Part II (6 points) Please answer all parts. Consider how health insurance affects the quantity of health services performed. Suppose that the typical medical procedure has a (social) cost of $500, yet a patient with health insurance pays only $30 out of pocket (a co-payment) for each additional procedure performed. The patient's insurance company pays the remaining $470. The insurance company will recoup the $470 through premiums, but the premium a person pays does not depend directly on how many procedures the person has; they only pay the co-payment for each procedure. a) Draw the demand curve in the market for medical care procedures. (The horizontal axis should be the number of medical procedures.) Show the quantity of procedures demanded if each procedure has a price of $500. b) on your diagram, show the quantity of procedures demanded if patients pay only $30 per procedure. If the cost of each procedure to society is truly $500 and if patients have health insurance as just described, will the number of procedures performed maximize total surplus? Explain. For simplicity. assume the social cost (MSC) of a procedrure is constant at $500 each no matter how many procedures are performed. (GIANT HINT: this is a flat MSC curve at $500) c) Economists often blame the health insurance system for excessive use of medical care. Given your answers to parts a and b, why might the use of care be viewed as "excessive? d) Would increasing co-pays reduce this excessive" use? Explain in a sentence or two. e) (somewhat challenging) Answer and briefly discuss: According to this problem, what economic role does health insurance play? Does insurance increase economic welfare (total surplus) or would efficiency be increased in this example by eliminating insurance entirely? Explain. (Refer to your answer to parts cand d and make your answer to parte consistent with your answers to parts cand d.) f) (possibly very challenging, for up to 1 point extra credit). What might be wrong with this assignment problem for thinking about the economic value of health insurance? Here is a hint: what if these were not $500 procedures but $100,000 heart surgeries for those suffering heart attacks with co-pays of $100 each. Would that fundamentally change the question? Change your answer? If not, isn't something wrong with this whole question? (Don't assume everyone can afford to pay $100K out of pocket for surgery.) Part II (6 points) Please answer all parts. Consider how health insurance affects the quantity of health services performed. Suppose that the typical medical procedure has a (social) cost of $500, yet a patient with health insurance pays only $30 out of pocket (a co-payment) for each additional procedure performed. The patient's insurance company pays the remaining $470. The insurance company will recoup the $470 through premiums, but the premium a person pays does not depend directly on how many procedures the person has; they only pay the co-payment for each procedure. a) Draw the demand curve in the market for medical care procedures. (The horizontal axis should be the number of medical procedures.) Show the quantity of procedures demanded if each procedure has a price of $500. b) on your diagram, show the quantity of procedures demanded if patients pay only $30 per procedure. If the cost of each procedure to society is truly $500 and if patients have health insurance as just described, will the number of procedures performed maximize total surplus? Explain. For simplicity. assume the social cost (MSC) of a procedrure is constant at $500 each no matter how many procedures are performed. (GIANT HINT: this is a flat MSC curve at $500) c) Economists often blame the health insurance system for excessive use of medical care. Given your answers to parts a and b, why might the use of care be viewed as "excessive? d) Would increasing co-pays reduce this excessive" use? Explain in a sentence or two. e) (somewhat challenging) Answer and briefly discuss: According to this problem, what economic role does health insurance play? Does insurance increase economic welfare (total surplus) or would efficiency be increased in this example by eliminating insurance entirely? Explain. (Refer to your answer to parts cand d and make your answer to parte consistent with your answers to parts cand d.) f) (possibly very challenging, for up to 1 point extra credit). What might be wrong with this assignment problem for thinking about the economic value of health insurance? Here is a hint: what if these were not $500 procedures but $100,000 heart surgeries for those suffering heart attacks with co-pays of $100 each. Would that fundamentally change the question? Change your answer? If not, isn't something wrong with this whole question? (Don't assume everyone can afford to pay $100K out of pocket for surgery.)
