Health_Insurance_basics_08 - Health Insurance: the Basics...

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
Health Insurance: the Basics PAM 435 February 14, 2008
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Today’s Objectives 1)Describe the benefits of health insurance 1)Examine problems caused by, or related to, health insurance 3)Discuss why most people in the U.S. receive health insurance from their employer.
Background image of page 2
Example of Calculating an Actuarially Fair (or “Pure”) Premium Under a System of Community Rating 40-year old female Expected Illness/Disease Probability Treatment Cost Cost Heart Disease 0.01 X $20,000 = $200 Diabetes 0.02 $15,000 $300 Cancer 0.002 $40,000 $80 Stroke 0.001 $20,000 $20 Pneumonia 0.005 $8,000 $40 None 0.30 $1,000 $300 $3,937 + 15% loading charge = $4,632 actual premium
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
$12,444 $11,592 $11,880 $10,692 $4,632 $4,332 $4,296 $3,864 PPO POS HMO High deductible Family Single Health Insurance Plans Are Expensive Average Annual Premium by Type of Health Plan, 2007 Source: The Kaiser Family Foundation, Employer Health Benefits, Annual Survey, 2007 .
Background image of page 4
Why would anyone pay more than the pure premium for health insurance? There is value from risk reduction Risk Premium = the amount above and beyond the pure premium one is willing to spend to get insurance If health risks are assessed accurately, a person will purchase insurance if his/her risk premium > loading charge
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Option B is Clearly Better… Isn’t It? Expected Payout Option A Option B (1.0) X $1 million = (0.10) X $5 million + (0.89) X $1 million + (0.01) X $0 million = $1 million $1.39 million <
Background image of page 6
Health Insurance Premiums Actual premium paid by the consumer = Pure Premium + Loading Charge Pure Premium (or actuarially fair premium) = expected medical spending for a group of people with the same risk level (i.e., same age, gender, …) Loading charge = amount of money the insurance company charges in addition to the pure premium Covers administrative cost, claims processing cost, marketing cost, profit
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Primary Benefit of Health Insurance Protects against financial risk It’s difficult to predict whether/when a low-probability but very expensive medical condition will occur Most people prefer to face a (relatively) small but certain loss (i.e., the health insurance premium) in exchange for avoiding the risk of a large financial loss Insurance shifts financial risk from an individual to the group by pooling resources; losses are shared by all members of group.
Background image of page 8
Now Consider a Different Way of Determining Health Insurance Premiums: Experience Rating Medical costs last year $1,000 $25,000 Expected costs $2,000 $22,000 this year + 15% loading charge Premium under experience rating $2,300 $25,300 Premium under $4,632 $4,632 community rating 40-year old woman who 40-year old woman smokes, has diabetes, in perfect health and is obese
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
1) Who is likely to buy health insurance in each pricing system? 1) Which of these two pricing systems is “fairer”?
Background image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 34

Health_Insurance_basics_08 - Health Insurance: the Basics...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online