Consider how health insurance affects the quantity of healthcare services performed. Suppose that the typical medical procedure has a cost of $100, yet a person with health insurance pays only $20 out of pocket. Her insurance company pays the remaining $80. (The insurance company recoups the $80 through premiums, but the premium a person pays does not depend on how many procedures that person chooses to undertake.)
a. Draw the demand curve in the market for medical care. (In your diagram, the horizontal axis should represent the number of medical procedures.) Show the quantity of procedures demanded if each procedure has a price of $100.
b. On your diagram, show the quantity of procedures demanded if consumers pay only $20 per procedure. If the cost of each procedure to society is truly $100, and if individuals have health insurance as just described, will the number of procedures performed maximize total surplus? Explain.
c. Economists often blame the health insurance system for excessive use of medical care. Given your analysis, why might the use of care be viewed as "excessive"?
d. What sort of policies might prevent this excessive use?

b. Use the graph above to see how insurance affects supply and demand. Given that there is a maximum amount of medical procedures that can be provided when the price for consumers is brought down demand surpasses supply and the total market surplus decreases.

c. The use of medical care that may be considered to be “excessive” may refer to the issue of individuals who are under going elective procedures taking up valuable medical resources that then cannot be given to those who need these same resources in order to live. If these non-essential procedures such as cosmetic surgeries or treatments that provide relatively small quality of life improvements are available at prices lower than market value the demand for them will be unnaturally high which in turn creates more congestion in the medical market.

d. A policy that may mitigate this issue would be reduced insurance coverage for optional procedures. This help to correct for the increase in demand caused by the difference in what consumers pay and what procedures cost.

Explanation:

a. See the attached image for the graph

b. Use the attached graph to see how insurance affects supply and demand. Given that there is a maximum amount of medical procedures that can be provided when the price for consumers is brought down demand surpasses supply and the total market surplus decreases.

c. The use of medical care that may be considered to be “excessive” may refer to the issue of individuals who are under going elective procedures taking up valuable medical resources that then cannot be given to those who need these same resources in order to live. If these non-essential procedures such as cosmetic surgeries or treatments that provide relatively small quality of life improvements are available at prices lower than market value the demand for them will be unnaturally high which in turn creates more congestion in the medical market.

d. A policy that may mitigate this issue would be reduced insurance coverage for optional procedures. This help to correct for the increase in demand caused by the difference in what consumers pay and what procedures cost.