Question

1. An insurance company has a copayment of $20 for a primary care visit and $30 for a specialist visit. This year there were 400,000 primary care visits and 600,000 specialist visits with these copayments. For each primary care visit the insurance company pays $100 in claims. For each specialist visit, the insurance company pays $150 in claims.

1. a. The company is considering raising the specialist copayment to $35. Based on the literature, the price elasticity of demand for specialist visits is assumed to be -0.2. The firm’s market share is 30%.
   1. i. How are net claims paid for specialist visits projects to change?
   2. ii. How much are revenues from copayments for specialist visits projected to change in the next year?
   3. iii. How many specialist visits do you forecast for next year with the higher copayment?

Answer 1

We know that

Price Elasticity of demand is given by

It is given that our PED is -.2

The % change in specialist visit copayments is 5/30=1/6=16.67%

Putting values in formula

-.2=% change in quantity demanded/.1667

%change in quantity demanded=-.2*.1667=-3.33%

New specialist claims=(1-.0333)*600000=58000.

A. Claims paid for 58000 visits=58000*150=8700000.

Claims paid for 60000 visits last year=60000*150=9000000

Change in claims paid for specialist visits=300000

B. Revenue from copayments earlier=60000*30=1800000

Revenue from copayments this year=58000*35=2030000.

Change in revenue from copayments=2030000-1800000=230000

C. As solved earlier,

New specialist visits=(1-.0333)*600000=58000.