3. (20p) The Massachusetts health reform, which was signed into law in April 2006, became a model for the national reform (the ACA), which was enacted in March 2010. Hackman, Kolstad and Kowalski (HKK) in two papers in AER in 2012 and 2015 focus on the features of the Massachusetts reform and health insurance environment that are relevant to adverse selection in the individual health insurance market. An individual mandate was the key feature of both reforms. In Massachusetts, the individual mandate requires that almost all non-poor residents either purchase a health insurance plan that meets minimum coverage criteria defined in the "Minimum Creditable Coverage" (MCC) plan or pay a penalty. Specifically, nonexempt individuals that do not have proof of sufficient health insurance coverage when they file their income taxes are charged an income- and age-dependent penalty of up to 50 percent of the lowest-priced plan available in the Massachusetts health insurance exchange market. a. Figure 1 of HKK (2015) compares trends in Massachusetts to trends in all other states for individuals whose family income exceeds 300 percent of the federal poverty line. The two panels compare insurance coverage trends for consumers who are offered health insurance through their employers (the "group market") with trends for consumers who are not offered health insurance through their employers (the "individual market"). The vertical lines separate the pre-reform and the post-reform years. Consequently, the years 2006 and 2007 represent the reform implementation years. What can you tell about health insurance coverage in the group versus the individual markets before 2006? How does the impact of Massachusetts health reform on health insurance coverage for the nonpoor population compare between the individual and group markets? b. In HKK (2012) the authors implement and empirical test for selection into health insurance using changes in coverage induced by the introduction of the health insurance mandate in Massachusetts and data from the hospital market. They find "Our test examines changes in the cost of the newly insured relative to those who were insured prior to the reform. We find that counties with larger increases in insurance coverage over the reform period face the smallest increase in average hospital costs for the insured population..." Is this evidence consistent with the predictions of the Rothschild-Stiglitz model? That is, is this evidence consistent with adverse selection into insurance before the reform? Explain. c. In the context of the Rothschild-Stiglitz model, what effect does mandating health insurance have on the utility of the robust people in the individual market of health insurance? Explain your assumptions about the initial equilibrium of the market and the new equilibrium caused by the reform. d. HKK (2015) develop a model of selection that incorporates a key element of recent health reforms: an individual mandate. From the paper: "Using data from Massachusetts, we estimate the parameters of the model. In the individual market for health insurance, we find that premiums and average costs decreased significantly in response to the individual mandate." What does this evidence imply about the existence of adverse selection? Is this evidence consistent with HKK (2012)?