Basic Idea

• This exercise is designed to simulate the experience of designing and purchasing health insurance.

• Some of you will play the role of insurers (2 people / insurer; 6 insurers total)

• The rest will be “customers” who are deciding whether to buy insurance, and which insurance plan to buy.

Basic Idea

• We’ll play multiple rounds, with different elements introduced in each round.

In Each Round …

• Customers will start with $10,000 in “wealth.”
• Customers will receive a “risk card” numbered from 1 (healthiest) to 6 (sickest).
• The risk cards tell you how likely it is that you will incur a major medical expense ($5,000) in the plan year.

In Each Round …

In Each Round …

• Customers will then be asked to shop for an insurance plan.
• Meanwhile, insurers set premiums based on the specified rules for the round.
• Insurers tally up the total amount of premiums collected from insured customers.

In Each Round …

• After plan selections are made, and insurers tally up their total premiums, I will role a dice.
• The roll of the dice determines realized health care use.
• If the dice roll is less than or equal to your risk number, you incur $5,000 in medical expenses.

In Each Round …

• Customers figure out their ending “wealth” by either subtracting your premium (if you purchased insurance) or your medical expenses (if you went uninsured).

• Insurers figure out their total incurred claims (sum of all medical expenditures incurred among insured members) and whether they make a profit or go insolvent.

Example: Customer

• I receive a health risk card with a 4.

• I have a 67% probability of incurring $5,000 in medical expenses.

  • I incur expenses if Dr. Graves rolls a 1, 2, 3, or 4.

Example: Customer

• I decide to purchase the policy.

• Dr. Graves rolls a 3 for the round.

• I incur $5,000 in medical expenses because the dice number (3) is less than or equal to my risk value (4).

• Because I bought insurance, my end-of-year wealth is $7,000 ($10,000 - $3,000).

• Note that the roll of the dice is irrelevant to me because I bought insurance.

Example: Customer

• I decide NOT to purchase the policy.

• Dr. Graves rolls a 3.

• I incur $5,000 in medical expenses because the dice number (3) is less than or equal to my risk value (4).

• Because I am uninsured, my end-of-year wealth is $5,000 ($10,000 - $5,000).

Example: Insurer

• I offer a fixed $3,000 premium policy to all-comers.

  • I do not request information (risk score) from potential consumers.
  • I do not deny coverage to anyone.

• I enroll 10 policyholders, so my “reserves” are $30,000 ($3,000 * 10)

Example: Insurer

Example: Insurers