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[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:13.96,0:00:17.03,Default,,0000,0000,0000,,- [Professor Tyler Cowen] In the previous\Nvideo, we introduced the ideas of
Dialogue: 0,0:00:17.03,0:00:21.28,Default,,0000,0000,0000,,asymmetric information, and adverse\Nselection and we applied those ideas to
Dialogue: 0,0:00:21.28,0:00:26.96,Default,,0000,0000,0000,,the used car market. Let's take those same\Nbasic concepts, and build a basic model of
Dialogue: 0,0:00:26.96,0:00:32.31,Default,,0000,0000,0000,,health insurance. Suppose that potential\Nhealth insurance consumers come in a range
Dialogue: 0,0:00:32.31,0:00:36.66,Default,,0000,0000,0000,,of states of health. For instance, the\Nleast healthy people might cost about
Dialogue: 0,0:00:36.66,0:00:42.92,Default,,0000,0000,0000,,$30,000 a year. That's these folks here.\NThe most healthy might cost nothing in
Dialogue: 0,0:00:42.92,0:00:48.54,Default,,0000,0000,0000,,healthcare. That's these folks over here.\NNow consumers know this information, but
Dialogue: 0,0:00:48.54,0:00:54.18,Default,,0000,0000,0000,,by assumption, insurers don't. From the\Ninsurer point of view, everyone is of the
Dialogue: 0,0:00:54.18,0:01:00.60,Default,,0000,0000,0000,,same average health. Here again, we have\Nasymmetric information. That is consumers
Dialogue: 0,0:01:00.60,0:01:06.07,Default,,0000,0000,0000,,of healthcare have more information about\Ntheir health status than insurers do. In
Dialogue: 0,0:01:06.07,0:01:10.77,Default,,0000,0000,0000,,this scenario, insurers have to price the\Ncoverage based on the average cost among
Dialogue: 0,0:01:10.77,0:01:18.42,Default,,0000,0000,0000,,all consumers, namely, $15,000. But if the\Ninsurance costs $15,000, then a portion of
Dialogue: 0,0:01:18.42,0:01:23.46,Default,,0000,0000,0000,,the market, the relatively healthy people,\Nthey will choose not to buy insurance as
Dialogue: 0,0:01:23.46,0:01:28.67,Default,,0000,0000,0000,,the cost of that insurance is greater to\Nthem than the expected benefit. So only
Dialogue: 0,0:01:28.67,0:01:33.30,Default,,0000,0000,0000,,part of this market will buy insurance.\NThe average cost of those who actually
Dialogue: 0,0:01:33.30,0:01:41.92,Default,,0000,0000,0000,,will buy is then not $15,000 but $22,500.\NIn that case, the insurance company, if it
Dialogue: 0,0:01:41.92,0:01:48.58,Default,,0000,0000,0000,,tries to price at $15,000, loses money. If\Nthe insurance company instead raises the
Dialogue: 0,0:01:48.58,0:01:54.92,Default,,0000,0000,0000,,price to $22,500, well, the same dynamic\Nis actually going to kick in again.
Dialogue: 0,0:01:54.92,0:01:58.88,Default,,0000,0000,0000,,That is relatively healthy people won't\Nfind it worth paying that price.
Dialogue: 0,0:01:58.90,0:02:03.47,Default,,0000,0000,0000,,The sicker people still will buy, and that\Nwill raise the expected costs to the
Dialogue: 0,0:02:03.47,0:02:09.07,Default,,0000,0000,0000,,insurer, and thus the price even further.\NThis dynamic continues until the
Dialogue: 0,0:02:09.07,0:02:13.95,Default,,0000,0000,0000,,individual insurance firm finds there is\Nno price at which it can attract a set of
Dialogue: 0,0:02:13.95,0:02:19.67,Default,,0000,0000,0000,,customers with healthcare costs lower than\Nthe price of insurance. This is the same
Dialogue: 0,0:02:19.67,0:02:26.14,Default,,0000,0000,0000,,death spiral we saw before with used cars\Nand it leads to a market failure. As we
Dialogue: 0,0:02:26.14,0:02:30.54,Default,,0000,0000,0000,,saw in the used car market, there are\Nseveral reasons why reality may differ
Dialogue: 0,0:02:30.54,0:02:35.35,Default,,0000,0000,0000,,from the simple model. First, the model we\Nlaid out would predict that the healthy
Dialogue: 0,0:02:35.35,0:02:39.72,Default,,0000,0000,0000,,people, those who exercise, eat their\Nveggies, and buckle their seatbelts would
Dialogue: 0,0:02:39.72,0:02:44.76,Default,,0000,0000,0000,,not buy insurance, while the model is\Npredicting that the smokers, the mountain
Dialogue: 0,0:02:44.76,0:02:51.55,Default,,0000,0000,0000,,climbers, and the motorcycle riders would\Nbuy insurance. Is this true? Mostly no.
Dialogue: 0,0:02:51.55,0:02:55.27,Default,,0000,0000,0000,,The people who buy health insurance\Nactually turn out to be the healthier
Dialogue: 0,0:02:55.27,0:03:01.65,Default,,0000,0000,0000,,people as well. Why is that? Well, those\Nwho try to avoid risk by eating well also
Dialogue: 0,0:03:01.65,0:03:06.09,Default,,0000,0000,0000,,try to avoid risk by buying health\Ninsurance. Our initial assumption that
Dialogue: 0,0:03:06.09,0:03:12.06,Default,,0000,0000,0000,,everyone calculates costs and benefits in\Nexactly the same way is too simple. Once
Dialogue: 0,0:03:12.06,0:03:16.43,Default,,0000,0000,0000,,you account for the fact that people have\Ndifferential tolerances for risk, you can
Dialogue: 0,0:03:16.43,0:03:20.20,Default,,0000,0000,0000,,end up having the healthier people be\Nthose who choose to buy the health
Dialogue: 0,0:03:20.20,0:03:25.34,Default,,0000,0000,0000,,insurance. This is called “propitious\Nselection” where the people who buy the
Dialogue: 0,0:03:25.34,0:03:31.86,Default,,0000,0000,0000,,health insurance are healthier, not sicker\Nthan average. This can keep costs low, and
Dialogue: 0,0:03:31.86,0:03:37.70,Default,,0000,0000,0000,,prevent the death spiral. Another possible\Nresponse to the adverse selection problem
Dialogue: 0,0:03:37.70,0:03:42.44,Default,,0000,0000,0000,,in health insurance might seem familiar.\NIf you recall, we saw that services such
Dialogue: 0,0:03:42.44,0:03:47.46,Default,,0000,0000,0000,,as CARFAX and Certified Inspections can\Nalleviate the asymmetric information
Dialogue: 0,0:03:47.46,0:03:52.75,Default,,0000,0000,0000,,problem when buying a used car. These\Nservices allow the buyer of the car to
Dialogue: 0,0:03:52.75,0:03:56.75,Default,,0000,0000,0000,,have similar information to that possessed\Nby the seller of the car.
Dialogue: 0,0:03:57.00,0:04:01.92,Default,,0000,0000,0000,,The result of this information is that\Nbetter cars can sell for more, and lemons
Dialogue: 0,0:04:01.92,0:04:07.11,Default,,0000,0000,0000,,can sell for less. Is there an analogous\Napproach for people in health insurance?
Dialogue: 0,0:04:07.11,0:04:12.28,Default,,0000,0000,0000,,Well, yes. The health of people can be\Ninspected just as cars are inspected. So
Dialogue: 0,0:04:12.28,0:04:16.33,Default,,0000,0000,0000,,while consumers initially may have more\Ninformation about their health than what
Dialogue: 0,0:04:16.33,0:04:21.11,Default,,0000,0000,0000,,the insurance companies have, a checkup\Nwill allow the insurance firms to get a
Dialogue: 0,0:04:21.11,0:04:26.01,Default,,0000,0000,0000,,better idea of the consumer's expected\Nhealthcare costs. And that allows the
Dialogue: 0,0:04:26.01,0:04:31.09,Default,,0000,0000,0000,,insurance companies to charge healthy\Nconsumers less and sicker consumers more.
Dialogue: 0,0:04:31.09,0:04:36.08,Default,,0000,0000,0000,,In the used car market, that seemed like a\Npretty good solution. After all, better
Dialogue: 0,0:04:36.08,0:04:40.60,Default,,0000,0000,0000,,cars should sell for more, and lemons\Nshould sell for less. In the health
Dialogue: 0,0:04:40.60,0:04:45.38,Default,,0000,0000,0000,,insurance market, that solution might\Nwork, but some people feel it is doubly
Dialogue: 0,0:04:45.38,0:04:49.76,Default,,0000,0000,0000,,unfair. Not only are the sick sick, but\Nnow they also have to pay more for their
Dialogue: 0,0:04:49.76,0:04:54.27,Default,,0000,0000,0000,,health insurance. Another problem with\Ninspection is that it might reveal too
Dialogue: 0,0:04:54.27,0:04:59.62,Default,,0000,0000,0000,,much information, thereby rendering health\Ninsurance no longer viable. For instance,
Dialogue: 0,0:04:59.62,0:05:04.26,Default,,0000,0000,0000,,let's say there's a very good diagnostic\Ntest, and it determines that a patient A
Dialogue: 0,0:05:04.26,0:05:09.95,Default,,0000,0000,0000,,has cancer and then B we know that cancer\Nwill cost $1 million to treat. Well, to
Dialogue: 0,0:05:09.95,0:05:15.17,Default,,0000,0000,0000,,insure against that cancer, the price of\Nthe policy has to be about $1 million, but
Dialogue: 0,0:05:15.17,0:05:19.11,Default,,0000,0000,0000,,that's no longer insurance. That's just\Npresenting the patient with the bill.
Dialogue: 0,0:05:19.11,0:05:24.15,Default,,0000,0000,0000,,Insurance is protecting against unexpected\Nstates of affairs, and it's a kind of risk
Dialogue: 0,0:05:24.15,0:05:27.74,Default,,0000,0000,0000,,pooling, a kind of protecting yourself\Nagainst the high bill. But if you're
Dialogue: 0,0:05:27.74,0:05:31.67,Default,,0000,0000,0000,,getting the high bill no matter what when\Nyou're sick, well, then we've lost those
Dialogue: 0,0:05:31.67,0:05:37.68,Default,,0000,0000,0000,,benefits of insurance. Another solution to\Nthe adverse selection problem when used
Dialogue: 0,0:05:37.68,0:05:42.63,Default,,0000,0000,0000,,extensively in the United States is group\Nhealth insurance through employers. Most
Dialogue: 0,0:05:42.63,0:05:47.43,Default,,0000,0000,0000,,people in America don't purchase insurance\Ndirectly. Instead, their employer purchases
Dialogue: 0,0:05:47.43,0:05:52.59,Default,,0000,0000,0000,,it for them as part of a group plan. The\Nbenefit of the system is that the
Dialogue: 0,0:05:52.59,0:05:57.08,Default,,0000,0000,0000,,insurance company doesn't have to worry\Nabout adverse selection so much. The
Dialogue: 0,0:05:57.08,0:05:59.88,Default,,0000,0000,0000,,employer doesn't know much more \Nabout its employees' health
Dialogue: 0,0:05:59.88,0:06:01.54,Default,,0000,0000,0000,,than does the insurance firm.
Dialogue: 0,0:06:01.54,0:06:04.21,Default,,0000,0000,0000,,Furthermore, the employer is\Ngoing to be buying
Dialogue: 0,0:06:04.21,0:06:07.54,Default,,0000,0000,0000,,health insurance for the employees\Nregardless of their health.
Dialogue: 0,0:06:07.54,0:06:11.42,Default,,0000,0000,0000,,So for these reasons,\Nthe adverse selection problem is
Dialogue: 0,0:06:11.42,0:06:16.31,Default,,0000,0000,0000,,much weaker with group health insurance.\NGroup health insurance, however, does
Dialogue: 0,0:06:16.31,0:06:20.27,Default,,0000,0000,0000,,cause other problems. If you lose your\Njob, you can lose your health insurance.
Dialogue: 0,0:06:20.27,0:06:26.22,Default,,0000,0000,0000,,And what we do about retirees? In the\NUnited States, various laws have made
Dialogue: 0,0:06:26.22,0:06:30.66,Default,,0000,0000,0000,,health insurance more affordable, and\Nfurthermore retirees are insured by the
Dialogue: 0,0:06:30.66,0:06:36.24,Default,,0000,0000,0000,,government under Medicare. So, there are\Nsome solutions, albeit imperfect ones as
Dialogue: 0,0:06:36.24,0:06:41.54,Default,,0000,0000,0000,,usual. The most recent approach to the\Nadverse selection problem was implemented
Dialogue: 0,0:06:41.54,0:06:47.20,Default,,0000,0000,0000,,in the Affordable Care Act, otherwise\Nknown as Obamacare. Under the Affordable
Dialogue: 0,0:06:47.20,0:06:51.46,Default,,0000,0000,0000,,Care Act, everyone is supposed to buy\Nhealth insurance. If you don't, you will
Dialogue: 0,0:06:51.46,0:06:57.66,Default,,0000,0000,0000,,be fined by law. The idea here is to force\Nall the healthy people into the pool of
Dialogue: 0,0:06:57.66,0:07:02.30,Default,,0000,0000,0000,,those who buy insurance that will moderate\Nthe cost of health insurance, and we will
Dialogue: 0,0:07:02.30,0:07:07.98,Default,,0000,0000,0000,,avoid the death spiral. As you can see,\Nalthough the adverse selection model is
Dialogue: 0,0:07:07.98,0:07:12.86,Default,,0000,0000,0000,,pretty simple, it has lots of applications\Nto some pretty complex real-world
Dialogue: 0,0:07:12.86,0:07:17.04,Default,,0000,0000,0000,,problems. Next up we'll tackle moral\Nhazard. See you then.
Dialogue: 0,0:07:18.79,0:07:21.17,Default,,0000,0000,0000,,- [Announcer] If you want to test yourself,\Nclick “Practice Questions.”
Dialogue: 0,0:07:22.38,0:07:25.46,Default,,0000,0000,0000,,Or, if you're ready to move on,\Njust click “Next Video.”