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?a. An \(\$ 800\) eye exam that has an MB of \(\$ 100\) to Ralph. b. A \(\$ 90\) hearing test that has an MB of \(\$ 5\) to Ralph. c. A \(\$ 35,000\) knee surgery that has an MB of \(\$ 3,000\) to Ralph. d. \(A\) S10,000 baldness treatment that has an MB of \(\$ 16,000\) to Ralph.

Short answer

Ralph will choose the eye exam and baldness treatment.

Step-by-step solution

Calculate Ralph's Out-of-Pocket Costs

Calculate the out-of-pocket cost for Ralph for each medical procedure. Since Ralph's insurance requires a 10% copay, the out-of-pocket cost is 10% of the procedure's price. - Eye exam: 10% of $800 = $80 - Hearing test: 10% of $90 = $9 - Knee surgery: 10% of $35,000 = $3,500 - Baldness treatment: 10% of $10,000 = $1,000

Compare Out-of-Pocket Costs with Marginal Benefit

For each procedure, compare Ralph's out-of-pocket costs with the marginal benefit (MB) to determine if the MB exceeds the out-of-pocket expense. - Eye exam: MB = $100, Out-of-pocket = $80 (MB > Out-of-pocket) - Hearing test: MB = $5, Out-of-pocket = $9 (MB < Out-of-pocket) - Knee surgery: MB = $3,000, Out-of-pocket = $3,500 (MB < Out-of-pocket) - Baldness treatment: MB = $16,000, Out-of-pocket = $1,000 (MB > Out-of-pocket)

Determine Ralph's Choice

Identify which procedures Ralph will choose based on MB exceeding the out-of-pocket cost. Ralph will choose the procedures where MB > Out-of-pocket cost. From the comparisons: - Ralph will choose the eye exam and the baldness treatment, because only in these cases does the MB exceed the out-of-pocket cost.

Key concepts

Marginal Benefit

Marginal benefit refers to the additional satisfaction or value that an individual obtains from consuming one more unit of a good or service. In the context of healthcare decision making, it involves comparing the perceived personal value of a healthcare service to its cost. Understanding marginal benefit helps individuals like Ralph make informed decisions about whether to undergo certain medical procedures. If the marginal benefit, expressed in monetary terms, is greater than the out-of-pocket costs, a rational decision would be to proceed with the service. For Ralph, the eye exam offers a marginal benefit of $100, and it costs him only $80 out of pocket. Therefore, the benefit surpasses the cost, making it a favorable choice.

Out-of-Pocket Costs

Out-of-pocket costs denote the portion of costs that a consumer directly pays for a service, excluding any contributions from insurance. For Ralph, these costs are determined by the 10% copay stipulated in his insurance policy. For instance, with a procedure priced at $800, Ralph's direct cost is calculated as 10% of $800, translating to $80. These calculations help Ralph assess which medical services are economically viable based on his perception of their benefits. It's a crucial factor in economic decision-making, as it directly impacts affordability and the overall decision about whether or not to consume a healthcare service. By comparing out-of-pocket expenses against the marginal benefit for each service, Ralph makes decisions that align with his financial and personal values.

Insurance Copay

An insurance copay is a fixed percentage that a policyholder is required to pay out of their own pocket when receiving medical services, with the rest covered by their insurance provider. Ralph's insurance copay is set at 10%, meaning he only needs to pay this fraction of any medical service's price. This affects his economic decisions because it significantly lowers his immediate cost barriers to accessing care. The lower out-of-pocket expense might make certain healthcare services more attractive, as seen with Ralph's decision to choose the eye exam and baldness treatment. His copay structure allows Ralph to consider procedures that might have been prohibitively expensive without such an insurance benefit.

Healthcare Economics

Healthcare economics examines how resources are distributed and managed in the healthcare system, affecting costs, quality, and access. It provides insights into decision-making processes faced by individuals, insurers, and policymakers. For Ralph, healthcare economics play a role in navigating insurance terms and understanding the financial implications of his health decisions. Given his insurance plan, Ralph evaluates his options through the lens of costs and benefits, much like larger economic systems assess resource allocations. By weighing the marginal benefit against the out-of-pocket costs for various procedures, Ralph demonstrates the application of economic principles to personal healthcare decisions. This understanding empowers consumers to make choices that optimize their wellbeing and financial resources.