Economics

Instructions: answer the questions thoroughly; your answers need to be unique (meaning written in your own words). You cannot work with a partner or submit the same answers.

1. Barry met with his company’s benefit manager to sign up for the health insurance provided through his employer. He had worked for the firm for over 2 years, but was one of many who chose not to take the offer to participate in the plan, because he considered his share of the premiums too expensive. In the intervening interview the subject turned to pre-existing conditions. Yes, Barry’s wife was eight months pregnant. Yes, he wanted insurance to cover the expenses of the impending childbirth (expected to cost $10,000). Barry was incredulous when he found out that there was a 90 day waiting period before any preexisting condition could be covered. “Well, something is really wrong with this country if you can’t even buy insurance when you need it.”
a. Is Barry justified in his criticism?
b. What is the purpose of insurance? Is Barry looking for insurance in this instance? What is he looking for?
c. Why doesn’t insurance cover preexisting conditions?
2. When employers pay for health insurance as part of the total compensation package provided its employees; who really pays—employers, employees, taxpayers? Explain.
3. Define the two concepts “moral hazard” and “adverse selection.” Describe separately how the existence of each affects the market for health insurance and medical care. What are some of the ways that insurance companies try to protect themselves against these two phenomena?
4. How are incentives to providers different when they are paid on a capitated basis rather than a fee-for-service basis? Discuss the arguments (both pro and con) relating to placing physicians on risk-sharing contracts.

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