1. Assume that you face two medical outcomes in the coming year:
Outcome
Stay healthy
Get sick
Probability
0.80
0.20
Cost
$0
$24,000
a. What is your expected healthcare cost?
Expected cost: (0.20) (24,000) + (0.80) (0) = 4,800
b. Assume that an insurance company is willing to sell you a healthcare policy that covers all of your
healthcare costs for the coming year for $5,000, would you purchase the policy? Please explain why or
why not.
c. Now assume that, given your lifestyle choices, your probability of getting sick is 60%, what is your
expected healthcare cost?
d. See part c above. Should the insurance company (see part b) sell you a healthcare policy that covers
all of your healthcare cost for the coming year for $4,800? Please explain.
2. What is the difference between fee-for service reimbursement and cost-based reimbursement?
3. What is the difference between charge-based reimbursement and prospective payment
reimbursement?
4. What is the difference between capitation and pay-for-performance (P4P)?