Chapter 9
Learning Objectives
1. Describe the function of health insurance.
2. Calculate the actuarially fair insurance
premium.
3. Using a diagram, illustrate the conditions under
which an individual would purchase insurance.
4. Describe the role of insurance firms in pooling
risks.
5. Explain how adverse selection can lead to a
market failure in the market for health
insurance.
9-2
Learning Objectives
(cont)
6. Outline how government intervention can
address the adverse selection problem.
7. Demonstrate how the problem of moral hazard
can lead to inefficient levels of health services.
8. Outline how information, externality, and
equity concerns can give rise to problems in
privatized health care markets.
9. Discuss the current challenges facing Canadas
health care system and the difficulties
encountered when attempting to measure its
performance.
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LO1
9-4
Expected Value
The amount of money an individual can
expect to receive on average when
she faces uncertain outcomes
Expected Value (EV) =
(probability of outcome 1)*(Payout in
outcome 1) + (probability of outcome
2)*(Payout in outcome 2) + + (probability
of outcome n)*(Payout in outcome n)
9-5
LO2
Table 9.1
Utility
UB
UD
UC
LO3
D
C
Expected
Utility
Option 1
No
insurance
UA
20,000
Figure 9.1
Risk
Smoothing
Figure 9.2
46
,50
47 0
,00
0
50
,00
0
B
E
A
Income
40
,00
0
47
,00
0
50
,00
0
B. More risk
averse
20
,00
0
Utility
A. Less risk
averse
20
,00
0
Utility
9-8
LO4
9-10
Adverse selection
Buyer has more information about the probability of
loss than the seller
Moral Hazard
The insured individual has more information about
actions that affect the probability of incurring loss
9-11
Table 9.2
9-12
LO6
Adverse Selection
Empirical evidence: A death spiral at Harvard?
Does adverse selection justify government
intervention?
Private market responses to adverse selection
Group coverage
Categorize risk - observable characteristics
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Utility
Low-Risk Individuals
Prefer Zero Coverage to
Social Insurance
B
UC
UF
A
Figure 9.3
50
,00
0
47
,00
0
45
,50
0
46
,50
0
20
,00
0
PMAX
Income
9-14
9-15
LO7
P0
Sm
.2P0
Dm
M0
M1
Additional expenditur
induced by
insurance
Figure 9.4
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Additional
Considerations
LO8
9-17
National Medicare in
Canada
Medicare refers to Canadas national health insurance
program
The Canada Health Act
1.
2.
3.
4.
5.
Universality
Accessibility
Comprehensiveness
Portability
Public administration
Figure 9.5
9-19
Trends in Health
Expenditures
Provincial and Territorial Government per
Capita Health Expenditures, 1975 to 2014
(constant 2002 dollars)
Figure 9.6
9-20
Trends in Health
Expenditures
Total Health Expenditures as a
Percent of GDP
Figure 9.7
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Trends in Health
Expenditures
Percent Shares of Health Care
Expenditures by Category
Table 9.3
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Table 9.4
9-23
LO9
Changing incentives
Defining medically necessary services
A national pharmacare program
Privatization
User charges
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Table 9.5
9-25
Percent of Patients
Receiving Care Within
Benchmark Wait Time
Table 9.6
9-26
Chapter 9 Summary
For a risk-averse person, an insurance plan that charges
an actuarially fair premium increases expected utility
because it allows risk smoothing.
The more risk averse an individual is, the more he or she
is willing to pay for an insurance policy.
By pooling individuals into one insurance program, an
insurance company can lower risk from a societal point
of view.
Health care services may be different from other
commodities and services for a number of reasons,
including adverse selection, moral hazard, and societys
desire to act paternalistically, to redistribute income, or
to internalize externalities.
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Chapter 9 Summary
(cont)
Government can address adverse selection by
providing universal health insurance coverage.
Government provision of health insurance faces the
same moral hazard problem as private insurance,
because it too reduces the price of medical services
faced by patients.
Health care insurance is a provincial government
responsibility; The federal government contributes
transfers to support health care services.
The Canada Health Act lays out five conditions that
must be met for provincial health insurance schemes
to qualify for federal transfers.
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Chapter 9 Summary
(cont)
Compared with health systems in selected OECD countries,
Canadas health system produces average or above-average
outcomes at above-average cost.
As we look to the future of the Canadian health care system, we
note that the health of Canadians is generally improving over
time.
Significant future public cost pressures will come as a result of
the aging population; technical advances in health sciences,
which will expand the range of health problems that can be
treated; and the increasing reliance on public funding for drugs.
Current debates about future directions for the Canadian health
care system centre on changing incentives faced by physicians
and other health care providers, defining a list of medically
necessary services, the value of a national pharmacare
program, and the role of the private sector in health care
financing.
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