Session 2 Hour 1

Question 1

Health insurance market in the US is fragmented

Answer 1

In the US, there are a variety of third party payers:

• Government-run: Medicare, Medicaid, CHIP
• Insurance companies
• Self-insured plans (employers contract directly with providers, providers provide health care services to employees, employers bear the financial risk)

Question 2

Each type of third party has its own rules as of:

Answer 2

• What it covers
• Where the money comes from
• Population covered

Question 3

Adverse Selection: Individuals know more about their health status than health insurers

Answer 3

• Sicker individuals are more likely to purchase insurance

- Individuals with higher risk are more likely to purchase insurance (i.e. genetic predisposition to cancer or smokers)

Question 4

Adverse selection is a problem for insurers:

Answer 4

If they combine individuals with dissimilar risk on the pool:

• Those with lower expected cost (healthier individuals) will get very high premiums and leave for more affordable options
• High utilizers will have relatively lower premiums, and be attracted to the plan, ultimately increasing costs and leading to losses for the insurer

Question 5

Adverse Selection: Insurers response

Answer 5

• Insurers response: premium setting based on risk

Question 6

Moral Hazard (definition)

Answer 6

• Refers to the situations in which the existence of insurance increases the probability of consuming a health service or the amount of the expenses incurred, or both

Question 7

Moral Hazard (change in behavior, what happens to premium, what is the implication)

Answer 7

• This responds to a rational behavior: individuals consume more if cost is shared with other individuals
• This excess of use makes the premium rise
• Implication: introduction of copayment and cost-sharing to reduce overconsumption associated with insurance

Question 8

Moral hazard also refers to…

Answer 8

• the change in behavior triggered by the issuance of an insurance policy.
• This increases the probability of a loss or a loss larger than the normal loss
• The insurer bears the burden of the risks, which in the long-term increases the premium
• Ex: purchasing life-insurance and going sky diving

Question 9

Healthcare Market Violations of Ideal Market Conditions

Answer 9

• Third party financing (Insurance)
• Uncertainty
• Information asymmetry
• Principle-agent relationship
• Lack of price transparency
• Lack of competition
• Barriers to entry
• Externalities

Question 10

Lack of Competition

Answer 10

Highly concentrated markets in:

• Provision of insurance
• Health care institutions
• Health care providers
• Pharmaceutical manufacturers