Question

Ralph will consume any health care service just as long as its MB exceeds the money he must pay out of pocket. His insurance policy has a zero deductible and a 10 percent copay, so Ralph only has to pay 10 percent of the price charged for any medical procedure. Which of the following procedures will Ralph choose to consume?will Ralph choose to consume? a. An 800 dollars eye exam that has an MB of 100 dollars to Ralph. b. A 90 dollars hearing test that has an MB of 5 dollars to Ralph. c. A 35,000 dollars knee surgery that has an MB of 3,000 dollars to Ralph. d. A 10,000 dollars baldness treatment that has an \(M B\) of 16,000 dollars to Ralph.

Short answer

Ralph will choose the eye exam and the baldness treatment.

Step-by-step solution

Understanding Out-of-Pocket Cost

Ralph pays 10% of the price charged for any medical procedure due to his insurance policy. Therefore, to calculate Ralph's out-of-pocket cost, we multiply the price of each procedure by 0.10.

Calculate Out-of-Pocket Cost for Each Procedure

Let's calculate the out-of-pocket cost for each procedure: a. Eye exam: 10% of $800 is $80. b. Hearing test: 10% of $90 is $9. c. Knee surgery: 10% of $35,000 is $3,500. d. Baldness treatment: 10% of $10,000 is $1,000.

Compare Marginal Benefit to Out-of-Pocket Cost

Ralph will choose to consume a procedure if its marginal benefit (MB) exceeds the out-of-pocket cost. Compare MB with costs: a. Eye exam: MB is $100, cost is $80. $100 > $80 ✓ b. Hearing test: MB is $5, cost is $9. $5 < $9 ✖ c. Knee surgery: MB is $3,000, cost is $3,500. $3,000 < $3,500 ✖ d. Baldness treatment: MB is $16,000, cost is $1,000. $16,000 > $1,000 ✓

Determine Ralph's Choices

Based on the comparison, Ralph will choose to consume the eye exam and the baldness treatment, as their MBs exceed their respective out-of-pocket costs.

Key concepts

Insurance Copayment

Insurance copayments are a form of cost-sharing between the insured individual and their insurance provider. Essentially, a copayment is a fixed percentage that a policyholder must pay out of pocket for medical services, with the insurance covering the remaining balance.
Understanding how copayments work is crucial for making informed healthcare decisions. In Ralph's case, his insurance plan requires him to pay only 10% of the price of any medical service. This means, regardless of the full price of a procedure, Ralph only needs to cover one-tenth of that cost from his pocket.
For example, a medical procedure priced at $1,000 would require Ralph to pay $100 out-of-pocket, while the insurance would cover the remaining $900. By effectively lowering the upfront cost barrier, copayments encourage individuals to seek necessary healthcare services without the burden of paying full prices. However, this still requires the policyholder to carefully evaluate the marginal benefit of each service in relation to their share of the cost.

Marginal Benefit

The concept of marginal benefit is essential in understanding consumer behavior in healthcare economics. Marginal benefit is the additional satisfaction or utility that a consumer anticipates from consuming one more unit of a good or service. In healthcare, this often translates to the perceived improvement in health or well-being from undergoing a medical procedure.
Ralph's decision to undergo a procedure is heavily dependent on comparing the marginal benefit with the cost he needs to pay out of pocket. If the perceived improvement in his health from the procedure exceeds the cost he incurs, Ralph finds it worthwhile.
In the exercise provided, the eye exam and baldness treatment offer marginal benefits that are greater than their out-of-pocket costs to Ralph, encouraging him to proceed with these services. By contrast, for procedures such as the hearing test and knee surgery, their marginal benefits are less than the costs Ralph must pay, dissuading him from consuming those services.

Out-of-Pocket Costs

Out-of-pocket costs refer to the expenses that an individual must pay directly when receiving healthcare services, separate from what is covered by insurance. These costs can vary significantly depending on one's insurance plan, the nature of the healthcare service, and whether there are any discounts or aid available.
Calculating the out-of-pocket costs is a straightforward process. For Ralph, it involves multiplying the total cost of each procedure by his 10% copayment rate. This calculation determines how much he personally owes for each healthcare service.
In our exercise, these calculations were essential in determining which procedures Ralph would choose. Out-of-pocket costs need to be compared against the perceived marginal benefit of the service. When the cost is lower than the benefit, it makes economic sense to proceed with the service. By understanding and calculating these costs accurately, individuals like Ralph can navigate their healthcare options more effectively, choosing treatments that provide the greatest benefit in relation to personal costs.