The paper "Health Insurance Policy in Australia" is an outstanding example of a micro and macroeconomic assignment. A customer would demand health insurance because they are averse to risk. This means that they would rather pay a certain sum of money to be guaranteed of future income, as opposed to remaining optimistic without insuring their future against unforeseen eventualities. A risk-averse consumer of health insurance will take this option due to the decreasing marginal utility of income as illustrated by the graph (Gans 2014). The risk-averse health insurance consumer will derive more utility due to the guaranteed income.
The risk-averse consumer is better off avoiding risk and that is why the guaranteed revenue from health insurance has more utility to the consumer than any other income that the consumer could be expecting. The welfare gain to the consumer of full insurance as measured by the risk premium As already mentioned, the consumer derives more utility regarding the welfare that they gain from the premium risk payouts in comparison to the satisfaction that the health insurance consumer would obtain from other expected incomes (Morris, Devlin, & Parkin 2007).
This is because the risk premiums are guaranteed payouts. Use either the Rothschild and Stiglitz model or the sketched model to describe the process of adverse selection. One of the common dilemmas in the insurance market is the concept of adverse selection. The main issues are revolving around the negative selection entail a situation where one party to the insurance contract, mainly the insurer, has private information in advance that they may exploit to their advantage and the detriment of the insured (Martinez-Giralt & Barros 2013).
This concept may be explained through the Rothschild and Stiglitz model. The solution to this dilemma is the passing of this credible and private information by the insurer through the action of signaling, or where the insured insists on accessing the said information through the operation of screening. Under the Rothschild and Stiglitz model, the information asymmetry may lead to an equilibrium that is separating. \
Blumenthal, D., Abrams, M., and Nuzum, R., (2015) “The Affordable Care Act at 5 Years” The New England Journal of Medicine 372(25):2451-245.
Gans, J. K., Stephen; Stonecash, Robin; Byf. (2014). Principles of Economics, 6th Ed. New York, Cengage Learning.
Martinez-Giralt, X. and Barros, P., 2013. Health economics: an industrial organization perspective. Routledge.
MORRIS, S., DEVLIN, N., & PARKIN, D. (2007). Economic analysis in health care. Chichester, Wiley.
Rothschild and Stiglitz, 1976 “Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information” Quarterly Journal of Economics 90(4): 629-649.
Sheils, John and Haught, Randall, (2011) “Without The Individual Mandate, The Affordable Care Act Would Still Cover 23 Million; Premiums Would Rise Less Than Predicted” Health Affairs 30 (11):2177-2185.