Question

Below is an example of supply and demand for healthcare services in the U.S.

1) If patient copays average to 20%, and their Insurance pays the other 80% of the cost of their visit, what quantity will be exchanged in this market? Remember, the assumption here is that the consumers' willingness to pay is based on their out-of-pocket cost, rather than the total cost of a visit.

2) What is the total amount spent on Healthcare when patients only pay 20% of the total cost.

3) Healthcare costs continue to rise faster than GDP, taking up an increasing share of total U.S. expenditures. What is one way that we might reduce total healthcare expenditures? Use the values on the table (estimates are totally fine) to illustrate how your proposal would reduce the total cost of healthcare.

Average cost per visit	Demand for office visits (Millions/yr)	Supply of office visits(Millions/yr)
$323	988	118
$647	928	208
$970	868	298
$1293	808	388
$1616	748	478
$1940	688	568
$2263	628	658
$2586	568	748
$2909	508	838
$3233	448	928

Answer 1

(1)

Average Cost	20% of AC
323	64.6
647	129.4
970	194
1293	258.6
1616	323.2
1940	388
2263	452.6
2586	517.2
2909	581.8
3233	646.6

Using a linear regression tool to estimate the Demand curve from this:

Demand curve: q= -0.92804p + 1048.01234 => q= -0.9p + 1048 => p = -1.1q + 1164

The supply curve will be calculated on the basis of the original table:

q = 0.27841p + 27.98149 => q= 0.3p + 28 => p = 3.3q -93

Setting D(p) = S(q) = q we get q= 286 and equilibrium price p= 849

(2) Total amount spent on healthcare by individuals = p* q = 849 * 286 = 242814 . This number is only 20% of the total sum because the insurance covers the other 80%.

Thus the total amount = 1214070

(3)

The situation facing insurance companies is one moral hazard. In economics, moral hazard occurs
when an entity has an incentive to increase its exposure to risk because it does not bear the full costs of that risk. We can incentivize individuals to take more precautionary steps by reimbursing a smaller share of the healthcare bill i.e. reducing insurance percentage.
Say the consumer now pays 35% of the bill; insurance pays only 65%.

Average Cost	35% of AC
323	113.05
647	226.45
970	339.5
1293	452.55
1616	565.6
1940	679
2263	792.05
2586	905.1
2909	1018.15
3233	1131.55

The new demand curve:

q= - 0.53031p + 1048.01234 => q= -0.5p + 1048 => p= 2096 - 2q

Supply curve:

q = 0.3p + 28 => p= 3.3q -93

Setting D(p) = S(q)

q=413 , p =1270

Amount spent by individuals = 524510

Total cost = 1498600