Question

health economics and policy

Case Study 2 Suppose that within a given city, women ages 65 and older fall into one of four health categories very healthy, healthy, unhealthy, and very unhealthy. As a part of the new PPACA, the government has mandated that insurance companies must charge the same premiums to all people within a given gender, age and geographical region. The insurance company must determine the premium it should charge to all people in this category so that it can cover the total cost of care. In order to do your analysis, make the following assumptions: 1. The insurance company does not incur any costs to run or administer the policies, and it does not make any profits 2. The population is large enough so that expected values hold at the aggregate level. 3. Anyone who pays the monthly premium receives complete coverage of all medical expenses (in other words, everyone is offered full insurance). 4. All citizens are risk averse and are therefore willing to pay a premium above the expected value of their costs, up to the amount indicated in the column "Maximum Willingness to Pay for Insurance" The following table presents the number of people in each group and the expected monthly cost of providing care for each category of person. The table also presents the maximum that an individual is willing to pay within each group. As you can see, this is higher than the expected cost. This reflects the fact that people are generally risk averse. In the context of health insurance, this means that they prefer to pay some amount for certain each month than to face paying the full cost of somewhat unpredictable care Complete the following table by computing the total expected monthly cost of care for each type of citizen, the total number of people in this market, and the total expected monthly cost of insuring all citizens. willingness to Expectat Maximum Monthly CO WTP Total Expected Monthly Cost (5) (S) Number of People 500 300 Type of Person Very Healthy Healthy Unhealthy Very Unhealthy (5) 100 450 700 5,000 110 518 980 7,500 200 50 Total If the insurance company must offer one plan to all women ages 65 and older, what will be the monthly premium (rounded to the nearest dollar) per person? 2. What is the Consumer Surplus for this cohort of women?

how do I calculate the following: if the insurance company must offer one plan to all women ages 65 and older, what will be the monthly premiun per person? and the surplus?

Answer 1

The Total Number of People in the Market Is 1050 (500+300+200+50) Total Expected Cost Of Insuring the People Is $5, 75,000 (50000+135000+140000+250000). So The Average Cost Of Insuring One Person Is $575000 / 1050 L.E., $547.62. So Assuming That The Insurance Company Is Non-Profitable And Has No Administrative Charges, It Should Charge $548 Per Person As Premium In order To Cover The Cost If It Plans To Bring All The People Above 65 Under A Single Plan. So Only The Women In The Categories Of Unhealthy And Very Unhealthy Will Opt For Insurance As Their Willingness To Pay For Insurance Is More Than The Expected Cost Of Insurance / Premium Payable. Very Healthy And Healthy Will Not Opt For Insurance. So The Amount The Insurance Company Collects As Premium From Them Is: = (200*980) + (50*7500) = 196.000+3.75,000 = $5,71,000 Amount The Company Is Expecting To Pay Out To Them Is: = (200* 700) + (50 * 5000) = 1,40,000+2,50,000 - $200 000