ºÝºÝߣ

ºÝºÝߣShare a Scribd company logo

Community Rating In The Market For Private Health Insurance

•Download as PPT, PDF•
•
S
s.coffey

The document analyzes why community rating, where all individuals pay the same health insurance premium regardless of risk level, cannot work in a competitive private health insurance market. It uses contingent commodities diagrams to show that high-risk individuals are made worse off by community-rated policies, while low-risk individuals are better off. This creates an incentive for insurers to fragment the market by offering different risk-adjusted premiums to attract only low-risk individuals. As a result, community rating is not a stable equilibrium and the private insurance market will not remain pooled.

1 of 42
Downloaded 12 times
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
Consider the following contingent commodities diagrams: High Risk Individuals Low Risk Individuals C 2 C 1 45 ° C 2 C 1 45 °
Consider the following contingent commodities diagrams: High Risk Individuals Low Risk Individuals C 2 C 1 45 ° C 2 C 1 45 °
Consider the following contingent commodities diagrams: High Risk Individuals Low Risk Individuals C 2 C 1 45 ° C 2 C 1 45 °
Consider the following contingent commodities diagrams: High Risk Individuals Low Risk Individuals C 2 C 1 45 ° C 2 C 1 45 °
Consider the following contingent commodities diagrams: High Risk Individuals Low Risk Individuals C 2 C 1 45 ° C 2 C 1 45 °
Insurance companies can fragment the market and offer different risk premiums to different groups. The slopes of the indifferences curves are: The slopes of the budget constraints are: For fair insurance p = r With two groups this can be a separating equilibrium p h = r h p l = r l
C 2 C 1 45 ° H
C 2 C 1 45 ° H L
C 2 C 1 45 °
L -> fair insurance line for low risk people H -> fair insurance line for high risk people C 2 C 1 H L
L -> fair insurance line for low risk people H -> fair insurance line for high risk people A -> average of the two C 2 C 1 H A L
Mapping the three diagrams together: C 2 C 1
Mapping the three diagrams together: IC 1 -> indifference curve if high-risk individuals are offered fair insurance IC 1 C 2 C 1
Mapping the three diagrams together: 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
Mapping the three diagrams together: A -> insurance line for pooled (community rated) contracts IC 1 IC 2 A C 2 C 1
Mapping the three diagrams together: A -> insurance line for pooled (community rated) contracts IC 1 IC 2 C 2 C 1
Mapping the three diagrams together: IC 3 -> indifference curve if high-risk individuals are offered pooled insurance contract IC 1 IC 2 IC 3 C 2 C 1
Mapping the three diagrams together: IC 3’ -> indifference curve for high-risk who cannot over insure with pooled contract IC 1 IC 2 IC 3’ C 2 C 1
Mapping the three diagrams together: 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
Mapping the three diagrams together: 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
If the market is competitive is this a stable equilibrium? C 2 C 1
In a competitive market other firms may enter the market and offer insurance. Another firm may offer insurance at a different price (insurance line) to the incumbent. 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
It is not possible to have a stable equilibrium in a competitive insurance market with community rating.
It is not possible to have a stable equilibrium in a competitive insurance market with community rating. Unless.............

More Related Content

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. Consider the following contingent commodities diagrams: High Risk Individuals Low Risk Individuals C 2 C 1 45 ° C 2 C 1 45 °
  • 5. Consider the following contingent commodities diagrams: High Risk Individuals Low Risk Individuals C 2 C 1 45 ° C 2 C 1 45 °
  • 6. Consider the following contingent commodities diagrams: High Risk Individuals Low Risk Individuals C 2 C 1 45 ° C 2 C 1 45 °
  • 7. Consider the following contingent commodities diagrams: High Risk Individuals Low Risk Individuals C 2 C 1 45 ° C 2 C 1 45 °
  • 8. Consider the following contingent commodities diagrams: High Risk Individuals Low Risk Individuals C 2 C 1 45 ° C 2 C 1 45 °
  • 9. Insurance companies can fragment the market and offer different risk premiums to different groups. The slopes of the indifferences curves are: The slopes of the budget constraints are: For fair insurance p = r With two groups this can be a separating equilibrium p h = r h p l = r l
  • 10. C 2 C 1 45 ° H
  • 11. C 2 C 1 45 ° H L
  • 12. C 2 C 1 45 °
  • 13. L -> fair insurance line for low risk people H -> fair insurance line for high risk people C 2 C 1 H L
  • 14. L -> fair insurance line for low risk people H -> fair insurance line for high risk people A -> average of the two C 2 C 1 H A L
  • 15. Mapping the three diagrams together: C 2 C 1
  • 16. Mapping the three diagrams together: IC 1 -> indifference curve if high-risk individuals are offered fair insurance IC 1 C 2 C 1
  • 17. Mapping the three diagrams together: 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. Mapping the three diagrams together: A -> insurance line for pooled (community rated) contracts IC 1 IC 2 A C 2 C 1
  • 19. Mapping the three diagrams together: A -> insurance line for pooled (community rated) contracts IC 1 IC 2 C 2 C 1
  • 20. Mapping the three diagrams together: IC 3 -> indifference curve if high-risk individuals are offered pooled insurance contract IC 1 IC 2 IC 3 C 2 C 1
  • 21. Mapping the three diagrams together: 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. Mapping the three diagrams together: 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. Mapping the three diagrams together: 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. If the market is competitive is this a stable equilibrium? C 2 C 1
  • 25. In a competitive market other firms may enter the market and offer insurance. Another firm may offer insurance at a different price (insurance line) to the incumbent. 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. It is not possible to have a stable equilibrium in a competitive insurance market with community rating.
  • 42. It is not possible to have a stable equilibrium in a competitive insurance market with community rating. Unless.............