1. Question 1 is broken into 3 parts based on the following scenario:

Suppose in a given state's new insurance marketplace, with community rating and no restrictions on who can buy at the community rate, the risk pool (distribution of expected health costs) is as follows:

* 30% of eligible enrollees' expected health costs = $1,000 (per year)

* 65% of eligible enrollees' expected health costs = $2,000

* 5% of eligible enrollees' expected health costs = $10,000

A. What would the pure community premium rate for this risk pool be? (assume zero loading costs for simplicity in this problem)

B. Now suppose one insurer, and one insurer only, were allowed to offer any premium it wanted to any potential buyer and to exclude those it did not want to cover? What premium would they likely charge and who would they sell to and who would they exclude? What would happen to the other insurers? Does this help you see why the ACA was written to apply to all insurers?

C.There has been a lot of controversy about the individual mandate in the ACA. The penalty for not complying with the individual mandate is so low, compared with the lowest price policy in any marketplace, many feared and now observe that many young people are not buying these new insurance products. This can be modeled (as a first approximation) by assuming the lowest risk folks do not end up in the new marketplace insurance pool. What would that do to the community rate in the marketplace? And what would that do to pressure from the middle risk group to allow them to buy in a risk rated environment as opposed to a community rated environment? Which environment would most insurers and most people prefer? Why?