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Community Rating in the Market for Private Health Insurance: A simple analysis of why it can’t work
Community Rating in the Market for Private Health Insurance: basic A simple analysis of why it can’t work
Source: Rothschild and Stiglitz,  1976
[object Object],[object Object],[object Object],[object Object],[object Object],C 2 C 1 45 ° C 2 C 1 45 °
[object Object],[object Object],[object Object],[object Object],[object Object],C 2 C 1 45 ° C 2 C 1 45 °
[object Object],[object Object],[object Object],[object Object],[object Object],C 2 C 1 45 ° C 2 C 1 45 °
[object Object],[object Object],[object Object],[object Object],[object Object],C 2 C 1 45 ° C 2 C 1 45 °
[object Object],[object Object],[object Object],[object Object],[object Object],C 2 C 1 45 ° C 2 C 1 45 °
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
C 2 C 1 45 ° H
C 2 C 1 45 ° H L
C 2 C 1 45 °
[object Object],[object Object],C 2 C 1 H L
[object Object],[object Object],[object Object],C 2 C 1 H A L
[object Object],C 2 C 1
[object Object],IC 1   ->  indifference curve if high-risk individuals are offered fair insurance IC 1 C 2 C 1
[object Object],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
[object Object],A  ->  insurance line for pooled (community rated) contracts IC 1 IC 2 A C 2 C 1
[object Object],A  ->  insurance line for pooled (community rated) contracts IC 1 IC 2 C 2 C 1
[object Object],IC 3   ->  indifference curve if high-risk individuals are offered pooled insurance contract IC 1 IC 2 IC 3 C 2 C 1
[object Object],IC 3’   ->  indifference curve for high-risk who cannot over insure with pooled contract IC 1 IC 2 IC 3’ C 2 C 1
[object Object],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
[object Object],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
[object Object],C 2 C 1
[object Object],[object Object],C 2 C 1
L  -> fair insurance line for low-risk group L C 2 C 1
Any contract in the shaded area makes low risk people better off but is not attractive to high risk people.  C 2 C 1
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
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
The original company will find p a  = r a  < p h and will be making a loss. X C 2 C 1
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
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
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
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
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
However at this price even high risk people will find contract  X attractive and will switch. X C 2 C 1
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
C 2 C 1 As a result of this the company will have to start increasing the price.
C 2 C 1 As a result of this the company will have to start increasing the price.
This is where we started. And we already know that this is not a stable equilibrium. C 2 C 1
[object Object]
[object Object],[object Object]

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Community Rating In The Market For Private Health Insurance

  • 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.
  • 5.
  • 6.
  • 7.
  • 8.
  • 9.
  • 10. C 2 C 1 45 ° H
  • 11. C 2 C 1 45 ° H L
  • 12. C 2 C 1 45 °
  • 13.
  • 14.
  • 15.
  • 16.
  • 17.
  • 18.
  • 19.
  • 20.
  • 21.
  • 22.
  • 23.
  • 24.
  • 25.
  • 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.
  • 42.