W3-1 (ECONOMICS OF HEALTHCARE)

Price Elasticity

You are the administrator for a medical practice. Assume all of your practice's patients are covered by insurance. Insurance pays, on average, 80% of your fee for a physician visit for which your practice charge is $100. The patient is responsible for the $100 fee but receives 80% back from the insurer. Currently, your practice's volume for this service is 1,500 per year. Answer the following question in regard to this assumption:

• Estimate what would happen to the volume of services and the expected revenue to the practice, should the area's health insurers increase patient cost sharing from 20% to 30% of this charge. Use the concept of price elasticity to make the projection.

Use the elasticities given in Wedig's, 1988 study: Price elasticity for physician visits for patients in good or excellent health is –0.35, while the price elasticity for physician visits for patients in fair or poor health is –0.16.

After a quick survey, you decide that 65% of the practice's patients are in at least good health and account for 1,000 of the 1,500 visits. The remaining patients are in fair or poor health. In light of this survey, write out all the steps of the calculation.

Write answers separately for patients in each category of health status—excellent, good, fair, and poor—for all patients.

Reference:

Wedig, G. J. (1988). Health status and the demand for health: Results on price
           elasticities. Journal of Health Economics, 7(2), 151–163. Retrieved from
           http://ideas.repec.org/a/eee/jhecon/v7y1988i2p151-163.html