South-Western College Publishing - Economics  
Managed Care Costs Becoming Unmanageable
Subject Comparative Statics
Topic Supply and Demand
Equilibrium
Key Words Costs, Competition, Prices, Premiums, Rates, Benefits, Pay
News Story

The health care costs of large companies are expected to rise by 7 to 11 percent in 2000, as in 1999. The increases for small firms will be even greater. The causes are higher drug prices, lower competition as hospitals, health plans, and doctors consolidate and insurers increase premiums after initially setting low rates to get business. This is in stark contrast to the late 1980s and early 1990s when rates were steady or declined as managed care grew.

It is unclear whether employers will pass the costs on to workers, or reduce benefits and/or pay. Regardless, many employees are already dissatisfied. One survey found that unhappiness with managed care plans rose from 17 percent to 22 percent between 1997 and 1998. The main complaints concern the plans' inability to solve problems; timeliness, professionalism and accuracy; and cost.

(Updated July 1, 1999)

Questions
1. Draw a supply and demand diagram of the market for health care in the late 1980s and early 1990s. Show the initial equilibrium price and quantity.
  a)In this period, employers increasingly adopted managed care plans. What happened to the supply curve as a result? Why?
  b)Illustrate this on your diagram and show the implications for the equilibrium price and quantity of health care.
2. Now draw a similar diagram for health care in 1999-2000. Show the initial equilibrium.
  a)As drug prices have risen and doctors have charged more as they have consolidated, what has happened to supply and/or demand? Explain your response.
  b)Illustrate the changes on your diagram and show the implications for the equilibrium price and quantity of health care.
3. Draw a diagram showing the demand for, and the supply of, managed care. Mark the initial equilibrium price and quantity.
  a)Many consumers are complaining about the service provided by managed care plans. If employers were to take their feelings into account, what would happen to the demand and/or supply curves? Explain which determinant of supply or demand has changed.
  b)Illustrate the effect of this on the equilibrium price and quantity of managed care.
  c)If both changes in Questions 2 and 3 were to occur in the market for managed care, what would happen to the equilibrium price and quantity of managed care?
Source Julie Appleby, "Health-care premiums on rise again," USA Today, May 17, 1999.

Return to the Supply and Demand Index or the Equilibrium Index

©1998  South-Western College Publishing.  All Rights Reserved   webmaster  |   DISCLAIMER