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Health Econ Flashcards

1
Q

Why do people demand insurance?

A

To protect against uncertainty and reduce the risk of financial loss; they are willing to pay a premium for peace of mind.

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2
Q

What role does risk aversion play in insurance demand?

A

Risk-averse individuals prefer a certain outcome over a risky one with the same expected value, so they are more likely to buy insurance.

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3
Q

What is expected utility in the context of insurance?

A

Expected utility = probability-weighted average utility across different possible income states (e.g., healthy vs. sick).

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4
Q

What is actuarially fair insurance?

A

Insurance where the premium equals the expected payout; insurer breaks even on average.

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4
Q

How does insurance work?

A

It pools risk among many individuals, allowing them to pay a predictable premium to avoid large unpredictable expenses.

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5
Q

What is full insurance vs. partial insurance?

A

Full insurance completely eliminates financial risk, making income the same in all states; partial insurance reduces but does not eliminate risk.

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6
Q

What does asymmetric information mean in insurance markets?

A

Buyers know more about their risk level than insurers, creating challenges in setting fair premiums.

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7
Q

What is adverse selection?

A

When higher-risk individuals are more likely to buy insurance, driving up costs and potentially leading to market collapse.

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8
Q

What is a death spiral in insurance?

A

When rising premiums due to adverse selection cause healthier people to exit the market, leading to even higher premiums and further exits.

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9
Q

How can we look for empirical evidence of adverse selection?

A

Compare health status or claims data of people who buy more generous insurance to those who don’t.

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10
Q

What is the RAND Health Insurance Experiment?

A

A randomized controlled trial that showed more generous insurance led to higher healthcare utilization.

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11
Q

What happened at Harvard with health insurance?

A

Harvard employees were given a choice between plans; healthier employees chose cheaper, less generous plans—evidence of adverse selection.

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12
Q

What are the axes in the Rothschild-Stiglitz model graph?

A

X-axis: income when healthy; Y-axis: income when sick.

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13
Q

What is the endowment point in the R-S model?

A

The individual’s income in each state without insurance.

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14
Q

What is the importance of the 45-degree line in the R-S model?

A

It represents full insurance—equal income in both states.

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15
Q

What is the zero profit line in the R-S model?

A

A line representing all insurance contracts where insurers break even.

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16
Q

How is an insurance contract represented in the R-S model?

A

As a point showing the income in each state (sick vs. healthy) under that contract.

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17
Q

What is a full insurance contract in the R-S model?

A

A point on the 45-degree line where income is the same regardless of health status.

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18
Q

How can we tell which contracts consumers prefer?

A

Consumers prefer contracts on higher indifference curves—more utility.

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19
Q

How is risk aversion portrayed in the R-S model?

A

Indifference curves are convex to the origin—people prefer insurance (certainty).

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20
Q

What is the feasible contract wedge?

A

The region bounded by zero-profit lines where insurance contracts are possible under imperfect information.

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21
Q

What does equilibrium look like with one consumer type and full information?

A

Everyone gets full insurance at actuarially fair prices.

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22
Q

What happens with two consumer types and full information?

A

Each group receives full insurance priced according to its risk level.

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23
Q

What happens with two consumer types and imperfect information?

A

Full insurance can’t be offered to both; insurer must design contracts to induce self-selection.

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24
What is a pooling equilibrium? Is it possible?
Both types buy the same contract—possible but unstable due to incentives to deviate.
25
What is a separating equilibrium? Is it possible? Who suffers?
Different types buy different contracts—possible but inefficient; high-risk types get worse deals.
26
How does insurer competition affect R-S model equilibrium?
Free entry prevents pooling equilibria; competition drives profits to zero, leading to adverse selection.
27
Why do robust and frail consumers have different zero-profit lines?
Frail consumers have higher expected claims, so insurers must charge them more.
28
Why do robust and frail consumers have different indifference curves?
Frail consumers value insurance more, leading to steeper indifference curves.
29
What are possible solutions to adverse selection?
Mandates, subsidies, community rating, or risk adjustment.
30
What is moral hazard in health insurance?
When insured individuals use more healthcare or take more risks because they don’t bear full cost.
31
What are the types of moral hazard?
Ex-ante: change in behavior before an event (e.g., being less careful); Ex-post: increased use of services after getting insurance.
32
Why does asymmetric information cause moral hazard?
Insurers can’t perfectly monitor behavior, so individuals have less incentive to control costs.
33
What determines the size of deadweight loss from moral hazard?
The difference between marginal cost and marginal benefit of care due to distorted incentives.
34
What determines the size of the price wedge?
How much of the cost the consumer faces; bigger wedge = more distortion.
35
Why does elasticity of demand matter for moral hazard?
More elastic demand means greater behavioral response to price changes = larger moral hazard.
36
What kinds of procedures have larger moral hazard problems?
Low-cost, discretionary care (e.g., check-ups, antibiotics).
37
What kinds of procedures have smaller moral hazard problems?
High-cost, non-discretionary care (e.g., emergency surgery).
38
What types of consumer cost-sharing help reduce moral hazard?
Deductibles, copayments, coinsurance.
39
Examples of insurer monitoring to control moral hazard?
Utilization review, prior authorization, provider networks.
40
What are the basic components of the Affordable Care Act (ACA)?
Individual mandate, insurance exchanges, Medicaid expansion, subsidies, and coverage regulations (e.g., no pre-existing condition exclusions).
41
What is consumption smoothing in the context of insurance?
It’s the idea that people prefer a stable level of consumption across different states (healthy/sick), using insurance to transfer resources from good times to bad times.
42
Why is insurance valuable for risk-averse people?
Because they prefer certainty and are willing to pay to avoid variability in outcomes; insurance smooths income and increases utility.
43
What is the difference between expected income and expected utility?
Expected income is the average monetary outcome; expected utility accounts for diminishing marginal utility and typically values certainty more.
44
How does insurance relate to expected utility?
Insurance increases expected utility by reducing uncertainty, even if expected income stays the same.
45
How is full insurance represented graphically?
As a point on the 45-degree line where income when sick equals income when healthy.
46
How is an actuarially fair premium calculated?
It equals the probability of the bad event times the payout: r = p*q
47
What happens to expected utility when p = 1 or p = 0 in insurance models?
It becomes the utility of the certain income in the sick or healthy state, respectively.
48
What does it mean if U(E[I]) > E[U(I])?
The person is risk-averse and prefers the utility of a certain income over the average utility of uncertain incomes.
49
In a graph comparing utility from expected income vs. expected utility, what does the gap between the curve and straight line represent?
It shows the loss in utility due to uncertainty — a motivation for buying insurance.
50
What is the “death spiral” in insurance markets?
It’s a feedback loop where healthier individuals drop out due to rising premiums, leading to even higher average risk and further exits.
51
How do insurers respond to the death spiral?
They raise premiums, which can further reduce the pool to only the sickest, potentially collapsing the market.
52
What are some ways to prevent adverse selection?
Mandates, subsidies, risk adjustment, community rating, or government intervention.
53
What are examples of ex-ante moral hazard?
Skipping a flu shot or engaging in riskier behavior due to having insurance.
54
What are examples of ex-post moral hazard?
Using more expensive drugs or procedures than necessary after becoming ill.
55
What determines the extent of social loss from moral hazard?
Two key factors: the extent of price distortion and the elasticity of demand (price sensitivity).
56
How does demand elasticity affect moral hazard?
Higher elasticity leads to larger changes in behavior from small price changes, increasing social loss.
57
How do coinsurance and copays reduce moral hazard?
They maintain a positive price for care, discouraging overuse by aligning consumer incentives.
58
How do deductibles limit moral hazard?
They require consumers to bear costs up to a threshold before insurance kicks in, reducing small or unnecessary claims.
59
How does insurer monitoring reduce moral hazard?
By setting gatekeeping rules, usage limits, or rewarding preventive behaviors like checkups or exercise.
60
What is the tradeoff in designing insurance plans?
Balancing consumption smoothing (insurance generosity) with minimizing moral hazard and social cost.
61
When is insurance generosity most valuable?
For large, unpredictable events (e.g. heart attack) where self-insurance is not feasible.
62
What is the “flat of the curve” in healthcare spending?
It refers to diminishing returns — each extra dollar on healthcare yields less benefit after a point.

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