Question

Health Economics writing question. Please help me.

Give three good reasons why someone might choose to pay $1,150 for health insurance when the actuarially fair premium was only $900.

Answer 1

Three good reasons why someone might choose to pay $1150 for health insurance when the actuarially fair premium was only $900 are mentioned below:

a) A person might be willing to pay more than actuarially fair premium for health insurance, if he or she is involved in a risky job profile or is having a high risk lifestyle. For example, a person who is a smoker will be willing to pay more than actuarially fair premium for health insurance because he/she will be having more information about his health. Unhealthy food habits or risk involved in their job profile will make them pay more than actuarially fair premium for health insurance.

b) Also, if there is a history of some sort of common disease in a person's family then he/she will be more willing to pay more than actuarially fair premium for health insurance. This is so because they are aware of the pre-existing diseases in their family genes & know that they might have to suffer from them at some point of life. For example, if there is a history of hemophilia or muscular dystrophy in a particular family, then the following generations have more chances of having same sort of problems, therefore, they will be willing to pay more than actuarially fair premium for health insurance.

c) Also, if a person expects that there will be deflation in the market, due to which the purchasing power of $900 in near future will be more than the existing purchasing power of $1,150. Purchasing power of people increases because of fall in prices of goods during deflation.