In my essay practise revision notes, I took all of the past paper questions from previous years and split them up into sub-questions to help me to formulate paragraphs based on different concepts and arguments that I could memorise for the exam. The document will include my own style of writing and...
ESSAY PRACTISE and Revision
notes: Health insurance - Health
Economics
CONCEPTS:
● Optimal health insurance contract
● Adverse selection
● Moral Hazard
● Public and private health insurance
● Price elasticity of demand for medical care
● Actuarially fair premiums in health insurance
● Community rating
● Pooling contract
● Causal impact of health insurance on medical care insurance
● Voluntary health insurance
● Separating contracts
● Partial mandatory insurance
● Ex-post moral hazard
● Full insurance coverage
● Copayments
Reading:
- The Oregon Experiment Baiker et al (2013)
- The RAND Experiment Finkelstein et al (2013)
- Equilibrium in competitive insurance markets: an essay on the
economics of imperfect information Rothschild and Stiglitz
(1976)
- Issues of Mandatory insurance - Kifmann (2014)
- Health insurance and the demand for medical care (Manning
et al, 1987)
,Discuss the optimal health insurance contract in the absence of
adverse selection and moral hazard.
Health insurance markets are very complex. In comparison to other
market types, most people will be insured in this market because access
to medical care is a human necessity. Without insurance there are
affordability issues as out-of-pocket payments for treatments are very
expensive, and hospitals ethically cannot refuse care to a person in
need. There are a lot of moral issues that need to be taken into account
in this market.
In data showing healthcare expenditure by type of financing taken from
the OECD Health Statistics in 2013, we see that little insurance comes
from private insurance, and the majority of insurance is mandatory, with
some people making out-of-pocket payments. Mandatory insurance is
usually regulated by government so that individuals are lawfully required
to pay for this insurance package with a baseline of benefits, then they
are able to choose to buy even more insurance if they need to with
private insurance, for those that did not have insurance to cover their
specific illness or injury costs they have to take out-of-pocket payments
or they pay this if they need to pay for their prescriptions. We see in the
data that all countries have a mixture of payment types, and not one
country is fully covered by mandatory insurance. As economists we
would like to understand why this is the case when in our basic model
we discuss later, full coverage is optimal in a perfectly competitive
insurance market with no asymmetric information. One example of a
type of mandatory insurance is the National Health Service (NHS) in the
UK provided by the UK Government for UK taxpayers. This is funded by
taxes based on income so that high earners pay more to fund the NHS
than low earners. In comparison to this, the US relies more heavily on
private insurance and out-of-pocket payments. In this essay I will discuss
the reasons why this market tends to fail to provide full health insurance.
To start with, our basic model comes from Rothschild and Stiglitz (1976).
In this model we can theoretically calculate the optimal level of insurance
and use it to understand why we should be insured against health care
, expenditure. We assume that individuals are risk-averse and are seeking
voluntary insurance coverage in a perfectly competitive market.
In this model we have two different states of the world, where the
individual is healthy or sick with probability, π, exogenous income being
Y in both states, and the medical treatment costing M, if the individual is
sick. Individuals derive a utility u(y) for a disposable income y. Individuals
are risk averse: u^′ (y)>0 and u^′′ (y)<0. Individuals can buy insurance
and pay a premium, P and receive benefits, I, if they are sick. We plot
this in the following diagram:
We calculate the disposable income in the two states:
𝐻𝑒𝑎𝑙𝑡ℎ𝑦: 𝑦ℎ = 𝑌 − 𝑃
𝑆𝑖𝑐𝑘: 𝑦𝑠 = 𝑌 − 𝑃 − 𝑀 + 𝐼
To find the optimal level of coverage we maximise the individual’s
expected utility:
𝐸𝑈 = (1 − π)𝑢(𝑦ℎ) + π𝑢(𝑦𝑠) = (1 − π)𝑢(𝑌 − 𝑃) + π𝑢(𝑌 − 𝑃 − 𝑀 + 𝐼)
To characterise the premium P we assume that insurers incur no
administrative costs and private insurers maximise profits with perfect
competition. With these assumptions, the premium is actuarially fair and
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