Demand and supply curves of physician care services per day are given by the following equations:...

Demand and supply curves of physician care services per day are given by the following equations:

Demand curve: Q_d= 700 – 3 P

Supply curve: Q_s= -260 + 5 P

where Q is the number of visits in a day and P is the fee per consultation.

Introduce insurance with one-third coinsurance. The insurance is provided free of charge (no premium). What will be the impact of introducing the insurance on quantity, consultation fee and health care expenditure per day? Compare these after-insurance levels with the pre-insurance situation (situation in section (a) above). Again, draw the curves to show pre and post insurance situations with equilibrium outcomes.

Solutions

Expert Solution

Without coinsurance the market equilibrium has

Qd = Qs

700 - 3P = -260 + 5P

960 = 8P

P = 120

Q = 700 - 3*120 = 340 visits

With coinsurance, the demand changes to Qd = 700 - 3 x (1/3) x P or Qd = 700 - P

New values are

700 - P = -260 + 5P

960 = 6P

P = 160 (gross)

Q = 700 - 160 = 540 visits

With coinsurance, consumers are paying P =160/3 = 53.33

Total expenditure falls from 120*340 = 40800 to 53.33*540 = 28798.

Rahul Sunny answered 2 years ago

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