower utilization and spending on health care.

See photo of graph at this link:

http://www.chegg.com/homework-help/would-individual-mandates-health-insurance-burdensome-poor-e-chapter-23-problem-3E-solution-9780132954808-exc

Answer 1

Initial equilibrium point is E as can be seen in the diagram. With a change in supply (increase) and demand (decrease), the equilibrium shifts to point G. The supply increases because of the increased cost sharing- firmshave to now supply more of the good than actually shown; eg- 2 people share the cost and are covered under the same health insurance which is a single unit which means the firm is supplying insurance to two people instead of one. This example has a two way effect- one an increase in supply and the other in the form of decrease in demand because now only 1 unit of good is being demanded by 2 people. The new equilibrium point G, hence, yeilds a lower quantity (Q₂) than earlier (Q₁?) and at a lower price (P₂ instead of P₁?).

The aggregate spending is calculated by computing the price of one unit of good times the quantity of that good purchased. Since area of OQ_?1EP_?1? > area of OQ_?2BP₂ ?implies increased cost sharing leads to lower utilisation (reduced quantity, ie, Q₂ ?rather thanQ₁?) and spending (lower price paid per unit, ie, P₂ instead of P₁?) in healthcare services.