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Healthcare Plans

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A large manufacturing company has for years offered generous health insurance to its employees. Over time, the cost of the health plan has increased considerably with the average cost being roughly $6000 per year. The firm has hired a management consulting company to make recommendations about how to reduce costs. The consulting company has recommended two steps to help the company save cost. First, they recommend that the company offer a lower-cost insurance package with much higher deductibles, copayments and coinsurance rates. This new package is estimated to initially cost less than $4000 per year. Second, the consultants recommend that the employer charge employees $100 a month if they opt for the more generous health insurance plan. Discuss in detail and provide evidence for what the likely short and long run implications are for the two health insurance plans if he firm adopts the consulting firm's suggestions.

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The solution discusses healthcare plans.

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I believe you want to focus on what Economists call "Adverse Selection". In offering the new (cheaper) insurance plan, people who are healthy (i.e. exercise regularly) are going to opt for the cheaper plan with higher deductibles. If they have a major health event, they are covered, but they do not anticipate needing to heavily use the plan. As such, the healthier individuals ...

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