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

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

3. 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

4. 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

5. 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

6. 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

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

8. 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

9. Extreme Cases: No Inefficiency / Unraveling

10. Full Coverage May Not Be Efficient

11. Advantageous Selection