L4 Flashcards
Why do markets fail in HC? (3)
1) unpredictable demand (ie. uncertainty!)
2) imperfect info
3) Costs bourne by producer, benefits enjoyed by consumer but also others too (eg. vaccines) (positive externality) (look into this further, check can explain fully) (also negative externalities too)
Where does uncertainty stem from in HC? (2)
1) time of HC use/expenditures
2) amount of HC required
Explain the ‘double-impact’ of needing HC?
High cost to individual and may often -> decreased ability to earn (tf insurance is good!)
Explain how HC insurance contracts work? (eg. UK, US< Europe)
Consumer pays insurance premium to the insurer, who then reimburses costs of HC if needed
How does risk pooling work in insurance?
It turns an uncertain large loss in any given year, into a guaranteed small loss
See and practice example in notes working out if people will or won’t demand insurance
EV: depends on their risk preferences too!
Explain the diminishing marginal utility of wealth/income?
If someone has DMUW/I, they will have a concave utility function tf will be risk-averse (draw diagram!)
How do insurers make profits?
They are risk-neutral tf accept a premium to bear the risks (see example again in notes)
2 main problems (and define) with HC insurance?
1) Adverse selection: asymmetry of information between consumer and insurer regarding health status of consumer when contract is agreed
2) Moral hazard: poor decision-making by the insured because they know they are insured against cost of getting ill
Explain how adverse selection may be a problem?
Premiums may initially reflect health risk of a insured population
BUT lower risk people may drop out of the policy since they are overpaying for their insurance. Therefore, insurers are left with a higher risk group (see death spiral example in notes)
2 solutions to adverse selection problems?
1) Compulsory health insurance (BUT leads to low-risk people subsidising the cost of high-risk people (NHS?))
2) Experience ratings - insurers use characteristics of people to set premiums for different groups
Problem with experience ratings?
May lead to ‘cherry picking’ ie. not allowing high-risk people to be insured! (some governments target this by ensuring all people who apply must be insured (sometimes all at same price too!))
2 elements of moral hazard in HC insurance, and when it occurs most often?
Occurs when HC is free/cheap at point of consumption
2 elements:
1) Less incentive to avoid poor health
2) More incentive to overconsume low value healthcare (eg. unnecessary doctor visits)
Draw diagram for different levels of coinsurance. Include the welfare loss, the 0% CI and 100% CI levels and explain why?
See notes
Explain why free/discounted HC at point of consumption is overconsumed (moral hazard issue!)?
D curve is vertical (completely inelastic) since the cost of consuming is free so a change in price makes no change to the consumption (is already being consumed at the desired level, price is irrelevant)
