Health Insurance Policy in Australia - Assignment Example

Health Insurance Policy (Author’s name) (Institutional Affiliation) 1. Using an increasing and concave utility function, show; a. Why a consumer would demand health insurance Insurance A customer would demand health insurance because they are averse to risk. This means that they would rather pay a certain sum of money to be guaranteed of future income, as opposed to remaining optimistic without insuring their future against unforeseen eventualities. A risk averse consumer of health insurance will take this option due to the decreasing marginal utility of income as illustrated by the graph (Gans 2014). The risk-averse health insurance consumer will derive more utility due to the guaranteed income. The risk averse consumer is better off avoiding risk and that is why the guaranteed revenue from health insurance has more utility to the consumer than any other income that the consumer could be expecting. b. The welfare gain to the consumer of full insurance as measured by the risk premium As already mentioned, the consumer derives more utility regarding the welfare that they gain from the premium risk payouts in comparison to the satisfaction that the health insurance consumer would obtain from other expected incomes (Morris, Devlin, & Parkin 2007). This is because the risk premiums are guaranteed payouts. 2. Use either the Rothschild and Stiglitz model or the sketched model to describe the process of adverse selection. One of the common dilemmas in the insurance market is the concept of adverse selection. The main issues are revolving around the negative selection entail a situation where one party to the insurance contract, mainly the insurer, has private information in advance that they may exploit to their advantage and the detriment of the insured (Martinez-Giralt & Barros 2013). This concept may be explained through the Rothschild and Stiglitz model. The solution to this dilemma is the passing of this credible and private information by the insurer through an action of signaling, or where the insured insists on accessing the said information through an operation of screening. Under the Rothschild and Stiglitz model, the information asymmetry may lead to an equilibrium that is separating. There are numerous insurance firms in the market with each one offering the prospective client an insurance contract as they are competing. Each of these insurance companies will be expecting no profit. This means that in a contract that has a particular type of clients, say L customers for low-risk consumers will be on a fair premium slope (1-πL)/ πL; and for H customers, the slope will be (1-πH)/ πH. The insurance companies will limit their coverage to the L type of consumers, meaning at best they can only offer them SL contracts, thus pushing the H clients to CH. On the other hand, the L consumers will take up the SL contracts in preference to the CH ones. However, the single crossing property of the model will find an insurance contract That is only appealing to the L types of clients, and it is below the profit zone for the insurance contracts that only have the L type of insurance clients. Thus, a company offering such deals will make positive benefits, and it is the entry of such insurers to the insurance market that destabilizes the pooling (Rothschild & Stiglitz 1976). This means that the insurance market equilibrium will be non-existent since the competition between the insurance firms will lead to a cyclic recurrence of pooling and separation. The government may help out in this regard by playing the pivotal role of regulating the insurance market. This can be done through making the joining pool a must for the insurance companies, hence helping avoid the adverse competition among the entities. 3. Use real world examples from Australia or overseas to analyze a possible government policy response to adverse selection in health insurance. The best real world example from overseeing that may be used to show the government's attempt in mitigating adverse selection in health insurance would be the United States Affordable Care Act. This public policy, which was the brainchild of President Obama's administration, has since been debated, passed, and legislated into law. It was meant to safeguard the American insurance industry by ensuring that both the old and young people get enrolled or registered for medical insurance. This is informed by the fact a stable insurance industry will rely on the adequate registration of as many health citizens as possible so that their funds will go into catering for the medical care of the registered citizens who end up falling sick (Sheils & Haught 2011). Needless to mention, the need for medical care increases with an increase in age, thus the reason for insisting that young people ought to enroll for the health insurance scheme. The enrollment of such category of medical insurance seekers in their droves will protect the American health insurance industry from a situation of adverse selection in which a low number of health citizens registers for the medical scheme, rendering it inefficient due to lack of funds to cover the medical care costs for the aged or sick populace. The age and health status of people registering for the Affordable Care Act, popularly referred to as the Obamacare medical scheme, are not related at all. The scheme is touted as the best remedy to tackling adverse selection in the United States because a substantial number of the American youth is expected to register since the Obamacare scheme offers more incentives and subsidies to the younger generation in comparison to the aged population that qualifies for the scheme. Having attained this objective, it is expected that insurance companies will have sufficient revenues to cover the medical expenses of the sick enrollees. Other different factors have stakeholder’s belief that the insurance industry under Obamacare will thrive due to the mitigated adverse selection. One such factor is based on the ample time that the public has to enroll in the program, thus leading to the overall financial viability of the policy. There is also an underlying belief that American insurance companies have cushioned themselves against adverse selection in that they set relatively higher premiums. Better yet is the fact that these companies have the flexibility of charging the older citizens up to thrice the amount of premiums that they charge the young Americans who have registered for the Obamacare medical insurance policy. The Affordable Care Act also contains favorable provisions that are formulated to safeguard the insurance entities in case of a skewed registration where the youth fail to register in targeted numbers (Blumenthal, Abrams & Nuzum 2015). Moreover, the costs of medical insurance to these insurance providers are about 4 or 5 percent below their profitability levels, thus no risk of adverse selection at all. In fact, observers in the American insurance market argue that the Affordable Care Act is carefully designed to profit the relatively sicker and older employees in comparison to the healthy proportion of the country's citizens who have registered for the Obamacare medical scheme, thus mitigating the prospect of adverse selection entirely. References Blumenthal, D., Abrams, M., and Nuzum, R., (2015) “The Affordable Care Act at 5 Years” The New England Journal of Medicine 372(25):2451-245. Gans, J. K., Stephen; Stonecash, Robin; Byf. (2014). Principles of Economics, 6th Ed. New York, Cengage Learning.  Martinez-Giralt, X. and Barros, P., 2013. Health economics: an industrial organization perspective. Routledge. MORRIS, S., DEVLIN, N., & PARKIN, D. (2007). Economic analysis in health care. Chichester, Wiley. Rothschild and Stiglitz, 1976 “Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information” Quarterly Journal of Economics 90(4): 629-649. Sheils, John and Haught, Randall, (2011) “Without The Individual Mandate, The Affordable Care Act Would Still Cover 23 Million; Premiums Would Rise Less Than Predicted” Health Affairs 30 (11):2177-2185. Read More