Private and Public Health Insurance

Part I. Answer the following two questions (At least three pages): 1. David Cutler and Richard Zeckhauser have asserted that a primary lesson associated with the provision of health insurance is the “fundamental tradeoff between risk spreading and appropriate incentives” or more specifically, the problem of moral hazard. Another important lesson to emerge from providing individuals with a broad choice of health plans (the problem of adverse selection). (Source:David M. Cutler and Richard J. Zeckhauser 2000 op. cit.: section on‘Equilibrium with Adverse Selection.) 2. Distinguish between the concepts of moral hazard and adverse selection. Discuss the implications of moral hazard for the efficient design of health plans and consider how provision of health insurance can lead to adverse selection and perverse behavior by insurers. Are the moral hazard and adverse selection unavoidable consequences of health insurance provision? What steps might you recommend to limit the welfare consequences of these responses to the provision of health insurance? (Source: Mark V. Pauly.2008. “Adverse Selection and Moral Hazard: Implications for Health Insurance Markets” in Sloan and Kasper (eds.) Incentives and Choice in Health Care, MIT Press, 2008). Part II. Answer Question (At least four pages): 1. Some policymakers have asserted that consumer-driven health plans (CDHPs), such as health savings accounts (HSAs), are likely to be an effective way of controlling health care spending. Such arrangements allow individuals and their employers to make tax-exempt contributions to an account which can then be used to pay for medical expenses, provided the individual also purchases a high deductible, catastrophic health plan. The use of CDHPs has stimulated an important debate regarding their equity and efficiency compared to employment-based coverage and more generally, with regard to their implications for the risk composition of the traditional health insurance market. As an expert in the area of health insurance coverage, you have been asked to answer the following questions: o Will high-deductible CDHPs such as HSAs make consumers more sensitive to the cost of medical care, thus mitigating the problem of moral hazard? o Since contributions to both traditional employment-based coverage and CDHPs are tax deductible, will the use of CDHPs affect the demand for employment-based coverage and thus, the structure of health insurance markets? o Will enrollment in CDHPs more generally help both patients and providers to make better (e.g., more efficient and effective) health care resource decisions? o As noted, most CDHPs are based on accounts that are used to pay for medical care and are thought to make the consumer more sensitive to health care costs. However, some observers remain concerned about making individuals responsible for the spending required by the CDHP and eliminating first-dollar protection. Could you suggest an alternative approach that might serve to mitigate such exposure?      

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