Question

Consider how health insurance affects the quantity of healthcare services performed. Suppose that the typical medical procedure has a cost of $120, yet a person with health insurance pays only $24 out of pocket. Her insurance company pays the remaining $96. (The insurance company recoups the $96 through premiums, but the premium a person pays does not depend on how many procedures that person chooses to undertake.)

Draw the demand curve in the market for medical care. (In your diagram, the horizontal axis should represent the number of medical procedures.) Show the quantity of procedures demanded if each procedure has a price of $120.

On your diagram, show the quantity of procedures demanded if consumers pay only $24 per procedure. If the cost of each procedure to society is truly $120, and if individuals have health insurance as described above, will the number of procedures performed maximize total surplus? Explain.

Economists often blame the health insurance system for excessive use of medical care. Given your analysis, why might the use of care be viewed as “excessive”?

What sort of policies might prevent this excessive use?

Answer 1