Skeleton Notes #9

Question 1

What is a pre-requisite for thriving, functioning, competitive markets?

Answer 1

the free-flow of information

Question 2

What has the power to compromise or destroy markets?

Answer 2

Information Asymmetries

Question 3

Where there is no free-flow of information, and one party might be able to use an information advantage to enter into exchanges that benefit that party at the expense of another

Answer 3

Information Asymmetries

Question 4

What is adverse selection?

Answer 4

An information advantage that a buyer/seller has that gives them the ability to misrepresent a good/service/themselves

Question 5

During adverse selection a person has incentive to _____________ when they buy insurance. Left unchecked an insurer that took on the customers will see that health costs are high and have to ___________. As a result the ________ people will keep insurance while the _____ people will leave. This leads to a _____ where only the unhealthiest people carry insurance.

Answer 5

hide costly health behaviors

raise premiums

unhealthiest

healthiest

death spiral

Question 6

Why does a moral hazard occur?

Answer 6

Due to a lack of information about how/why someone behaves in a potentially harmful way – certain services/goods may lower incentives for healthy behavior

Question 7

Adverse selection arise due to an inability to ______________. For instance if potential buyers do not know the real _______ of any used-car at a dealership

Answer 7

trust the quality
quality

Question 8

In adverse selection a dealer sells cars at market price P. The seller is aware of the varying quality of the cars. At the market price P, they will only offer the cars of ________ that earn them a ____. They will not offer the ________.

Answer 8

Lower quality
profit
higher quality cars

Question 9

over time the market learns that only cars of a certain __________ are available, and demand for these cars falls, leading to _____ P

Answer 9

lower quality
lower

Question 10

When demand for these cars falls, the seller responds by offering only the ___________. Buyers later respond with even less ______. This continues leading to ________

Answer 10

lower quality cars
demand
market collape

Question 11

Market collapse is the problem of ___________, where one party has incentives to __________ of their product

Answer 11

adverse selection
misrepresent the quality

Question 12

(adverse selection prediction) riskier people will seek

Answer 12

more coverage

Question 13

(adverse selection prediction) insurance companies will charge bulk markups for

Answer 13

additional coverage

Question 14

(adverse selection prediction) insurance pools will unravel leading to

Answer 14

death spiral

Question 15

A person who is higher risk is more willing to pay ___________ for insurance

Answer 15

more/higher premiums

Question 16

if only people who participate in an insurance program are all high risk, _____ will rise, ______ will rise, and a _______ is possible

Answer 16

costs
premiums
death spiral

Question 17

Insurers will attempt to account for this risk by _______ the price as someone attempts to buy more insurance

Answer 17

increasing

Question 18

if insurance pulls unravel, this leads to a

Answer 18

death spiral

Question 19

A _________ person is more willing to pay higher premiums for insurance. If the only people who participate in an insurance program are all __________, costs will _____, premiums will _____, and a __________ is possible

Answer 19

higher risk
high risk
rise
risk
death spiral

Question 20

insurers will attempt to account for this risk by ________ the price as someone attempts to buy more insurance. This is a bulk markup where someone is charged more (per unit) when they buy/use __________.
This is unlike the typical bulk discount in toilet paper or other goods in large quantities where you pay______(per unit) the more you buy.

Answer 20

increasing
more insurance
less

Question 21

A death spiral played out at Harvard University. LESS healthy subgroups will select__________ because they are more likely to need it. Healthier subgroups will ________ of higher-priced insurance because they are unlikely to need it.

Answer 21

HIGHER-priced insurance
OPT UT

Question 22

segmenting a pool of unhealthy people into their own insurance is the first step to a?

Answer 22

collapse of that market (death spiral)

Question 23

when it comes to death spirals, the ____________ predicts that the market will survive if there’s demand, a price ceiling doesn’t work, government regulation helps quality.

Answer 23

Akoroff Model

Question 24

According to the Akoroff Model the market will survive as there is a high __________ for the good or service. Even at a very _________, people will spend money on inelastic goods.

Answer 24

need/demand
high price

Question 25

According to the Akoroff Model, a _________ doesn't work and likely makes the problem worse. THis government law that keeps the price of a good from rising keeps car or insurance prices under a certain level. For used cars, this will only serve car dealers to take out the top quality cars and leave only those under the price cap. The same for insurance companies, they will make the low-risk plan unappealing to high-risk people.

Answer 25

price ceiling

Question 26

According to the Akoroff Model, government regulation can help by having ____________. Having these in the car market would disallow dealers from selling a car unless it meets certain standards. they would have to invest in a bit in fixing the car, then can sell it at a higher price that is indicative of the cars _____________.

Answer 26

quality standards true quality

Question 27

When talking about unknown quality in the insurance market, we are talking about the __________ of the Market. Just as low-quality care would be rejected in the market, ____________ would be rejected in the insurance market.

Answer 27

sick-level high-risk customers

Question 28

Despite the problem of adverse selection used-car dealerships still operate and insurance markets do not all __________. There are a number of reasons why markets still function in spite of the _______________.

Answer 28

spiral out of control information asymmetry

Question 29

Potential insurance customers may believe they are not as _________ as they actually are, they do not attempt to over-insure. OVERCONFIDENCE can be a countervailing force against ___________, since they misrepresent their own risk they underinsure.

Answer 29

unhealthy adverse selection

Question 30

potential customers know that they are unhealthy, but do not act on their knowledge by trying to get better _________. They may not think it is worth the bother, even if they could potentially find a _________.

Answer 30

insurance coverage good deal

Question 31

No information asymmetry exists if insurers can _________ the actual health risk of a person. If this is the case, then they can offer prices that account for the added ________.

Answer 31

predict risk

Question 32

If an insurance knows ones ____________, they have a good idea of the future risk of that person.

Answer 32

pre existing conditions

Question 33

An insurer may be likely to market and target relatively ____________ for a certain age group, an insurance company is interested in having a ___________ of customers

Answer 33

healthier people healthier pool

Question 34

because people are ____________, they are likely to buy insurance. In fact, if one is risk averse in one area of life, they may be risk averse in ___________, the people who are making the best health decisions may also be the ones most likely to ____________

Answer 34

risk-adverse many areas buy insurance

Question 35

advantageous selection where the least risky are most likely to buy insurance may also be a ___________ against adverse selection

Answer 35

countervailing force

Question 36

A healthy insurance program is __________ having lots of people that are paying into the system and relatively few using it.

Answer 36

diverse

Question 37

Adverse selection poses a risk to __________, it helps explain why insurance companies want to know information about ____________.

Answer 37

diverse pulling pre-existing conditions

Question 38

If government outlawed insurance companies from learning about pre-existing conditions then?

Answer 38

insurers must find a different way to achieve a diverse, large pool in the insurance

Question 39

One way to create a diverse insurance pool is common in the US, to ____________. All ages, safe/risky, are in the employers pool, ____________ costs.

Answer 39

to link insurance to the employer reducing

Question 40

The US government further incentivizes employees to take __________ from their __________because the value of it is not taxed

Answer 40

insurance employers

Question 41

A second strategy is to have ___________, where everyone is in the same insurance programs. As described by the Rothschild-stiglitz Model, this means that ___________ get a discount and the healthy pay _______ for insurance

Answer 41

one-universal pool frail/risky people more

Question 42

What ideas all build the concept of adverse selection

Answer 42

Pre-existing conditions universal care insurance mandates

Question 43

Go back to the previous modeling exercise and look at question 4 (everyone pays premium = $65,000). It turns out that you have 100 people like Lena and 100 people like bree (with their same probabilities of being sick - lena has a 10% chance and bree a 80% chance). How many people will be healthy in this scenario? how much do you make on them altogether

Answer 43

Pg 8 of completed Skeleton 10

Question 44

Go back to the previous modeling exercise and look at question 4 (everyone pays premium = $65,000). It turns out that you have 100 people like Lena and 100 people like bree (with their same probabilities of being sick - lena has a 10% chance and bree a 80% chance). How many people like lena are sick? how much in premiums do you get altogether? how much do you pay out altogether?

Answer 44

Pg 8 of completed Skeleton 10

Question 45

Go back to the previous modeling exercise and look at question 4 (everyone pays premium = $65,000). It turns out that you have 100 people like Lena and 100 people like bree (with their same probabilities of being sick - lena has a 10% chance and bree a 80% chance). How many people like Bree are sick? how much in premiums do you get altogether? how much do you pay out altogether?

Answer 45

Pg 8 of completed Skeleton 10

Question 46

What does a price distortion product created by insurance do?

Answer 46

Lower the cost of risky behavior to the individual

Question 47

What kind of demand is price sensitivity?

Answer 47

elastic

Question 48

Suggests that one changes decisions when the price of risky behavior changes

Answer 48

price sensitivity

Question 49

if one is price sensitive, then they are induced to switch toward _________. it is an incentive to be less _______

Answer 49

More expensive treatments (covered by plan) frugal

Question 50

What kind of information is there about an individual's risk aversion?

Answer 50

asymmetric

Question 51

More risk-seeking individuals are the ones that are more _____________

Answer 51

price sensitive

Question 52

Regarding moral hazard, we are interested in instances when insurance and health product/service loosens the buyer's tendency to _________. It creates an incentive to act _____ and worry less about the ____ of losses

Answer 52

avoid risk riskier cost

Question 53

occurs when a product/service insuring against an event changes one's behavior in a way to make that event more likely

Answer 53

ex ante moral hazard

Question 54

occurs when a product/service sways one toward more expensive recovery options after an event takes place

Answer 54

ex post moral hazard

Question 55

If risky behavior like hang gliding is responsive to the ______ (meaning it is demand ____) then covering such behaviors ______ of getting an injury. This creates a large __________ that will likely be passed on to everyone else

Answer 55

price of injury elastic lowers the price social costs

Question 56

Interpret the graph on the left (skeleton 9.14)

Answer 56

Moral hazard leads to either greater risky behavior or more costly but unnecessary treatments. This has the effects of lower costs to the individual exhibiting the moral hazard but higher costs to society. (negative externality)

Question 57

Interpret the graph on the right (skeleton 9.14)

Answer 57

Likely generates social benefits by a greater number of patients receiving necessary treatment. If the barrier to treatment was income or lack of insurance then the insurance product is increasing access to the treatment, as opposed to inducing moral hazard

Question 58

Many authors make the hard cast for moral hazard, limiting discussion to the price-elastic example that ________________. However this assumes that consumers are acting in the strictest sense of _________

Answer 58

insurance lowers price to injury, leading to more risky behavior rationality

Question 59

People face true constraints to ______. They may not be initially using care because they _______, not because the price is too high.

Answer 59

accessing do not have access

Question 60

_______ become more and more _____ as they go longer without receiving care. Empirical studies show that people in the US do this quite often due to ________ and previous ___________

Answer 60

Untreated health problems costly uninsurance catastrophic health expenses

Question 61

What are the effects of untreated health problems?

Answer 61

large public cost, costlier emergency rooms, higher insurance and healthcare for everyone

Question 62

Based on the graph on the right (skeleton 9.14) the price of care has _____ to do with the demand for treatment and that demand is created by ______. Rather than leading to moral hazard by lowering price of treatment insurance increases _________ by making it more _____

Answer 62

little inheritance access affordable

Question 63

It is perhaps incorrect to assume that people always act _____, looking for opportunities to take advantage of insurance. The policy answer that many come up with is to simply _________________. For example: ______

Answer 63

rationally not allow the price distortion Narcan

Question 64

Just as there are social costs to moral hazard, there are social costs to?

Answer 64

Not treating health issues and leaving them to get worse

Question 65

Remember how I said wouldn't of bought the nicest sunglasses had they not been ___________? If I have to pay a little, then my overuse of care and their associated costs will _______.

Answer 65

covered by insurance fall

Question 66

Look at graph A on ch9-16, this shows __________ incurs a ______________ (assumed to be from ____________)

Answer 66

full coverage large social cost unnecessary care

Question 67

In graph B on ch9-16, the patient has a __________... this reduction of the quantity of care demanded ____________.

Answer 67

copayment price P, moving the market from Point A to Point B lowers social costs

Question 68

Compare graph A on ch9-16 with a vertical demand curve to graph C. Effective demand is vertical with full insurance because the patient is ___________. In graph C, the coinsurance percentage rises, and the effective demand shifts towards the ____________.

Answer 68

not price-responsive uninsured demand

Question 69

True or False: When the price elasticity of demand for health care is zero, health insurance coverage induces no moral hazard. Explain?

Answer 69

True --> patients will not respond to lower cost of care

Question 70

True or False: An uninsured patient who incessantly visits his doctor because he always thinks he is getting sick is an example of moral hazard. Explain?

Answer 70

False --> does not force the price distortion (pays to do this anyways)

Question 71

True or False: A woman who uses her fireplace only after she buys homeowners insurance is an example of moral hazard. Explain?

Answer 71

True --> she changes behavior do to insurance (price of colamity falls)

Question 72

True or False: A previously-uninsured man who enrolls in his workplace health insurance plan after being diagnosed with multiple sclerosis is an example of moral hazard. Explain?

Answer 72

False --> disease/behavior not related to insurance. But this is adverse selection

Question 73

True or False: if a health insurance company could somehow monitor everything a customer does and thinks, it could create a full-insurance contract with no moral hazard. Explain?

Answer 73

True --> Information asymmetry would go away

Question 74

True or False: It would be easy for private health insurances to eliminate moral hazard by redesigning insurance contracts, but they ae prevented from doing so by strict government regulations (at least in most developed countries). Explain?

Answer 74

False -->Information asymmetry (not regulation) is the problem, even in unregulated markets

Question 75

True or False: Moral hazard is mostly a problem in countries with universal insurance programs like the United Kingdom.

Answer 75

False