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Consider a health insurance market where there are many buyers with different levels of underlying risk (some people are more likely to get sick and

  1. Consider a health insurance market where there are many buyers with different levels of underlying risk (some people are more likely to get sick and need care than others), but the insurance companies must charge a single premium for all people who purchase insurance (i.e. there is only one contract for sale). Explain how the adverse selection problem will affect this market.
  2. Economists tend to think of moral hazard from insurance as creating social or welfare losses because it can cause individuals to overutilize healthcare. Explain why moral hazard may in fact cause social or welfare gains (i.e. reduce healthcare costs).
  3. One policy of the Affordable Care Act was to mandate insurers introduce zero cost-sharing (zero out-of-pocket cost for the consumer) for at least one version of each form on prescription contraception. A recent study found this policy reduced condom use and increased the rate of sexually transmitted infections (STIs) like chlamydia and gonorrhea. Using economic theory, explain why the policy decreased condom use and increased STIs.
  4. The federal dependent coverage mandate (FDCM) is part of the Affordable Care Act that allows young adults to be covered by the family/parent's health insurance until age 26. After 26, young adults must find their own insurance coverage or go without it. Many studies show this age limit reduces the likelihood someone has health insurance at 26 by 4-10 percentage points. One study shows individuals who lose insurance at 26 because of the FDCM do not change their smoking or drinking behavior. What does the theory of moral hazard say should happen to smoking and drinking behavior for individuals that lose their health insurance at age 26? What might explain why smoking and drinking behavior doesn't change?
  5. In the early 2000s, Massachusetts implemented healthcare reform to enroll people without insurance into a plan. The reform required people without insurance to buy insurance and imposed penalties on those who did not. Suppose we find that counties with larger increases in insurance coverage after the reform had smaller increases in the average healthcare costs for the insured population. Is this result consistent with predictions from the Rothschild-Stiglitz model? In other words, is this consistent or inconsistent with adverse selection into insurancebeforethe Massachusetts reform? Explain.

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