Answer to Question #255195 in Microeconomics for alice

Question

Consider how health insurance affects the quantity of healthcare services performed. Suppose that the typical medical procedure has a cost of $100, yet a person with health insurance pays only $20 out of pocket. Her insurance company pays the remaining $80. (The insurance company recoups the $80 through premiums, but the premium a person pays does not depend on how many procedures that person chooses to undertake.)

b. On your diagram, show the quantity of procedures demanded if consumers pay only $20 per procedure. If the cost of each procedure to society is truly $100, and if individuals have health insurance as described above, will the number of procedures performed maximize total surplus? Explain.

c. Economists often blame the health insurance system for excessive use of medical care. Given your analysis, why might the use of care be viewed as “excessive”?

d. What sort of policies might prevent this excessive use?

Answer 1

(b)

If the consumer pays only $20 per procedure, the quantity of procedures will increase from Q₁ to Q₂.

If the cost to society is $ 100 and individuals have health insurance, the number of procedures will maximize the total surplus since there will be a rightward shift in the

demand curve from D₁D₁to D₂D₂, making the consumer and producer surpluses increase.

(c)

A health insurance system leads to an excessive use of medical care because the consumer has to pay only $20 even though the actual cost of the procedure is $100. The rest of the $80 is paid by the insurer. The premium paid by a person is not dependant on the number of producers he chooses to undertake.

(d)

Excessive use can be prevented by policies which link the premium with the number of medical procedures, i.e., the number of procedures should be restricted for a given amount of premium.

The effect of health insurance on the quality of healthcare services is depend on the medical procedure and the premium paid by the person.