MGEC32 Lecture 3A

Social Insurance

What is the biggest driver of growth in governments? How much does the Canadian government spend on it?

Social Insurance; ~15-17%

What drove growth in the government in the 20th century?

Social Insurance Programs

What happens to risk aversion as stakes are higher?

The higher the stakes, the more risk averse people are

What are examples of incomplete insurance?

1. Deductibles

2. Copays

3. Caps on Coverage

4. Tight Rules

What are examples of insurances that don’t exist?

1. Long term care insurance

2. Job Obsoletion Prevention

3. Recession Risks

4. Self-employed Entrepreneur Insurance

What are 3 main reasons why insurance markets fail?

1. Adverse Selection: When people know more about their risk level than the insurer

2. Correlated Risk

3. Moral Hazard

Which two market failures can governments prevent in insurance market failures?

1. Adverse Selection

2. Correlated Risk

Explain the Adverse Selection death spiral?

Lack of risk pooling, as lower risk people exit the market

What happened in the Kentucky Insurance case study?

Insurance market collapsed due to a death spiral:

1. Private health insurance companies had to offer an insurance plan to anyone that applied for one.

2. Insurers were mostly not allowed to vary the premiums or coverage based on individual characteristics

What are the 2 Private Market solutions to Adverse Selection?

1. Acquire Risk Information: Estimate risk for different groups, charge differently

2. Offer Incomplete Insurance

   1. Offer low risk → low premium + high deductible

   2. Offer high risk → high premium + low deductible

What is the industry for estimating risk?

Actuary Sciences

How do insurance companies make money through incomplete insurances?

Insurers lose money on high risk people, but earn money through low risk clients

Which two properties do private insurance markets need for them to succeed? What could wipe them out?

Predictable Risk & Diversified Risk; Correlated Risk could wipe out a private insurance company

What are the two justifications for government involvement in insurance programs?

Solves the Adverse Selection & Correlated Risk market failures

How does universal government insurance affect low & high risk people?

Low risk are minorly worse off, but high risk people are MUCH better off

How does Canada fund medical care insurance? What about the US?

1. Canada uses tax revenue to fund medical care

2. Mandated everyone to purchase insurance or face financial penalty

Who oversees health insurance in Canada?

Provincial Government. 25% Federal Funding & 75% Provincial

What are the features of Canadian healthcare?

1. All residents are elgible

2. All medically necessary care is provided

   1. Though 65% of pharmaceuticals drugs aren’t

3. Most outpatient cares provided by for profit entities; government then reimburses them

4. Hospitals are non-profits

What are the challenges of the Canadian healthcare system?

• More and more older population in Canada

• Health Spending per Capita has gone up dramatically (2.5x)

• Healthcare share of GDP keeps increasing (13.2%)

How can the Canadian government deal with its medical challenges?

1. Expand supply of medical care:

• Raise taxes or increase government debt (deferred taxes) to pay for it

• Remove barriers on the supply: i.e. Canadian provinces currently:

  • (i) restrict medical school spots

  • (ii) restrict residency spots

  • (iii) cap the quantity of medical care a physician can provide

  • (iv) make it hard for foreign-trained doctors to work here.

2. Reduce medical care per person

• Much longer wait time to get treatment

Maritime provinces have DRASTICALLY increased wait time for medical care

What are two reasons Canada’s healthcare system is re-distributive?

1. Universal healthcare makes everyone buy insurance, causing costs to go down

2. The poorest household receive the most amount of medical care, but the wealthiest household receive less, but pay for the most