Consistent with Figure 12.1, assume that the FFS price was $100 per visit and the average patient made eight visits per year. A competing managed care organization came in and charged $80 per visit, providing seven visits per year.

(a) Calculate the change in total expenditures.

(b) Graph the FFS and the managed care market equilibria as was done in Figure 12.1.

What do our fi ndings suggest about demand for managed care compared to demand for FFS care?

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Price P Pm 10 Total expenditures (fee-for-service) Total expenditures (managed care) D, Demand (fee-for-service) = Dm Demand (managed care) = Qm Price (fee-for-service) 0 Quantity Figure 12.1 Treatment and Expenditures under Managed Care Q Price (managed care)