The following question provides some practice calculating the AFPs for different

Question

The following question provides some practice calculating the AFPs for different insurance policies. If the individual remains healthy (80% probability), she will consume $500 in medical care in the upcoming year. If the individual is afflicted by a moderate health condition (15% probability), she will consume $5000 in medical care. If the individual is afflicted with a serious condition (5% probability), she will consume $101,000 in medical care. Calculate the AFP for this person under each type of insurance described below. a. An insurance policy with a $1000 deductible and no coinsurance (i.e. every dollar of HC spending beyond the $1000 deductible is fully covered by the insurance). b. An insurance policy with a $1000 deductible and a coinsurance rate of 20%. c. An insurance policy with a $1000 deductible, a coinsurance rate of 20%, and a catastrophic cap of $10,000.

Explanation / Answer

Remains Healthy Moderate Critical Total expected amount (AFP) Insurance policy A 0 5000-1000 = 4000 101000-1000 = 100000 0.8*0+0.15*4000+0.05*100000 = 5600 Insurance policy B 0 0.2*(5000-1000) = 800 0.20*(101000-1000) = 20,000 0.8*0+0.15*800+0.05*20,000 = 1120 Insurance policy C 0 Min(10,000,0.2*(5000-1000)) = 800 Min(10,000,0.2*(101000-1000) = 10,000 0.8*0+0.15*800+0.05*10,000 = 620

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