Transcript Find your role and sit at the indicated seat. Don’t disturb the materials. Name Role Abdimajid Abdirahman Adriano Gianturco Gulisano Aida Ibricevic Alejandro Komai Allen Mendenhall Anamaria Boioglu Andrew Seremetis Ariel.

Find your role and sit at the indicated seat.
Don’t disturb the materials.
Name
Role
Abdimajid Abdirahman
Adriano Gianturco Gulisano
Aida Ibricevic
Alejandro Komai
Allen Mendenhall
Anamaria Boioglu
Andrew Seremetis
Ariel Goldring
Arya Morshed
Babatunde Rosanwo
Benjamin Eisen
Brandon Peterson
Brian Stacy
Bridgette Richey
Caitlin McLean
Candice Malcolm
Carlos Ormachea
Charlotte Rommerskirchen
Chris Knudsen
Consumer 1
Consumer 1
Consumer 2
Consumer 2
Consumer 3
Consumer 3
Consumer 4
Consumer 4
Consumer 5
Consumer 5
Consumer 6
Consumer 6
Consumer 7
Consumer 7
Consumer 8
Consumer 8
Consumer 9
Consumer 9
Consumer 10
Claire Litherland
Consumer 10
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Name
Coleman Drake
Colin Keesee
Crane Sorensen
Daniel Piedra
Daniel Suddes
Daniel Sockwell
Denis Clijsters
Dominic Foppoli
Dustin Robinson
Eleanor Smith
Emilie Maes
Yashua Bhatti
Enrique Angulo
Eric Sosnoff
Jens Moens
Joseph Corey
Ryan Biese
Joseph Foutch
Yashua Bhatti
Role
Consumer 11
Consumer 11
Consumer 12
Consumer 12
Consumer 13
Consumer 13
Consumer 14
Consumer 14
Consumer 15
Consumer 15
Consumer 16
Consumer 16
Consumer 17
Consumer 17
Consumer 18
Consumer 19
Consumer 19
Consumer 20
Consumer 20
Name
Role
Julia Novitskaia
Julio Padilla
Kareem Khalaf
Kathryn Isaacson
Lai Xu
Larisa Burakova
Liliya Leontyeva
Margaret Gales
Theodore Dasher
Mark Yager
David Hendricks
Michal Kuz
Mike Tellier
Milko Markov
Nicholas Dunn
Oliver Cooper
Patricio Echagüe
Philippe Caeymaex
Rossen Valchev
Insurer 1
Insurer 1
Insurer 2
Insurer 2
Insurer 3
Insurer 3
Insurer 4
Insurer 4
Insurer 5
Insurer 5
Insurer 6
Insurer 6
Insurer 7
Insurer 7
Insurer 8
Insurer 8
Insurer 9
Insurer 9
Insurer 10
Ryan Lynch
Insurer 10
The purpose of this simulation is to create a
competitive market and to observe the market as it
achieves equilibrium.
In this simulation, you will experience real market
forces. The same human traits and behaviors that
govern real markets exist in the simulation.
What are artificial are your surroundings. The market
forces are real.
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2
The Players and the Goals
In this experiment, there are CONSUMERS and INSURERS.
INSURERS sell INSURANCE.
CONSUMERS buy FOOD and INSURANCE.
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Consumers
Each consumer has $20 to spend.
A unit of food costs $1.
The more food the consumer eats, the happier the consumer
becomes.
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4
Consumers: The Catch
Each consumer faces some risk of badness.
If badness befalls the consumer, the consumer loses all of the
purchased food.
vs.
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5
Consumers: The Insurance
But, consumers can purchase insurance contracts from the
insurance companies.
Each contract pays the consumer one unit of food if badness
befalls that consumer.
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Consumers: Example
Suppose a consumer can purchase insurance contracts at a
price of $0.50 each (the price of food is always $1 each).
Suppose that the consumer spends $5 on insurance contracts.
The remaining $15 is automatically spent on food.
10 insurance contracts
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15 food
7
Consumers: Example
If badness does not befall the consumer, the consumer eats 15
units of food and is very happy.
Very
Happy !!
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Consumers: Example
If badness does befall the consumer, the 15 units of food
disappear, each insurance contract pays $1.00 (which buys 1
unit of food), and the consumer is somewhat happy.
Somewhat
Happy
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Consumers
Each consumer’s goal: Maximize happiness
More insurance means
 More food when badness befalls.
 Less food when badness does not befall.
 Too little insurance is bad. Too much insurance is also bad.
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Insurers
Each insurer can write as many insurance contracts as liked and
charge any price.
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Insurers
If badness does not befall the consumer, the insurer walks away
with the money the consumer paid for the contracts.
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$
$
$
$
$
$
12
Insurers
If badness does befall the consumer, the insurer pays the
consumer $1.00 for each contract the insurer sold the consumer.
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Insurers: Example
Suppose an insurer sells Consumer A six contracts for $0.60
each, and sells Consumer B five contracts for $0.30 each.
The insurer collects $3.60 from Consumer A and $1.50 from
Consumer B.
Revenue =
$5.10
$3.60
$1.50
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Insurers: Example
Suppose badness befalls Consumer B but not Consumer A.
The insurer owes Consumer B $1.00 for each contract
Consumer B purchased.
Revenue =
$5.10
Cost =
$5.00
Profit =
$0.10
$5.00
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Insurers: Example
Suppose badness befalls Consumer A but not Consumer B.
The insurer owes Consumer A $1.00 for each contract
Consumer A purchased.
Revenue =
$5.10
Cost =
$6.00
Loss =
$0.90
$6.00
(Insurers do not need cash reserves to cover policies.)
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Insurers
Each insurer’s goal: Maximize expected profit
Insurers can ask whatever prices they like for contracts
 Too low a price is bad. Too high a price is also bad.
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Badness
There are five types of consumer. Each faces a
different probability of badness.
Type 1
Type 2
Type 3
Type 4
Type 5
10%
20%
30%
40%
50%
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Badness
Each consumer knows which type he/she is, but
insurers don’t.
The average probability of badness is 30%.
Type ?
?
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The Objects
= insurance contract(s)
Contracts Sold
Buyer
Suspected Risk
(0.1 to 0.5 )
Total Revenue
Expected Cost
(contracts x risk )
Expected Profit
(revenue - cost )
= sales register
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20
Contracts
Customer 6 purchases 12 contracts from insurer for $0.40 each.
12
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6
$4.80
21
Register
Contracts Sold
Buyer
12
12
6
6
Suspected Risk
(0.1 to 0.5 )
Total Revenue
Expected Cost
(contracts x risk )
Expected Profit
(revenue - cost )
0.3 $4.80 $3.60 $1.20
0.5 $4.80 $6.00 -$1.20
The register is for your own use in tracking your expected costs.
Feel free to cross out and re-enter information when your
suspected risk for a consumer changes.
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22
The Mechanics
Insurers
Agent
Head Office
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Consumers
$0.30
Yes
23
The Mechanics
Insurers
Consumers
Agent
Head Office
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The Mechanics
Insurers
Consumers
Agent
Head Office
Head Office:
Keep track of your
expected profits.
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Consumers:
Keep track of how
much you’ve spent.
You only have $20!
25
Ready to begin…
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26
Consumers: Buy some insurance. All remaining
money goes to food.
Insurers:
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Sell insurance to expected maximize
profit.
27
Accounting Phase
Consumers report:
• Contracts purchased, cost, and from which
insurer(s)
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28
Consumer Badness
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
no
YES
no
YES
no
no
no
YES
no
YES
no
YES
no
no
no
YES
no
no
no
no
30
25
20
15
10
5
0
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1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Consumer #
Food Purchased
Contracts Purchased
Food Consumed
29
Consumer Badness
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
no
YES
no
YES
no
no
no
YES
no
YES
no
YES
no
no
no
YES
no
no
no
no
$25.00
$20.00
$15.00
$10.00
$5.00
$0.00
1
2
3
4
5
6
7
8
9
10
-$5.00
-$10.00
-$15.00
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Insurer #
Revenue
Indemnities
Profit
30
Mandated Insurance
Concerned that some consumers do not have enough
insurance coverage, the law stipulates that an insurer may
not sell less than 50 contracts to a buyer unless the buyer
has already purchased at least 50 contracts (from any
insurer) this round.
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31
Ready to begin…
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32
Consumers: Buy some insurance. All remaining
money goes to food.
Insurers:
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Sell insurance to maximize profit.
33
Accounting Phase
Consumers report:
• Contracts purchased, cost, and from which
insurer(s)
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34
Consumer Badness
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
no
no
no
no
no
YES
no
YES
YES
no
no
no
no
YES
no
no
no
YES
no
YES
60
50
40
30
20
10
0
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1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Consumer #
Food Purchased
Contracts Purchased
Food Consumed
35
Consumer Badness
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
no
no
no
no
no
YES
no
YES
YES
no
no
no
no
YES
no
no
no
YES
no
YES
$80.00
$60.00
$40.00
$20.00
$0.00
1
2
3
4
5
6
7
8
9
10
-$20.00
-$40.00
-$60.00
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Insurer #
Revenue
Indemnities
Profit
36
Mandatory Insurance
Concerned that some consumers do not have any
insurance, the law requires that all consumers buy a total
of no less than 50 contracts this round.
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37
Ready to begin…
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38
Consumers: Buy some insurance. All remaining
money goes to food.
Insurers:
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Sell insurance to maximize profit.
39
Accounting Phase
Consumers report:
• Contracts purchased, cost, and from which
insurer(s)
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40
Consumer Badness
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
no
YES
no
no
YES
no
no
no
no
no
YES
no
no
YES
YES
no
no
no
no
YES
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45
40
35
30
25
20
15
10
5
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Consumer #
Food Purchased
Contracts Purchased
Food Consumed
41
Consumer Badness
$80.00
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
no
YES
no
no
YES
no
no
no
no
no
YES
no
no
YES
YES
no
no
no
no
YES
$60.00
$40.00
$20.00
$0.00
1
2
3
4
5
6
7
8
9
10
-$20.00
-$40.00
-$60.00
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Insurer #
Revenue
Indemnities
Profit
42
Results…
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43
Insurance Contracts Purchased
120
100
80
60
40
20
0
Type 1
Free Ma rket
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Type 2
Type 3
Ma nda ted
Type 4
Type 5
Ma nda tory
44
Insurance Contracts Purchased
800
700
600
500
400
300
200
100
0
Type 1
Type 2
Free Ma rket
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Type 3
Ma nda ted
Type 4
Type 5
Ma nda tory
45
Food Purchased
90
80
70
60
50
40
30
20
10
0
Type 1
Type 2
Free Ma rket
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Type 3
Ma nda ted
Type 4
Type 5
Ma nda tory
46
Food Purchased
450
400
350
300
250
200
150
100
50
0
Type 1
Type 2
Free Ma rket
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Type 3
Ma nda ted
Type 4
Type 5
Ma nda tory
47
Insurance Price per Contract
$0.40
$0.35
$0.30
$0.25
$0.20
$0.15
$0.10
$0.05
$0.00
Free Mkt
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Mandated
Mandatory
48
Insurance Price per Contract
$0.45
$0.40
$0.35
$0.30
$0.25
$0.20
$0.15
$0.10
$0.05
$0.00
Free Market
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Mandated
Mandatory
49
Insurance Profits
$20.00
$10.00
$0.00
-$10.00
Type 1
Type 2
Type 3
Type 4
Type 5
-$20.00
-$30.00
-$40.00
Free Ma rket
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Ma nda ted
Ma nda tory
50
Insurance Profits
$100.00
$80.00
$60.00
$40.00
$20.00
$0.00
($20.00)
($40.00)
($60.00)
($80.00)
($100.00)
Type 1
Type 2
Free Ma rket
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Type 3
Ma nda ted
Type 4
Type 5
Ma nda tory
51
Insurance Contracts Purchased
800
700
600
500
400
300
200
100
0
Type 1
Type 2
Free Ma rket (ful l i nfo)
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Type 3
Free Ma rket
Type 4
Ma nda ted
Type 5
Ma nda tory
52
Food Purchased
450
400
350
300
250
200
150
100
50
0
Type 1
Type 2
Free Ma rket (ful l i nfo)
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Type 3
Free Ma rket
Type 4
Ma nda ted
Type 5
Ma nda tory
53
Insurance Price per Contract
$0.45
$0.40
$0.35
$0.30
$0.25
$0.20
$0.15
$0.10
$0.05
$0.00
Free Market (full info)
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Free Market
Mandated
Mandatory
54
What is the effect of insurance mandates?
• Forces lower risk people to consume
quantities of goods that they may not want
to consume.
• End result is a transfer of wealth from low
risk to high risk people.
• A better solution is simply to tax the low
risk people, give the money to the high risk
people and let them buy what they want.
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But, we have to do something!
Look at what has been happening to the cost
of health care over time!
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400.0
350.0
Price of medical care has increased 349% since 1980 versus 135%
for other consumer prices.
300.0
250.0
200.0
150.0
100.0
50.0
Price of Medical Care
2006
2003
2004
2005
2001
2002
1998
1999
2000
1996
1997
1993
1994
1995
1991
1992
1988
1989
1990
1986
1987
1983
1984
1985
1981
1982
1980
0.0
Consumer Prices Excluding Medical Care
Source: Bureau of Labor Statistics (www.economy.com)
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500.0
Hospital services
+ 576%
Drugs and supplies
+ 402%
400.0
Physician services
+ 282%
350.0
Other consumer prices
+ 135%
450.0
300.0
250.0
200.0
150.0
100.0
50.0
2006
2003
2004
2005
2001
2002
1998
1999
2000
1996
1997
1993
1994
1995
1991
1992
1988
1989
1990
1986
1987
1983
1984
1985
1981
1982
1980
0.0
Price of Physicians Services
Price of Hospital Services
Price of Prescription Drugs and Medical Supplies
Source: Bureau of Labor Statistics (www.economy.com)
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Growth in Prices 1980 - 2006
-200%
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1 GHz of Computing Power
New Cars
Gasoline
Food
Housing
Federal Gov't (per-capita)
State/Local Gov't (per-capita)
-400%
Medical Care
College Tuition
600%
400%
200%
0%
-600%
-800%
Source: Bureau of Labor Statistics (www.economy.com)
59
But, the cost of health care is only half of
the picture.
What has been happening to the quality of
health care?
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How do we measure the quality of health care?
1. What is “quality?”
2. How do we account for health care that has
become routine but didn’t exist in the past
(e.g., pre-natal care)?
3. How do we weigh qualities across different
types of care (e.g., glasses vs. heart
transplant)?
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How does one measure the quality of health care?
An easy and composite measure of the
effectiveness of health care is the mortality rate.
Some health care may have little or no impact on
the mortality rate (e.g., orthodonture).
But, it is not unreasonable to assume that the
qualities of other types of health care grow at
similar rates.
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10.0
9.5
9.0
8.5
8.0
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1960
7.5
Deaths per 1,000 People
Source: Statistical Abstract of the United States, 2008, Table 77.
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30.0
25.0
20.0
15.0
10.0
5.0
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1960
0.0
Infant Mortality per 1,000 Live Births
Source: Statistical Abstract of the United States, 2008, Table 77.
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60.0
50.0
40.0
30.0
20.0
10.0
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
0.0
(per
100,000
population)
Deaths by
by Influenza
Influenceand
andPneumonia
Pneumonia
(per
100,000
population)
Source: Statistical Abstract of the United States, 2008, Table 110.
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Millions
2.9
2.7
What does increased cost of health care buy us?
2.5
2.3
400,000 lives saved annually
2.1
1.9
1.7
Actual Deaths in the Current Year
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1960
1.5
Deaths at the 1960 Mortality Rate
Source: Derived from Statistical Abstract of the United States, and the Bureau of Economic Analysis.
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But, what about the uninsured?
They aren’t sharing in this increased quality of
health care.
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67
18%
16%
14%
12%
10%
The percentage of the population that is uninsured has remained stable over time.
8%
6%
4%
2%
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
0%
Source: Income, Poverty, and Health Insurance Coverage in the U.S.: 2006, US Census Bureau.
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35.0%
30.0%
Percentage of uninsured has remained relatively constant for the young and
the old – the two groups for whom there is the least incentive to tradeoff
health care for spending on other things.
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
1999
2000
Under 18
2001
18 to 24
2002
25 to 34
2003
35 to 44
2004
45 to 54
2005
2006
55 to 64
Source: Income, Poverty, and Health Insurance Coverage in the U.S.: 2006, US Census Bureau.
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6%
5%
Pattern of uninsured is commensurate with the hypothesis that, as the price of
health care rises, the more healthy willingly choose not to be insured.
4%
3%
2%
1%
0%
Under 18
18 to 24
25 to 34
35 to 44
45 to 54
55 to 64
-1%
-2%
Change in % of Uninsured 1999 to 2006
Source: Income, Poverty, and Health Insurance Coverage in the U.S.: 2006, US Census Bureau.
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Voting for the “right” amount of insurance
A free choice to purchase is a vote, but with three important differences.
Political vote:
One size fits all.
Free market vote: Multiple sizes for multiple recipients.
Political vote:
Speed of change is driven by the election cycle.
Free market vote: Speed of change is driven by the accounting cycle.
Political vote:
Signal is distorted because the vote is for a “bundle” of
issues embodied by one candidate.
Free market vote: Signal is clear because the vote is for a specific issue.
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