Chapter 7

Health Insurance
Prepared and Taught by Lecturer: YIN SOKHENG, Master in Finance

INTRDUCTION
Most consumers of medical care patients pay only a portion of the price charged by the providers of medical care doctors and hospitals. In some cases, consumers pay nothing. An insurer either a private company or the government.

Instructed by YIN SOKHENG, Master in Finance

PRINCIPLES OF HEALTH INSURANCE

The Genesis of Health Insurance In a society without health insurance Must pay your own medical bills. Most people have good health, but a few people are not so lucky In a society with health insurance Buy insurance by paying a premium to company depends on how risk-averse. Company will pay your entire medical bill.
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 Starting a Health Insurance Company For every 100 people who buy your insurance, 5 people are likely to incur a $61,000 bill, and 95 people, a $1,000 bill. =>Expected total bill = 5($61,000) + 95($1,000)= $400,000 => Take in at least $400,000 in revenue to cover expected cost $400,000

Instructed by YIN SOKHENG, Master in Finance

Starting a Health Insurance Company Expected Value: If a person has a 5% chance of incurring a $61,000 medical bill and a 95% chance of incurring a $1,000 medical bill. =>Expected value of persons medical cost = .05($61,000) + .95($1,000)= $4,000 => As long as your premium is at least $4,000, it looks like youll make a profit.
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Starting a Health Insurance Company Sets a premium: Companies cant cut their premium below their expected cost Actuarially fair premium would equal the expected cost Have to charge more than $4,000 to cover these costs

Instructed by YIN SOKHENG, Master in Finance

 Starting a Health Insurance Company Price Equals Expected Medical Cost: Suppose that a high-expected cost person has a 9% chance of incurring a $61,000 medical bill and a lowexpected cost person has a 1% chance of incurring a $61,000 medical bill. Pi = EMCi Where Pi is a price, EMCi is the expected medical cost
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Price Equals Expected medical Cost:

Table 7.1 Expected Medical Bills
Describe Chance of a $61,000 Chance of a $61,000 Medical Bill Medical Bill 9% 1% 91% 99% Expected Medical Bill $6,400 1,600

High-cost person Low-cost person

Pi = EMCi
- The price charged to a person will vary with the persons expected medical cost, but the price will not vary with the persons income. - Have to raise your price to $6,400 to break even.
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Moral Hazard and Price Responsiveness

Theres another problem to watch out for when youre deciding which premium to charge called moral hazard. To economists, moral hazard is simply price responsiveness. Economists have used various techniques to try to estimate the magnitude of price responsiveness specifically, the price elasticity for different kinds of medical care.
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THE ROLE OF GOVERNMENT PLAY INHEALTH INSURANCE

Medicaid and the State Childrens Health Insurance Program:

The main government program for helping poor people pay for medical care (is Medicaid).
Childrens health Retirees health Low-income families

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Alternative Public Policies for Working Families: Consumer-Driven Health Care: Households would be given a tax incentive to buy highdeductible catastrophic insurance that would keep them paying routine medical bill. Health Saving Account: Contribution to a fund to pay their routine bill called health saving account would be tax-free. Responsible Health Insurance:
a requirement (mandate) that each household obtain health insurance, a refundable tax credit would help them afford it, And provision of fallback (last-resort) insurance

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Responsible Health Insurance

Table 7.2 Propose Tax Credit by Household Income for a Family of Four
Household Income $ 0 50,000 100,000 150,000 Tax Credit $ 8,000 6,000 4,000 2,000

The tax credit helps households afford insurance. The tax credit would vary inversely with the households income.
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Government Insurance
The government would pay most or all of each medical bill. The private sector business firms and households would pay taxes to the government instead of premiums to private insurance companies.

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Advocates of government insurance make several arguments

1. It would be a simple way to get everyone covered. 2. It would be a fairer system because everyone is covered regardless of income, health, or employment. 3. The governments leverage as the primary payer of most medical bills would give it the ability to hold down prices and payments to providers.
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Opponents of government insurance also make several arguments:

1. Tax would have to increase substantially. 2. Government would overregulate medical providers, thereby impending the introduction of new technologies, procedures, and medications. 3. Government would overrstrict supply, generating queues and excessive waiting times. 4. The majority of householders are currently satisfied with their employer-provided private insurance, so such insurance should be retained, not replaced.

Instructed by YIN SOKHENG, Master in Finance

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