Case: As part of the most recent collective bargaining agreement with employees, an employer must offer medical insurance at "reasonable, non-profit rates." The employer plans to self-insure in place of using a private insurance company. Statistical evidence suggests that the average household currently spends $450 per year for medical bills and $80 for health screening and routine check-ups. Administrative costs are expected to average $30 per family. The collective bargaining agreement dictates that the plan's coverages and rates be fixed for a period of two years. The auditor considers the choice of the plan to be extremely important. Consequently, the auditor has asked you to evaluate the three proposals listed below. 1. Proposal A would charge a $350 premium with no deductible. Coverage
Case: As part of the most recent collective bargaining agreement with employees, an employer must offer medical insurance at "reasonable, non-profit rates." The employer plans to self-insure in place of using a private insurance company. Statistical evidence suggests that the average household currently spends $450 per year for medical bills and $80 for health screening and routine check-ups. Administrative costs are expected to average $30 per family. The collective bargaining agreement dictates that the plan's coverages and rates be fixed for a period of two years. The auditor considers the choice of the plan to be extremely important. Consequently, the auditor has asked you to evaluate the three proposals listed below. 1. Proposal A would charge a $350 premium with no deductible. Coverage
Chapter18: Asymmetric Information
Section: Chapter Questions
Problem 18.9P
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Case: As part of the most recent collective bargaining agreement with employees, an employer must offer medical insurance at "reasonable, non-profit rates." The employer plans to self-insure in place of using a private insurance company. Statistical evidence suggests that the average household currently spends $450 per year for medical bills and $80 for health screening and routine check-ups. Administrative costs are expected to average $30 per family. The collective bargaining agreement dictates that the plan's coverages and rates be fixed for a period of two years. The auditor considers the choice of the plan to be extremely important. Consequently, the auditor has asked you to evaluate the three proposals listed below.
1. Proposal A would charge a $350 premium with no deductible. Coverage is extended to pre-existing conditions, but to cover the non-deductible clause, health screening and routine check-ups are not covered.
2. Proposal B charges a $250 premium with a $200 deductible. The plan does not cover pre-existing conditions but does cover health screening and routine check-ups.
3. Proposal C charges a $150 premium with a $150 deductible. This plan does not cover pre-existing conditions. Health screening and routine check-ups are not covered, either.
Discuss both of the following two questions:
Would you recommend proposal A to the employer and the auditor? You must provide your rationales for your recommendation and decision.
From the perspectives of an economist and an employee respectively, which proposal would you recommend to the employer? You must provide your rationales for your recommendation.
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