Question

Medigap is a private insurance product that causes government expenditures through Medicare to be higher than otherwise. Let’s see how we can estimate just how much more the government spends as a result. 70 yr old Mr. Smith has frequent need for doctor-administered injections that improve his hip functioning. His demand for these treatments is given by P=30-0.60Q where P is the full market price of the service (if Mr. Smith had no insurance), and the supply of these treatments is given by P=15.

A.) Suppose that Mr. Smith is covered by Medicare, that has a 20% coinsurance, and then also purchases a Medigap plan that covers the coinsurance of Medicare fully. Show carefully, with supply and demand graphs and shading, as well as with calculations, how much do Medicare costs increase when Medigap is introduced?

Answer 1

SOLUTION:-

* Medigap plan covers the coinsurance of Medicare fully. So, Medigap is not paying anything, as "100% coinsurance" means the insurance company is paying 0%, & Mr. Smith pays 100%.

Demand of health care -

A)

(i) So equilibrium purchase of health-care is 25, equilibrium price is 15. Medicare has 20% co-insurance policy. So, it will pay 15 x 20% 3/-, rest will be paid by Mr.Smith so cost will fall.

(ii) Medigap covers the co-insurance of Medicare fully. 100% co-insurance means, Medi-gap is not paying any ammount. So, Mr.Smith needs to pay more.

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