Imagine a health insurance market with 100 people. In this market in Year 1, 40
ID: 1124943 • Letter: I
Question
Imagine a health insurance market with 100 people. In this market in Year 1, 40 people expect to have $0 in health expenses per year, 35 people expect to have $250 in health expenses per year, 12 people expect $5,000 in health expenses per year, 10 people expect $10,000 in health expenses and 2 people expect $25,000 in health expenses and 1 person expects $40,000 in health expenses over the entire year. Assume insurance covers 100% of medical expenses and premiums are equal to expected costs.
1. What is the expected cost of insurance per month in year 1? Note, use this premium as the Y1 premium across all parts of this problem.
2. In Year 1 how many people would choose to buy insurance and how many would not choose to buy insurance based on the premium and their expected benefits?
3. What would the Y2 premium be based on the individuals who choose to buy insurance?
4. If everyone values “just having insurance” in Year 1 at $2500 how many people would change their decision?
5. If there is an individual mandate penalty in Year 1 of $695 per year for not having insurance in addition to the “just having insurance” value of $2,500 how many people would change their purchase decisions? What would be the expected Y2 premium?
Explanation / Answer
1. Monthly premium = 258750/100= 2587.50/12= $215.625
2. 75 pwhoserople whose health expenses are less then insurance premium will not buy the insurance and 25 people will buy the insurance because their health expenses will be more then the premium paid to purchase the insurance.
3. Y2 premium = 250000/25= $10000
because health expenses of only 25 people who buys insurance will be considered.
4. No extra person will choose the decision because 40 people had no health expenses so they will still not buy insurance and 35 people have their health expenses as only $250 which is way less then $2500 so they too will still not buy insurance.
5. No change in number of ppeople and Y2 insurance premium will still remain same as $10000.
please vote the answer.
No. Of people Total Expenses on insurance ($) 40 0 35 35*250= 8750 12 12*5000= 60000 10 10*10000= 100000 2 2*25000= 50000 1 1*40000= 40000 100 258750