Assume that there are three groups of hospital patients (instead of two as shown in Figure 14.1): private, Medicare, and Medicaid (which has a lower fi xed rate of reimbursement than Medicare). Explain how a hospital would select patients in order to maximize profi ts.

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P C Surplus over variable cost 0 Q Demand Marginal revenue A. Private Sector R R C 0 Surplus over variable cost Q B. Medicare Sector Figure 14.1 Analysis of Changes in the Medicare Hospital Reimbursement Rate Average variable cost