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16-6 Medicare Part B has co-insurance of 20% and no-cap on the co-insurance amount a person...

16-6 Medicare Part B has co-insurance of 20% and no-cap on the co-insurance amount a person pays in the event of high medical bills. For example, if the patient has a major health event and the physician fees amount to $50,000, the patient is responsible for 20% of the fee or the patient pays $10,000. Of course, a plan with co-insurance is preferred to first-dollar coverage plan to minimize more hazard and deadweight loss in the health insurance market. On the other hand, as just illustrated, co-insurance payments can become very expensive for the chronically ill or for persons who have a major adverse health event.

a. Why is consumption smoothing limited when there is no cap on the co-insurance amount the patient pays?

b. Explain why having an annual cap of $5,000 for co-insurance payments may not interfere with the objective of minimizing the patient’s moral hazard associated with the demand for physician health services.

Solutions

Expert Solution

1--- Coinsurance is a type of insurance where there is cost sharing of the loss or expenses that are incurred in the event of bad health, the cost is shared between the insured and the insurance company.

In the case of coinsurance, this is predetermined and agreed that how much of the total cost will be shared by the insured and how much will the insurance company will pay.

For example, if John gets ill and he has a coinsurance plan that states cost sharing in the ratio of 20:80. If John gets ill and he gets health care services and that cost him $100 than 20$ will be paid by John and 80$ will be borne by the insurance company. This cost sharing is the coinsurance policy.

Consumption smoothing is done in case of coinsurance policies because the insured will also make a contribution to the expense that is incurred in taking the healthcare services. Since the insured has to bear the expense then there will be no unnecessary claims and in this way, the consumption limits will be regulated for the patients that they make.

2----Copay insurance is another type of insurance in which there is cost sharing but the amount that is to be shared is fixed and this does not increase or decrease with the amount of claim that is made.

This amount in copay insurance is fixed.

An annual cap of $5K will not interfere in providing relax of mind in case of critical Illness as the insured is always assured that he has to pay the fixed amount, no matter how much big the claim amount is.

So in copay insurance the insured is always under the liability to pay fix sum of amount despite how much big the claim is.

Suppose John has a copay insurance and he had bad health and becomes critically ill and the total cost of hospitalization comes out to be $100K, in this case, John is only liable to pay the $5K amount. So this has given John peace of mind in the event of critical illness also.


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