Question

QUESTION 3

1. Politicians are considering a policy that would fully privatize Medicare. From an economics perspective, what would be the likely effect? (Think of moral hazard, adverse selection, prices, and number of people who have insurance)

QUESTION 4

1. What is adverse selection? What are three different policies that reduce or eliminate adverse selection?

QUESTION 5

1. What is moral hazard? What are three different policies that reduce or eliminate moral hazard?

Answer 1

3. The insurers can still charge older people three times more than younger people. So for someone 65 or older to be able to buy coverage anywhere close to adequate, the vouchers would have to be pretty generous.

And here’s another reason why such a program would likely cost taxpayers more in the long run: private insurers have not been able to control medical costs nearly as well as Medicare has. Private insurers pay doctors and hospitals considerably more, on average, than Medicare does, because Medicare uses its massive leverage to negotiate more aggressively.

Insurance companies wouldn’t have a problem with vouchers so long as they were sizable enough for them to not only to cover the cost of senior care but also enable them to make a profit

The ability of insurance companies to claim that Medicare Advantage plans provide the “same” coverage as regular Medicare is an important loophole, because many seniors would be leery of switching to a for-profit provider without such assurances. Few would be willing to wade through the fine print that differentiates the myriad plans, which are not standardized like supplemental Medigap plans. In fact, Medicare Advantage plans only provide “actuarially equivalent” coverage, meaning that the projected out-of-pocket cost per enrollee should be the same as or less than with regular Medicare if the public and private plans cover similar groups of seniors.

The problem is that they may not cover similar groups of seniors. This flexibility allows the private plans to structure cost-sharing and offer benefits, such as discounted fitness club memberships, designed to appeal to healthier seniors who are less costly to cover. This longstanding problem has only been partly addressed through the gradual introduction of risk-adjusted payments, which are supposed to be based on the health status of enrollees. However, since payments are not based on actual health care expenditures, the insurance companies have an incentive to exaggerate the health problems of enrollees.

4. Adverse selection refers generally to a situation in which sellers have information that buyers do not have, or vice versa, about some aspect of product quality—in other words, it is a case where asymmetric information is exploited. Asymmetric information, also called information failure, happens when one party to a transaction has greater material knowledge than the other party.

Typically, the more knowledgeable party is the seller. Symmetric information is when both parties have equal knowledge.

There are a few broad methods of addressing the adverse selection problem. One very clear solution is for producers to provide warranties, guarantees, and refunds. This is particularly notable in the used car market.

Another intuitive and natural response is for consumers and competitors to act as monitors for each other. Consumer Reports, Underwriters Laboratory, notaries public, and online review services such as Yelp help bridge gaps in information.

The study of efficient market arrangements is known as mechanism design theory, which is a more flexible offshoot of game theory

5. Moral hazard, essentially, is risk-taking. Generally, moral hazard occurs when one party or individual in a transaction takes risks knowing that, if things don't work out, another party or individual then suffers the burden of the adverse consequences. The disservice to the second party can occur in the course of the transaction, to get the transaction to occur, and even after the transaction has taken place. There are several ways to reduce moral hazard, including incentives, policies to prevent immoral behavior and regular monitoring.

Moral hazard occurs in different types of situations and different arenas. In the financial sector, one motivator can be bailouts. Lending institutions tend to make their highest returns on loans that are considered risky. They are more inclined to make such loans when they have the assurance or expectation of some sort of government aid in the event of loan defaults.

Mortgage securitization can lead to moral hazard – and did, in the subprime meltdown and financial crisis of 2008. Originators of mortgages can pool the loans, and then sell pieces of this mortgage pool to investors, thus passing the risk of default on to someone else. In such a situation, it benefits the buyer or buying agency to be diligent in monitoring the originators of the loans and in verifying loan quality.

In the health insurance market, when the insured party or individual behaves in such a way that costs are raised for the insurer, moral hazard has occurred. Individuals who don't have to pay for medical services have an incentive to seek more expensive and even riskier services that they would otherwise not require. For these reasons, health insurance providers generally institute a co-pay and deductibles, which requires individuals to pay for at least part of the services they receive. Such a policy and usage of deductible amounts is an incentive for the insured to cut down on services and to avoid making claims.

Moral hazard in one of its most basic form occurs when employees shirk responsibility at their places of employment. An employee has a basic incentive to do the least amount of work for the same amount of pay. It benefits the employer to cut down on this moral hazard. The employer may establish incentives that encourage employees to accomplish an above-average workload.