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Imagine that at your first full time job after graduation, you need to decide between getting an HMO or a FFS health plan. Suppose that

Imagine that at your first full time job after graduation, you need to decide between getting an HMO or a
FFS health plan. Suppose that the average client of FFS buy $5000 in services (sF =5,000). In the HMO
market, the average HMO client buy $3500 services (sH =$3500), and HMO market operated with an
efficiency factor of .8. The coinsurance rate for both plans is r=25%
The FFS plan charges you a 25 percent coinsurance rate. The FFS plan average coinsurance rate is also
25 percent. In addition, we estimate that the value of being able to freely choose ones doctor
under the FFS plan is worth 1.1 times a patients medical costs to treat the severity of the
illness, s. Assume that both the HMO and FFS providers earn zero profits in the long run.
Hint: for the questions below remember that the extra cost of FFS plan is defined as:
E= FFS cost HMO cost =(Deductibles + FFS copay) HMO price =
=[(1)\alpha ]+
A) Set up this problem graphically, labelling the E and V curves
B) At which values of s would you be indifferent between an HMO and a FFS plan? Explain the
intuition of this value
C) If you expect to spend $2000 on health care, will you choose and HMO or a FFS plan? WHY?
Explain the intuition
D) If you expect to spend $1000 on health care, will you choose and HMO or a FFS plan? WHY?
Explain the intuition solve and the FFs plan is worth 1.1 times !

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