[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:02.29,0:00:05.94,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:14.30,0:00:15.40,Default,,0000,0000,0000,,- [Professor Tyler Cowen] \NIn the previous video,
Dialogue: 0,0:00:15.40,0:00:18.28,Default,,0000,0000,0000,,we introduced the ideas \Nof asymmetric information,
Dialogue: 0,0:00:18.28,0:00:21.28,Default,,0000,0000,0000,,and adverse selection \Nand we applied those ideas
Dialogue: 0,0:00:21.28,0:00:22.68,Default,,0000,0000,0000,,to the used car market.
Dialogue: 0,0:00:22.88,0:00:25.04,Default,,0000,0000,0000,,Let's take those same \Nbasic concepts,
Dialogue: 0,0:00:25.04,0:00:28.63,Default,,0000,0000,0000,,and build a basic model \Nof health insurance.
Dialogue: 0,0:00:28.63,0:00:31.42,Default,,0000,0000,0000,,Suppose that potential \Nhealth insurance consumers
Dialogue: 0,0:00:31.42,0:00:33.66,Default,,0000,0000,0000,,come in a range of states of health.
Dialogue: 0,0:00:33.66,0:00:35.68,Default,,0000,0000,0000,,For instance, \Nthe least healthy people
Dialogue: 0,0:00:35.68,0:00:38.92,Default,,0000,0000,0000,,might cost about $30,000 a year.
Dialogue: 0,0:00:38.92,0:00:40.61,Default,,0000,0000,0000,,That's these folks here.
Dialogue: 0,0:00:40.61,0:00:43.98,Default,,0000,0000,0000,,The most healthy might cost \Nnothing in healthcare.
Dialogue: 0,0:00:43.98,0:00:46.12,Default,,0000,0000,0000,,That's these folks over here.
Dialogue: 0,0:00:46.12,0:00:48.54,Default,,0000,0000,0000,,Now consumers know this information,
Dialogue: 0,0:00:48.54,0:00:51.18,Default,,0000,0000,0000,,but by assumption, insurers don't.
Dialogue: 0,0:00:51.18,0:00:53.16,Default,,0000,0000,0000,,From the insurer point of view,
Dialogue: 0,0:00:53.16,0:00:56.01,Default,,0000,0000,0000,,everyone is of the same \Naverage health.
Dialogue: 0,0:00:56.01,0:00:58.96,Default,,0000,0000,0000,,Here again, we have \Nasymmetric information.
Dialogue: 0,0:00:59.11,0:01:01.46,Default,,0000,0000,0000,,That is consumers of healthcare
Dialogue: 0,0:01:01.46,0:01:02.78,Default,,0000,0000,0000,,have more information about
Dialogue: 0,0:01:02.78,0:01:05.10,Default,,0000,0000,0000,,their health status \Nthan insurers do.
Dialogue: 0,0:01:05.48,0:01:08.88,Default,,0000,0000,0000,,In this scenario, insurers have to \Nprice the coverage
Dialogue: 0,0:01:08.88,0:01:12.00,Default,,0000,0000,0000,,based on the average cost \Namong all consumers,
Dialogue: 0,0:01:12.00,0:01:13.98,Default,,0000,0000,0000,,namely, $15,000.
Dialogue: 0,0:01:14.53,0:01:18.96,Default,,0000,0000,0000,,But if the insurance costs $15,000,\Nthen a portion of the market,
Dialogue: 0,0:01:18.96,0:01:20.83,Default,,0000,0000,0000,,the relatively healthy people,
Dialogue: 0,0:01:20.83,0:01:23.46,Default,,0000,0000,0000,,they will choose not \Nto buy insurance as
Dialogue: 0,0:01:23.46,0:01:26.13,Default,,0000,0000,0000,,the cost of that insurance \Nis greater to them
Dialogue: 0,0:01:26.13,0:01:27.54,Default,,0000,0000,0000,,than the expected benefit.
Dialogue: 0,0:01:27.88,0:01:31.30,Default,,0000,0000,0000,,So only part of this market \Nwill buy insurance.
Dialogue: 0,0:01:31.30,0:01:33.95,Default,,0000,0000,0000,,The average cost of those \Nwho actually will buy
Dialogue: 0,0:01:33.95,0:01:39.42,Default,,0000,0000,0000,,is then not $15,000 but $22,500.
Dialogue: 0,0:01:39.42,0:01:41.83,Default,,0000,0000,0000,,In that case, \Nthe insurance company,
Dialogue: 0,0:01:41.83,0:01:45.58,Default,,0000,0000,0000,,if it tries to price at $15,000, \Nloses money.
Dialogue: 0,0:01:45.58,0:01:51.40,Default,,0000,0000,0000,,If the insurance company instead \Nraises the price to $22,500,
Dialogue: 0,0:01:51.40,0:01:55.22,Default,,0000,0000,0000,,well, the same dynamic\Nis actually going to kick in again.
Dialogue: 0,0:01:55.22,0:01:56.68,Default,,0000,0000,0000,,That is relatively healthy people
Dialogue: 0,0:01:56.68,0:01:58.90,Default,,0000,0000,0000,,won't find it worth \Npaying that price.
Dialogue: 0,0:01:58.90,0:02:01.29,Default,,0000,0000,0000,,The sicker people still will buy,
Dialogue: 0,0:02:01.29,0:02:03.03,Default,,0000,0000,0000,,and that will raise \Nthe expected costs
Dialogue: 0,0:02:03.03,0:02:06.42,Default,,0000,0000,0000,,to the insurer, \Nand thus the price even further.
Dialogue: 0,0:02:06.80,0:02:10.40,Default,,0000,0000,0000,,This dynamic continues \Nuntil the individual insurance firm
Dialogue: 0,0:02:10.40,0:02:13.20,Default,,0000,0000,0000,,finds there is no price \Nat which it can attract
Dialogue: 0,0:02:13.20,0:02:16.02,Default,,0000,0000,0000,,a set of customers with \Nhealthcare costs
Dialogue: 0,0:02:16.02,0:02:18.31,Default,,0000,0000,0000,,lower than the price of insurance.
Dialogue: 0,0:02:18.54,0:02:23.14,Default,,0000,0000,0000,,This is the same death spiral \Nwe saw before with used cars
Dialogue: 0,0:02:23.14,0:02:24.83,Default,,0000,0000,0000,,and it leads to a market failure.
Dialogue: 0,0:02:26.08,0:02:27.54,Default,,0000,0000,0000,,As we saw in the used car market,
Dialogue: 0,0:02:27.54,0:02:30.54,Default,,0000,0000,0000,,there are several reasons \Nwhy reality may differ
Dialogue: 0,0:02:30.54,0:02:32.35,Default,,0000,0000,0000,,from the simple model.
Dialogue: 0,0:02:32.35,0:02:35.50,Default,,0000,0000,0000,,First, the model we laid out would \Npredict that the healthy people,
Dialogue: 0,0:02:35.50,0:02:38.05,Default,,0000,0000,0000,,those who exercise, \Neat their veggies,
Dialogue: 0,0:02:38.05,0:02:41.37,Default,,0000,0000,0000,,and buckle their seatbelts would \Nnot buy insurance,
Dialogue: 0,0:02:41.37,0:02:45.37,Default,,0000,0000,0000,,while the model is predicting that \Nthe smokers, the mountain climbers,
Dialogue: 0,0:02:45.37,0:02:48.55,Default,,0000,0000,0000,,and the motorcycle riders would\Nbuy insurance.
Dialogue: 0,0:02:48.55,0:02:51.24,Default,,0000,0000,0000,,Is this true? Mostly no.
Dialogue: 0,0:02:51.24,0:02:52.96,Default,,0000,0000,0000,,The people who buy health insurance
Dialogue: 0,0:02:52.96,0:02:56.49,Default,,0000,0000,0000,,actually turn out to be \Nthe healthier people as well.
Dialogue: 0,0:02:56.49,0:02:57.83,Default,,0000,0000,0000,,Why is that?
Dialogue: 0,0:02:57.83,0:03:01.40,Default,,0000,0000,0000,,Well, those who try to avoid risk \Nby eating well
Dialogue: 0,0:03:01.40,0:03:04.87,Default,,0000,0000,0000,,also try to avoid risk \Nby buying health insurance.
Dialogue: 0,0:03:04.87,0:03:06.22,Default,,0000,0000,0000,,Our initial assumption that
Dialogue: 0,0:03:06.22,0:03:08.48,Default,,0000,0000,0000,,everyone calculates \Ncosts and benefits
Dialogue: 0,0:03:08.48,0:03:10.72,Default,,0000,0000,0000,,in exactly the same way \Nis too simple.
Dialogue: 0,0:03:10.72,0:03:12.68,Default,,0000,0000,0000,,Once you account for the fact that
Dialogue: 0,0:03:12.68,0:03:15.88,Default,,0000,0000,0000,,people have differential \Ntolerances for risk,
Dialogue: 0,0:03:15.88,0:03:18.39,Default,,0000,0000,0000,,you can end up having \Nthe healthier people be\N
Dialogue: 0,0:03:18.39,0:03:21.10,Default,,0000,0000,0000,,those who choose to buy \Nthe health insurance.
Dialogue: 0,0:03:21.10,0:03:24.05,Default,,0000,0000,0000,,This is called \N“propitious selection”\N
Dialogue: 0,0:03:24.05,0:03:27.28,Default,,0000,0000,0000,,where the people who buy \Nthe health insurance are healthier,
Dialogue: 0,0:03:27.28,0:03:29.32,Default,,0000,0000,0000,,not sicker than average.
Dialogue: 0,0:03:29.32,0:03:32.51,Default,,0000,0000,0000,,This can keep costs low, \Nand prevent the death spiral.
Dialogue: 0,0:03:33.54,0:03:36.63,Default,,0000,0000,0000,,Another possible response \Nto the adverse selection problem
Dialogue: 0,0:03:36.63,0:03:39.44,Default,,0000,0000,0000,,in health insurance \Nmight seem familiar.
Dialogue: 0,0:03:39.44,0:03:42.44,Default,,0000,0000,0000,,If you recall, \Nwe saw that services such as
Dialogue: 0,0:03:42.44,0:03:45.17,Default,,0000,0000,0000,,CARFAX and Certified Inspections
Dialogue: 0,0:03:45.17,0:03:47.83,Default,,0000,0000,0000,,can alleviate \Nthe asymmetric information problem
Dialogue: 0,0:03:47.83,0:03:49.75,Default,,0000,0000,0000,,when buying a used car.
Dialogue: 0,0:03:49.75,0:03:52.64,Default,,0000,0000,0000,,These services allow \Nthe buyer of the car
Dialogue: 0,0:03:52.64,0:03:54.00,Default,,0000,0000,0000,,to have similar information
Dialogue: 0,0:03:54.00,0:03:57.00,Default,,0000,0000,0000,,to that possessed\Nby the seller of the car.
Dialogue: 0,0:03:57.62,0:04:00.08,Default,,0000,0000,0000,,The result of this information \Nis that better cars
Dialogue: 0,0:04:00.08,0:04:03.53,Default,,0000,0000,0000,,can sell for more, \Nand lemons can sell for less.
Dialogue: 0,0:04:03.53,0:04:06.71,Default,,0000,0000,0000,,Is there an analogous approach \Nfor people in health insurance?
Dialogue: 0,0:04:06.71,0:04:07.90,Default,,0000,0000,0000,,Well, yes.
Dialogue: 0,0:04:07.90,0:04:09.75,Default,,0000,0000,0000,,The health of people \Ncan be inspected
Dialogue: 0,0:04:09.75,0:04:11.91,Default,,0000,0000,0000,,just as cars are inspected.
Dialogue: 0,0:04:11.91,0:04:14.99,Default,,0000,0000,0000,,So while consumers initially \Nmay have more information
Dialogue: 0,0:04:14.99,0:04:18.45,Default,,0000,0000,0000,,about their health than what \Nthe insurance companies have,
Dialogue: 0,0:04:18.45,0:04:20.65,Default,,0000,0000,0000,,a checkup will allow \Nthe insurance firms
Dialogue: 0,0:04:20.65,0:04:23.53,Default,,0000,0000,0000,,to get a better idea of \Nthe consumer's expected
Dialogue: 0,0:04:23.53,0:04:24.96,Default,,0000,0000,0000,,healthcare costs.
Dialogue: 0,0:04:24.96,0:04:27.12,Default,,0000,0000,0000,,And that allows \Nthe insurance companies
Dialogue: 0,0:04:27.12,0:04:31.63,Default,,0000,0000,0000,,to charge healthy consumers less \Nand sicker consumers more.
Dialogue: 0,0:04:32.10,0:04:33.16,Default,,0000,0000,0000,,In the used car market,
Dialogue: 0,0:04:33.16,0:04:35.18,Default,,0000,0000,0000,,that seemed like \Na pretty good solution.
Dialogue: 0,0:04:35.18,0:04:37.60,Default,,0000,0000,0000,,After all, better cars \Nshould sell for more,
Dialogue: 0,0:04:37.60,0:04:40.18,Default,,0000,0000,0000,,and lemons should sell for less.
Dialogue: 0,0:04:40.18,0:04:41.51,Default,,0000,0000,0000,,In the health insurance market,
Dialogue: 0,0:04:41.51,0:04:43.38,Default,,0000,0000,0000,,that solution might work,
Dialogue: 0,0:04:43.38,0:04:45.63,Default,,0000,0000,0000,,but some people feel it is \Ndoubly unfair.
Dialogue: 0,0:04:45.63,0:04:47.86,Default,,0000,0000,0000,,Not only are the sick sick,
Dialogue: 0,0:04:47.86,0:04:49.71,Default,,0000,0000,0000,,but now they also have \Nto pay more
Dialogue: 0,0:04:49.71,0:04:51.57,Default,,0000,0000,0000,,for their health insurance.
Dialogue: 0,0:04:51.57,0:04:53.12,Default,,0000,0000,0000,,Another problem \Nwith inspection is that
Dialogue: 0,0:04:53.12,0:04:55.61,Default,,0000,0000,0000,,it might reveal \Ntoo much information,
Dialogue: 0,0:04:55.61,0:04:59.16,Default,,0000,0000,0000,,thereby rendering health insurance\Nno longer viable.
Dialogue: 0,0:04:59.16,0:05:02.27,Default,,0000,0000,0000,,For instance, let's say there's \Na very good diagnostic test,
Dialogue: 0,0:05:02.27,0:05:05.35,Default,,0000,0000,0000,,and it determines that \Na patient A has cancer
Dialogue: 0,0:05:05.35,0:05:09.54,Default,,0000,0000,0000,,and then B we know that cancer\Nwill cost $1 million to treat.
Dialogue: 0,0:05:09.54,0:05:11.55,Default,,0000,0000,0000,,Well, to insure against that cancer,
Dialogue: 0,0:05:11.55,0:05:14.75,Default,,0000,0000,0000,,the price of the policy \Nhas to be about $1 million,
Dialogue: 0,0:05:14.75,0:05:16.52,Default,,0000,0000,0000,,but that's no longer insurance.
Dialogue: 0,0:05:16.52,0:05:19.11,Default,,0000,0000,0000,,That's just presenting the patient \Nwith the bill.
Dialogue: 0,0:05:19.11,0:05:23.07,Default,,0000,0000,0000,,Insurance is protecting against \Nunexpected states of affairs,
Dialogue: 0,0:05:23.07,0:05:25.15,Default,,0000,0000,0000,,and it's a kind of risk pooling,
Dialogue: 0,0:05:25.15,0:05:27.74,Default,,0000,0000,0000,,a kind of protecting yourself\Nagainst the high bill.
Dialogue: 0,0:05:27.74,0:05:30.05,Default,,0000,0000,0000,,But if you're getting the high bill \Nno matter what when you're sick,
Dialogue: 0,0:05:30.05,0:05:34.06,Default,,0000,0000,0000,,well, then we've lost \Nthose benefits of insurance.
Dialogue: 0,0:05:34.66,0:05:37.26,Default,,0000,0000,0000,,Another solution to \Nthe adverse selection problem
Dialogue: 0,0:05:37.26,0:05:39.63,Default,,0000,0000,0000,,when used extensively \Nin the United States
Dialogue: 0,0:05:39.63,0:05:42.11,Default,,0000,0000,0000,,is group health insurance \Nthrough employers.
Dialogue: 0,0:05:42.11,0:05:46.15,Default,,0000,0000,0000,,Most people in America \Ndon't purchase insurance directly.
Dialogue: 0,0:05:46.15,0:05:48.29,Default,,0000,0000,0000,,Instead, their employer \Npurchases it for them
Dialogue: 0,0:05:48.29,0:05:49.68,Default,,0000,0000,0000,,as part of a group plan.
Dialogue: 0,0:05:50.49,0:05:53.65,Default,,0000,0000,0000,,The benefit of the system is that \Nthe insurance company
Dialogue: 0,0:05:53.65,0:05:57.08,Default,,0000,0000,0000,,doesn't have to worry about \Nadverse selection so much
Dialogue: 0,0:05:57.08,0:05:59.88,Default,,0000,0000,0000,,The employer doesn't know much\Nmore about its employees' health
Dialogue: 0,0:05:59.88,0:06:02.23,Default,,0000,0000,0000,,than does the insurance firm.
Dialogue: 0,0:06:02.23,0:06:04.21,Default,,0000,0000,0000,,Furthermore, the employer is\Ngoing to be buying
Dialogue: 0,0:06:04.21,0:06:08.05,Default,,0000,0000,0000,,health insurance for the employees\Nregardless of their health.
Dialogue: 0,0:06:08.05,0:06:11.42,Default,,0000,0000,0000,,So for these reasons,\Nthe adverse selection problem is
Dialogue: 0,0:06:11.42,0:06:14.31,Default,,0000,0000,0000,,much weaker with \Ngroup health insurance.
Dialogue: 0,0:06:14.31,0:06:17.77,Default,,0000,0000,0000,,Group health insurance, however, \Ndoes cause other problems.
Dialogue: 0,0:06:17.77,0:06:20.81,Default,,0000,0000,0000,,If you lose your job, \Nyou can lose your health insurance.
Dialogue: 0,0:06:20.81,0:06:23.22,Default,,0000,0000,0000,,And what we do about retirees?
Dialogue: 0,0:06:23.86,0:06:26.22,Default,,0000,0000,0000,,In the United States, \Nvarious laws have made
Dialogue: 0,0:06:26.22,0:06:28.52,Default,,0000,0000,0000,,health insurance more affordable,
Dialogue: 0,0:06:28.52,0:06:31.17,Default,,0000,0000,0000,,and furthermore retirees are insured \Nby the government
Dialogue: 0,0:06:31.17,0:06:32.69,Default,,0000,0000,0000,,under Medicare.
Dialogue: 0,0:06:32.69,0:06:37.14,Default,,0000,0000,0000,,So, there are some solutions, \Nalbeit imperfect ones as usual.
Dialogue: 0,0:06:37.58,0:06:40.93,Default,,0000,0000,0000,,The most recent approach \Nto the adverse selection problem
Dialogue: 0,0:06:40.93,0:06:43.39,Default,,0000,0000,0000,,was implemented \Nin the Affordable Care Act,
Dialogue: 0,0:06:43.39,0:06:45.56,Default,,0000,0000,0000,,otherwise known as Obamacare.
Dialogue: 0,0:06:46.21,0:06:47.83,Default,,0000,0000,0000,,Under the Affordable Care Act,
Dialogue: 0,0:06:47.83,0:06:50.59,Default,,0000,0000,0000,,everyone is supposed to buy\Nhealth insurance.
Dialogue: 0,0:06:50.59,0:06:53.55,Default,,0000,0000,0000,,If you don't, \Nyou will be fined by law.
Dialogue: 0,0:06:53.55,0:06:57.66,Default,,0000,0000,0000,,The idea here is to force \Nall the healthy people into the pool
Dialogue: 0,0:06:57.66,0:06:59.30,Default,,0000,0000,0000,,of those who buy insurance
Dialogue: 0,0:06:59.30,0:07:01.82,Default,,0000,0000,0000,,that will moderate the cost \Nof health insurance,
Dialogue: 0,0:07:01.82,0:07:04.28,Default,,0000,0000,0000,,and we will avoid the death spiral.
Dialogue: 0,0:07:04.28,0:07:06.12,Default,,0000,0000,0000,,As you can see, although \N
Dialogue: 0,0:07:06.12,0:07:08.55,Default,,0000,0000,0000,,the adverse selection model \Nis pretty simple,
Dialogue: 0,0:07:08.55,0:07:10.15,Default,,0000,0000,0000,,it has lots of applications
Dialogue: 0,0:07:10.15,0:07:13.23,Default,,0000,0000,0000,,to some pretty complex \Nreal-world problems.
Dialogue: 0,0:07:13.23,0:07:17.00,Default,,0000,0000,0000,,Next up we'll tackle moral\Nhazard. See you then.
Dialogue: 0,0:07:17.00,0:07:18.79,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:07:18.79,0:07:19.79,Default,,0000,0000,0000,,- [Announcer] If you want \Nto test yourself,
Dialogue: 0,0:07:19.79,0:07:21.94,Default,,0000,0000,0000,,click “Practice Questions."
Dialogue: 0,0:07:22.32,0:07:26.28,Default,,0000,0000,0000,,Or, if you're ready to move on,\Njust click “Next Video.”