Weeks 8-10

Question 1

About [xx%] of the U.S. population under 65 has health insurance through private or governmental programs

Answer 1

90%

Question 2

Currently, about [xx%] of the US population remains uninsured, due to changes beginning with the [xxxx] Affordable Care Act

Answer 2

9%, 2014

Question 3

What three tools did the PPACA make use of to ensure an increase in the coverage of insurance rates?

Answer 3

1. Coverage through employers
2. “Health Insurance Exchanges”
3. Low-income medicaid insurance program expansion

Question 4

Describe the logic behind health insurance

Answer 4

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.

Question 5

Describe the equation for expected value

Answer 5

Expected value is described as the sum of all possible outcomes of X weighted by each outcome’s probability

Question 6

Outline the difference between expected utility and expected income

Answer 6

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

Question 7

Describe the utility function for a risk averse person

Answer 7

U’(I) > 0, U’‘(I) < 0

Question 8

Describe the costs associated with insurance

Answer 8

E(B) = Expected Medical Benefit
L = Maximum loading fee
Overall insurance premium (R)
E(B) + L

Question 9

Define actuarially fair insurance

Answer 9

Actuarially fair insurance means that it’s a fair bet, and that the insurer would make zero profit in expectation

Question 10

what is the meaning of a deductible?

Answer 10

A deductible is defined as the amount you pay for covered health care services before your insurance plan starts to pay for your care.

Question 11

Describe the essential logic behind a co-insurance plan

Answer 11

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.

Question 12

What is the expected payment from the insurance company to the consumer

Answer 12

(1-c)p_m m, where m is the expected quantity of care

Question 13

A difficulty is that the __________depends on the coinsurance of their health insurance plan

Answer 13

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.

Question 14

Define moral hazard

Answer 14

Moral hazard is the tendency for insurance against loss to reduce the incentive to prevent or minimize the loss

Question 15

Differentiate between natural hazard and moral hazard

Answer 15

Natural hazards are outside of our control, whereas moral hazards like carelessness or fraud are generally the result of decisions by humans

Question 16

Ex ante moral hazard

Answer 16

Behavior changes that occur before an insured event (leaving the stove on, skipping the flu vaccine)

Question 17

Ex post moral hazard

Answer 17

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)

Question 18

Explain how health insurance creates a welfare loss for society (write)

Answer 18

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.

Question 19

how is the welfare loss from buying medical care resolved

Answer 19

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.

Question 20

how does co-insurance affect the consumer demand curve for care? describe the slope and elasticity.

Answer 20

the demand curve rotates to the right, the resulting curve is steeper and it is less elastic.

Question 21

how do we approximate welfare loss from insurance

Answer 21

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.

Question 22

relate the elasticity of demand to moral hazard

Answer 22

less elastic —> steeper curve —> less moral hazard –> insurance companies will want to insure

Question 23

the price of insurance is ____ above the expected benefits

Answer 23

L, or the loading fee

Question 24

how does loading fee change with co-insurance rate

Answer 24

high loading fee, lower co-insurance rate, higher c, smaller (1-c) or insurance company payment

Question 25

define actuarially fair insurance

Answer 25

in actuarially fair insurance, the insurance premium equals just the expected benefits E(B)

Question 26

when did the employer’s share of health insurance peak?

Answer 26

Peaked in 1980s, with a subsequent gradual decline in response to changes in the magnitude of tax subsidies

Question 27

characterize the role of taxes in employer-provided health insurance

Answer 27

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).

Question 28

summarize the factors affecting health insurance demand

Answer 28

price insurance, degree of risk aversion, potential tax liability, income, probability of illness, medical care demand elasticity, patterns of insurance coverage

Question 29

According to the expected utility model, a consumer seeking to maximize expected utility will select what kind of policy

Answer 29

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).

Question 30

the theory of demand for insurance suggests that consumers would be better of with

Answer 30

less complete coverage

Question 31

define adverse selection

Answer 31

adverse selection is defined as the oversupply of low-quality goods, products, or contracts that results when there is asymmetric information

Question 32

describe an adverse selection death spiral

Answer 32

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

Question 33

if insurance companies have perfect information, what option do they have

Answer 33

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)

Question 34

how could insurance companies get around the lack of perfect information

Answer 34

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)