True or False
The Law of Large Numbers explains why it is unlikely that the actuarially fair premium for an insurance policy will be the same for a small start up firm as it will be for a large employer such as a university.
Depending on assistance from family and friends to pay for one’s unforeseen medical expenses is an example of an economic trade-off between consumption today and consumption tomorrow.
The ultimate solution for adverse selection is to include everyone in a social insurance system, similar to what the United States did for the elderly by creating Medicare.
The U.S. is unusual in the developed world in that it uses a general tax to fund health insurance for the elderly.
Title XVII of the Social Security Act of 1965 dealt with the problem of adverse selection in health insurance markets for elderly people.
Bill’s employer offers a new health insurance benefit which covers preventive and cosmetic dental services, including orthodontic care, for employees and their family members. If Bill knows his children need extensive orthodontic care, he will buy the policy. This is an example of moral hazard.
Bill’s health insurance covers preventive and cosmetic dental services, including orthodontic care, for employees and their family members. Bill is willing to pay $30 per month for over the counter teeth whitening strips at the local pharmacy. With his co-pay, he learns he can pay $25 per month and receive professional teeth whitening services at his dentist. He chooses to go to the dentist for the service, which costs the insurance company $75 per month. This is an example of adverse selection.
Increasing the ratio of part time instructors to full time professors reflects one of many ways that universities attempt to reduce costs of its workforce.
Bill is an aging snowboard instructor at a local ski resort. All winter, he takes over the counter pain medication to deal with his aching joints. Each summer, he moves home with his parents and takes a part time job making minimum wage. This summer, he got qualified for and enrolled into state government subsidized health insurance. Now he plans to undergo arthroscopic surgery by the end of the summer to repair his knee. Though this is an economically rational decision for Bill, it represents a welfare loss to society as a whole.
Catastrophic medical expenses are large, infrequent and unpredictable. Risk aversion explains why people buy insurance which covers such catastrophic events.
The primary funding source for the expenses of current Medicare beneficiaries is the fund current beneficiaries contributed to throughout their lifetime.