Question

   Health Care Demand

An individual's demand for physician office visits in a given year is given by, Q = 10 - 0.04P, where Q is the number of office visits and P is the out-of-pocket price paid by the individual for each visit. Assume the market price of an office visit is $180.

Use this information to answer the questions below.

QUESTIONS:

1. Without insurance, how many office visits will the individual make in one year?

NOTE: round to nearest whole number

2. Suppose the individual has insurance and pays only a $40 copayment for each visit. How many office visits will the individual make in one year?

NOTE: round to nearest whole number

3. What is the moral hazard and deadweight loss (DWWL) associated with having insurance?

Moral Hazard=

DWL=

4. Based on the Nyman model, suppose the value the individual places on each visit increases by $50 when the individual is ill and has insurance.

a.) Write the general expression for the inverse demands equation, accounting for the increased value of insurance for the individual

b.) What value of Q (number of visits) represents the dividing line between welfare-increasing and welfare decreasing moral hazard?

c.) from Nyman's perspective, what is the welfare-increasing moral hazard, the welfare decreasing moral hazard, and deadweight loss (DWL) associated with having insurance?

Welfare increasing moral hazard =

welfare decreasing moral hazard -

DWL =

Answer 1

Q = 10-0.04P

WHERE Q = the number of office visits

P=  the out-of-pocket price paid by the individual for each visit.

1) P = $180

Q = 10 - 0.04*180 = 2.8

2) INSURANCE DONE , P= $40

Q = 10 - 0.04*40 = 8.4

3) MORAL HAZARD associated with having insurance:

Moral hazard refers to the additional health care that is purchased when persons become insured. Under conventional theory, health economists regard these additional health care purchases as inefficient because they represent care that is worth less to consumers than it costs to produce. Moral hazard increases the amount of medical care consumed

The extent of moral hazard depends on the responsiveness of the quantity de- manded by the insured to price changes. This responsiveness may be measured by the price elasticity of demand.

moral hazard =  [(Q2-Q1)/(P1-P2)]

{8.4-2.8)/(180-40)} = 0.04

DEADWEIGHT LOSS associated with having insurance

Deadweight loss (and attendant reductions in the quantity of health care) occurs for individuals who are uninsured or are priced out of the insurance market, but there is no deadweight loss for those individuals who remain insured.

deadweight loss = 1/2 * price difference * quantity difference

= 1/2 *(180-40)*(8.4-2.8)

=392