Discuss the following - What feature(s) of Medicare would cause an economist to say that "Medicare stinks as insurance"? Medicare supplement insurance is available from the commercial market and most commonly covers 'up-front' deductibles and least commonly covers "high-end" risks. Does this model of coverage afford well or poorly with the model of demand for insurance set forth in Ch. 10? What should we conclude from this?

popular ple will not participate money paid in) and the gamble invo use response to a financial gamble depends on the weg (in this approach) people overweigh low-probability events, Lotto-line gambles will see more attractive. 10.11 Summary Health insurance offers a way to protect against financial risk. Economists' models of expected utility maximization predict certain patterns of insurance purchases, including the Presence of deductibles, copayments, and insurance against the riskiest (large, uncommon) events, rather than lower-risk events (common, relatively low cost). These models predict the actual patterns of insurance purchases well, but not perfectly. Most insurance is sold through groups, most commonly by employer work groups. This insurance provides to consumers the added benefit of reducing income taxes. In some cases, the tax benefit is large enough to tip the balance between buying and not buying insurance. Health insurance creates a subsidy for medical care, so a "welfare loss" emerges each time medical care is purchased because consumers are induced (by the lower price of care generated by the insurance policy) to buy more medical care than they otherwise would. Indeed, they are "tricked" into buying care that costs them (through the insurance premium) more than it is worth in restoring health. This is an added "cost" of health insurance that doesn't show up on anybody's accounting books, but it is a real cost in any economic sense. Health insurance provides a way to diversify financial risks associated with illness, but the markets for such insurance plans have grown increasingly complex. Firms selling such insurance have important distinctions. Some sell group insurance; others sell to individuals. Nongroup plans run the risk of considerable adverse selection, which group plans (especially those organized around the work group) avoid. Market failure looms as a risk in health insurance markets because of the asymmetric information between individual buyers of health insurance (who may be unusually sickly) and health insurers. Various mechanisms to solve this potential problem exist, the most nota- ble of which is the use of large groups (e.g., those assembled in the workforce) as the basis for insurance contracts. Another way to solve the problem for the society as a whole (include ing those not working in the labor force) is for the government to require "community- rated" insurance. Under some circumstances, both the relatively sickly and the relatively healthy segments of a society might gain by such a regulation, but it is also possible for the regulation to help the relatively sickly only at the expense of the relatively healthy. Group insurance, coupled with favorable tax treatment for employer-paid premiums, has made health insurance a popular but not universal fringe benefit. A growing pool of persons remains uninsured through either conventional insurance or various government programs. Many of these people are employed with wages at or near the minimum wage.Chapter 10 The Demand for Health Insurance 287 The recent health care reform legislation (PPACA) changed the landscape of U.S. health insurance in numerous ways. Most importantly for this chapter's topics, the PPACA (1) requires all individuals to have health insurance coverage of at least a minimum stand- ard (and much will continue to be provided through the same mechanisms as currently, for example, through employer work groups, subsidized by insurance if the tax law remains unchanged); and (2) prohibits insurers from using preexisting conditions to affect health insurance premiums or coverage decisions regarding individuals' health needs. Chapter 11 explores further details of the PPACA relating to the supply of insurance. 10.12 Related Chapters in Handbook of Health Economics Volume 1 Chapter 11, "The Anatomy of Health Insurance" by David M. Cutler and Richard J. Zeckhauser Chapter 12, "Health Insurance and the Labor Markets" by Jonathan Gruber 10.13 Problems 1. "People most commonly buy insurance against hospital costs because it is that type medical care that has the biggest average expense for individuals year in and year out Comment. 2. "The single most important health policy choice in the United States over the past fo decades has nothing to do with the Department of Health and Human Services, b rather with the Internal Revenue Service." Comment. 3. Prove that the welfare loss triangle described in footnote 12 has a value of approx mately -0.57(1 - C)2p m, for medical event i. 4. a. Obtain tax tables for the current year (you can easily get them from the Intern appropriate for your state. (If you live in one of those select states with no st income tax, this problem is a little easier for you. However, if you live or w in New York City or many other cities, you also have city income taxes to wo about.) Calculate the effective marginal tax rate for each of the four hypoth cal single-person households with the following combinations of wage and to an find more information about calculating marginal tax rate income