SECTION 3: HEALTH INSURANCE

The United Kingdom provides public healthcare to all permanent residents, about 58 million people. Healthcare coverage is free at the point of need, and is paid for by general taxation. About 18% of a citizen's income tax goes towards healthcare, which is about 4.5% of the average citizen's income. Overall, around 8.4% of the UK's gross domestic product is spent on healthcare (an amount of around 0.18984 trillion GBP). The UK also has a growing private healthcare sector that is still much smaller than the public sector.

Since the 1980s, total healthcare expenditure as a percentage of GDP has in general trended up. Also, the private sector for health insurance has taken on a more prominent role, accounting for about 16.7% of healthcare spending in 1999, up from 10.6% in 1980. According to a report by Towers Watson, medical trend rates in 2006, 2009, 2010 and 2011 were 6.0%, 9.3%, 8.8% and 9.5%, respectively.

In the 1990s, the UK government put into effect one of the most significant changes for the NHS in recent times by creating the internal market. Doctors must now be part of the internal market (later, the NHS Trust) to be able to compete for patients. These markets were independent organizations that were individually managed and that competed with each other. It started with 57 trusts and by the mid 90s all healthcare in the UK was provided through these trusts. In 1998, the UK instituted the NHS Plan, which helped modernize the NHS. Up until this point, the NHS was operating using a 1940s system in a 21st century world. The system was lacking in national standards; it lacked incentives and means to improve performance and it over-centralized and took power away from the patient.

3.1. What happens to the demand for health in a health care market like the UK, when health care is freely provided to all residents?

3.2. Explain three methods to limit moral hazard in the UK Health Care System. Make sure to illustrate the mechanisms with graphical tools.

3.3. A market for private health insurance has emerged in the UK since the 1990s. What type of contracts can private health insurers offer? Does the answer depend on whether insurers can distinguish between health and unhealthy individuals? If yes, show how.

[Note: Derive your insights from the textbook adverse selection model which we had covered in class. State clearly the assumptions made about the individuals and the insurance firms, and explain why adverse selection arises. Show graphically the equilibrium quantity of insurance provided under the assumption of information asymmetry].