HSA 3430 Chapter 13 ppts - Chapter 13 Asymmetric...

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Chapter 13 Asymmetric Information and Incentives Copyright 2015 Health Administration Press
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After mastering this material, students will be able to define asymmetric information and opportunism, explain why they are important and common, explain why they are especially challenging in healthcare, and describe strategies for addressing them. Copyright 2015 Health Administration Press 2
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ASYMMETRIC INFORMATION Copyright 2015 Health Administration Press 3
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Asymmetric information is common, affects many relationships, has potentially serious consequences, must be considered by managers, and can be addressed in multiple ways. Copyright 2015 Health Administration Press 4
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Asymmetric information is common in healthcare. It is often a factor in provider–patient relations, insurer–provider relations, employer–employee relations, and buyer–seller relations. Copyright 2015 Health Administration Press 5
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Problems Adverse selection People with a hidden characteristic can take advantage of the ignorance of others. Example: Sick people buying life insurance Moral hazard People can take hidden actions and take advantage of the ignorance of others. Example: Employees shirking Copyright 2015 Health Administration Press 6
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A Pooling Equilibrium Type Share Risk of Illness WTP Expecte d Cost Well 95% 1% $750 $500 $500 = 1% × $50,000 Ill 5% 10% $7,500 $5,000 $5,000 = 10% × $50,000 Copyright 2015 Health Administration Press 7
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If the insurer charges $725, everyone buys insurance. $725 = 95 percent × $500 + 5 percent × $5,000 For the well, $725 < WTP = $750. For the ill, $725 < WTP = $7,500. Everyone is in the same risk pool. The ill are getting a great deal. Copyright 2015 Health Administration Press 8
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Small changes make a pooling equilibrium impossible. Type Share Risk of Illness WTP Expecte d Cost Well 90% 1% $750 $500 $500 = 1% × $50,000 Ill 10% 10% $7,500 $5,000 $5,000 = 10% × $50,000 Copyright 2015 Health Administration Press 9
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If the insurer charges $950, only the ill buy insurance.
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