Economics Exam 1- Health Insurance

Front 1

why do people buy insurance? (3)

Back 1

To avoid loss under uncertainty

A loss is a negative outcome

Most people are risk averse and willing to pay to avoid future loss

Front 2

examples of insurance for property loss (3)

Back 2

Car insurance
Renter’s insurance
Flood insurance

Front 3

examples of insurance for health loss (3)

Back 3

Life insurance
Health insurance
Disability insurance

Front 4

risk adverse definition

Back 4

don't like risk (there are variabilities in degree)

Front 5

2 things that affect demand for insurance (2)

Back 5

people do not insure themselves against all risks (like getting hit by lightning)- only against risks you think might happen

for some risks, no insurance is available

Front 6

people most willing to purchase insurance for what?

Back 6

People are most willing to purchase insurance for losses that are catastrophic

Front 7

does health insurance compensate you for loss of health?

Back 7

no!

but disability insurance does

Front 8

how insurance companies work (2)

Back 8

In the event of a loss, the insurance company will compensate the insured individual for that loss.

Compensation is determined by the policy

Front 9

from insurance perspective: health loss vs. other loss (differences) (3)

Back 9

Hard to quantify and define loss.

A health loss may create an ongoing need for medical care rather than a one time payment.

Health losses occur more frequently than other losses.

Front 10

describe how the insurance supply works (what companies do to create it)

Back 10

Insurance companies “pool risk” - create certainly out of uncertainty by bringing groups of people with different risks together.

Front 11

expected loss = ?

Back 11

the amount of loss x probability of the loss.

Front 12

Suppose there is a population of 100 people and there is a 1% chance that someone will require $100,000 of medical care. What is the expected loss?

explain what this means

Back 12

expected loss = $100,000 (0.01) = $1000

Each person in the population can either take the risk of getting sick and paying $100,000 or they could pool risk by having each person paying $1000 into a pool and giving the person who gets sick the $100,000 from the pool

Front 13

insurance pricing- how to they calculate premiums

Back 13

Insurance companies charge a price (premium) for insurance that is:

expected loss plus a loading fee. The loading fee covers administrative expenses plus profit

Front 14

administrative fees covers what? (3)

Back 14

underwriting, marketing, and claims processing.

Front 15

The loading fee often is ...

example

Back 15

some percent of the expected loss.

if avg expected loss is 200 then loading fee might be like 20% or something, so total premium would be 220$

Front 16

Estimates of the average loading fee for health insurance in the U.S.

Back 16

vary from 5% to over 50%.

Front 17

definition of moral hazard (2)

Back 17

(insurance induced demand): Changes in the amount or probability of loss as a result of insurance coverage.

e.g. a situation where a party will have a tendency to take risks because the costs that could incur will not be felt by the party taking the risk

Front 18

moral hazard- what happens as a result? (3)

Back 18

Changes in behavior based on the removal of risk

If you remove the risk, people won’t practice good risk management techniques.

Increased utilization in response to decreased prices

Front 19

Does health insurance coverage change the amount or probability of loss? what does it change? (6)

Back 19

yes- big issue

The probability of illness

The amount of healthcare used in the event of illness

Provider (supplier) induced demand

Increases in technology

Less incentive to “price shop"- if it's 5$ regardless of where you go who cares

Desire to get “money’s worth” from insurance (will elect to do procedures, take meds etc)

Front 20

issue of moral hazard cost-wise (4)

Back 20

increased health care expenditures from all this extra spending are passed on to pt and employers in the form of higher premiums

this results in cutting costs (less comprehensive coverage or more patient cost sharing)

or sometimes more uninsured individuals

welfare loss

Front 21

what is welfare loss and how is it caused?

Back 21

people consume goods and services that they value less than the market price of the service- like we value doc visits at 5$ but they're actually 300$- so we just buy it all

this results in welfare loss?? wtf

Front 22

demand with insurance SD curve (5)

Back 22

Assuming a given price for the service (flat supply line)

If there is co-pay…at any particular price, the amount that you are willing to buy now goes up by a certain % (
At higher prices, the co-insurance covers larger amount. At lower prices it covers less and that’s why it’s sloped weird (pivoted to right)
Where it hits supply curve is a much larger quantity

But there is an extra cost assoc. with this service- increase in the Quantity x Price is the extra amount gone/paid- but consumers don’t value this so dead weight loss is area above demand curve

Area above demand curve and below the price is dead weight loss

Insurance basically lowers price and induces people to purchase health services

what the fuck look this up

Front 23

demand with insurance SD curve- how to calc total extra cost for prescriptions wtf is total extra cost

deadweight loss

Back 23

If insurance pays 80% of the bill for Lipitor

The market quantity demanded will increase fromQ0 to Q1

The total extra cost for these prescriptions is (Q1-Q0)*P0

However, consumers don’t value these extra prescriptions that much, and the deadweight loss is the area above the demand curve and under the price

Front 24

example of adverse selection??

results from what?

Back 24

High-risk individuals are more likely than low-risk individuals to purchase insurance



Results from asymmetric information – individuals have better knowledge of their health risk than insurers.

Front 25

why adverse selection is bad?

Back 25

if you only have buying insurance because they need to spend money on health you will have a collapse of business

Front 26

when is adverse selection a big issue?

3 examples

Back 26

Is a problem when healthcare can be predicted or postponed by the consumer.

prescription drugs
elective surgery
pregnancy

Front 27

what happens to losses/premiums for insurance during adverse selection? why? (2)

Back 27

If more high-risk people than low-risk people buy insurance, the expected losses will be higher and premiums will increase.

High prices cause more low-risk people to not purchase insurance.

Front 28

2 components/types of health insurance

most health insurance have which one?

Back 28

risk removal
prepayment

both

Front 29

risk removal- why u need

Back 29

There is a risk of unpredictable catastrophic medical care costs, so there is a valid reason for purchasing insurance to avoid this risk.

Front 30

prepayment- what dis

Back 30

Most health insurance policies also cover many predictable and/or non-catastrophic medical expenses (e.g. routine physical exams, dental cleanings, vaccinations).

Front 31

if you have a 100% risk of requiring 2 dental exams per year at a cost of 75$ per exam what is the expected loss?

assuming no adverse selection, what would the premium be?

Back 31

You have a 100% chance of requiring two dental exams per year at a cost of $75 per exam. The expected loss = ($150)(1) = $150.

Assuming no adverse selection (the insurer knows you will require two dental cleanings), the insurer would charge you $150 + loading fee for the “insurance.”

Front 32

Is prescription drug coverage insurance or pre-payment? (3)

Back 32

pre-payment WTF WHY

the way most companies think about it is that it is pre-payment- high selling drugs go to chronic problem patients- oh you have high cholesterol you are going to incur this fee of statin drug over the year so we will charge you this much on your premium

chemo might be catastrophic

Front 33

why can we afford health insurance? (3)

Back 33

Health insurance often is obtained through an employer so people are shielded from the direct costs of the premium (even loading fee + pre-payment is cheaper than direct cost due to bargaining with hospitals)

Tax subsidy for health insurance benefits through an employer.

Insurers may use bargaining power to lower prices charged by health care providers.

Front 34

% of uninsured

Back 34

18 percent of the non-elderly U.S. population does not have health insurance. (low income adults)

Front 35

the uninsured: variation across states, bad things that happen if you are uninsured (2)

Back 35

The percent uninsured varies widely by state.

Poor access to health care is associated with poorer health outcomes.

Some people are underinsured (have insurance that's really crap with no catastrophic protection) and face significant health care costs if they get a serious illness.

Front 36

bulk of uninsured in terms of age/have kids or not

Back 36

most are adults without dependent children

Front 37

what is shocking though, about even people who have employer insurance?

Back 37

even people with insurance can't afford prescription drugs sometimes

Front 38

deductible vs. prepayment

Back 38

deductible- what you pay yourself

prepayment- this is not something you get a bill for/pay. just a way your insurance is structured. it is the part of your insurance that goes towards care that is expected

Front 39

HSA- what is it? (2)

Back 39

employer puts some money in account to pay for preventive stuff and your employer and you pay a small part per month for catastrophic coverage (separate from HSA)

essentially take pre-payment part out of plan and put it in the HSA to pay with cash WHAT??

Front 40

HSA criticism

Back 40

criticized because no preventative care, but HSA has kind of added limited preventative care (vaccinations, etc) into it

Front 41

single payer plan in article (down side) (2)

Back 41

boards that decide what is necessary/excluded (downside)- have to ration care

plan is based on the "avg person" so if you have some rare condition you are out of luck though you'd prob be out of luck in our current system as well

Front 42

upsides of single payer govt plan (5)

Back 42

no co pay/deductible
no dis-incentive for preventative care
Long-term, rehabilitation and dental care are included
universal coverage
pooling everything together that will make more efficient

Front 43

4 properties of HSA type plan

Back 43

high deductibles
low premiums
Tax free contributions to a HAS
have to have catastrophic coverage

Front 44

main issue with HSA

Back 44

if you have chronic condition, you may underutilize system for things you need

Front 45

3 properties of single payer plan

Back 45

Hospitals and clinics privately owned but funded by the government.

Physicians paid on fee-for-service or salary by their employer

All current government health systems would be pooled.

Front 46

HSA plan benefits (4)

Back 46

eliminates moral hazard- will not call doc to every single thing because you're in charge of your own money
cheaper
more efficient