Answer to Question #183072 in Microeconomics for Ruchi

Question

The health insurance reform signed into law by President Obama in 2010 included the following two provisions. i. Insurance companies must offer health insur ance to everyone who applies and charge them

the same price regardless of a person's preex isting health condition.

ii. Everyone must buy health insurance or pay a penalty for not doing so.

a. Which of these policies taken on its own makes the problem of adverse selection worse? Explain b. Why do you think the policy you identified in part (a) was included in the law?

c. Why do you think the other policy was included in the law?

Answer 1

a)

Policy i (Insurance companies must offer health insurance to everyone who applies and charge them the same price regardless of a person's pre existing health condition.) will make the problem of adverse selection worse.

b)

This is because this policy imposes a waiting period before coverage starts thus charging higher premiums and out-of-pocket expenses to cover people with pre existing conditions. People with pre existing conditions are likely to cost the insurer more in claims expenses because the insurance companies cannot limit these benefits.

c)

The other policy was included into the law in bid to ensure everyone is covered under affordable health care services in order to ensure no one is vulnerable as this will improve the standards of living