lecture 4 - insurer premium setting and health plan choice

Question 1

employer based insurance

Answer 1

need to compete for contracts and after they need to compete for employees

Question 2

individual based insurance

Answer 2

just need to compete for individuals

Question 3

why do so few people change insurance plan

Answer 3

• Consumers not having easy access to key information
• Consumers not attending to readily available information
• Consumers having difficulty integrating certain types of information into decisions

“The key point is that this money left on the table is not due to risk aversion, but to frictions or biases that result in limited knowledge”.

Question 4

consumer inertia might mitigate welfare loss of adverse selection?

Answer 4

If you are going to improve decision making by giving more information  people switch  higher premiums maybe  higher risks in plan  premium dead spiral
“if premiums are allowed to adjust in response to consumer sorting, then a policy that reduces inertia by three-quarters improves consumer choices, but also exacerbates adverse selection, leading to a 7.7 percent in reduction in welfare.”

Question 5

what is consumer inertia

Answer 5

• Switching costs: Costs by switching
• Search costs: Many options available
• Inattention: not respond to the information
• Naïve present bias: you want to switch but when the moment is there you don’t do it because you don’t have time or want to put effort in it