Exam III Review Flashcards
insurance premiums
money that is paid to an insurer so that an individual will be insured against adverse events
means-tested welfare programs
refers to programs in which eligibility depends on the level fo one’s current income or assets
consumption smoothing
the translation of consumption from periods when consumption is high, and thus has low marginal utility, to periods when consumption is low, and thus has high marginal utility
expected utility model
the weighted sum of utilities across states of the world, where the weights are the probabilities of each state occuring
(1-p) X U (consumption with no adverse event) + p x U (consumption with adverse event)
acturially fair premium
an insurance premium that is set equal to the insurer’s expected payout
central result of expected utility theory
with actuarially fair pricing, individuals will want to fully insure themselves to equalize consumption in all states of the world
risk aversion
the extent to which individuals are willing to bear risk
information asymmetry
the difference in information that is available to sellers and to purchasers in a market
adverse selection
the fact that insured individuals know more about their risk than does the insurer might cause those most likely to have the adverse outcome to select insurance, leading insurers to lose money if they offer insurance
risk premium
the amount that risk adverse individuals will pay for insurance above and beyond the actuarially fair price
pooling equilibrium
a market equilibrium in which all types of people buy full insurance even though it is not fairly priced to all individuals
ways to fight adverse selection
- pooling equilibrium
2. offering separate products at separate prices (separating equilibrium)
separating equilibrium
a market equilibrium in which different types of people buy different kinds of insurance products design to reveal their true types
self-insurance
the private means of smoothing consumption over adverse events, such as through one’s own savings, labor supply of family members, or borrorwing from friends
moral hazard
adverse actions taken by individuals or producers in response to insurance against adverse outcomes
three types of health insurance patient payments
- deductibles: individuals face the full cost of their care but only up to some limit
- copayments: individuals make some fixed payment when they get a medical service
- coinsurance: the patient pays a percentage of each medical bill rather than a flat dollar amount
nongroup insurance market
the market through which individuals or families buy insurance directly rather than through a group, such as workplace
two reasons employers provide private insurance
- risk pooling
2. the tax subsidy
risk pooling
the group of individuals who enroll in an insurance program
- allows companies to create large insurance pools with a predictable distribution of medical risk
- prevents adverse selection
two benefits of risk pooling
- absence of adverse selection
- law of large numbers: as the size of teh pool grows, the odds that the insurer will be unable to predict the average health outcome of the pool falls
tax subsidy to employer-provided health insurance
workers are taxed on their wage compensation but not on compensation in the form of health insurance, leading to a subsidy to health insurance provided through employers
medicare
a fedearl program that provides health insurance to all people over age 65 and disabled persons under age 65
medicaid
a fedearl and state program that provides health care for the poor
job lock
the unwillingness to move to a better job for fear of losing health insurance
prospective reimbursement
the practice of paying providers based on what treating patients should cost, not on what the provider spends
-forces doctors to treat their patients cost effectively
retrospective imbursement
reimbursing physicians for the costs they ahve already incurred
-removes incentives for doctors to treat their patients cost effectively
who is eligible for Medicaid?
all individuals age 18 or young at a point up to 100% of the poverty line, and children under 6 and pregnant women are covered up to 133% of the poverty line
what services does Medicaid cover?
federal rules require states to cover major services, but not prescription drugs or dental care
-all states cover drugs and optometrist services, all but one cover dental
how do Medicaid providers get paid?
states regulate the rate at which health service providers are reimbursed
-typically, most states reimburse physicians at a much lower level than the private sector
national health insurance
a system whereby the government provides insurance to all ints citizens, as in Canada, with out the involvement of a private insurance industry
legacy debt
the debt incurred by the governmetn because early generations of beneficiaries received much more in benefits than they paid in taxes
poverty line
the federal government’s standard for measuring absolute deprivation
how was the poverty line devised?
this lady named Molly started with nutritional standards for a minimally acceptable diet and applied average national foods costs to price out the cost of buying this bundle of goods for families of different sizes
- calculated that 1/3 of a families income is spent on food
- multipled that first value by 3
- its adjusted for inflation every year
problems with the poverty line
- the bundle of household goods has changed: by 2010, typical family only spent 13% of budget on food
- differences in cost of living across areas are ignored
- income definition is incomplete: the computation of the poverty rate compares an individual’s cash income to the pvoerty standard. Cash income is not a true representation of the individual’s available resources
categorical welfare
welfare programs restricted by some demographic characteristic, such as single motherhood or disability
means-tested welfare
welfare programs restricted only by income and asset levels
cash welfare
welfare programs that provide cash benefits to recipients
in kind welfare
welfare programs that deliver goods, such as medical care or housing, to recipients
benefit reduction rate
the rate at which welfare benefits are reduced per dollar of other income earned
Three sources of leakage for welfare policy
- administrative costs of enabling this transfer (roughly 10% of all TANF spending)
- higher income individuals are taxed to pay for income transfers; this taxation lowers reutnrs to work and saving and might cause higher income people to work less hard or save less
- moral hazard effects on teh poor individuals who are potential recipients of these transfters
- individuals might reduce labor in order to become poor and qualify for cash welfare
the iron triangle of redistributive programs
there is no way to change either the benefit reduction rate or the benefit guarantee to simultaneously encourage work, redistribute more income, and lower costs
how do we solve the problem of decreasing labor and moral hazard with welfare recipients?
lower the benefit reduction rate!
-not clear if this will do
3 major ways to reduce the moral hazard of welfare
- moving to categorical welfare payments
- targeting mechanisms - using ordeal mechanisms
- increasing outside options
ordeal mechanism
features of welfare programs that make them unattractive, leading to the self selection of only the most needy recipients
how is social security financed?
almost all workers in the USA pay the Federal Insurance Contributions Act tax on their earnings
- this rate is currently 6.2%, employers also pay a tax of 6.2% on these same earning
- only levied on first 110,100 of earnings
who is eligible for social security?
to be eligible, a person must have worked and paid his payroll tax for 40 quarters over his or her lifetime and must be 62 years or older
how are social security benefits calculated?
when eligible, the social security claimant receives an annuity payment that is a function of the recipient’s average lifetime earnings, hwere each month’s earnings are expressed in today’s dollars by inflating their value for increases in the wage level since the earnings occured
-usually an average of an individual’s 35 highest earning years
Ida May Fuller example of why Social Security is destined to fail
Ida May Fuller was the first beneficiary of Social Security
- she worked for a total of 3 years after the establishment of the SS system, and paid a total of $24.75 in taxes
- she lived for 35 more years after her initial payment and collected a total of $22,888.92 in SS benefits
- pretty solid investment
rationales for social security
- there’s a market failure in the annuities market
- adverse selection can lead the annuities market to fail
- individuals know more about their potentnial life expectancy than do insurers - paternalism: they are concerned that people won’t save enough for their own retirement
- according to studies, only about 55% of singles and 70% of those without a high school diploma have saved enough for retirement
in theory, what are the two effects of social security on retirement decisions?
- implicit taxation: levied on work by SS at older ages by reducing the value of SS benefits if retirement is delayed
- Gruber and Wise define the implicit tax rate from SS as the reduction in SS wealth if one continues working another year relative to the wage that could be earned by working that year - redistributive property of SS
- system results in some groups becoming richer over their life, and others becoming poorer. These changes in wealth will have income effects on retirement, as the groups that are richer use some of their wealth to buy themselves more retirement, adn the groups that are poorer work longer
what are some suggested incremental reforms to Social Security?
- raise taxes further
- extend the base of taxable wages
- raise the retirement age
- lower benefits
- reduce benefits for higher income groups
what are some fundamental reforms proposed for Social Security?
- invest the trust fund in stocks
2. privatization
principal agent problem
you pay the physician to do things in yoru best interest, but the physician may have their interests in mind…may try to give you extra services you don’t need
