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Analyzing a Health Insurance Market Failure
A new insurance company, 'SecureHealth,' enters a market to offer a single health insurance plan. Lacking detailed health histories for individuals, they set the annual premium at $5,000, calculated based on the average expected health costs of the entire community. After the first year, SecureHealth's actual costs are much higher than projected because the enrolled members were, on average, less healthy than the general population. To compensate, they raise the premium to $6,500 for the second year. In response, a number of the healthiest remaining members drop their coverage.
Analyze this scenario. Identify the economic phenomenon driving these events, explain the cyclical process that has begun, and predict the likely outcome for this insurance plan if the trend continues.
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Analyzing a Health Insurance Market Failure
A health insurance company operates in a market where it cannot distinguish between high-risk and low-risk individuals. The following events describe a dynamic that can unfold in this market. Arrange these events in the logical sequence that illustrates a price spiral.
Predicting Insurance Market Dynamics
An insurer offers a single-price travel insurance plan that covers trip cancellations. A new, highly-publicized weather forecasting model becomes available to the public, allowing travelers to predict with great accuracy whether their specific travel dates are likely to have severe, trip-canceling weather. The insurer cannot access this individual forecast data. What is the most likely effect on the insurer's business over time if they do not change their single-price model?
In an insurance market where the seller cannot distinguish between customer types and offers a single price, a price spiral dynamic begins when the departure of the lowest-risk customers causes the average cost of insuring the remaining pool of customers to decrease.
The Driving Force of a Price Spiral
A health insurance company, unable to differentiate between individuals' health risks, offers a single community-rated premium. This can lead to a 'price spiral'. Match each component of this dynamic with its correct description.
A government regulator is concerned that a voluntary, single-price health insurance market is collapsing. They observe that premiums are rising each year, and the number of healthy, young individuals enrolling is declining. To stabilize the market and halt this trend, which of the following policy proposals is most likely to be effective?
Diagnosing an Unprofitable Insurance Plan
Evaluating Policy Interventions for Insurance Market Collapse