Question

1. 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.
   1. 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