Question

The following graph shows the market for doctor's office visits. In this market, the central government provides health insurance to all consumers. The government insurance plan stipulates a copayment of $40 per doctor's office visit. That is, consumers pay $40 for each doctor's appointment, and the government pays the remainder. Market for Doctor's Office Visits Demand Supply Area Calculator AGE PRICE Dollars per visit) QUANTITY OF VISITS (Million per month

Answer 1

Solution:

Without copayment plan, equilibrium price is $100 per visit and equilibrium quantity is 4 million per month.

With copayment plan of $40, demand curve will shift vertically downward by $40. Quantity demanded of visit is 3 million per month and equilibrium price is $80 per visit. Thus government pays 80-40 = $40 per visit under copayment plan.

In the absence of copayment plan, total payment for visit = 100*4 = $400 million.

Under copayment plan, total payment to doctor = 80*3 = $240 million out of which consumers pay 3*40 = $120million and government pays 240-120 = $120million.

The copayment plan may lead to an efficient outcome if visits to doctor's office generate external benefits.