How does a third party payer system effect an equilibrium price and quantity?

Answer 1

The person who receives the good differs from the person paying for the good. A health insurance program is a good example. The quantity demanded is effected by the consumer who pays the co-pay, and the amount demanded effects the price. Quantity demanded and what is totally spent is generally greater than the original equilibrium, which has no interferences.

Hypothetically and for example: Say health insurance doesn't exist, and that the free market equilibrium (FME) is $25 per doctor visit; your doctor sees 10 patients per day under the FME..this is the doctor's capacity. (Our equilibrium in this case is Pc=$25 and Q=10)

All of a sudden health insurance is devised, and you work for an employer that offers it to you. Your insurance company approaches your doctor and gets them on board as a provider. Under contract, the insurance company tells you that you have a co-pay of $5. The demand for service need/want increases and the insurance company tells the doctor that they now have to handle (we look on the "Pc" at $5, and follow across to the amount on the Demand Curve and we find 18 on "Q") 18 patients a day to be listed as a provider. The doctor says, yes, BUT...(we then go from Q=18 and meet the Supply curve which is at Pc=$45)I need to charge $45 per head, for this increase in patient load and payment liability.

And to add, the insurance company pays the $40 difference.

So, in this case the equilibrium for quantity and price increased on their respective curves, dependent on the interference of the new price.