Question

4. Carefully draw the demand curve for an individual with no insurance and the same demand curve for a person with insurance paying for 75% of the medical expenses of that individual. Be sure to describe how you construct the “75% insured” demand curve using the uninsured demand curve as a reference.

Answer 1

Answer :

How do insurance copayments impact demand :

• Suppose there is a copayment rate of $C
• Without insurance, demand is line (ab)
• At a price of $C, people will demand Q1
• With a copay of $C, any price in excess of $C generates out of pocket price of only $C, so demand is vertical at Q1
• Demand with a copay is therefore line (acd)
• 

Example:

Pd = 40 – 2Q

Ps = 4 + 4Q

c =0.25 – Patients pick up 25% – Insurance picks up 75%

Market solution without insurance – Pd=Ps

– 40-2Q=4+4Q;

36 = 6Q

Q=6, P=2

Demand curve with insurance : Pd=Psc = 40 – 2Q – P = 40/c – 2Q/c = 40/.25 = 2Q/.25 – P = 160 – 8Q

Market solution with insurance – Supply = Demand

– 4 + 4Q = 160 – 8Q – 156 =12Q

Q = 13 and P = 56

•

What do consumers value the last unit consumed?

Q = 13

Pd= 40 - 2Q = 40 – 2(13) = 14

DWL= triangle abc

Area = (1/2)height x base = (1/2)(56-14)(13 – 6) = 140