Health Economics
14th Edition
ISBN: 9781137029966
Author: Jay Bhattacharya
Publisher: SPRINGER NATURE CUSTOMER SERVICE
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Chapter 7, Problem 15EQ
To determine
Explain the standard model and real world insurance markets work.
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Health insurance is normally seen as a good that is most valuable to sick people, since health expenditures are highest for the sick. Yet, in the basic insurance model discussed in this chapter, actuarially-fair health insurance is worth nothing to people who are certain to become sick (p = 1). Why does the standard model produce this result? How is this different from the way real-world insurance markets work?
Indicate whether the statement is true or false, and justify your answer.In real life, investments in health can generate long-lasting benefits, but the Grossman model neglects this aspect of health.
One major premise of the Rothschild-Stiglitz (RS) model is that there is a perfectly competitive market for health insurance. Suppose instead that the market is not perfectly competitive, and in fact competitor firms have a hard time entering the market. Could a pooling equilibrium occur in this case? What is it about competition that prevents pooling in the RS model? No formal proof is necessary, but do make your reasoning clear. Evaluate the following statement: competition in health insurance markets is harmful.
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- One of the key provisions of the Affordable Care Act was the ensuring coverage for “pre- existing conditions,” which had formerly been excluded from insurance plans as people with known medical conditions that will require treatment with certainty, the costs of which are virtually guaranteed to be more than the premiums that insurance companies could charge Suppose we have a population of patients with different health profiles, so that the cost of future treatment X is uniformly distributed on the interval [0, 1000], X˜ ∼ U [0, 1000]. Suppose that we have an insurance company that is bound to offer the same plan to all customers who wish to buy it and cannot deny coverage based on pre-existing conditions. The market for insurance is competitive, so that the insurance company must set its premium equal to the expected future payout. P = E[X˜] Another key provision of the ACA was the “individual mandate,” which required…arrow_forwardUse a two-state model with clearly marked labels to show the following statements: a) People with different risk profiles (ie., risk-secking vs. risk-neutral vs. risk-averse) have different expected utility curves. b) A risk-neutral person can be indifferent to a full insurance (compared to no insurance). c) A risk-seeking person does not like the idea of diversification d) For-sure outcomes with higher payoffs are preferred to for-sure outcomes with lower payoffs.arrow_forwardAn empirically testable hypothesis for additional health care expenditure as an investment rather than as an expense is: a. If an increase in health care expenditure today results in an increase in productivity tomorrow, then health careexpenditure has an investment effect. b. If an increase in health care expenditure today results in an a rise in health care stock prices, then health care expenditure has an investment effect. c. If an increase in health care expenditure today results in worse health outcomes today, then health care expenditure has an investment effect. d. If an increase in health care expenditure today results in a more competitive health care market tomorrow, then health care expenditure has an investment effect.arrow_forward
- Which type of medical services suffers LEAST from the uncertainty problem? preventative services surgeries medical testing prescription drugsarrow_forwardIndicate whether the statement is true or false, and justify your answer.In an actuarially fair insurance contract, the insurance premium equals the probability of sickness times the payout amount.arrow_forwardWhich of the following is NOT a defining characteristic of the Beveridge model? a. universal, public health insurance b. community rating c. publicly provided health carearrow_forward
- It was taught that liability insurance would undermine the tort system, which has as its central theorem the concept that the individual responsible for injuring another should be made to pay for that injury. Do you think the existence of liability insurance causes one to be less careful than he or she might otherwise be?arrow_forwardIndicate whether the statement is true or false, and justify your answer.Under the typical assumptions of the Rothschild–Stiglitz model, there is nothing that an insurance company can do to distinguish between robust and frail customers.arrow_forwardIndicate whether the statement is true or false, and justify your answer.The Rothschild–Stiglitz model predicts that people who own life insurance should have fewer unobserved traits (that is, unobserved by insurance companies) that lead to a higher risk of death when compared against people with the same level of income but who do not own life insurance.arrow_forward
- Indicate whether the statement is true or false, and justify your answer.In the framework of the Grossman model, an individual’s level of health is completely controlled by her actions. Thus, in any given period, an individual is unconstrained in her choice of health status.arrow_forwardWhich is not an example of asymmetric information? Group of answer choices A customer not knowing which insurance plan is best A client making a purchase of a used private airplane of unknown condition A mail carrier making her deliveries An insurer not having the full information about a client’s drug use A tree service recommending needless pruning on fruit trees is an example of: Group of answer choices adverse selection. mutually beneficial trades. moral hazard. a trade fallacy.arrow_forwardConsider two individuals whose utility function over wealth I is ?(?) = √?. Both people face a 10 percent chance of getting sick, and foreach the total cost of illness equals $50,000. Suppose person A has a total net worth of $100,000, and person B has a total net worth of $1,000,000. Both people have the option to buy an actuarially fair insurance contract that would fully insure them against the cost of the illness. a. Using expected utility calculations, show that person A would certainly buy full, actuarially fair insurance. b. Suppose an insurance company wants to maximize profits and wants to charge each customer the maximum price they are willing to pay. How much should the insurance company charge each client so that both buy the contract? c. What is surprising about your result in part b? What does this tell you about how insurance companies may be pricing health insurance contracts in the real world?arrow_forward
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