As part of the most recent collective bargaining agreement with state employees,
ID: 1166117 • Letter: A
Question
As part of the most recent collective bargaining agreement with state employees, a state government must offer dental insurance at “reasonable, non-profit rates.” The state plans to self insure in place of using a private insurance company. Statistical evidence suggests that the average household currently spends $300 per year for corrective dental work and $80 for routine check-ups. Administrative costs are expected to average $20 per family. The collective bargaining agreement dictates that the plan’s coverages and rates be fixed for a period of three 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 in terms of their propensity to result in adverse selection and/or moral hazard. Proposal 1 would change a $400 premium with no deductible. Coverage is extended to pre-existing conditions, but to cover the non-deductible clause, routine check-ups are not covered. Proposal 2 charges a $200 premium with a $200 deductible. This plan doesn’t cover pre-existing conditions but does cover routine office visits. Proposal 3 charges a $150 premium with a $150 deductible or routine checkups. This plan does not cover pre-existing conditions or routine checkups. The collective bargaining agreement dictates that participation in the plan must be at the employee’s option.
Explanation / Answer
Proposal 1 Because of the pre-existing condition coverage this proposal may creates adverse selection difficulties. The employees with existing dental problems may choose the proposal in disproportionate numbers and also creates a moral hazard as the participants have low incentive to maintain their check schedules. Furthermore only dental problems are fully covered but check-ups are not covered.
Proposal 2: (This is the best proposal) With an exclusion of pre-existing conditions this propsal reduces adverse selection. The adverse selection would still be present, however is not as significant when preexisting conditions are covered. Moreover routine check-up Coverage of the may reduce or eliminate difficulties of moral hazard.
Propoal 3 With an exclusion of pre-existing conditions this proposal reduces adverse selection but exclusion of coverage for the routine check-up may increase the moral hazard problems.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.