Health USA was established in 2013 and will begin operations in January 2014.

Health USA will be subsidized by the US Treasury; assume 0% load for expenses, profit, and interest.

Health USA has observed that expected health care costs, based on the industry at large, are distributed as follows:

Health USA is barred by Congress from underwriting; it must accept all applicants regardless of their health status (guaranteed issue) and it must charge all applicants the same premium.

Health USA will set its premium at the expected average cost and it expects all eligible participants to join the plan

1. A. What is the premium that Health USA will charge each of its members for 2014?

Individual purchase of insurance is NOT mandatory. Individuals will join Health USA as long as the premium charged is NO GREATER than $500 plus 3X their expected cost. They dont know exactly what their health care costs will actually be for the following year, but they have some sense of their relative wellness.

2. How many individuals will purchase insurance from Health USA for 2014?
3. What is the total amount of premium that Health USA will collect?
4. What are the anticipated total claims costs that it will incur during 2014 based on the population that it is insuring?
5. What is the 2014 profit/loss for Health USA?

In year 2 (2015) and in each subsequent year, Health USA will set its premium equal to the actual average health costs that it experienced in the prior year (i.e., the premium per member for 2015 will equal the average per member actual cost in 2014). Assume there is no health care inflation (so the expected cost distribution stays the same from one year to the next).

2. A. What is the premium that Health USA will charge for Year 2 (2015)?
   2. How many individuals will purchase insurance from Health USA for 2015?
   3. What is the total amount of premium that Health USA will collect during 2015?
   4. What are the anticipated total claims costs that it will incur during 2015, given the population that it is insuring?
   5. What is the 2015 profit/loss for Health USA?

3. A. What is the premium that Health USA will charge for Year 3 (2016)?

2. How many individuals will purchase insurance from Health USA during 2016?
3. What is the total amount of premium that Health USA will collect during 2016?
4. What are the anticipated total claims costs that it will incur during 2016, given the population that it is insuring?
5. What is the 2016 profit/loss for Health USA?

4. A. What is the premium that Health USA will charge for Year 4 (2017)?
   2. How many individuals will purchase insurance from Health USA during 2017?
   3. What is the total amount of premium that Health USA will collect during 2017?
   4. What are the anticipated total claims costs that it will incur during 2017, given the population that it is insuring?
   5. What is the 2017 profit/loss for Health USA?

5. A. What is the premium that Health USA will charge for Year 5 (2018)?

2. How many individuals will purchase insurance from Health USA during 2018?
3. What is the total amount of premium that Health USA will collect during 2018?
4. What are the anticipated total claims costs that it will incur during 2018, given the population that it is insuring?
5. What is the 2018 profit/loss for Health USA?

6. Fully describe what is happening in this situation and why it is happening.

7. Would you invest your money in a company that was operating under these rules? Why or why not?

8. What could be done to ensure that this situation does not continue to occur? To get all the points, you need to describe more than one alternative and why each could fix the problem.

Number of people 20 Expected Annual Cost/person 200 750 4,000 10,000 20,000 50,000 100,000 500,000