Answer the following questions: 1. Suppose a particular outpatient procedure cos

Question

Answer the following questions: 1. Suppose a particular outpatient procedure costs $3200. (a) Calculate the expected medical costs for a person who has a 15% probability (0.15) of needing the procedure in a given year (b) How would your answer to part (a) change if the person planned ahead of time to have procedure done? 2. Explain what it means for a premium to be actuarially fair. Do actuarially fair premiums exist in the real world? Why or why not. 3. Define moral hazard. Give two examples of moral hazard: one that is health care related and one that is not. 4. Suppose a law is passed that requires insurance companies to cover any pre-existing conditions that a patient has. (a) How will the expected losses for the insurance company change after the law is passed? b) What will happen to the premiums that the insurance company charges after the law is passed?

Explanation / Answer

1)

a) The expected cost will be = Probability of needing the procedure* cost+ Probability of needing the procedure* cost

Expected Cost =0.15*3200+0.85*0 = $480

b) If the person had planned ahead then Cost will be =$3200.

*Please post unrelated questionseparately. We are supposed to do only one question.

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