Unit 4

Question 1

Adverse Selection

Answer 1

– hidden type (one side of the market doesn’t observe the type of the other side)

this hidden type (person with expensive health care) might join an insurance pool and it can effect the operations of a insurance company so it will either close/end or raise premium; they need healthy people to pay for the sick

Question 2

Examples of adverse selection

Answer 2

examples of _____:
apples at the market (same taste, same smell but more expensive)

roof repair (not obvious who is better/worse)

healthcare pool: the more expensive person joining and effecting the rest of the group

Question 3

What do insurance companies need to exist?

Answer 3

healthy people to help pay for the sick

Question 4

Death spiral

Answer 4

(death of the market) because of adverse selection a spiral happened where ABCD became uninsured

 Premiums (something starts the cycle to increase the premium (maybe sick per joins (risk pool) or price of healthcare increased over time)
 Healthy people drop out (so insurance company needs to raise premium)
-people become voluntarily uninsured

Question 5

Example of death spiral

Answer 5

Example of ____

All-you-can-eat restaurants (When people leave, the price goes up..)

universal healthcare (healthcare is paid through taxes or somewhere; someone is paying for it)

Harvard changing the way it subsidized insurance for employers (expenses lead to higher premiums)

Question 6

Strategies to combat adverse selection

Answer 6

o Encourage healthy, discourage sick
o Charge different prices based on healthcare utilization
o Focus on Large Employers

Question 7

How do insurers avoid death spiral by charing different prices to different people

Answer 7

Charge different prices to different people based on what they know (higher risk, the price goes up); adjusting to the risk ; change different prices based on healthcare utilization

example: car insurance - when you get in an accident, price goes up. Teenagers are more at risk, therefore they are more expensive

Question 8

How do insurers avoid death spiral by attracting healthy customers (via favorable selection)

Answer 8

o Cannot distract sick customers from joining (pre-existing conditions) by stopping offering certain benefits

o Pays/reimburses for gym membership (to attract healthy customers)

 **They do this to attract the healthy type into their plan ; attract the kind of person who chooses to go to the gym = low healthcare cost

Question 9

How do insurers avoid death spiral by focusing on large employers

Answer 9

 People come together and form a large pool of risk.
 In this large pool, people are not coming together based on health, but for other reasons (usually) unrelated to their health. As a result, some are healthy and some aren’t, and this mix balances out in the end.
 Insurers hope that people do not join an employer because of healthcare, but because they want to work there. This prevents adverse selection.

example of large employer: columbia

Question 10

How does government policy try to avoid a death spiral?

Answer 10

mandates

Question 11

Mandate

Answer 11

everyone must be insured, you cant drop out of the market ; forcing healthy to buy insurance

o Gets rid of the death spiral while the premiums can still go up

Examples: Affordable Care Act & Massachusetts mandate in 2007

If the mandate is combating adverse selection; forcing healthy people to buy insurance —> The people who just joined should be healthier than the people who were insured before the mandate

Question 12

What examples would the government intervene with a mandate?

Answer 12

Government would intervene with a ______ for

1. Insurers charging different prices to different consumers might not avoid a death spiral if the insurer can’t set the prices very well.
2. Focusing only on large employers is fine, but it leaves people working at small businesses or people who are unemployed out of luck.
3. Attracting the healthy or deterring the sick might help the individual plan, but is problematic if all plans start following their lead.

Question 13

What is the importance of individual mandate?

Answer 13

o Changes in Spending

o Changes in insured population demographics

Question 14

The government can prevent adverse selection by implementing a mandate which requires everyone to buy health insurance.

How would this prevent adverse selection?

Answer 14

o Recall that adverse selection occurs when the healthy drop out of the insurance market. And we need the healthy to pay for the sick.
o A mandate does not allow the healthy person to drop out, so adverse selection is resolved.
o What’s interesting is that many people think the goal of a mandate is to provide health care access to all. While that is true, it also serves a dual role of eliminating adverse selection.

Question 15

Affordable Care Act Individual Mandate

Answer 15

o The individual mandate states that everyone must buy health insurance or pay a fine. The fine is high enough to make it worthwhile to get insurance.
o This discouraged healthy people from leaving and kept premiums down.

Question 16

Before the U.S. passed the ACA, Massachusetts passed its own version in 2007.

Answer 16

The 2007 mandate stated that everyone in the state must buy health insurance.

Before the mandate, the average age of new enrollees was ~45, but after the mandate, the age of new enrollees was ~4 years younger. And we know age is a good proxy for health status.

Also, the new enrollees had lower diagnosis of chronic illness and lower health care expenses.

This study provides evidence consistent with adverse selection, and that the mandate is helping to solve it.

Question 17

It is important to think about how insurance companies deal with costs associated with mandates.

Answer 17

1. You might think that such a law is unambiguously good. You force the employers to pay for the health insurance, and then their employees get health care without having to pay for it.
2. The effect of a mandate might not be as simple as you would think. Just because the employer is supposed to pay for health insurance, doesn’t mean that employers bear the cost.
3. The employer will pay for the health insurance—it has to—but it might end up cutting its employees’ wages afterwards, as a result.

Example: maternity benefits (firm didnt bear the cost of maternity benefits. Instead, they passed the cost onto women through lower wages.)