Lesson 8
Pure Premium- AKA: Actuarially fair premium. The amount of money that the insurer needs to collect in order to cover expected claims for an insured group. Does not include loading costs.
Community Rating- When the premium is determined using the risk characteristics of the entire membership.
Experience Rating- When the premium is determined using the risk characteristics of the individual consumer.
Loading Costs- Include administration cost, marketing cost, profit, etc.
Expected Value- The value of the outcomes weighted by the probability of their occurrence
Variance- A summary of the variability of the distribution of outcomes.
Standard Deviation- Square root of Variance
Pooling Arrangement- Situation where multiple uncorrelated risks are pooled in order to reduce the variance of the outcomes.
Decreasing Marginal Utility of Wealth- Each dollar increases a person's satisfaction, but the first dollar increases utility by more than the next.
Steps to Solve for Insurance Prices:
1. Find the expected wealth based on the probability and the $ amount of the loss.
2. Find the expected utility based on the probability of and the utilities of the good and bad states.
3. Use the expected utility in wealth/utility curve to determine the level of wealth that would be associated with that if it were a no-risk level of utility.
4. Find the difference between the expected wealth and the no-risk level of wealth to determine the amount of loading costs the consumer would be willing to pay.
Insurance Model Results:
Higher probabilities of loss increase the actuarially fair premium.
People are willing to pay the highest loading costs for medium probability events and are more likely to self-insure for low/high probability events.
The higher a person's income, the larger the gap between expected utility and expected wealth Thus, the larger amount a person would be willing to pay to be insured.
Medicaid- A federal and state program for the medically indigent. Physicians and hospitals are paid directly by the government on behalf of the recipient.
Medicare- A federal health insurance program for the aged.
Part A- (Original) hospital coverage
Part B- (Original) optional insurance for physician services
Part C (aka Medicare Advantage)- (added 1997) private companies offer insurance coverage of the same type as Part A and B
Part D- (added 2003 effective 2006)- prescription drug plan
Health Maintenance Organization (HMO)- A health care delivery system that combines insurer and producer functions. HMO's are prepaid and in return provide comprehensive care to enrollees.
within the HMO system.
Diagnostic Related Groupings (DRG)- A prospective reimbursement system developed under Medicare used to compensate hospitals based on the patient's primary diagnosis. DRGs estimate cost based on the diagnosis, comorbidities and other demographic factors.
Patient Protection and Affordable Care Act- AKA the ACA or Obamacare. Main Features:
State-Based Exchanges
Individual Mandate (with $695 penalty for noncompliance)
Companies cannot refuse individuals with Pre-existing Conditions
Subsidies Low-Income Individuals
Cost-Sharing Reduction- A discount that lowers the amount low-income insured people have to pay for deductibles, copayments, and coinsurance.
Premium Tax Credit- The premium ta