Weeks 8-10 Flashcards
Prepare for final exam
About [xx%] of the U.S. population under 65 has health insurance through private or governmental programs
90%
Currently, about [xx%] of the US population remains uninsured, due to changes beginning with the [xxxx] Affordable Care Act
9%, 2014
What three tools did the PPACA make use of to ensure an increase in the coverage of insurance rates?
- Coverage through employers
- “Health Insurance Exchanges”
- Low-income medicaid insurance program expansion
Describe the logic behind health insurance
An individual who purchases health insurance pays a premium, this premium which may be more or less than they actually require in medical treatment. Risk is pooled and spread throughout the population. Overall, the sum of the premiums will exceed the sum of medical expenses.
Describe the equation for expected value
Expected value is described as the sum of all possible outcomes of X weighted by each outcome’s probability
Outline the difference between expected utility and expected income
For risk averse people, U(E[I]) > E(U[I]), preferring the utility from expected income over an uncertain income. They’ll prefer a certain outcome to an uncertain one with the same expected income
Describe the utility function for a risk averse person
U’(I) > 0, U’‘(I) < 0
Describe the costs associated with insurance
E(B) = Expected Medical Benefit
L = Maximum loading fee
Overall insurance premium (R)
E(B) + L
Define actuarially fair insurance
Actuarially fair insurance means that it’s a fair bet, and that the insurer would make zero profit in expectation
what is the meaning of a deductible?
A deductible is defined as the amount you pay for covered health care services before your insurance plan starts to pay for your care.
Describe the essential logic behind a co-insurance plan
Consumer chooses a plan with coinsurance rate c such that the insurance company will pay (1-c)% of medical bills, and the consumer will pay c percent.
What is the expected payment from the insurance company to the consumer
(1-c)p_m m, where m is the expected quantity of care
A difficulty is that the __________depends on the coinsurance of their health insurance plan
Quantity of care, or m
The dependence of quantity of care on co-insurance rate can be explained by the moral hazard principle, and the effects of the insurance coverage on demand feed back on the demand for insurance itself. Insurance companies cannot assume that m* is the same, even for consumers who choose the same plan.
Define moral hazard
Moral hazard is the tendency for insurance against loss to reduce the incentive to prevent or minimize the loss
Differentiate between natural hazard and moral hazard
Natural hazards are outside of our control, whereas moral hazards like carelessness or fraud are generally the result of decisions by humans
Ex ante moral hazard
Behavior changes that occur before an insured event (leaving the stove on, skipping the flu vaccine)
Ex post moral hazard
Behavior changes that occur after an insured event happens, rendering recovery from that event more expensive (using expensive drugs instead of generics, knee replacement surgery instead of painkillers)
Explain how health insurance creates a welfare loss for society (write)
health insurance reduces the price of medical care, effectively breaking the link between care and what a person actually gets. the result is an induced demand, people will continue to purchase care, even after the marginal cost of the care exceeds marginal benefit.
how is the welfare loss from buying medical care resolved
the welfare loss from buying more medical care offsets the welfare gains that consumers receive by reducing their financial risk. the best coinsurance rate (c) balances these two ideas.
how does co-insurance affect the consumer demand curve for care? describe the slope and elasticity.
the demand curve rotates to the right, the resulting curve is steeper and it is less elastic.
how do we approximate welfare loss from insurance
we approximate welfare loss from insurance by looking at the “triangles” formed by comparing the price line, the co-insurance price line, and the demand curve. to get an exact amount, we’d also have to multiply by the likelihood that the illness will actually occur.
relate the elasticity of demand to moral hazard
less elastic —> steeper curve —> less moral hazard –> insurance companies will want to insure
the price of insurance is ____ above the expected benefits
L, or the loading fee
how does loading fee change with co-insurance rate
high loading fee, lower co-insurance rate, higher c, smaller (1-c) or insurance company payment
define actuarially fair insurance
in actuarially fair insurance, the insurance premium equals just the expected benefits E(B)
when did the employer’s share of health insurance peak?
Peaked in 1980s, with a subsequent gradual decline in response to changes in the magnitude of tax subsidies
characterize the role of taxes in employer-provided health insurance
In employer-provided health insurance, employer provided insurance generally leads to higher net pay as the price of the insurance is paid prior to the income tax (i.e. as a deduction to the employer).
summarize the factors affecting health insurance demand
price insurance, degree of risk aversion, potential tax liability, income, probability of illness, medical care demand elasticity, patterns of insurance coverage
According to the expected utility model, a consumer seeking to maximize expected utility will select what kind of policy
They will select a policy with full coverage above the deductible, at least when losses are truly random (best plans have a co-insurance rate of about 25 percent plus an initial deductible).
the theory of demand for insurance suggests that consumers would be better of with
less complete coverage
define adverse selection
adverse selection is defined as the oversupply of low-quality goods, products, or contracts that results when there is asymmetric information
describe an adverse selection death spiral
successive rounds of adverse selection that destroy an insurance market, such that there is no way for the insurer to turn a profit in this model
if insurance companies have perfect information, what option do they have
experience rating means that an applicant or group’s medical history and claims experience is taken into consideration when premiums are determined (two curves appear on the graph)
how could insurance companies get around the lack of perfect information
insurance companies could set the limit on policies. low coverage plans are developed around the needs of healthy people, while high coverage plans are developed around healthy individuals (3 curves appear on the graph)
