Question

Jose has a downward sloping demand curve for physician visits.

a. Show Jose’s optimal choice of physician visits assuming he has no health insurance and faces a market price of physician visits, PV.

b. Now assume Jose has an insurance policy with a 15 percent coinsurance rate and no deductible. Would Jose’s optimal number of visits increase or decrease? Show the welfare impact of health insurance coverage.

c. How would an increase in the coinsurance rate to 30 percent change the magnitude of the welfare effect identified in part b?

Answer 1

a)

The demand curve for physician visits is downward sloping, implies if the price decreases then the number of physician visits increases. Price changes lead to the movement along the demand curve. Now let he has no health insurance and faces a market price of physician visits as P then his optimal choice of physician visit will be "q".

b) Now let us assume Jose has an insurance policy with a 15 percent coinsurance rate and no deductible. This will lead to a demand of "q_c" visit at market price P. As a result the demand curve will shift towards right from DD to DD' and now it is shared by both consumer and coinsurance company. This demand curve will be a vertical straight line if the consumer has full coverage. So Jose's optimal number of visits increases. A reduction in the coinsurance rate would represent a welfare gain. However the size of the welfare loss depends on the shape of demand and supply curve.

c)

Since because of coinsurance demand curve shifts from DD to DD' outward. Here the output increases from Q1 to Q2. The welfare loss is given by the area of the triangle "abc".

However the magnitude of welfare loss depends on the slope of supply and demand curve. In Fig1 the demand curve is inelastic an leads to high welfare loss as compared to elastic demand curve. Similarly if the supply curve is steprer produces high welfare loss compared to flat supply curve.