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Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
Community Rating In The Market For Private Health Insurance
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Community Rating In The Market For Private Health Insurance

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  • 1. Community Rating in the Market for Private Health Insurance: A simple analysis of why it can’t work
  • 2. Community Rating in the Market for Private Health Insurance: basic A simple analysis of why it can’t work
  • 3. Source: Rothschild and Stiglitz, 1976
  • 4. <ul><li>Consider the following contingent commodities diagrams: </li></ul><ul><li>High Risk </li></ul><ul><li>Individuals </li></ul><ul><li>Low Risk </li></ul><ul><li>Individuals </li></ul>C 2 C 1 45 ° C 2 C 1 45 °
  • 5. <ul><li>Consider the following contingent commodities diagrams: </li></ul><ul><li>High Risk </li></ul><ul><li>Individuals </li></ul><ul><li>Low Risk </li></ul><ul><li>Individuals </li></ul>C 2 C 1 45 ° C 2 C 1 45 °
  • 6. <ul><li>Consider the following contingent commodities diagrams: </li></ul><ul><li>High Risk </li></ul><ul><li>Individuals </li></ul><ul><li>Low Risk </li></ul><ul><li>Individuals </li></ul>C 2 C 1 45 ° C 2 C 1 45 °
  • 7. <ul><li>Consider the following contingent commodities diagrams: </li></ul><ul><li>High Risk </li></ul><ul><li>Individuals </li></ul><ul><li>Low Risk </li></ul><ul><li>Individuals </li></ul>C 2 C 1 45 ° C 2 C 1 45 °
  • 8. <ul><li>Consider the following contingent commodities diagrams: </li></ul><ul><li>High Risk </li></ul><ul><li>Individuals </li></ul><ul><li>Low Risk </li></ul><ul><li>Individuals </li></ul>C 2 C 1 45 ° C 2 C 1 45 °
  • 9. <ul><li>Insurance companies can fragment the market and offer different risk premiums to different groups. </li></ul><ul><li>The slopes of the indifferences curves are: </li></ul><ul><li>The slopes of the budget constraints are: </li></ul><ul><li>For fair insurance </li></ul><ul><li>p = r </li></ul><ul><li>With two groups this can be a separating equilibrium </li></ul><ul><li>p h = r h </li></ul><ul><li>p l = r l </li></ul>
  • 10. C 2 C 1 45 ° H
  • 11. C 2 C 1 45 ° H L
  • 12. C 2 C 1 45 °
  • 13. <ul><li>L -> fair insurance line for low risk people </li></ul><ul><li>H -> fair insurance line for high risk people </li></ul>C 2 C 1 H L
  • 14. <ul><li>L -> fair insurance line for low risk people </li></ul><ul><li>H -> fair insurance line for high risk people </li></ul><ul><li>A -> average of the two </li></ul>C 2 C 1 H A L
  • 15. <ul><li>Mapping the three diagrams together: </li></ul>C 2 C 1
  • 16. <ul><li>Mapping the three diagrams together: </li></ul>IC 1 -> indifference curve if high-risk individuals are offered fair insurance IC 1 C 2 C 1
  • 17. <ul><li>Mapping the three diagrams together: </li></ul>IC 1 -> indifference curve if high-risk individuals are offered fair insurance IC 2 -> indifference curve if low-risk individuals are offered fair insurance IC 1 IC 2 C 2 C 1
  • 18. <ul><li>Mapping the three diagrams together: </li></ul>A -> insurance line for pooled (community rated) contracts IC 1 IC 2 A C 2 C 1
  • 19. <ul><li>Mapping the three diagrams together: </li></ul>A -> insurance line for pooled (community rated) contracts IC 1 IC 2 C 2 C 1
  • 20. <ul><li>Mapping the three diagrams together: </li></ul>IC 3 -> indifference curve if high-risk individuals are offered pooled insurance contract IC 1 IC 2 IC 3 C 2 C 1
  • 21. <ul><li>Mapping the three diagrams together: </li></ul>IC 3’ -> indifference curve for high-risk who cannot over insure with pooled contract IC 1 IC 2 IC 3’ C 2 C 1
  • 22. <ul><li>Mapping the three diagrams together: </li></ul>IC 3’ -> indifference curve for high-risk who cannot over insure with pooled contract IC 4 -> indifference curve if low-risk individuals are offered pooled insurance contract IC 1 IC 2 IC 4 IC 3’ C 2 C 1
  • 23. <ul><li>Mapping the three diagrams together: </li></ul>We see that: IC 3’ > IC 1 ⇒ high-risk people are on a higher indifference curve IC 2 < IC 4 ⇒ low-risk people are on a higher indifference curve IC 1 IC 2 IC 4 IC 3’ C 2 C 1
  • 24. <ul><li>If the market is competitive is this a stable equilibrium? </li></ul>C 2 C 1
  • 25. <ul><li>In a competitive market other firms may enter the market and offer insurance. </li></ul><ul><li>Another firm may offer insurance at a different price (insurance line) to the incumbent. </li></ul>C 2 C 1
  • 26. L -> fair insurance line for low-risk group L C 2 C 1
  • 27. Any contract in the shaded area makes low risk people better off but is not attractive to high risk people. C 2 C 1
  • 28. Point X represents a better contract for the low risk individuals if the bad state of the world occurred. At X the new insurance company will only attract low risk individuals. X C 2 C 1
  • 29. Point X represents a better contract for the low risk individuals if the bad state of the world occurred. At X the new insurance company will only attract low risk individuals. X C 2 C 1
  • 30. The original company will find p a = r a < p h and will be making a loss. X C 2 C 1
  • 31. The original company will find p a = r a < p h and will be making a loss. To counter this the company may start to charge a higher price. X C 2 C 1
  • 32. The original company will find p a = r a < p h and will be making a loss. To counter this the company may start to charge a higher price. X C 2 C 1
  • 33. The original company will find p a = r a < p h and will be making a loss. To counter this the company may start to charge a higher price. X C 2 C 1
  • 34. The original company will find p a = r a < p h and will be making a loss. To counter this the company may start to charge a higher price. X C 2 C 1
  • 35. As they have all high risk people this company may increase it price to the fair price for those people. X C 2 C 1
  • 36. However at this price even high risk people will find contract X attractive and will switch. X C 2 C 1
  • 37. However at this price even high risk people will find contract X attractive and will switch. This is not what the company the entered the market and offered X wants. X C 2 C 1
  • 38. C 2 C 1 As a result of this the company will have to start increasing the price.
  • 39. C 2 C 1 As a result of this the company will have to start increasing the price.
  • 40. This is where we started. And we already know that this is not a stable equilibrium. C 2 C 1
  • 41. <ul><li>It is not possible to have a stable equilibrium in a competitive insurance market with community rating. </li></ul>
  • 42. <ul><li>It is not possible to have a stable equilibrium in a competitive insurance market with community rating. </li></ul><ul><li>Unless............. </li></ul>

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