ECO440H5 Chapter Notes -Centers For Medicare And Medicaid Services, Utilization Management, Copayment

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emeralddog909

15 May 2014

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Actuarially fair premium: an insurance premium that is set where the expected payouts equal the premiums paid by the insured (plus the cost of administration) Co-insurance: the percentage of a medical bill that the insured must pay, after deductibles and co-payments are met. Community rating: insurance premiums that are based on the pooled risk of a community. All indivduals in the community pay the same premium, regardless of claims experience or personal level of risk. Co-payment: a specified amount of the insured must pay for each received service that can vary by service. Deductible: a fixed amount of a health care charge that the insured must pay before the insurer begins payment for all or part of the remainder of the costs. Experience rating: insurance premiums are based on the claims experience or risk level, such as age, of each insured group.

Related Questions

Rosa has a 10% chance of getting sick in the next year. If she gets sick, her medical bills will amount to $500. She has a wealth of $1,000. Suppose she has the utility function u(x) = x0.5, where x is her net wealth at the end of the year.

(a) Calculate Rosa's risk premium.

(b) What is the most that Rosa is willing to pay for an insurance policy that fully covers against

her loss?

(c) Some insurance policies have deductibles. A deductible is an amount of a claim not covered by insurance; it's a fixed portion of the medical bills that the insured person must pay in order to make a claim to their insurer. Suppose Rosa's insurance company provides two plans. Plan A has zero deductibles but charges a high premium. Specifically, Plan A charges $55 for $500 of coverage. Plan B has a deductible of $K, where K<500, but charges a premium of just $(55 - .1K). Suppose K =b $300. Will Rosa purchase insurance and, if so, which plan? Show this mathematically.

viridiansheep800

Suppose there are two types of people who need health insurance; high-risk and low-risk consumers. High-risk consumers have a relatively high probability of needing expensive medical care and on average incur $2,000 of medical expenses per year. The high-risk consumers would be willing to pay up to $2,500 for insurance that covers all their medical bills. Low-risk consumers would be willing to pay up to $1,400 for full-coverage insurance and on average would incur on average $1,200 in medical bills. Assume 1/3 of all consumers are high-risk and the remaining 2/3 of consumers are low-risk. Consumers know whether they are high-risk or low-risk. The insurance company knows 2/3 of all consumers are low-risk but cannot identify which consumers are low-risk.

If all consumers bought insurance, what price must the insurance company charge to break even in expectation? That is, what price must the insurance company charge so that the expected payments equals the premium?

Which consumers would purchase insurance at that price?

Are there wealth-creating transactions that are not consummated because of the information asymmetry?

If the low-risk consumers were willing to pay $1,500 for the insurance, how would your answers to questions 2 and 3 change?

1. If all consumers bought insurance, what price must the insurance company charge to break-even in expectation? That is, what price must the insurance company charge so that the expected payments equal the premium?

2. Which consumers would purchase insurance at that price?

3. Are there wealth-creating transactions that are not consummated because of the information asymmetry?

4. If the low-risk consumers were willing to pay $1,500 for the insurance, how would your answers to questions 2 and 3 change?

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ECO440H5 Chapter Notes -Centers For Medicare And Medicaid Services, Utilization Management, Copayment

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