d. Suppose the cost of the healthcare insurance subsidy is divided evenly among those who can fully afford the healthcare insurance premium. What do you calculate will be the total amount per person that these individuals will need to pay for their healthcare insurance premium and their contribution to the subsidy fund? Show how you found your answer. Also fill in the following table to consolidate your work in this problem. Individual Income Available to be spent on health insurance (this is related to total gross income of the individual) Amount of subsidy required in order for the individual to be able to afford the healthcare insurance premium for the year Healthcare Insurance Premium (what the individual paid for healthcare insurance) Additional charge per person to cover healthcare subsidy costs Total Payment per person for Healthcare Insurance (includes premium as well as any share of subsidy cost) Joe $10,000 Mary $10,000 Sue $10,000 Mabel $20,000 Clyde $20,000 Sylvester $60,000 Owen $100,000 Abigail $100,000 Samantha $100,000 Cletus $100,000 Answer: Our earlier work indicated that the healthcare insurance premium is $25,000 per person. Now, we also need to collect $55,000 to cover the cost of the subsidy for lower income individuals. There are 5 people who can fully fund their health insurance and now they will also need to fund the fund for the subsidy. So, ($55,000/5 people) gives us $11,000 per person. So, for these five people they will need to contribute $25,000 + $11,000 or $36,000 each in order for the healthcare fund to have sufficient funds to cover healthcare costs as well as the costs of the subsidies for low income individuals. Here is the completed table: notice that if you sum the last column you do get $250,000, which is the total amount of dollars that must be collected in order to provide healthcare to everyone in this country for the year. Individual Income Available to be spent on health insurance (this is related to total gross income of the individual) Amount of subsidy required in order for the individual to be able to afford the healthcare insurance Healthcare Insurance Premium (what the individual paid for their healthcare insurance) Additional charge per person to cover healthcare subsidy costs Total Payment per person for Healthcare Insurance (includes premium as well as any
is related to total gross income of the individual) healthcare for this year premium as well as any share of subsidy cost) from (d) program if given option to participate or not Joe $10,000 Low Healthcare costs $10,000 $2000 Will not participate Mary $10,000 Significant Healthcare costs $10,000 $200,000 Will participate Sue $10,000 Some Healthcare costs $10,000 $10,000 May or may not participate Mabel $20,000 Low Healthcare costs $20,000 $2000 Will not participate Clyde $20,000 Some Healthcare costs $20,000 $10,000 Will not participate Sylvester $60,000 Low Healthcare $36,000 $2000 Will not participate Owen $100,000 Some Healthcare costs $36,000 $10,000 Will not participate Abigail $100,000 Some Healthcare costs $36,000 $10,000 Will not participate Samantha $100,000 Low Healthcare costs $36,000 $2000 Will not participate Cletus $100,000 Low Healthcare costs $36,000 $2000 Will not participate f. Given your work in this problem, provide a brief explanation of why the Affordable Care Act (“Obamacare”) includes both a subsidy for low income individuals as well as an Individual Mandate that requires everyone to purchase healthcare insurance. Answer: The adverse selection problem exists in the market of health insurance because of asymmetric information. People know more about their health and their potential health care issues than do insurers, so even when insurance companies do their homework about how much someone will cost them to insure, they can only know so much. When only sick people or people with a higher likelihood of becoming sick buy insurance, their costs of care will be relatively high compared to a more diverse (in terms of healthcare needs) pool of people and the insurance company will need to collect relative high insurance premiums for this group. Higher premiums make insurance even less attractive for healthy people, causing even more of them to drop out of the healthcare insurance market. As this problem continues to become a bigger problem it leads to coverage becoming too expensive for almost everyone and the