H_08_05_Market demand

H_08_05_Market demand - HEALTH ECONOMICS Handout 8 Demand...

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HEALTH ECONOMICS Handout 8 Demand Market Demand Demand DO NOT CONFUSE THE AGGREGATE DEMAND CURVE FOR MEDICAL SERVICES WITH THE DEMAND CURVE FACED BY INDIVIDUAL FIRMS How Insurance Affects the Demand Curve Insurance changes the price paid by the individual for care, creating a gap between the price paid by the individual and the true price of care. For this reason insurance will shift the demand curve. Of course how insurance shifts the demand curve depends on the specifics of the policy. We will analyze several cases. 1) Coinsurance. A coinsurance policy forces the consumer to pay only a percentage of the costs. For coinsurance use the following method to construct the demand curve. 1) Start with the “patient price” demand curve. This tells you the out of pocket price that would be consistent with the consumption of any quantity. 2) For each quantity, figures out how much the provider could charge so that the consumer would only pay the out-of pocket price on the “patient price” demand curve. (This will be a price equal to or above the point on the “patient price” demand curve.) 3) Connect the “provider” prices to get the “provider price” demand curve. Graph 1 1
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$ 100 60 “ Provider Price” “ Patient Price” Medical Care Coinsurance generates a “provider price” demand curve which is a rotated version of the patient price demand curve. The provider price demand curve is more inelastic than the patient price demand curve (if the consumer pays zero co-insurance, the provider price demand curve is perfectly inelastic). As you would expect, at provider price=0 the “provider price” and “patient price” demand curves touch. Because the coinsurance rate lowers prices to the consumer, the elasticity with repeat to co-insurance rate is the same as the elasticity of demand with respect to the provider price.
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This note was uploaded on 04/09/2008 for the course HMP 661 taught by Professor Michaelchernew during the Winter '06 term at University of Michigan.

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H_08_05_Market demand - HEALTH ECONOMICS Handout 8 Demand...

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