This is a highly stylized example of an insurance market. Suppose there are just two risk types, A and B, and their probabilities of different levels of medical spending are as shown in the table below (similar to Table 7.1 on page 89 of Reinhardt's book). In this example, we will not be concerned about moral hazard; probabilities and medical spending levels are the same whether or not one has Insurance. Table 1. Probabilities of Different Levels of Medical Spending _ Fraction of Type A Fraction of Type B Slze of Expected to lncur Expected to lncur Medical bill Such a Bill Such a Bill m 0.551 5.5255 mom 52m $100,000 0.009 0.0405 Use this additional information in your answers: 0 80 percent of the population is Risk Type A, 20 percent is Risk Type B 0 Individuals know whether they are Type A or Type B, and they know the probabilities of different levels of medical spending (this may be the most unrealistic assumption) 0 Insurance is purchased in an individual market 0 In order to cover their costs, insurers need to include a loading factor, L = .2, in the premiums they charge 0 Individuals are risk-averse up to a point. They are willing to pay up to 1.25 times their "expected\" level of medical spending (probability-weighted average) for insurance, but they will not buy insurance if the premium is larger than that amount