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.
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. (Wedig, G.J. 1988. Health status and the demand for health: Results on
price elasticities. Journal of Health Economics, 7, 151–163.)
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.
For Questions 2 to 4, write out all the steps of the calculation. For Questions
3 and 4, write answers separately for patients in each category of health
status—excellent, good, fair, poor—and for all patients
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