Module 4

Question 1

Sources of Market Failure in Health Insurance

Answer 1

Adverse selection, Increasing Returns to Scale, Moral Hazard

Question 2

Consumer Adverse Selection

Answer 2

Selection of insurance considering the price of health insurance (their premium), their budget, and their expected health care costs for the insured period

This increases EC (expected cost)

Question 3

Producer Adverse Selection

Answer 3

Segmenting the market, offering those with demonstrably low risk lower premiums, those with seemingly average expected costs a higher premium, and perhaps refusing to cover those with a history of high health care costs all together.

Question 4

Risking pooling is significant because

Answer 4

With a larger group, decreases variation in cost experienced by an insurer.

Question 5

Producer adverse selection is market failure for ___ because _____

Answer 5

Low risk; imperfect info - low risk doesn’t want to pay a lot and insurer doesn’t know who low risk people are (causing EC to rise)

Question 6

Potential solution to adverse selection

Answer 6

Insurance mandate, regulations towards insurance to cover preexisting conditions, healthcare for everyone through taxes, government owned hospitals and employed practitioners through taxes

Question 7

Increasing Returns to Scale

Answer 7

Also known as (economies of scale)

Average costs decrease as number of insured increases (natural monopoly).

So one large insurer can provide same coverage at lower cost than small insurers. However, doesn’t mean that insurer would pass on savings as lower premiums

Question 8

Moral Hazard

Answer 8

Having insurance increases expected cost that has been insured against.

Question 9

Consumer moral hazard

Answer 9

Consumer agrees to or asks for more healthcare bc they have insurance

Question 10

Producer moral hazard

Answer 10

Practitioners don’t know how much services cost, but have authority to tell it. Also fee by service

Question 11

Moral hazard - insurance does what to supply/demand?

Answer 11

Increases demand and therefore price. Too much HC is used

Question 12

What would full free insurance do?

Answer 12

Even more unnecessary HC; demand will be inelastic (straight up and down line);doctors will be gate keepers

Question 13

No consumer sovereignty in HC because

Answer 13

Supplier induced demand, insurance companies determine demand when they decided how much to cover for treatment, doctors determine own supply