# Suppose the price of a unit of medical care is $100 and the person’s insurance policy covers… 1 answer below »

1. Suppose the price of a unit of medical care is $100 and the person’s insurance policy covers up to $100,000 in expenditures incurred on behalf of the insured individual per year. Show graphically how the maximum payment limit affect the quantity demanded. Assume a zero co-pay to the limit.

2. Bills new insurance policy contains a prescription plan that provides all drugs through a local pharmacy with a $2 co-payment. Under the old insurance plan, Bill had to for his own medication and purchased nine inhalers at $17 a piece to help control his asthma. With the new plan, Bill purchases fifteen inhalers, keeping some of the spares in his glove compartment and desk, since he only has to pay a $2 co-payment for each one. How much are the six additional inhalers worth to Bill? How much do they cost him? How much do they cost the insurance company? Is Bill better off or worse off under the new plan.

3. Suppose the county in which you live provides flu shots at pharmacies in the county for $5. facing a budgetary crises, the county raises the price of flu shots to $10. After two flu seasons, the county observes the percentage of the population getting flu shot decreased from 50 percent to 40 percent. Calculate the implied arc elasticity of demand. What is potentially wrong with this calculation, and what additional data would you need to collect to fix it.

4). Suppose a hospital has 500 beds. It faces a demand curve X = 1200 – 2p, where p is the price of the bed day and X is the number of patient days of care demanded. The fixed cost of adding a new bed is $150 and the total housekeeping cost is given by (B/3.5) squared. ( I dont know how to put the squared up there), where B is the total number of beds.

a). suppose the hospital’s market price is fixed at $250/bed day. What is the net marginal revenue to this hospital from an increase of one additional bed.

b). with p fixed at 250, graph the net marginal revenue curve, with the number of beds on the x-axis and dollars on the y-axis. Explain its shape

c). suppose the hospital is restricted from increasing its capacity for now, but it can set the price for each bed day. What is the optimal price level for the hospital if the hospital’s objective is to maximize profits? Will the hospital fully use its current capacity in this case?

d). Now suppose the hospital is considering building a branch in another town. There is no existing hospital in that town. The cost of each new bed and housekeeping are the same as above, but the hospital’s demand curve in this other town is X = 800 – 1.2p. What is its profit maximizing price per bed day? How many beds should the new hospital have?

5). A person with osteoarthritis of the knee plans to have a knee replacement. Assume he has a quasi-linear utility function (u(.)) over wage w and his health H. that is, U(w,H) = w+10 rise to power of 4 lnH. Suppose with an artificial knee, the person can enjoy 20 additional healthy days annually during the next 10 years, during which he can earn a wage of $150/day. The annual interest rate is 2 percent.

a). what is the increase in the person’s wage income if the person decides to get his knee replaced.

b). what is the net present value of the monetary return on knee replacement surgery?

Now suppose that in addition to the above conditions, the person also has a current health capital of 500 units. In the next decade, the additional health capital attributable to the artificial knee is given in the following table:

Year 1 2 3 4 5 6 7 8 9 10

Health capital 50 49 48 46 43 39 34 28 21 12

The patient discount his utility from health capital at a 10 percent annual rate. That is, he is indifferent between receiving 100 units of health capital this year and receiving 110 units next year.

c). what is the present value of his utility gain from having knee replacement surgery?

d). if the total cost (including both the monetary loss from paying the surgical fee and the dis-utility from undergoing the surgical procedure?

6). Suppose the health department in a small country has been given a budget of $10 million to spend on new drugs. Its objective is to maximize health gains per dollar. The department’s analysis have developed a list of drugs that could be covered by the insurance program, together with estimates of their costs and benefit (in QALY’s gained):

Drugs Benefits(QALY’s) Cost $

A 500 1000000

B 500 2000000

C 250 2000000

D 200 1200000

E 150 4500000

F 100 1200000

G 100 1800000

H 100 2000000

I 100 5000000

J 50 800000

a). Calculate the cost effectiveness ratio (CER) for each drug.

b). List the drug that could be reimbursed by the insurance plan, and the threshold value of your reimbursement decision

c). if the budget of health department is cut and only $3 million can be allocated to spending for new drugs, which drugs will be included in the reimbursement list, and what is the threshold value of your reimbursement decision?

7). Given the following information, compute the value of a statistical life.

Industry fatality rate per 100,000 workers Mean hourly wage

Construction 13.4 25

Manufacturing 3.8 15

2. Bills new insurance policy contains a prescription plan that provides all drugs through a local pharmacy with a $2 co-payment. Under the old insurance plan, Bill had to for his own medication and purchased nine inhalers at $17 a piece to help control his asthma. With the new plan, Bill purchases fifteen inhalers, keeping some of the spares in his glove compartment and desk, since he only has to pay a $2 co-payment for each one. How much are the six additional inhalers worth to Bill? How much do they cost him? How much do they cost the insurance company? Is Bill better off or worse off under the new plan.

3. Suppose the county in which you live provides flu shots at pharmacies in the county for $5. facing a budgetary crises, the county raises the price of flu shots to $10. After two flu seasons, the county observes the percentage of the population getting flu shot decreased from 50 percent to 40 percent. Calculate the implied arc elasticity of demand. What is potentially wrong with this calculation, and what additional data would you need to collect to fix it.

4). Suppose a hospital has 500 beds. It faces a demand curve X = 1200 – 2p, where p is the price of the bed day and X is the number of patient days of care demanded. The fixed cost of adding a new bed is $150 and the total housekeeping cost is given by (B/3.5) squared. ( I dont know how to put the squared up there), where B is the total number of beds.

a). suppose the hospital’s market price is fixed at $250/bed day. What is the net marginal revenue to this hospital from an increase of one additional bed.

b). with p fixed at 250, graph the net marginal revenue curve, with the number of beds on the x-axis and dollars on the y-axis. Explain its shape

c). suppose the hospital is restricted from increasing its capacity for now, but it can set the price for each bed day. What is the optimal price level for the hospital if the hospital’s objective is to maximize profits? Will the hospital fully use its current capacity in this case?

d). Now suppose the hospital is considering building a branch in another town. There is no existing hospital in that town. The cost of each new bed and housekeeping are the same as above, but the hospital’s demand curve in this other town is X = 800 – 1.2p. What is its profit maximizing price per bed day? How many beds should the new hospital have?

5). A person with osteoarthritis of the knee plans to have a knee replacement. Assume he has a quasi-linear utility function (u(.)) over wage w and his health H. that is, U(w,H) = w+10 rise to power of 4 lnH. Suppose with an artificial knee, the person can enjoy 20 additional healthy days annually during the next 10 years, during which he can earn a wage of $150/day. The annual interest rate is 2 percent.

a). what is the increase in the person’s wage income if the person decides to get his knee replaced.

b). what is the net present value of the monetary return on knee replacement surgery?

Now suppose that in addition to the above conditions, the person also has a current health capital of 500 units. In the next decade, the additional health capital attributable to the artificial knee is given in the following table:

Year 1 2 3 4 5 6 7 8 9 10

Health capital 50 49 48 46 43 39 34 28 21 12

The patient discount his utility from health capital at a 10 percent annual rate. That is, he is indifferent between receiving 100 units of health capital this year and receiving 110 units next year.

c). what is the present value of his utility gain from having knee replacement surgery?

d). if the total cost (including both the monetary loss from paying the surgical fee and the dis-utility from undergoing the surgical procedure?

6). Suppose the health department in a small country has been given a budget of $10 million to spend on new drugs. Its objective is to maximize health gains per dollar. The department’s analysis have developed a list of drugs that could be covered by the insurance program, together with estimates of their costs and benefit (in QALY’s gained):

Drugs Benefits(QALY’s) Cost $

A 500 1000000

B 500 2000000

C 250 2000000

D 200 1200000

E 150 4500000

F 100 1200000

G 100 1800000

H 100 2000000

I 100 5000000

J 50 800000

a). Calculate the cost effectiveness ratio (CER) for each drug.

b). List the drug that could be reimbursed by the insurance plan, and the threshold value of your reimbursement decision

c). if the budget of health department is cut and only $3 million can be allocated to spending for new drugs, which drugs will be included in the reimbursement list, and what is the threshold value of your reimbursement decision?

7). Given the following information, compute the value of a statistical life.

Industry fatality rate per 100,000 workers Mean hourly wage

Construction 13.4 25

Manufacturing 3.8 15

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