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3. Obamacare with a faulty website. Health insurance markets are a classic example of adverse selection. One feature of the Affordable Care Act ("ACA", also known as Obamacare) is "Community Rating" on the health insurance exchanges, which says that a single price is offered to all consumers in a region and broad demographic group, without any medical tests. This question will examine the market for health insurance on the ACA for males in the 19-29 age range. In this age group, there are two types of individuals shopping on the ACA exchanges: "healthy" types, who are 90% of such individuals, and "chronic" types, who are 10%. The Healthy types have expected annual health expenses that are uniformly distributed between $0 and $1000 (math reminder: the mean of a uniform distribution between a and b is (a+b)/2, and the probability that a draw from such a distribution is at or above p is (b-p)/(b-a)). The Chronic types are guaranteed to have $1500 in annual expenses. All customers know their expected annual health expenses exactly, but insurers do not. a. First, suppose hypothetically that all individuals in this market (males age 19-29) will purchase insurance plans. Insurers negotiate rates with hospital networks so that the cost of providing care is 40% less than the true expense, so a $100 expense actually only costs the insurer $60. We will assume the market is competitive, so that premiums equal average costs. What will be the resulting policy premiums with all individuals covered? p = b. In reality, consumers will purchase an insurance plan only if the premium is less than their expected expenses (i.e. they are risk-neutral; making them risk-averse would complicate the math without changing the intuition). At the price you just found, what proportion of the Healthy types would choose to purchase health insurance if the requirement to purchase were lifted? Proportion of Healthy opting to buy insurance: Right away, we see the challenge with universal coverage: without some way of forcing individuals to buy insurance, the healthiest in a market would choose not to participate, which would increase the average cost, which would increase prices, and so on. We want to solve for what the market outcome would be if individuals can choose to be uninsured. We'll do this as a function of a general price for coverage, p. c. First, what is the fraction of Healthy types that would purchase insurance, given a price p. We will denote this fraction as f(p). f(p) =

3. Obamacare with a faulty website. Health insurance markets are a classic example of adverse selection. One feature of the Affordable Care Act ("ACA", also known as Obamacare) is "Community Rating" on the health insurance exchanges, which says that a single price is offered to all consumers in a region and broad demographic group, without any medical tests. This question will examine the market for health insurance on the ACA for males in the 19-29 age range.

In this age group, there are two types of individuals shopping on the ACA exchanges: "healthy" types, who are 90% of such individuals, and "chronic" types, who are 10%. The Healthy types have expected annual health expenses that are uniformly distributed between $0 and $1000 (math reminder: the mean of a uniform distribution between a and b is (a+b)/2, and the probability that a draw from such a distribution is at or above p is (b-p)/(b-a)). The Chronic types are guaranteed to have $1500 in annual expenses. All customers know their expected annual health expenses exactly, but insurers do not.

a. First, suppose hypothetically that all individuals in this market (males age 19-29) will purchase insurance plans. Insurers negotiate rates with hospital networks so that the cost of providing care is 40% less than the true expense, so a $100 expense actually only costs the insurer $60. We will assume the market is competitive, so that premiums equal average costs. What will be the resulting policy premiums with all individuals covered?

p =

b. In reality, consumers will purchase an insurance plan only if the premium is less than their expected expenses (i.e. they are risk-neutral; making them risk-averse would complicate the math without changing the intuition). At the price you just found, what proportion of the Healthy types would choose to purchase health insurance if the requirement to purchase were lifted?

Proportion of Healthy opting to buy insurance:

Right away, we see the challenge with universal coverage: without some way of forcing individuals to buy insurance, the healthiest in a market would choose not to participate, which would increase the average cost, which would increase prices, and so on.

We want to solve for what the market outcome would be if individuals can choose to be uninsured. We'll do this as a function of a general price for coverage, p.

c. First, what is the fraction of Healthy types that would purchase insurance, given a price p. We will denote this fraction as f(p).

f(p) =

$3. Obamacare with a faulty website. Health insurance markets are a classic example of adverse selection. One feature of the Affordable Care Act ("ACA", also known as Obamacare) is "Community Rating" on the health insurance exchanges, which says that a single price is offered to all consumers in a region and broad demographic group, without any medical tests. This question will examine the market for health insurance on the ACA for males in the 19-29 age range. In this age group, there are two types of individuals shopping on the ACA exchanges: "healthy" types, who are 90% of such individuals, and "chronic" types, who are 10%. The Healthy types have expected annual health expenses that are uniformly distributed between $0 and $1000 (math reminder: the mean of a uniform distribution between a and b is (a+b)/2, and the probability that a draw from such a distribution is at or above p is (b-p)/(b-a)). The Chronic types are guaranteed to have $1500 in annual expenses. All customers know their expected annual health expenses exactly, but insurers do not. a. First, suppose hypothetically that all individuals in this market (males age 19-29) will purchase insurance plans. Insurers negotiate rates with hospital networks so that the cost of providing care is 40% less than the true expense, so a $100 expense actually only costs the insurer $60. We will assume the market is competitive, so that premiums equal average costs. What will be the resulting policy premiums with all individuals covered? p = b. In reality, consumers will purchase an insurance plan only if the premium is less than their expected expenses (i.e. they are risk-neutral; making them risk-averse would complicate the math without changing the intuition). At the price you just found, what proportion of the Healthy types would choose to purchase health insurance if the requirement to purchase were lifted? Proportion of Healthy opting to buy insurance: Right away, we see the challenge with universal coverage: without some way of forcing individuals to buy insurance, the healthiest in a market would choose not to participate, which would increase the average cost, which would increase prices, and so on. We want to solve for what the market outcome would be if individuals can choose to be uninsured. We'll do this as a function of a general price for coverage, p. c. First, what is the fraction of Healthy types that would purchase insurance, given a price p. We will denote this fraction as f(p). f(p) =$

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