Question

Suppose that an insurance company covers an organization with members from two population groups: healthy and sick. The healthy population group averages $2,000 in healthcare expenditures annually while the sick population group averages $50,000 in expenditures. If the insurance company believes 90% of the organization consists of healthy individuals, what is the average expected spending for the members? If the health insurance company adds a 10% loading factor onto the average costs to cover administrative expenses, what is the average charge per person for the organization?  

Answer 1

1. Average expected spending for the members = Probability of healthy * Healthy group average + Probability of Sick * Sick group average

Average expected spending for the members = 0.90 * 2000 + 0.10 * 50000

Average expected spending for the members = $6800

2. Average Cost including Loading factor = Average Spending * (1 + Loading Factor)

Average Cost including Loading factor = 6800 * (1 + 0.10)

Average Cost including Loading factor = $7480