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Economics 498 Assignment

1 .    This question is about adverse selection and pooling in health insurance. In the MSU Student Health
Insurance Base Plan, offered through Aetna, the annual premium for a  domestic  student this year  is
\$ 2,070.
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If a student is married and want s  to add a spouse who is not an MSU student to the policy, the
premium for the spouse  is  \$ 5 ,762 . We will assume that these rates are “fair” to Aetna, meaning that
\$ 2,070  represents average total cost of covering a student and \$5,762  represents average total cos t  of
covering a spouse. Some students  have wanted to see Aetna offer the same rate for students and
spouses (we’ll call this a pooled plan), instead of having a much higher rate for spouses.

a. Suppose that currently students make up 98 percent of enrollees in the plan and non-student spouses
are 2 percent. What do you think would be a fair premium for a pooled plan, assuming that moving to
the pooled plan would not change who would enroll? Ex plain how you came up with this premium.

b.  Why might Aetna be worried that the rate you calculated in (a) would be too low for it to break even
or make a profit? Make at least one calculation to back up your argument   and explain   it . (Hint: some
students have spouses not currently covered under the  plan.)

c . What would you need to know (or need to make guesses about) to determine what a fair premium
(premium = average cost) for a pooled plan would be? (Hint: Is there any reason to think the average
cost for spouses would be lower under the pooled plan than under the current plan? Why?)

d. If a fair (to Aetna) premium could be arrived at, do you think all students would be in favor of moving
from the current structure to a pooled plan? Discuss briefly.

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For reference,  see  https://www.aetnastudenthealth.com/students/student-connection.aspx?GroupID=711130.
Scroll down to see the premiums.

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