Cover: Coinsurance and the Demand for Medical Services

Coinsurance and the Demand for Medical Services

Published 1974

by Charles E. Phelps, Joseph P. Newhouse


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Using a formal model of utility maximization, a model of demand is developed for medical services when reimbursement insurance is present, and when time costs are involved in purchasing medical care. Responsiveness to changes in insurance coverage is shown to diminish as the cost of time becomes a relatively more important (and money price a relatively less important) proportion of total costs for medical services. Under plausible (and weak) conditions, the observed responsiveness of demand for medical care to either money price changes or insurance coverage changes approaches zero as insurance coverage becomes complete. The arc-elasticity for all medical services in the zero to 25 percent coinsurance range is shown to be on the order of 0.1. It is estimated that around 8 to 17 percent more services would be demanded at a zero coinsurance rate than at a 25 percent rate.

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