Chap:
1. Premiums:
Consumers pay a premium to the insurance company. This is a regular
payment, usually monthly, that covers potential medical expenses in the
future.
Uncertainty: For any individual consumer, it's uncertain whether their
medical expenses in a given year will be higher or lower than the premium
they pay. Some people might have few medical needs and end up paying
more in premiums than they receive in benefits, while others might have
significant medical expenses and receive more in benefits than they paid in
premiums.
2. Risk Pooling:
The key to how insurance works is risk pooling.
Insurance companies pool together the premiums paid by a large number of
people.
This allows them to spread the risk.
Even though some individuals might have high medical costs, the overall pool
of premiums collected is typically sufficient to cover the medical expenses of
the entire group.
3. Profitability:
Because the insurance company pools premiums from a large number of
people, the sum of the premiums collected will generally exceed the sum of
the medical expenses paid out. This allows the insurance company to make a
profit.
Determinants of Health Insurance Demand
Price of Insurance:
Simple Rule: People are less likely to buy insurance if it's too expensive.
Example: If the image showed that someone was only willing to pay $5,000
for insurance, they wouldn't buy it if the price was higher.
2. Degree of Risk Aversion:
Risk Aversion: This means how much someone dislikes uncertainty or risk.
Impact on Demand: People who are more worried about getting sick and
losing money are more likely to buy insurance.
Income:
Simple Rule: The more money you make, the more likely you are to buy
health insurance.
Why? If you get sick and lose a lot of income, it hurts more when you make a
lot of money. Health insurance protects that higher income.
4. Probability of Illness:
Frequent Events: You're more likely to buy insurance for things that happen
often (like dental visits).
Rare Events: You're less likely to buy insurance for things that rarely
happen.
Random Events: People are more likely to buy insurance to protect
themselves against unexpected events.
assumptions underlying the theoretical model of health insurance demand
The image you sent presents assumptions underlying the theoretical model of
health insurance demand. Let's break down those assumptions:
1. Consumers Bear the Full Cost of Their Own Health Insurance.
This assumption implies that individuals are solely responsible for paying the
full cost of their health insurance premiums.
In reality, this may not always be the case.
o Employers may offer subsidized health insurance plans to their
employees.
o Government programs like Medicare and Medicaid may provide
financial assistance to cover health insurance costs for certain
populations.
2. Insurance Companies Can Appropriately Price Policies.
This assumption suggests that insurance companies have the ability to
accurately assess risk and price their policies accordingly.
However, in reality, predicting future healthcare costs is complex.
o Unforeseen medical breakthroughs, changes in disease patterns, and
unexpected events can significantly impact healthcare costs.
o This can make it challenging for insurance companies to accurately
price their policies and remain profitable.
3. Individuals Can Afford Health Insurance/Health Care.
This assumption implies that everyone has the financial means to afford
health insurance and necessary healthcare services.
However, in reality, this is not always the case.
o Many individuals may struggle to afford health insurance due to high
premiums or may face financial barriers to accessing healthcare even
with insurance.
The majority Consumers have employer-provided health insurance
l Employer-paid health insurance is exempt from federal, state, and Social
Security taxes.
è Employee will prefer to purchase insurance through work, rather than on his
own.
Consequences for Costs related to health insurance. Let's break down the points:
1. "Too Many" Services Covered:
This suggests that health insurance plans in the past may have covered a
very wide range of medical services, including some that were considered
relatively minor or unnecessary.
2. Increased Administrative Costs:
Covering a large number of small claims can significantly increase
administrative costs for insurance companies.
o Processing and paying for many small claims can be time-consuming
and expensive, even if the individual claims are not large.
3. Employer Subsidies for Expensive Plans:
When employers offer multiple health insurance plans to their employees,
they often fully subsidize the more expensive plans.
o This can lead to higher overall healthcare costs as employees tend to
choose the most comprehensive and expensive plans, even if they
don't fully utilize the benefits.
