Economics 2159A/B Lecture 9: Health Care Part 12
20 Apr 2018
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Under a fee-for-service payment system, patients pay the price of p d" =0 and demand q" of health services, and physicians receive the fee of p s" and supply q" of health services. In this equilibrium, there is no shortage in supply of health care services. Now suppose the government imposes an expenditure cap on physician incomes below the current level of expenditures, as part of an overall policy package intended not just to control physician spending but to reduce public spending more broadly. Under such a cap, expenditures are controlled with a policy governing both fees and services, simultaneously. This implies that any expenditures in excess of the cap are not reinbursed to physicians. Effectively, this places a s volume limit of q"" for reimbursement under a set fee-for-service of p. Health care providers are no longer rewarded for providing more services (through fee-per-service) at higher cost (through higher fees).
