Consider the discussion on adverse selection into HMOs and FFS care, as noted through equation (12.2) and Figure 12.3. Suppose that, on average, FFS clients bought $2,000 in servicesF 000 and HMO clients bought $1,500 in services H 500 , with aneffi ciency factor of 0.9. The FFS plan charges a 10 percent coinsurance rate.

(a) Set up this problem graphically, labeling the E and V curves.

(b) If a client expects to spend $250 on care, will he or she choose an HMO or an FFS plan? Why?

(c) At which value of s would the client expect to be indifferent between an HMO and an FFS plan? Why?

(d) How would your answer to parts

(b) and

(c) change if the HMO adopted a 20 percent coinsurance rate?

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(5 = 2,000)