The Health Insurance Game

Transcription

1 Jennifer Kohn The Health Insurance Game Jennifer L. Kohn, Drew University IHEA Biennial Congress, Pre-congress session on teaching health economics Boston MA 2017 Agenda: I. The Problem: Vocabulary AND intuition surrounding health insurance purchasing and policy II. A Solution: Play the health insurance game III. Let s Play! IV. And discuss.

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3 Number Correct 0 8% 1 5% 2 5% 3 4% 4 6% 5 10% 6 10% 7 18% 8 18% 9 12% 10 4% Percentage Earning This Score

4 The Insurance Game!! Adverse selection, the insurance death spiral and experiments in public policy Goal: To have the most $$ at the end of each round. Decisions: a) Buy or sell insurance b) What price What s in it for you: a) 2 bonus points towards final grade b) Intuitive understanding of insurance decisions under different policy options

5 Policies: Free Market Community Rating Guaranteed Issue Individual Mandate Mandatory Coverage Deductibles, co-pays Lifetime caps Information: Perfect information Asymmetric uncertainty Symmetric uncertainty Risk: Risk neutral Risk averse

6 Risk cards (index cards with numbers 1 6) Random Number Generator (dice) ( Insurance Company Advertising (big paper) Score sheets (consumer & insurer) Writing implements, calculators, (spreadsheets)

7 Rules of the Game 1. You are either an CUSTOMER or an INSURER Both try to maximize the $$ at the end of each round (no saving) 2. CUSTOMERS have Risk Cards with a number 1 6. KEY: If the die comes up with your number or LESS, you get sick! # Ratio Probability 1 1/6 17% 2 2/6 33% 3 3/6 50% 4 4/6 67% 5 5/6 83% 6 6/6 100% 3. At then end of each round: CUSTOMERS: Starting $ - premium OR expenses = Ending $ INSURERS: Total premiums Total expenses = Net Profit 4. We will change numbers, costs and market regulations each round.

8 Example (Risk Neutral) You get a card with # 2, therefore, you have a 33% chance of getting sick. The cost of getting sick is $5,000 # Ratio Probability 1 1/6 17% 2 2/6 33% 3 3/6 50% 4 4/6 67% 5 5/6 83% 6 6/6 100% The Actuarially Fair Premium (AFP) (expected expenses) is: 2/3($0) + 1/3($5,000) = $1,667 IF the die rolls a #1 or #2 the customer gets sick: Customer pays $5,000 in medical bills if uninsured Insurer pays $5,000 in medical bills if insured. IF the die rolls a #3, 4, 5 or 6 the customer stays healthy! Customer pays no medical bills if uninsured Insurer pays no medical bills if insured

9 Customer Score Sheet Round Starting $ Card # Premium $ die# Sick $ Ending $ Free Market, full information, risk neutral Bought insurance, no expenses $ 10,000 2 $1, $8,500 Bought insurance, sick expenses $ 10,000 4 $ 3,500 3 $ - $ 6,500 No insurance, no expenses $ 10,000 2 $ - 3 $ - $ 10,000 No insurance, sick expenses $ 10,000 4 $ - 3 $ 5,000 $ 5,000 Insurer Score Sheet Round: #1 Free market, full information die #: 3 Client Name Premium $ Client Card # Expenses paid Net $ John Smith $1, $1,500 Sally Sims $3,500 4 $5,000 ($1,500) Total $5,000 $5,000 $0

10 Free Market, Perfect Information Customer Profile: Starting $: $10,000 Sick expenses: $5,000 Risk cards distributed BEFORE insurance decision Insurers can: 4 Ask any question and consumers MUST answer Charge any price (customers can choose not to pay) Charge different prices to different customers

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12 The Different Shapes of Risk Risk Averse Risk Neutral Risk Seeking

13 Expected Utility WITH Risk = Expected Utility WITHOUT Risk N å i= 1 pu( M ) = U( M -X) i i j What we are willing to pay! Example: (U = sqrt(m)) If you have $10,000, a 1/3 probability of getting sick with medical care expenses of $5,000 how much would you be willing to pay for insurance? , 000 = 10, 000 -X = 10, 000-8, = 10, X = 1, Test yourself: What would you be willing to pay if you were risk neutral (U=M)? X X

14 Free Market, Asymmetric Information Customer Profile: Starting $: $10,000 Sick expenses: $5,000 Risk cards distributed BEFORE insurance decision Insurers can: Ask any question BUT customers don t have to tell & can lie! Charge any price (customers can choose not to pay) Charge different prices to different customers

15 The Insurance Death Spiral # Ratio Probability AFP 1 1/6 17% $ /6 33% $ 1, /6 50% $ 2, /6 67% $ 3, /6 83% $ 4, /6 100% $ 5, Insurer s neutral best guess AFP: 1/6 ($17,500) = $2, Insurer s best guess AFP: 1/3 ($12,500) = $4, Insurer s best guess AFP: 1/2 ($9,166.67) = $4, Insurer s best guess AFP: 1 ($5,000) = $5,000

16 Free Market, Symmetric Uncertainty Customer Profile: Starting $: $10,000 Sick expenses: $5,000 Risk cards distributed AFTER insurance decision Insurers can: Ask any question but customers don t know anything. Charge any price (customers can choose not to pay) Charge different prices to different customers

17 Community Rating, Perfect Information Customer Profile: Starting $: $10,000 Sick expenses: $5,000 Risk cards distributed BEFORE insurance decision Insurers can: Ask any question and consumers MUST answer MUST charge the same price to everyone CAN refuse to sell insurance to anyone (pre-existing condition exclusion)

18 Community Rating, Perfect Information, Guaranteed Issue Customer Profile: Starting $: $10,000 Sick expenses: $5,000 Risk cards distributed BEFORE insurance decision Insurers can: Ask any question and consumers MUST answer MUST charge the same price to everyone CAN NOT refuse to sell insurance to anyone

19 Community Rating, Asymmetric Information, Guaranteed Issue, Individual Mandate Customer Profile: Starting $: $10,000 Sick expenses: $5,000 Risk cards distributed BEFORE insurance decision Individuals must buy insurance OR pay a penalty of $695 Insurers can: Ask any question BUT customers don t have to tell & can lie! MUST charge the same price to everyone CAN NOT refuse to sell insurance to anyone

20 Community Rating, Asymmetric Information, Guaranteed Issue, Individual Mandate, Preventative Care Coverage Customer Profile: Starting $: $10,000 Sick expenses: $5,000 Preventative care expenses $150 Risk cards distributed BEFORE insurance decision Individuals must buy insurance or pay a penalty of $695 Insurers can: Ask any question BUT customers can lie! MUST charge the same price to everyone CAN NOT refuse to sell insurance to anyone MUST cover preventative care

21 What is the price elasticity of demand for preventative care? Would consumers buy it without insurance? IF NO (elastic demand) , 000 = 10, 000 -X 3 3 IF YES (inelastic demand) Willing to pay: $1, AFP = 1/3(5,000) = $1, , = 10, X 3 3 Willing to pay: $2, $2, $1, = $ > $150

22 Play the Health Insurance Game! Customize it for your class Different levels of math Different policies Different amounts of time me at for slides, spreadsheets & scorecards