Introductions to Options

Draw the payoff diagrams for the following:

A. A high deductible health insurance plan with a maximum out of pocket expense of $12,000 a year.

B. A traditional health insurance plan with no deductible buy a co-pay of 10% on all healthcare expenses, no maximum out of pocket expenditure limit is specified

C. No health insurance coverage

What is the underlying? What type of option is a healthcare insurance (please specify long or short, call or put, or a combination)?

Assume that the net liquid asset in the household portfolio is $P where P> $12,000. How does your answer change where P< $12,000.

Hint: Ability to declare personal bankruptcy is a put option.

What kind of behavior do you expect to see by healthcare providered and consumers based on the information above and for the different plan types?