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$Understanding How Health Insurance Markets Works The purpose of the assignment is to understand how health insurance markets work. That is, the goal is for you to understand how premiums are determined, how a co-payment or a deductible impacts the premium, and what happens to premiums when you have a high risk group (such as people with pre-existing health conditions) and insurance companies can't charge different premiums. You are working for a health insurance company. For the 2000 people you insure, the amount they see the doctor in a year are: Meaning that of the 2000 people who you insure, 750 of them will never go to the doctor, 600 will go 1 time, 590 will go 4 times, and 60 people will go 10 times. 1. Using these figures, figure out the 'fair premium' if there is: a) No co-payment or deductible and the fee is $150 per visit b) No co-payment or deductible and the fee is $200 per visit c) A co-payment of $10 and the fee is $200 per visit d) A co-payment of $50 and the fee is $200 per visit e) Annual deductible of $250 and the fee is $200 per visit 2. Now supposed there are two types of people - those without a chronic condition and those with a chronic condition. And suppose that those with a chronic condition use healthcare more than those without: Using these figures, figure out the 'fair premium' for each group if there was no co-payment or deductible and the fee is $200 per visit. 3. Compare your answer to 1.b (combined groups with no co-pay and $200 a visit) to your answer in 2 (separate groups with no co-pay and $200 a visit). Explain how charging each group the same amount (1.b) will lead to 'adverse selection.' ORDER YOUR PAPER NOW Expert Answer This solution was written by a subject matter expert. It's designed to help students like you learn core concepts. Step-by-step 1st step All steps Answer only Step 1/3 1. Determining Fair Premiums: a) There is a $150 visit fee and no co-payment or deductible: For those with insurance, the overall cost of healthcare can be computed as follows: EXPLANATION Total Cost = (Number of people with 1 visit * $150) + (Number of people with 4 visits * $600) + (Number of people with 10 visits * $1500) = (Number of people with 1 visit * $150) x (600 * $600) x (60 * $1500) = $90,000 + $354,000 + $90,000 = $534,000 By dividing the whole cost by the covered population, in this example 2000, one may determine the fair premium: Fair Premium = Total Cost / Insured Population, or $534,000 / 2000, or $267. The reasonable premium is $267 per person as a result. b) There is a $200 visit fee and there is no co-payment or deductible: Understanding How Health Insurance Markets Works EXPLANATION Overall cost is (number of visits * $200) + (number of visits * $800) + (number of visits * $2000) = (600 * $200) + (590 * $800) + (60 * $2000). = $120,000 + $472,000 + $120,000 \s= $712,000 Total Cost / Number of Insured = $712,000 / 2000 = Fair Premium = $356 The reasonable premium is $356 per person as a result. Step 2/3 c) A co-payment of $10 and a visit charge of $200: Each covered person in this situation will contribute $10 for each visit, with the insurance provider covering the remaining expenses. EXPLANATION Total Cost = (Number of Visits * ($200 - $10) + (Number of Visits * ($800 - $40) + (Number of Visits * ($2000 - $100)) = (600 * $190) + (590 * $760) + (60 * $1900) = $114,000 + $448,400 + $114,000 = $676,400. Total Cost / Number of Insured = $676,400 / 2000 = Fair Premium = $338 The reasonable premium is $338 per person as a result. d) A co-payment of $50 and a visit charge of $200: Each covered person in this situation will contribute $50 towards each visit, with the insurance provider covering the remaining expenses. EXPLANATION Total Cost is equal to (Number of people with 1 visit * ($200 - $50) + (Number of people with 4 visits * ($800 - $200) + (Number of people with 10 visits * ($2000 - $500)) = (600 * $150) + (590 * $600) + (60 * $1500) = $90,000 + $354,000 + $90,000 = $534,000 Fair Premium = Total Cost / Insured Population, or $534,000 / 2000, or $267. The reasonable premium is $267 per person as a result. Step 3/3 e) A $250 annual deductible and a $200 visit fee: Understanding How Health Insurance Markets Works Each insured person will be required to pay $250 for medical care before the insurance provider begins to cover their costs. EXPLANATION Total Cost = (Number of Visitors * ($200 - $250)) x (Number of Visitors * ($800 - $) x (Number of Visitors * ($400 - $)) ORDER YOUR PAPER NOW Final answer We can observe that the fair premium in 2 is larger than in 1.b by comparing the answers from 1.b (mixed groups with no co-pay and $200 each visit) and 2.b (separate groups with no co-pay and $200 per visit). This is due to the fact that grouping covered people according to projected healthcare utilisation enables more precise pricing based on risk. Adverse selection may result if all people pay the same premium regardless of their risk profile. When those with higher risks are more likely to buy insurance than people with lower risks, this is known as adverse selection. This is so because those who face greater risks anticipate utilising more healthcare services, placing a larger value on insurance. charging the same rate to everyone Understanding How Health Insurance Markets Works$

Expert Answer

Understanding How Health Insurance Markets Works

The purpose of the assignment is to understand how health insurance markets work. That is, the goal is for you to understand how premiums are determined, how a co-payment or a deductible impacts the premium, and what happens to premiums when you have a high risk group (such as people with pre-existing health conditions) and insurance companies can't charge different premiums. You are working for a health insurance company. For the 2000 people you insure, the amount they see the doctor in a year are: Meaning that of the 2000 people who you insure, 750 of them will never go to the doctor, 600 will go 1 time, 590 will go 4 times, and 60 people will go 10 times. 1. Using these figures, figure out the 'fair premium' if there is: a) No co-payment or deductible and the fee is

$150

per visit b) No co-payment or deductible and the fee is

$200

per visit c) A co-payment of

$10

and the fee is

$200

per visit d) A co-payment of

$50

and the fee is

$200

per visit e) Annual deductible of

$250

and the fee is

$200

per visit 2. Now supposed there are two types of people - those without a chronic condition and those with a chronic condition. And suppose that those with a chronic condition use healthcare more than those without: Using these figures, figure out the 'fair premium' for each group if there was no co-payment or deductible and the fee is

$200

per visit. 3. Compare your answer to

1. b

(combined groups with no co-pay and

$200

a visit) to your answer in 2 (separate groups with no co-pay and

$200

a visit). Explain how charging each group the same amount (1.b) will lead to 'adverse selection.'

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Expert Answer

Step-by-step

1st step

All steps

Answer only

Step 1/3

1. Determining Fair Premiums:

a) There is a $150 visit fee and no co-payment or deductible:

For those with insurance, the overall cost of healthcare can be computed as follows:

EXPLANATION

Total Cost = (Number of people with 1 visit * $150) + (Number of people with 4 visits * $600) + (Number of people with 10 visits * $1500) = (Number of people with 1 visit * $150) x (600 * $600) x (60 * $1500) = $90,000 + $354,000 + $90,000 = $534,000

By dividing the whole cost by the covered population, in this example 2000, one may determine the fair premium:

Fair Premium = Total Cost / Insured Population, or $534,000 / 2000, or $267.

The reasonable premium is $267 per person as a result.

b) There is a $200 visit fee and there is no co-payment or deductible: Understanding How Health Insurance Markets Works

EXPLANATION

Overall cost is (number of visits * $200) + (number of visits * $800) + (number of visits * $2000) = (600 * $200) + (590 * $800) + (60 * $2000).

= $120,000 + $472,000 + $120,000 \s= $712,000

Total Cost / Number of Insured = $712,000 / 2000 = Fair Premium = $356

The reasonable premium is $356 per person as a result.

Step 2/3

c) A co-payment of $10 and a visit charge of $200:

Each covered person in this situation will contribute $10 for each visit, with the insurance provider covering the remaining expenses.

EXPLANATION

Total Cost = (Number of Visits * ($200 - $10) + (Number of Visits * ($800 - $40) + (Number of Visits * ($2000 - $100)) = (600 * $190) + (590 * $760) + (60 * $1900) = $114,000 + $448,400 + $114,000 = $676,400.

Total Cost / Number of Insured = $676,400 / 2000 = Fair Premium = $338

The reasonable premium is $338 per person as a result.

d) A co-payment of $50 and a visit charge of $200:

Each covered person in this situation will contribute $50 towards each visit, with the insurance provider covering the remaining expenses.

EXPLANATION

Total Cost is equal to (Number of people with 1 visit * ($200 - $50) + (Number of people with 4 visits * ($800 - $200) + (Number of people with 10 visits * ($2000 - $500)) = (600 * $150) + (590 * $600) + (60 * $1500) = $90,000 + $354,000 + $90,000 = $534,000

Fair Premium = Total Cost / Insured Population, or $534,000 / 2000, or $267.

The reasonable premium is $267 per person as a result.

Step 3/3

e) A $250 annual deductible and a $200 visit fee: Understanding How Health Insurance Markets Works

Each insured person will be required to pay $250 for medical care before the insurance provider begins to cover their costs.

EXPLANATION

Total Cost = (Number of Visitors * ($200 - $250)) x (Number of Visitors * ($800 - $) x (Number of Visitors * ($400 - $))

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Final answer

We can observe that the fair premium in 2 is larger than in 1.b by comparing the answers from 1.b (mixed groups with no co-pay and $200 each visit) and 2.b (separate groups with no co-pay and $200 per visit). This is due to the fact that grouping covered people according to projected healthcare utilisation enables more precise pricing based on risk. Adverse selection may result if all people pay the same premium regardless of their risk profile.

When those with higher risks are more likely to buy insurance than people with lower risks, this is known as adverse selection. This is so because those who face greater risks anticipate utilising more healthcare services, placing a larger value on insurance. charging the same rate to everyone Understanding How Health Insurance Markets Works

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