There are two types of seat in the room: 35 Consumers 14 Insurers Sit one person to each seat. If you are comfortable doing a lot of rudimentary math, sit at an Insurer seat. After all the seats are filled, extra bodies should team up with insurers. Do not team up with consumers.

Health Insurance

The Players and the Goals In this experiment, there are CONSUMERS and INSURERS. INSURERS sell INSURANCE. CONSUMERS buy FOOD and INSURANCE. 3

Consumers Each consumer gets $25 per day. A unit of food costs $1. 4 $25 The more food the consumer eats, the happier the consumer becomes.

Consumers: The Catch Each day, consumers face some risk of badness. 5 vs. If badness befalls the consumer, the consumer loses all of the purchased food for that day.

Consumers: The Insurance But, consumers can purchase insurance contracts from the insurance companies. 6 Each contract pays the consumer $1 worth of food if badness befalls the consumer that day.

Consumers: Example Suppose you can purchase insurance contracts at a price of $0.50 each (the price of food is always $1 each). 7 $20 You spend $5 on insurance contracts. The remaining $20 is automatically spent on food. 10 insurance contracts 20 food (Consumers may buy fractions of a unit of food.) $20 $5

Consumers: Example If badness does not befall you, then you eat 20 units of food and are very happy. 8 Very Happy !!

Consumers: Example If badness does befall you, the 20 units of food disappear, and each insurance contract pays $1. You automatically buy food, eat it, and are somewhat happy. 9 Somewhat Happy

Decision Consumers: Example The consumer makes one set of decisions that are repeated for each of the three days. Daily outcomes may change due to randomness. Day 1 Day 2Day 3 10

Consumers Each consumer’s goal: Maximize happiness More insurance means  More food when badness befalls.  Less food when badness does not befall.  Too little insurance is bad. Too much insurance is also bad. 11

Insurers Each insurer can write as many insurance contracts as liked and charge any price. 12

Insurers If badness does not befall the consumer, the insurer walks away with the money the consumer paid for the contracts. 13 $$$ $$$

Insurers If badness does befall the consumer, the insurer pays the consumer $1 for each contract the insurer sold the consumer. 14

Insurers: Example You sell Consumer A six contracts for $0.60 each, and sell Consumer B five contracts for $0.30 each. 15 For each of the three days, you collect $3.60 from Consumer A and $1.50 from Consumer B. $15.30 Revenue = $3.60 $1.50 $3.60 $1.50

Insurers: Example Suppose that badness then befalls Consumer B on two of the days, but Consumer A on none of the days. 16 You owe Consumer B $1 for each contract for the two days. $15.30 Revenue = $10.00 Cost = $5.30 Profit = $5.00

Insurers: Example Alternatively, suppose that badness befalls Consumer A on all three days, but Consumer B on none of the days. 17 You owe Consumer A $1 for each contract for the three days. $15.30 Revenue = $18.00 Cost = $2.70 Loss = (Insurers do not need cash reserves to cover policies.) $6.00

Insurers Each insurer’s goal: Maximize expected profit Insurers can ask whatever prices they like for contracts  Too low a price is bad. Too high a price is also bad. 18

19 Type 1 10% Badness There are five types of consumer. Each faces a different probability of badness. Type 2 20% Type 3 30% Type 4 40% Type 5 50%

The Objects 20 = insurance contract(s) = sales register

Contracts $4.80 Customer 6 purchases 12 contracts from insurer 4 for $0.40 each. This contract generates $4.80 daily income for three days for the insurer.

Register The register is for your own use in tracking your customers. Be aware of customers who buy a lot of insurance. At the end of the round, watch to see which of your customers has badness befall them.  These are possible signs that the customer is high risk. You will need to estimate consumers’ risks.

The Mechanics 23 Agent InsurersConsumers Head Office $0.50 Prices are per contract. You may buy multiple contracts.

The Mechanics 24 Agent InsurersConsumers Head Office

The Mechanics 25 Agent InsurersConsumers Head Office Consumers: Keep track of how much you have spent. You need to save cash to buy food and you only have $20. Head Office: Keep track of risk estimates and expected profits. Advise the agent on setting prices. Agent: Try to estimate consumers’ risks based on how many contracts they want and the prices they are willing to pay.

Risk Types 26

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Ready to begin… 30

31 Consumers:You have $25. Buy some insurance (if you want). All remaining money goes to food. Insurers:Sell insurance to maximize expected profit.

Accounting Phase Consumers report: Contracts purchased, cost, and from which insurer(s) 32

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Mandated Insurance People have lobbied the government to require insurance companies to provide at least 50 contracts’ worth of coverage. Insurers now may not sell fewer than 50 contracts to a consumer.* *(unless the consumer already owns at least 50 contracts) 36

Ready to begin… 37

38 Consumers:You have $25. Buy some insurance (if you want). All remaining money goes to food. Insurers:Sell insurance to maximize expected profit. You may not sell fewer than 50 contracts to a consumer unless that consumer already owns at least 50 contracts.

39 Accounting Phase Consumers report: Contracts purchased, cost, and from which insurer(s)

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Mandatory Insurance Concerned that some consumers are uninsured, the government requires that all consumers buy at least 50 contracts. 43

Ready to begin… 44

45 Consumers:You have $25. You must buy at least 50 contracts. All remaining money goes to food. Insurers:Sell insurance to maximize expected profit.

46 Accounting Phase Consumers report: Contracts purchased, cost, and from which insurer(s)

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Results… 50

Compared to the free market, what do you believe happens to the price of insurance under… 1.Mandated insurance 2.Mandatory insurance 51

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53 Compared to the free market, what do you believe happens to the number of uninsured people under… 1.Mandated insurance 2.Mandatory insurance

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Consider The price per contract isn’t the consumer’s health care cost. The consumer’s health care cost is the total amount of money the consumer pays for insurance. 55

Compared to the free market, what do you believe happens to the total cost of insurance per insured person under… 1.Mandated insurance 2.Mandatory insurance 56

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59 Compared to the free market, what do you believe happens to food purchases under… 1.Mandated insurance 2.Mandatory insurance

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62 On whom do you believe the insurance companies make or lose money in each scenario?

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Forces people to consume quantities of goods and insurance that they may not want to consume. Transfers wealth from low risk to high risk people.  A better solution is simply to tax the low risk people, give the money to the high risk people and let them buy what they want. 65 What is the effect of insurance mandates? (but what if they don’t buy insurance?)

But, we have to do something! Look at what has been happening to the cost of health care over time! 66

67 Source: Bureau of Labor Statistics ( Price of medical care has increased 350% since 1980 versus 135% for other consumer prices.

But, the cost of health care is only half of the picture. What has been happening to the quality of health care? 68

How do we measure the quality of health care? 1.What is “quality?” 69 2.How do we account for care didn’t exist in the past? 3.How do we weigh qualities across different types of care?

How does one measure the quality of health care? An easy and only-somewhat-sucky measure of the effectiveness of health care is the mortality rate. 70

71 Source: Statistical Abstract of the United States, 2008, Table 77. From 1960 to 2006, infant mortality fell 70%.

72 Source: Statistical Abstract of the United States, 2008, Table 110. Deaths by Influenza and Pneumonia (per 100,000 population) From 1960 to 2004, deaths due to influenza and pneumonia fell 60%.

73 Source: Statistical Abstract of the United States, 2008, Table 77. From 1960 to 2006, the mortality rate fell by 15%.

74 What does the increased cost of health care buy us?

75 Source: Derived from Statistical Abstract of the United States, and the Bureau of Economic Analysis. If the quality of our health care had remained at the level it was in 1967, how many people would have died each year since 1967?

76 Source: Derived from Statistical Abstract of the United States, and the Bureau of Economic Analysis. 600,000 lives saved just in 2010

What are the claimed problems? 77 Many people are uninsured. Many people cannot afford insurance. Lack of competition makes insurance too expensive.

78 Many people are uninsured

79 Source: Income, Poverty, and Health Insurance Coverage in the U.S.: 2006, US Census Bureau. The percentage of the population that is uninsured has remained rather stable over time.

80 Source: Bureau of Labor Statistics, Census Bureau (15% of the population) How many Americans are uninsured?

81 Source: Bureau of Labor Statistics, Census Bureau (12% of the population) How many Americans are uninsured?

82 Source: Bureau of Labor Statistics, Census Bureau (4% of the population) How many Americans are uninsured? If we count one-third of this group, the uninsured are between 6% and 8% of the population depending on whether or not we count this group.

83 Many people cannot afford insurance

84 Source: Individual Health Insurance 2009, America’s Health Insurance Plans Center for Policy Research The average cost for individual coverage is $3,300. The average cost for family coverage (adjusted to the mean family size) is $6,900.

85 Source: Individual Health Insurance 2009, America’s Health Insurance Plans Center for Policy Research Community Rating  Cannot charge based on health history Guaranteed Issue  May not deny coverage

86 Source: Individual Health Insurance 2009, America’s Health Insurance Plans Center for Policy Research Annual premia are significantly higher for low deductible policies.

87 Source: Consumer Expenditures, US Bureau of Labor Statistics, Average annual expenditures (per household) compared to the cost of family health insurance.

88 Lack of competition makes insurance expensive.

89 The law makes it difficult for insurance companies to operate across state lines. Individual insurance is subject to mandates that employer-provided insurance is not. Employer-provided insurance benefits are tax- free, which causes an increase in demand for insurance and health services.

90 Can one place a value on a human life? (and, if yes, is it wrong to do so?) Yes, it is possible. No, it is not wrong to do so.  Almost everyone does it almost every day.

Seat Belts on School Buses It costs (on average) $2.5 million for every child’s life saved.  Should we install seatbelts on school buses?

Spend $2.5 million on:# Lives Saved Annually Seatbelts on school buses1 Airbags in cars3 Heart transplants13 Malaria prevention975 If our concern is saving lives, then we should not spend money for seatbelts on school buses because every 1 life saved will be offset by 975 lives we might otherwise have saved.