Medicare recipients pay a monthly premium for coverage, must meet an annual deductible, and have a co-payment for doctor visits. What impact would an increase in the monthly premium have on their consumer surplus? What would be the impact of a reduction in co-payments? President George W. Bush introduced new coverage for prescription medications. What is the impact on consumer surplus of offering some coverage for prescription medication?
Medicare provides medical coverage to millions of Americans who are old and/or disabled and covers medical expenses, hospital stay, medicines, etc. However, the total cost of medical treatment is not covered and patients have to pay out-of-pocket expenses as well. The responsibilities of the patient include payment of monthly premiums, paying certain portion of the expenses (deductibles) and partly supporting the cost of doctor visits.
An increase in monthly premiums will decrease the amount of cash available to the patients and will reduce their purchasing power and thus their consumer surplus, since they will actually pay a higher amount for the services than earlier, while their willingness to pay would be the same.
A reduction in co-payment will similarly increase the consumer surplus (actual cost goes down, while willingness to pay stays same).
If some coverage is provided for prescription medication, Medicare will pay for the covered medication and thus save some amount to the patients and hence will increase the consumer surplus.