1
What is health insurance and which health-related expenses does it usually cover?
Health insurance is a form of insurance that provides financial security to individuals when they use health services. It usually covers expenses such as doctor’s visits, medical tests, hospitalizations, surgical procedures, and prescription medications.
2
Why do health expenses usually rise as people get older?
Health expenses usually rise with age because aging increases healthcare needs. The chapter explains that these expenses rise gradually until retirement and then increase more significantly after retirement because of age-related health conditions and greater care needs.
3
How does health insurance reduce the financial burden of healthcare expenses?
Health insurance acts as a financial buffer for individuals. It reduces the burden of healthcare expenses by helping people pay for necessary medical services and by protecting them against unexpected health-related financial risks.
4
How does health insurance spread financial risk among individuals?
Health insurance spreads financial risk by pooling the healthcare expenses of many individuals. While only some insured people face high costs because of illness or injury, the group as a whole contributes through premiums, so the burden is shared across many people.
5
What is the difference between co-payment and co-insurance?
A co-payment is a fixed amount paid for a covered healthcare service, usually at the time of service. Co-insurance is the insured person’s share of the cost of a claim, and it is usually expressed as a percentage rather than a fixed amount.
6
What is a deductible and how is it related to premiums?
A deductible is the amount an insured person must pay each year before the insurance policy starts covering costs. Plans with low deductibles usually have higher premiums, while plans with high deductibles usually have lower premiums.
7
What is a premium in the health insurance market?
A premium is the ongoing payment required for a health plan. It is usually paid monthly, quarterly, or yearly by the insured person and or the employer, and it may be accompanied by other costs such as copayments or deductibles.
8
What is expected value of wealth?
Expected value of wealth is the weighted average of the possible wealth outcomes that an individual may face, with each outcome weighted by its probability. In the chapter, it is shown as the wealth when ill multiplied by the probability of illness plus the wealth when healthy multiplied by the probability of staying healthy.
9
What is expected utility and why is it important in health insurance decisions?
Expected utility is the anticipated value of utility across possible outcomes, each weighted by its probability. It is important in health insurance decisions because individuals buy insurance to replace uncertain future losses with a more predictable financial situation.
10
What does risk aversion mean in the context of health insurance?
Risk aversion means preferring a certain outcome to an uncertain one when both have the same expected value. In health insurance, risk-averse individuals prefer paying a predictable premium instead of facing the possibility of large unexpected medical expenses.
11
What is fully fair insurance?
Fully fair insurance is an insurance arrangement in which the individual’s wealth is equal in both the healthy state and the ill state. Under fully fair insurance, the insurance payment equals the cost of illness, and in a perfectly competitive market the premium equals the probability of illness multiplied by that cost.
12
Why may risk-averse individuals be willing to buy unfair insurance?
Risk-averse individuals may be willing to buy unfair insurance because they value financial certainty. Even when the premium is higher than the fully fair amount, they prefer paying more rather than facing a potentially very large loss without insurance.
13
What does the supply of health insurance refer to?
The supply of health insurance refers to the availability of insurance products and services offered by insurance companies. It includes the types of coverage offered, premium rates, deductibles, copayments, network coverage, and other plan characteristics.
14
Why does perfect competition fail in the health insurance market?
Perfect competition fails in the health insurance market because many of its conditions are not met. The chapter emphasizes risk aversion, asymmetric information, adverse selection, moral hazard, and the strong role of intermediaries, all of which move the market away from perfect competition.
15
How does Akerlof’s market for lemons help explain adverse selection?
Akerlof’s market for lemons shows that when sellers know more about product quality than buyers, low-quality products remain in the market while high-quality products leave. The chapter uses this example to explain health insurance, where information asymmetry can cause relatively low-risk individuals to leave and higher-risk individuals to remain.
16
What is adverse selection in health insurance?
Adverse selection occurs when consumers know more about their own health risks than insurers do and choose insurance plans that are most advantageous for themselves. As a result, higher-risk individuals are more likely to buy insurance, which raises the average risk in the insured pool.
17
What is an adverse selection death spiral?
An adverse selection death spiral occurs when premiums rise because the insured pool becomes riskier, and then healthier individuals leave the market because the premium no longer seems attractive. This makes the pool even riskier and pushes premiums up again.
18
What is moral hazard in the health insurance market?
Moral hazard is the tendency for insurance against loss to reduce incentives to prevent or minimize that loss. In the health insurance market, insured individuals may take greater risks or use more healthcare services because they do not bear the full cost of care.
19
How do coinsurance, copayments, and deductibles reduce moral hazard?
Coinsurance, copayments, and deductibles reduce moral hazard by requiring the insured to bear part of the cost of healthcare. Because patients face some out-of-pocket payment, they have stronger incentives to use healthcare services more carefully and avoid unnecessary consumption.
20
What are the main characteristics of private health insurance?
Private health insurance is generally offered by profit-driven insurers and financed through premiums paid by individuals, employers, or both. It is characterized by competition, risk pooling, variable premiums, customization, regulation, cost-sharing, adverse selection, moral hazard, and market segmentation.
21
What are the main characteristics of social health insurance?
Social health insurance is managed by a public entity and is usually financed through mandatory payroll deductions. It is characterized by compulsory membership, redistributive policies, earmarked resources, public administration, and an aim to ensure access to healthcare based on need rather than ability to pay.
22
How does health insurance contribute to the efficient allocation of healthcare resources?
Health insurance contributes to efficient allocation through risk pooling and risk sharing, preventive care and early intervention, risk management strategies, and provider reimbursement mechanisms. These tools help improve access while also encouraging more effective use of healthcare resources.
23
What are the main income transfer effects of health insurance?
Health insurance transfers income by redistributing risk from the healthy to the sick, by promoting equity in access to healthcare, and by using premium subsidies or income-based support in some systems. In this way, it both protects individuals from medical costs and redistributes financial resources within society.