Health Insurance: Introduction Stephen P. Ryan Olin Business School Washington University in St. Louis

Insurance Markets vs. Regular Markets Adverse selection Moral hazard Intermediaries Supply-side demand Regulation Subsidies State-owned enterprises vs private provision Human rights

Selection and Moral Hazard Insurance markets are differentiated from regular markets by the presence of selection and moral hazard Both are examples of asymmetric information Selection: consumers have private information about type, determines probability of consumption Adverse selection: marginal cost of highest WTP is highest Advantageous selection: marginal cost of highest WTP is lowest Moral hazard: otherwise identical agents behave differently given differing incentives Example: you drive a lot more cautiously when forget your wallet Key point: connection between marginal cost to demand curve

Intermediation Insurance markets are characterized by intermediates Very rarely are marginal costs expressed in prices In US medical context, “insurance” is more like a negotiated discount with a provider network Relationship further complicated by nonlinear pricing Deductibles Co-pays Co-insurance Out-of-pocket maximums In- and out-of-network

Supply-side demand / Regulation Medical services ordered by someone else Also highly regulated markets along many dimensions We will talk about subsidy mechanisms Standard benefit designs Minimum actuarial value to contracts Limits on what information firms can price on Regulated entry on several levels

Private versus Public Markets related to one of the oldest questions in IO: public enterprise versus private marketplace Governments have been moving to private provision of publicly-subsidized goods Major question: how to do this best? Some emerging evidence regarding how mechanisms currently work, how they could do better Key links between prices, subsidies, cost, welfare

Human Rights Major complication here: cannot treat medical procedures as regular goods Problem is coming in cross supply and demand…

Einav and Finkelstein (2011) The innovation here is that the marginal cost curve is downward sloping Interpret demand curve as WTP for insurance contract Zero profit condition: revenue must equal cost, therefore set P at AC=demand Revenue = p*q Total cost = AC * q Implies that p = AC Deadweight loss is everyone not served that has WTP > cost

Extreme Cases: No Inefficiency / Unraveling

Full Coverage May Not Be Efficient

Advantageous Selection