Economic Analysis for Health Services
1. Suppose medical care is consumed only in units of a homogeneous quantity, for instance, office visits which are priced at $40 per visit. The available insurance plan carries a $200 deductible and has a coinsurance rate of 20% (i.e. patient pays 20%).
a. Graph the out-of-pocket price faced by the individual as more office visits are consumed.
b. Suppose individual A's demand curve is described by function
QA(P) = (-3/32) P + 6.75
How much medical care will individual A consume?
2. The previous director of an insurance plan required no co-pay. As the new director, your first reform was to implement a co-pay. Assume that each doctor visit costs the insurance plan $40, and use the following demand curve for your enrollees:
P = 50 - 4 Q
a. Illustrate graphically the impact of a $20 co-pay on the quantity of doctor visits demanded by your enrollees. What is the new quantity of visits demanded? Decimal values are fine for this example.
b. Imposing the $20 co-pay increases out-of pocket expenses for the beneficiary and reduces the plan's expenditures. Answer the following:
i. How much does imposing the co-pay generate (the increase in out-of-pocket expenses)?
ii. How much does the reduction in visits save the insurance plan?
iii. If you are competing against another insurance group, imposing the co-pay will allow you to reduce premiums by how much?
iv. Calculate the consumer surplus before and after the copay was imposed. Compare the change in consumer surplus with the change in premiums. Is the beneficiary better off with the co-pay?
c. In designing your new plan, you would prefer to encourage some visits and discourage others. Consider three services with their price elasticities:
Emergency room visits: 0.01
Doctor visits: 0.20
Childhood vaccinations 1.00
i. The $20 co-pay will cause the largest utilization reductions for which service?
ii. If you want to encourage childhood vaccinations, discourage doctor visits, and drastically reduce unnecessary emergency room visits, suggest an alternative co-pay policy other than your $20 for all services
3. Perfect competition should produce marginal cost pricing where the market price is equal to the marginal cost of production. For this problem, you will derive an estimate of the marginal cost of a physician office visit for a sole-practitioner who owns their own practice. Remember the concept of "marginal" analysis. "On the margin" would be similar to opening the office for an additional hour in the evening.
a. Make a list of costs that are relevant to calculating a physician's cost of production and provide an estimate of the total cost of each. Assume you're your timeframe of analysis is one year and standardize your variable costs on this annual budget. Identify whether each is a fixed cost or a variable cost.
b. Next, you will need to make an assumption on the number of visits that a physician provides per year. Explain your assumption.
c. Calculate a short run marginal cost.
d. Calculate a long run marginal cost.
e. How do c & d compare to the payment rates for an established office visit in Medicare and Ohio Medicaid (code 99213).