SOLUTION: JNC Asymmetric Information and Agency Discussion


Health Economics Chapter 8 Demand and Supply of Health Insurance Tianxu Chen Outline • • • • • • What Is Insurance? Risk and Insurance The Claim for Insurance The Supply of Insurance The Condition of Ethical Hazard Health Security and the Efficient Aldregs of Resources • Allowance Transfer Proceeds of Insurance • Conclusions WHAT IS INSURANCE? A Simple Example • Consider a club after a while 100 congruous components. It seems that environing uniformly a year one of the 100 components gets indisposed and incurs heartiness foresight absorbs of $5,000. The impingement of ailment seems to be haphazard. Club components, worried environing virtual damagees due to ailment, painser to infer $50 from each component and put the $5,000 in the bank for safekeeping and to realize a pigmy curiosity-behalf. If a component becomes ill, the stock is used to pay for the matter. This, in a nutshell, is security. The components bear remunerated $50 to avoid the surrender or hesitation, notwithstanding minute, of having to pay $5,000. Desirable Characteristics of an Insurance Arrangement 1. The compute of secured should be enlightened, and they should be fractionsly exposed to the virtual damage. 2. The damagees mature should be restricted in time, assign, and whole. 3. The hapjeopard of damage should be measurable. 4. The damage should be inherent from the viewapex of the idiosyncratic who is secured. WHAT IS INSURANCE? • Security generally reduces the variability of the allowances of those secured by pooling a enlightened compute of race and bountiful on the principle of the law of enlightened computes. Insurance vs. Social Insurance • The council programs are • Security is granted security programs after a while the through dispenses in which council as securer and are buyers secure themselves distinguished by two features: athwart worthy truths after a while - Premiums (the wholes remunerated by probabilities that can be purchasers) are heavily and frequently estimated statistically. completely (as in the condition of Medicaid) subsidized. - Participation is constrained according to council-set eligibility rules. Insurance Terminology • Premium, Coverage—When race buy security policies, they typically pay a attached douceur for a attached whole of coverage should the truth appear. • Cosecurity and Copayment—Many security policies, particularly in the heartiness security diligence, claim that when truths appear, the secured idiosyncratic divide the damage through copayments. This percentage remunerated by the secured idiosyncratic is the cosecurity objurgate. After a while a 20 percent cosecurity objurgate, an secured idiosyncratic, for pattern, would be liable (out of crib) for a $30 copayment out of a $150 charge. The security troop pays the rest. More Security Terminology • Deductible—With frequent policies, some whole of the heartiness foresight absorb is remunerated by the secured idiosyncratic in the conceive of a deductible, irrespective of counterfeitsurance. In a wisdom, the security does not apportion until the consumer pays the deductible. Deductibles may be applied inland idiosyncratic claims, or, frequently in the condition of heartiness security, they may be applied simply to a sure whole of aggregate score in any attached year. • Exclusions—Services or conditions not mature by the security system, such as cosmetic or experimental treatments. Still Past Insurance Terminology • Limitations—Maximum coverages granted by security policies. For pattern, a system may supply a completion of $3 darling period coverage. • Pre-Existing Conditions—Medical problems not mature if the problems awaited precedent to issuance of security system. Examples hither authority grasp pregnancy, cancer, or HIV/AIDS. • Pure Premiums—The actuarial damagees associated after a while the events entity secured. • Loading Fees—General absorbs associated after a while the security troop doing persuadeing, such as sales, advertising, or effect. Deductibles and Coinsurance • Deductibles and cosecurity may direct to desirable economic consequences. Why? • The claimment of a copayment constitute consumers past bsurrender to differences in the true absorbs of the matter they are purchasing, and deductibles constitute secured race past cognizant of the issues of their actions. RISK AND INSURANCE Expected Value • Believe Elizabeth considers liberal a diversion in which a counterfeit get be flipped. If it comes up heads, Elizabeth get win $1; if it comes up tails, she get win dot. • After a while an upequitable counterfeit, the verisimilitude of heads is onehalf (0.5), as is the verisimilitude of tails. The expected value, rarely enumerated the expected requite, is: ER = (verisimilitude of heads) x (requite if heads, $1) + (verisimilitude of tails) x (requite if tails, 0) = $0.50 In General • After a while n products, expected prize E is written as: E = p1R1 + p2R2 + … + pnRn • whither pi is the verisimilitude of product i, (that is p1 or p2, through pn) and Ri is the requite if product i appears. The sum of the probabilities pi resemblings 1. Actuarially Untarnished Security Policy • When the expected favors remunerated out by the security troop are resembling to the douceurs enthralled in by the troop the security system is determined an actuarially untarnished security system. • In awaitence, security companies must to-boot cover subjoined administration and afhonorable absorbs to break equable, but the specification of an actuarially untarnished system supplys a benchmark in talking environing insurance. Marginal Advantage of Plenty and Risk Aversion • Now believe that the counterfeit flip in the former pattern is radical so that the counterfeit flip yields $100 or dot, but Elizabeth is now asked to pay $50 to enact. • This is an actuarially untarnished diversion but Elizabeth may elect not to enact owing the disadvantage of losing currency may exceed the advantage of alluring a resembling whole. Utility of Wealth • The advantage of plenty administration pictured to the equitable exhibits diminishing final advantage and describes an idiosyncratic who is surrender loath, that is, get not conimmovable an actuarially untarnished bet. Purchasing Insurance • Believe that Elizabeth can buy an security system absorbing $1,000 per year that get maintain her plenty irrespective of her heartiness. • Is it a amiable buy? We see that at a net plenty of $19,000, which equals her primal plenty minus the security douceur, her certainty advantage is 198. Elizabeth is emend off at apex D than at apex C, as paraden by the truth that apex D gives the loftier advantage. Figure 8-1 Aggregate Advantage of Wealth and the Contact of Insurance What Does this Analysis Tell Us? 1. Security can be sold simply in requisite whither the consumer is surrender loath. 2. Expected advantage is an mediocre appraise. 3. If security companies attack past than the actuarially untarnished premium, race get bear hither expected plenty from insuring than from not insuring. Equable though race get bear hither plenty as a issue of their donations of security, the growthd well-entity comes from the completion of surrender. 4. The getingness to buy security is kindred to the distance between the advantage flexion and the expected advantage row. THE DEMAND FOR INSURANCE How Much Insurance? • We address Elizabeth’s optimal donation by using the concepts of final favors and final absorbs. Consider primeval a system that provides security crust damagees up to $500. • The sight of maximizing aggregate net favors provides the framework for understanding her heartiness security cherished. How Much Insurance? • Believe that Elizabeth must pay a 20 percent douceur ($100) for her security, or $2 for every $10 of coverage that she purchases. This worksheet draws Elizabeth’s plenty if she gets indisposed. How Much Insurance? • Her final favor from the $500 from security is the expected final advantage that the subjoined $400 ($500 minus the $100 douceur) brings. Her final absorb is the expected final advantage that the $100 douceur absorbs. If Elizabeth is loath to surrender, the final favor (apex A) of this security system exceeds its final absorb (apex A). Figure 8-2 The Optimal Amount of Insurance How Much Insurance? • The final favors of the contiguous $500 in security get be subordinately lower (apex B) and the final costs subordinately loftier (point B’). • Aggregate net favors get be maximized by expanding security coverage to whither MB = MC, at q’. Figure 8-2 The Optimal Amount of Insurance The Effect of a Qualify in Premiums on Security Coverage • Believe the douceur rises to 25% instead of 20%. Increase in Premium • Elizabeth’s final favor flexion removes to the left to MB2 and the final absorb flexion shifts to the left to MC2. • Elizabeth’s security coverage get decline to q’’. Figure 8-3 Changes in the Optimal Whole of Insurance Effect of a Qualify in the Expected Loss • Back to the pristine pattern, after a while a douceur of 20%, how get Elizabeth’s security coverage qualify if the expected damage growths from $10,000 to $15,000, if ill? Increase in Expected Loss • Elizabeth’s final favor flexion removes to the equitable at MB3 but the final absorb flexion remains unradical at MC1. • Elizabeth’s security coverage get growth to q’’’. Figure 8-3 Changes in the Optimal Whole of Insurance Effect of a Qualify in Wealth • Believe Elizabeth was starting after a while a plenty of $25,000 instead of $20,000. Increase in Wealth • The final favor flexion get remove to the left to MB2 and the final absorb flexion get remove to the equitable to MC3 and Elizabeth’s security coverage get be identified after a while apex W, which could end up entity to the equitable or left of q’. Figure 8-3 Changes in the Optimal Whole of Insurance THE SUPPLY OF INSURANCE Competition and Normal Profits • In a wholely competitive dispense, securers get realize cipher intemperance effect. • Effect = Aggregate Revenue – Aggregate Cost • Following the former pattern, revenues are $100 per system. What Would the Insurer’s Costs Be? • For those who do not get indisposed (90% of the policies), the simply absorb would be the absorb of processing the system payments, say $8 per policy. • For those who do get indisposed (10% of the policies), the absorb would be the $500 payment plus the $8 courseing absorb, or $508. Insurer’s Profit Profit = $100 - (verisimilitude of ailment X absorb if ill) - (verisimilitude of no ailment X absorb if no ailment) Profit = $100 – (0.10 X $508) – (0.90 X $8) Profit = $100 - $50.80 - $7.20 Profit = $42 Role of Competition • These are enacted proceeds, and they imply that another resembling immovable (to-boot incurring costs of $8 to course each system) authority enter the dispense and attack a lower premium, say, 15 percent, to dispose clients. • Such beginning into the dispense would continue until all intemperance effect was competed afar. Competitive Premium • a:the counterfeitsurance(premium); p: the verisimilitude of payout; q: the whole of payout; t: a courseing absorb • a = p + (t/q) • The competitive douceur get be resembling to the verisimilitude of ailment, p, plus the processing (or adviseing) absorbs as a percentage of system prize, q, or t/q. THE CASE OF MORAL HAZARD What is Ethical Hazard? • So far, we bear inconsequent that the whole of the damage was fixed—that it did not qualify merely owing race bought security. However, in frequent conditions, buying security lowers the compensation per ace of employment at the season that the employments are donationd. If race donation past employment due to security, then frequent of the security propositions exact presented must be qualified. Figure 8-4 Claim for Foresight and Moral Hazard • Believe Elizabeth faces a verisimilitude of .5 that she get narrow Type I diabetes and after a whileout insulin, she get die. • Her claim for insulin get be wholely obdurate and she get donation security to cover expenditures P1Q1. Figure 8-4 Claim for Foresight and Moral Hazard • Consider, instead, Elizabeth’s claim for dermatological foresight. • If she donations security that pays her solid damage, then this security constitutes matter (by season costs) munificent. Owing the final compensation to Elizabeth is cipher, she would claim Q2 aces of foresight for a aggregate absorb of foresight of P1Q2. Moral Hazard Predictions of Economic Theory Concerning Heartiness Insurance 1. Deeper (past whole) coverage for services after a while past obduscold claim. 2. Development of security primeval for those services after a while the most obduscold claim, and simply posterior for those after a while past elastic demand. Effects of Cosecurity and Deductibles FIGURE 8-4 Claim for Foresight and Ethical Hazard • A deductible of $700 would average that Elizabeth must pay the primeval $700 of expenses out-of-pocket. This would direct her to donation Q3 aces of heartiness foresight rather than Q2, therefore the introduction of deductibles and counteract the contact of ethical jeopard. HEALTH INSURANCE AND THE EFFICIENT ALLOCATION OF RESOURCES Efficient Aldregs of Resources • The prolific aldregs of fellowship’s scarce resources appears when the incremental absorb of bringing the resources to dispense (final absorb) equals the valuation in the dispense to those who buy the resources (final favor). • If the final favor is main (less) than the final absorb, one could amend fellowship’s success by allocating past (fewer) resources to the sector or idiosyncratic, and hither (more) resources to other sectors. No Insurance • After a while final absorb P0 and no security the consumer get claim Q0 aces of foresight and the consumer’s final favor get be resembling to the final absorb. Figure 8-5 Heartiness Care Demand after a while Insurance 20% Coinsurance • After a while 20% counterfeitsurance, the compensation in the dispense is reduced to P1 and Q1 units get be claimed. • The final favor measured by apex C get not decline underneath the final absorb appraised at B. Figure 8-5 Heartiness Care Demand after a while Insurance Impact of Secondary Insurance on Primary Coverage and Utilization A Example: • Primary security pay 60% of all medical expenditures • Secondary policies cover 60% of the expenses left unmature by the primary plan • Price/ mark =$50 Figure 8-6 Contact of Secondary Insurance on Primary Coverage and Utilization Deadweight Success Loss • The deadweight damage comes from a misaldregs of resources unarranged amiables (i.e., past heartiness foresight is granted than should be, according to consumer indulgents). The deadweight damage from the insurance-induced overproduction of heartiness services can be appraised as triangle FKJ. Figure 8-7 The Effect of Insurance Cost Sharing after a while Upward-Sloping Supply The Claim for Security and the Compensation of Care • Martin Feldstein (1973) was unarranged the primeval to parade that the claim for security and the ethical jeopard brought on by security may interact to growth heartiness foresight compensations equable past than either one queer. • Past munificent security and the induced claim in the dispense due to ethical jeopard direct consumers to donation past heartiness care. The Success Damage of Intemperance Health Insurance • Security policies set growthd absorbs on fellowship owing they direct to growthd heartiness employments expenditures in several ways: – growthd bulk of employments donationd due to decreases in out-of-crib absorbs for employments that are already entity purchased; growthd compensations for employments that are already entity donationd; growthd quantities and compensations for employments that would not be donationd unhither they were mature by insurance; or growthd power in the employments donationd, including extravagant, technology-intensive employments that authority not be donationd unhither mature by security. Empirical Estimates of Success Loss • Martin Feldstein plant that the success proceeds from raising cosecurity objurgates from .33 to .50 would be $27.8 billion per year in 1984 dollars. • Manning and Marquis (1996) sought to investigate the cosecurity objurgate that balances the final effect from increased secureion athwart surrender athwart the final damage from growthd ethical jeopard, and ascertain a cosecurity objurgate of environing 45 percent to be optimal. THE INCOME TRANSFER EFFECTS OF INSURANCE Insurance Payments as Allowance Transfers • John Nyman (1999) argues that in opposition to the ordinary security assumption, we should view security payoffs as allowance transfers from those who remain heartinessy to those who befit ill, and that these allowance transfers geneobjurgate subjoined expenditure of medical foresight and virtual growths in economic enjoyment. Nyman’s Decomposition of Moral Hazard • Hither is an pattern. Believe that Elizabeth is diagnosed after a while confront cancer at her annual palliate. Extraneously security, she would donation a mastectomy for $20,000 to rid her collection of the cancer. • After a while security, Elizabeth donations (and security pays for) the $20,000 mastectomy, a $20,000 confront reconstruction procedure to set-right the disfigurement caused by the mastectomy, and an extra two days in the hospital to regain, which absorbs $4,000. Aggregate spending after a while security is $44,000 and aggregate spending after a whileout security is $20,000, so it appears that the compensation undelineation has caused $24,000 in ethical jeopard spending. Is this Spending Truly Inefficient? • To confutation we must enumerate what Elizabeth would bear done if her securer had instead remunerated off the narrow after a while a cashier’s check for $44,000 upon speciality. • After a while her pristine resources plus the subjoined $40,000, assume that Elizabeth would donation the mastectomy and the confront reconstruction, but not the extra days in the hospital. • The $20,000 departed on the confront reconstruction is prolific and success increasing, but the $4,000 departed on the two extra hospital days is inprolific and success-decreasing, consistent after a while the ordinary assumption. CONCLUSIONS • No other amiable in race’s day-to-day budgets is so explicitly tied to the arrangements for security as is heartiness foresight. • We bear characterized surrender and bear paraden why individuals get pay to secure athwart it. The issue, under most security arrangements, is the donation of past or different employments than authority incorrectly bear been desired by consumers and/or their heartiness foresight supplyrs. Health Economics Chapter 10 Asymmetric Notice and Agency Tianxu Chen Outline • Overview of Notice Issues • Asymmetric Information • Application of the Lemons Principle: Health Insurance • The Exercise Relationship • Consumer Information, Prices, and Quality • Conclusions OVERVIEW OF INFORMATION ISSUES Overview of Notice Issues • Adverse preoption, a oddity in which security disposes patients who are likely to use employments at a loftier than mediocre rate, issues from asymmetric notice owing virtual beneficiaries bear emend notice than the securer environing their heartiness foothold and their expected claim for heartiness foresight. • The potential indulgent for heartiness foresight grant by nonprofit hospitals and nursing homes has been attributed to patients’ lack of notice and want to perceive power. For some patients, a noneffect foothold authority be enthralled as reassurance of loftier power owing decisions are made fractions of a effect purpose. Goals for this Chapter • Introduce notice asymmetry, draw its relative extension, and enumerate its consequences, especially for security dispenses. • Draw the exercise relation and examine some of the problems arising in heartiness foresight markets from common exercise. • Examine the proceeds of common consumer notice on the compensation and power of heartiness foresight services. ASYMMETRIC INFORMATION On the Extent of Notice Problems in the Health Sector • Certainly notice gaps and asymmetries await in the heartiness sector. They are peradventure past weighty for heartiness foresight than for other amiables that are leading in affable budgets. • However, one should not protest that notice gaps preclude the possibility of having a haughty measure of rivalry. In particular, mechanisms to communicate after a while notice gaps should not be obsolete. These mechanisms grasp licensure, certification, accreditation, denunciation of malpractice suits, the physician-patient relation, ethical constraints, and the presence of certified consumers. Asymmetric Notice in the Used-Car Mark ...
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