What is adverse selection in the health insurance market

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Health Economics Homework

1. What is "adverse selection" in the health insurance market? How does adverse selection affect the operation of health insurance market? Describe at least two approaches insurance companies can adopt in order to reduce the problems associated with adverse selection.

2. Demand for flu vaccine per day during vaccine season is given by the following equation: Q=180 -2 P + 0.01 Y, where P is the price of vaccine plus vaccine administration cost and Y is the income of population per capita. (i) Draw the demand curve for flu vaccine if the average income of the population is $20,000. (ii) Draw the curve again when the income of the population increases to $30,000. (iii) A planner calculated that to protect the population from flu during flu season, the number of vaccines used per day should be 400. Market price (=P including administration cost) of vaccine is $100. What will be the level of use of vaccine in the area at that price (assuming income level at $20,000)? What should be the price level to ensure that adequate number of vaccines are used or demanded? (iv) From your result in section (iii), indicate what the price level means for policy perspective. How can the policy makers implement this price?

3. Demand and supply curves of physician care services per day are given by the following equations:

Demand curve: Q_d = 500 - 2.5 P

Supply curve: Q_s = -100 + 4 P

where Q is the number of visits in a day and P is the fee per consultation.

(a) Find the equilibrium quantity and fee in this market. What is the total expenditure on physician in the market per day?

(b) Introduce insurance with 40% coinsurance. The insurance is provided free of charge (no premium). What will be the impact of introducing the insurance on quantity, consultation fee and health care expenditure per day? Compare these after-insurance levels with the pre-insurance situation.

(c) Rather than offering insurance with 40% coinsurance, assume that the insurance was introduced with a copayment of $40 per visit. What will be the effects of this insurance on the market compared to no-insurance situation? [Discuss the effects on quantity, fee and expenditure]

(d) Start from the no-insurance situation again (using the demand-supply curves). Introduce insurance with indemnity payment of $40 per consultation. Compare the market outcomes of this insurance with no-insurance situation.

4. Demand function faced by a physician is D = 600 - 3 F, where d is the number of consultations provided per month and F is the fee per consultation. The physician care market is characterized by monopolistic competition. If the marginal cost of producing a consultation is given by M=20, find the optimal level of d and F for the physician (hint: you have to derive marginal revenue (MR) curve from the average revenue curve. If demand curve is written as F=.... rather than D=....., it will represent the average revenue curve. If you are unable to derive MR curve mathematically, you can use the information that the slope of MR curve is double the slope of AR curve starting at the same point as the demand curve when D=0).

5. Define the following terms. Provide numeric examples to illustrate each of the concepts: (a) pure premium, (b) risk premium, (c) community rated insurance plan, (d) moral hazard in insurance, (e) expected payoff

6. Describe two methods widely used to find the "optimal size" of physician practice. Which of these two approaches, do you think, is a better approach to identify the optimal size and why?

7. What is "monopolistic competition"? Why do we consider physician care market as monopolistic competition? In a monopolistic competition situation, why is it important to adopt legal restrictions against sharing of revenue between specialist physicians and the referring physicians? How important is it to restrict revenue sharing between physicians and diagnostic centers and laboratories? Discuss.

Reference no: EM131465149

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