how the consumers equilibrium would change before and after the Affordable Care Act
Added by Curtis C.
Step 1
- The budget constraint includes the insurance premium, along with potential out-of-pocket costs for services. - Equilibrium occurs where marginal utility (value of expected health/coverage) equals marginal cost (premium plus expected out-of-pocket expenses), Show more…
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Let’s consider the health insurance market. Suppose there are two types of consumers: those with pre-existing conditions and those without. Those with pre-existing conditions make up 10% of consumers. All consumers are risk-averse with utility function, U left parenthesis X right parenthesis equals square root of X. Those with pre-existing conditions require medical care 50% of the time. Those without require medical care 5% of the time. Assume each consumer has an initial wealth of $1000 and medical care costs $500. If the insurance companies are allowed to sell insurance at different prices to the two types of consumers and competition forces them to charge the fair insurance premium, consumers without pre-existing conditions ___________ insurance at a price of $__________. Consumers with pre-existing conditions insurance ____________ at a price of $ _______________. Now suppose the government passes a law that bans discrimination on the basis of pre-existing conditions. In this case, the insurance companies can no longer offer insurance at two different prices (they can only charge a single price). In this case, in equilibrium, consumers without pre-existing conditions insurance _______________ at a price of $______________. Consumers with pre-existing conditions insurance ________________ at a price of $ ________________. Relative to before the law is passed, consumers without pre-existing conditions are _________________ off. Consumers with pre-existing conditions are ________________ off. DROP DOWN OPTIONS: 0 10 25 47.5 100 125 227.5 250 BUY DONT BUY INDIFFERENT BETWEEN BUYING AND NOT BUYING BETTER NEITHER BETTER OR WORSE WORSE
Akash M.
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 $60. We will assume the market is competitive, so that premiums equal average costs. What will be the resulting policy premiums with all individuals covered? p = b. In reality, consumers will purchase an insurance plan only if the premium is less than their expected expenses (i.e. they are risk-neutral; making them risk-averse would complicate the math without changing the intuition). At the price you just found, what proportion of the Healthy types would choose to purchase health insurance if the requirement to purchase were lifted? Proportion of Healthy opting to buy insurance: Right away, we see the challenge with universal coverage: without some way of forcing individuals to buy insurance, the healthiest in a market would choose not to participate, which would increase the average cost, which would increase prices, and so on. We want to solve for what the market outcome would be if individuals can choose to be uninsured. We'll do this as a function of a general price for coverage, p. c. First, what is the fraction of Healthy types that would purchase insurance, given a price p. We will denote this fraction as f(p). f(p) =
Complete the following table by computing the total expected monthly cost of care for each type of citizen, the total number of people in this market, and the total expected monthly cost of insuring all citizens. Expected Monthly Cost Type of Person Number of People ($) Very Healthy 550 100 Healthy 300 500 Unhealthy 100 650 Very Unhealthy 50 5,500 Total 1,000 Maximum Willingness to Pay for Insurance ($) 110 575 6,008 8,250 Total Expected Monthly Cost ($) 55,000 150,000 65,000 275,000 545,000 If the insurance company must offer one plan to all men between the ages of 30 and 41, the monthly premium (rounded to the nearest dollar) must be $545 per person in order for the total amount the insurance company collects to be equal to the total amount it expects to pay out. Suppose the government repeals the mandate, and now it allows each person to decide whether he wants to buy into the policy. Complete the following table, assuming that the premium is the one you calculated above. If a type of person will not purchase insurance at this premium, enter 0 into the appropriate cell, since the insurance company collects no money from them. Amount Insurance Company Collects (Number of People x Premium) Type of Person Chooses to buy health insurance? ($) Very Healthy No Healthy Yes 163,500 Unhealthy Yes 54,500 Very Unhealthy Yes 27,250 Once consumers are given a choice of whether to buy into the premium, the insurance company will collect a total of $245,250 in monthly premiums, and it will pay out an expected total of $490,000 to cover the expenses of all those who buy the policy. Based on the groups that still want to buy insurance at the original premium, the insurance company would need to increase the premium to this price. Which of the following groups would still be willing to buy health insurance? Check all that apply. Very Healthy, Healthy, Unhealthy, Very Unhealthy Without a government mandate to purchase insurance, as premiums rise the most healthy people are likely to stop purchasing insurance. This causes the insurance company to face higher costs, thus forcing it to increase premiums in order to break even. The cycle continues until only the least healthy individuals remain insured.
Ivan K.
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