Question

Briefly explain what each of these acronyms mean and describe the type of services each provide.

ACO:

HMO:   

PPO:   

EPO:

Calculate the elasticity of demand using the data shown in the table below.  Use the midpoint method, and show all your work.

Price Per Hour of Therapy	Demand for Therapy
4	12
5	11
6	10
7	9
8	8
9	7
10	6
11	5
12	4
13	3
14	2
15	1
16	0

The Eric Challenge: Assume you have issues with your back after taking too many health economics exams. Also that you have a budget of $5,400 and you have a choice of selecting two good therapies, hot massage, at $50 per hr., and electro acupuncture, at $60 per hr. Estimate your budget constraint line and calculate your intercepts.

Consider the graph below and explain the meaning of it.

The Sara Challenge: Below is a list of my former students and their monthly compensation. As good economist, define the below of income distribution for this group. Please note, similarity of names with our current class is a simple coincidence!

Student	Monthly Compensation (000’s)
Erik	$16,000
J.	$15
Lucille	$14
Marcie	$13
Pam	$12
Sara	$11
Louis	$10
Caren	$9
Adriana	$8
Carlos	$7
K.	$6
Dan	$5
Isa	$4
Lady D	$3

Answer 1

1. a. ACO - Accountable Care Organizations is a consortium of healthcare providers, insurers and hospitals in which all parties voluntarily take the responsibility of the medical as well financial conditions for Medicare patients. An ACO makes sure that a patient receives proper care and that too, at the right time. The goal is to reduce the risk of delayed, duplicate and fraudulent services and medical errors.

b. HMO - Health Maintenance Organization needs a patient to choose a primary care physician (PCP). Most of the health care needs will be taken care of with a PCP only. In order to see a specialist, a referral from the PCP is generally needed. Thus, in an HMO plan, though there will be less expenses compared to the other plans but, it will also offer less flexibility in the choice of hospitals or physicians as compared to the other plans.

c. PPO - Preferred Provider Organization is a plan in which the patient uses a network of preferred hospitals and doctors. These hospitals and doctors are contracted providers of service to the plan members at a discounted (or negotiated) rates. There is a choice to visit any doctors (or even specialists) in the network and there is no need of a Primary Care Physician. The patient needs to pay an annual fee (a deductible fee) before the insurance company starts covering the medical expenses. There is also a system of co-insurance or co-payment for some services wherein a percentage of the total expenses need to be paid by the person.

d. EPO - Exclusive Provider Organization is a similar plan to HMO. The members of this plan have a Primary Care Physician (PCP) who provides referral to the in-network doctors and specialists. The members pay co-payments and may be required to pay a deductible if needed.

2. The table is provided in the question as:

S. No.	Price Per Hour of Therapy	Demand for Therapy
1.	4	12
2.	5	11
3.	6	10
4.	7	9
5.	8	8
6.	9	7
7.	10	6
8.	11	5
9.	12	4
10.	13	3
11.	14	2
12.	15	1
13.	16	0

The mid point method is calculated as the percentage change in the quantity demanded (change in the quatity demanded divided by the average of those quantities) upon the percentage change in the prices (change in the prices divided by the average of those prices). The formula is:

The percentage change in quantity demanded is given by:

The percentage change in price is given by:

The elasticity 'e' is the ratio of these two, that is,

The elasticity for the provided values is calculated as follows:

3. The total income is $5400.

The price of hot massage therapy is $50 per hour and the price of electro acupuncture is $60 per hour.

Since, the general equation of a budget constraint line is:

where, 'M' is the total money income, X is the quantity of good X and Y is the quantity of good Y. The price of good X is and the price of good Y is .

In the provided problem, assuming that hot massage is good X and electro acupuncture is good Y, the prices are

and and the total money income M is $5400. Thus, the budget constraint line is:

5400=50*X+60*Y

Now, x-intercept means that the consumer consumes all of good X and none of good Y. All of the money income of the consumer will be spent on good X in this case. Thus, the Quantity of good X is caclulated as:

Hence, x-intercept value is (X,0)=(108,0).

y-intercept means that the consumer consumes all of good Y and none of good X. All of the money income of the consumer will be spent on good Y in this case. Thus, the Quantity of good Y is caclulated as:

Hence, y-intercept value is (0,Y)=(0,90).

In the graph, the red line represents the Budget Line. The x-intercept is the blue dot on the x-axis (108,0) and the y-intercept is the blue dot on the y-axis (0,90).

4. The provided table of income distroibution shows that Erik has the maximum monthly compensation in comparison to the other ex-students. Thus, the monthly compensation can be seen as large as Erik's ($16000) and is as low as Lady D's ($3). This simply shows a high income inequality among the students. Income inequality refers to the unequal distribution of income amongst people of an economy. Here, Erik's income is exceptionally high as compared to the other ex-students. The income inequality can occur due to many factors like difference in gender, social status, education, region etc.