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Find your role and sit at the indicated seat.Don’t disturb the materials.

Name Role Name Role Name Role

Abdimajid Abdirahman Consumer 1 Coleman Drake Consumer 11 Julia Novitskaia Insurer 1

Adriano Gianturco Gulisano Consumer 1 Colin Keesee Consumer 11 Julio Padilla Insurer 1

Aida Ibricevic Consumer 2 Crane Sorensen Consumer 12 Kareem Khalaf Insurer 2

Alejandro Komai Consumer 2 Daniel Piedra Consumer 12 Kathryn Isaacson Insurer 2

Allen Mendenhall Consumer 3 Daniel Suddes Consumer 13 Lai Xu Insurer 3

Anamaria Boioglu Consumer 3 Daniel Sockwell Consumer 13 Larisa Burakova Insurer 3

Andrew Seremetis Consumer 4 Denis Clijsters Consumer 14 Liliya Leontyeva Insurer 4

Ariel Goldring Consumer 4 Dominic Foppoli Consumer 14 Margaret Gales Insurer 4

Arya Morshed Consumer 5 Dustin Robinson Consumer 15 Theodore Dasher Insurer 5

Babatunde Rosanwo Consumer 5 Eleanor Smith Consumer 15 Mark Yager Insurer 5

Benjamin Eisen Consumer 6 Emilie Maes Consumer 16 David Hendricks Insurer 6

Brandon Peterson Consumer 6 Yashua Bhatti Consumer 16 Michal Kuz Insurer 6

Brian Stacy Consumer 7 Enrique Angulo Consumer 17 Mike Tellier Insurer 7

Bridgette Richey Consumer 7 Eric Sosnoff Consumer 17 Milko Markov Insurer 7

Caitlin McLean Consumer 8 Jens Moens Consumer 18 Nicholas Dunn Insurer 8

Candice Malcolm Consumer 8 Joseph Corey Consumer 19 Oliver Cooper Insurer 8

Carlos Ormachea Consumer 9 Ryan Biese Consumer 19 Patricio Echagüe Insurer 9

Charlotte Rommerskirchen Consumer 9 Joseph Foutch Consumer 20 Philippe Caeymaex Insurer 9

Chris Knudsen Consumer 10 Yashua Bhatti Consumer 20 Rossen Valchev Insurer 10

Claire Litherland Consumer 10 Ryan Lynch Insurer 10


The purpose of this simulation is to create a competitive market and to observe the market as it achieves equilibrium.

In this simulation, you will experience real market forces. The same human traits and behaviors that govern real markets exist in the simulation.

What are artificial are your surroundings. The market forces are real.

2


The Players and the Goals

In this experiment, there are CONSUMERS and INSURERS.

INSURERS sell INSURANCE.

CONSUMERS buy FOOD and INSURANCE.

3


Consumers

Each consumer has $20 to spend.

A unit of food costs $1.

4

$20

The more food the consumer eats, the happier the consumer becomes.


Consumers: The Catch

Each consumer faces some risk of badness.

5

vs.

If badness befalls the consumer, the consumer loses all of the purchased food.


Consumers: The Insurance

But, consumers can purchase insurance contracts from the insurance companies.

6

Each contract pays the consumer one unit of food if badness befalls that consumer.


Consumers: Example

Suppose a consumer can purchase insurance contracts at a price of $0.50 each (the price of food is always $1 each).

7

$20

Suppose that the consumer spends $5 on insurance contracts. The remaining $15 is automatically spent on food.

10 insurance contracts

15 food


Consumers: Example

If badness does not befall the consumer, the consumer eats 15 units of food and is very happy.

8

Very Happy !

!


Consumers: Example

If badness does befall the consumer, the 15 units of food disappear, each insurance contract pays $1.00 (which buys 1 unit of food), and the consumer is somewhat happy.

9

Somewhat Happy


Consumers

Each consumer’s goal: Maximize happiness

More insurance means

More food when badness befalls.

Less food when badness does not befall.

Too little insurance is bad. Too much insurance is also bad.

10


Insurers

Each insurer can write as many insurance contracts as liked and charge any price.

11


Insurers

If badness does not befall the consumer, the insurer walks away with the money the consumer paid for the contracts.

12

$ $ $

$ $ $


Insurers

If badness does befall the consumer, the insurer pays the consumer $1.00 for each contract the insurer sold the consumer.

13


Insurers: Example

Suppose an insurer sells Consumer A six contracts for $0.60 each, and sells Consumer B five contracts for $0.30 each.

14

The insurer collects $3.60 from Consumer A and $1.50 from Consumer B.

$3.60

$1.50

$5.10

Revenue =


Insurers: Example

Suppose badness befalls Consumer B but not Consumer A.

15

The insurer owes Consumer B $1.00 for each contract Consumer B purchased.

$5.00

$5.10

Revenue =

$5.00

Cost =

$0.10

Profit =


Insurers: Example

Suppose badness befalls Consumer A but not Consumer B.

16

The insurer owes Consumer A $1.00 for each contract Consumer A purchased.

$6.00

$5.10

Revenue =

$6.00

Cost =

$0.90

Loss =

(Insurers do not need cash reserves to cover policies.)


Insurers

Each insurer’s goal: Maximize expected profit

Insurers can ask whatever prices they like for contracts

Too low a price is bad. Too high a price is also bad.

17

www.antolin-davies.com 18

Type 1

10%

Badness

There are five types of consumer. Each faces a different probability of badness.

Type 2

20%

Type 3

30%

Type 4

40%

Type 5

50%


Type ?

?

Badness

Each consumer knows which type he/she is, but insurers don’t.

The average probability of badness is 30%.


The Objects

20

= insurance contract(s)

Contracts Sold BuyerSuspected Risk

(0.1 to 0.5 )Total Revenue

Expected Cost (contracts x risk )

Expected Profit (revenue - cost )

= sales register


Contracts

21

12 6

$4.80

Customer 6 purchases 12 contracts from insurer for $0.40 each.


Register

22

Contracts Sold BuyerSuspected Risk

(0.1 to 0.5 )Total Revenue

Expected Cost (contracts x risk )

Expected Profit (revenue - cost )

12

6 $4.80

0.3

$3.60

$1.20

The register is for your own use in tracking your expected costs.

Feel free to cross out and re-enter information when your suspected risk for a consumer changes.

12

6 0.5

$4.80

$6.00

-$1.20


The Mechanics

23

Agent

Insurers Consumers

Head Office

$0.30Yes


The Mechanics

24

Agent

Insurers Consumers

Head Office


The Mechanics

25

Agent

Insurers Consumers

Head Office

Consumers:Keep track of how much you’ve spent. You only have $20!

Head Office:Keep track of your expected profits.


Ready to begin…

26


Consumers: Buy some insurance. All remaining money goes to food.

Insurers: Sell insurance to expected maximize profit.

27


Accounting Phase

Consumers report:

• Contracts purchased, cost, and from which insurer(s)

28


1 no2 YES3 no4 YES5 no6 no7 no8 YES9 no10 YES11 no12 YES13 no14 no15 no16 YES17 no18 no19 no20 no

BadnessConsumer

0

5

10

15

20

25

30

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Consumer #

Food Purchased Contracts Purchased Food Consumed


1 no2 YES3 no4 YES5 no6 no7 no8 YES9 no10 YES11 no12 YES13 no14 no15 no16 YES17 no18 no19 no20 no

BadnessConsumer

-$15.00

-$10.00

-$5.00

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

1 2 3 4 5 6 7 8 9 10

Insurer #

Revenue Indemnities Profit


Mandated Insurance

Concerned that some consumers do not have enough insurance coverage, the law stipulates that an insurer may not sell less than 50 contracts to a buyer unless the buyer has already purchased at least 50 contracts (from any insurer) this round.

31


Ready to begin…

32



Insurers: Sell insurance to maximize profit.

33


Accounting Phase

Consumers report:



1 no2 no3 no4 no5 no6 YES7 no8 YES9 YES10 no11 no12 no13 no14 YES15 no16 no17 no18 YES19 no20 YES

BadnessConsumer

0

10

20

30

40

50

60

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Consumer #



1 no2 no3 no4 no5 no6 YES7 no8 YES9 YES10 no11 no12 no13 no14 YES15 no16 no17 no18 YES19 no20 YES

BadnessConsumer

-$60.00

-$40.00

-$20.00

$0.00

$20.00

$40.00

$60.00

$80.00

1 2 3 4 5 6 7 8 9 10

Insurer #



Mandatory Insurance

Concerned that some consumers do not have any insurance, the law requires that all consumers buy a total of no less than 50 contracts this round.

37


Ready to begin…

38



Insurers: Sell insurance to maximize profit.

39


Accounting Phase

Consumers report:



1 no2 YES3 no4 no5 YES6 no7 no8 no9 no10 no11 YES12 no13 no14 YES15 YES16 no17 no18 no19 no20 YES

BadnessConsumer

0

5

10

15

20

25

30

35

40

45

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Consumer #



1 no2 YES3 no4 no5 YES6 no7 no8 no9 no10 no11 YES12 no13 no14 YES15 YES16 no17 no18 no19 no20 YES

BadnessConsumer

-$60.00

-$40.00

-$20.00

$0.00

$20.00

$40.00

$60.00

$80.00

1 2 3 4 5 6 7 8 9 10

Insurer #



Results…

43


Insurance Contracts Purchased

0

20

40

60

80

100

120

Type 1 Type 2 Type 3 Type 4 Type 5

Free Market Mandated Mandatory



0

100

200

300

400

500

600

700

800




Food Purchased

010

203040

506070

8090




Food Purchased

0

50100

150

200250

300

350400

450




Insurance Price per Contract

$0.00

$0.05

$0.10

$0.15

$0.20

$0.25

$0.30

$0.35

$0.40

Free Mkt Mandated Mandatory



$0.00

$0.05

$0.10

$0.15

$0.20

$0.25

$0.30

$0.35

$0.40

$0.45



Insurance Profits

-$40.00

-$30.00

-$20.00

-$10.00

$0.00

$10.00

$20.00




Insurance Profits

($100.00)($80.00)($60.00)($40.00)($20.00)

$0.00$20.00$40.00$60.00$80.00

$100.00





0

100

200

300

400

500

600

700

800


Free Market (ful l info) Free Market Mandated Mandatory


Food Purchased

0

50100

150

200250

300

350400

450


Free Market (ful l info) Free Market Mandated Mandatory



$0.00

$0.05

$0.10

$0.15

$0.20

$0.25

$0.30

$0.35

$0.40

$0.45

Free Market (full info) Free Market Mandated Mandatory


• Forces lower risk people to consume quantities of goods that they may not want to consume.

• End result is a transfer of wealth from low risk to high risk people.

• A better solution is simply to tax the low risk people, give the money to the high risk people and let them buy what they want.

55

What is the effect of insurance mandates?


But, we have to do something!

Look at what has been happening to the cost of health care over time!

56


0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

1980

1981

1982

1983

1984

1985

1986

1987

1988

19

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

06

Price of Medical Care Consumer Prices Excluding Medical Care

57

Source: Bureau of Labor Statistics (www.economy.com)

Price of medical care has increased 349% since 1980 versus 135% for other consumer prices.


0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

500.0

1980

1981

1982

1983

1984

1985

1986

1987

1988

19

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

06

Price of Physicians Services

Price of Hospital Services

Price of Prescription Drugs and Medical Supplies

58


Hospital services + 576%

Drugs and supplies + 402%

Physician services + 282%

Other consumer prices+ 135%



-800%

-600%

-400%

-200%

0%

200%

400%

600%

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Tu

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n

Me

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Fed

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(pe

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Ho

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98

0

-20

06


But, the cost of health care is only half of the picture.

What has been happening to the quality of health care?

60


How do we measure the quality of health care?

1. What is “quality?”

61

2. How do we account for health care that has become routine but didn’t exist in the past (e.g., pre-natal care)?

3. How do we weigh qualities across different types of care (e.g., glasses vs. heart transplant)?


How does one measure the quality of health care?

An easy and composite measure of the effectiveness of health care is the mortality rate.

62

Some health care may have little or no impact on the mortality rate (e.g., orthodonture).

But, it is not unreasonable to assume that the qualities of other types of health care grow at similar rates.


7.5

8.0

8.5

9.0

9.5

10.0

1960

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Deaths per 1,000 People

Source: Statistical Abstract of the United States, 2008, Table 77.


0.0

5.0

10.0

15.0

20.0

25.0

30.0

1960

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Infant Mortality per 1,000 Live Births

64




0.0

10.0

20.0

30.0

40.0

50.0

60.0

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Deaths by Influence and Pneumonia (per 100,000 population)Deaths by Influenza and Pneumonia (per 100,000 population)


1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9

1960

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Mill

ions

Actual Deaths in the Current Year Deaths at the 1960 Mortality Rate

66

Source: Derived from Statistical Abstract of the United States, and the Bureau of Economic Analysis.

What does increased cost of health care buy us?

400,000 lives saved annually


But, what about the uninsured?

They aren’t sharing in this increased quality of health care.

67


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

68

Source: Income, Poverty, and Health Insurance Coverage in the U.S.: 2006, US Census Bureau.

The percentage of the population that is uninsured has remained stable over time.


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

1999 2000 2001 2002 2003 2004 2005 2006

Under 18 18 to 24 25 to 34 35 to 44 45 to 54 55 to 64

69


Percentage of uninsured has remained relatively constant for the young and the old – the two groups for whom there is the least incentive to tradeoff health care for spending on other things.


-2%

-1%

0%

1%

2%

3%

4%

5%

6%

Under 18 18 to 24 25 to 34 35 to 44 45 to 54 55 to 64

Change in % of Uninsured 1999 to 2006

70


Pattern of uninsured is commensurate with the hypothesis that, as the price of health care rises, the more healthy willingly choose not to be insured.


A free choice to purchase is a vote, but with three important differences.

Political vote: One size fits all.

Free market vote: Multiple sizes for multiple recipients.

Political vote: Speed of change is driven by the election cycle.

Free market vote: Speed of change is driven by the accounting cycle.

Political vote: Signal is distorted because the vote is for a “bundle” of issues embodied by one candidate.

Free market vote: Signal is clear because the vote is for a specific issue. 71

Voting for the “right” amount of insurance

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