Insurance: premiums, deductibles and why people buy it

Grade 12 Social Studies Worksheet - Challenge Me

Circle the best answer.

1. Read this first

   Use this

   Cards A to C on a town health plan (all made up for practice). Card A, "A town plan (made up)". Written for this sheet. Summary in our words, not a quotation: 2,000 people could join. 1,200 are low-risk, with expected claims of $60 each a year. 800 are high-risk, with expected claims of $300 each. The insurer cannot tell them apart and sets one premium equal to the average claim, which is $156 in Year 1. Card B, "Years 2 to 4 (made up)". Written for this sheet. Summary in our words, not a quotation: each year the premium is reset to the average claim of the people still in the plan. Each year, half of the low-risk people still in the plan leave. All high-risk people stay. So the plan has 600 low-risk people in Year 2, 300 in Year 3 and 150 in Year 4. Card C, "A penalty (made up)". Written for this sheet. Summary in our words, not a quotation: the town proposes a $100 penalty for anyone without a plan. Reader T says a low-risk person who values the plan at about $40, the size of the claims expected, would rather pay the $100 penalty than a premium of $156.

2. 1.

   Jun works out the premiums for Years 2 and 3 from cards A and B. Which account fits the evidence best?

   • The premium rises from $156 to about $197 to about $235, as each rise sends more low-risk people away
   • The premium stays at $156, since the average claim in the town is the same in each year
   • The premium rises because high-risk people claim more each year, not because anyone leaves the plan
   • The premium falls each year, since fewer members mean fewer claims for the insurer to pay
3. 2.

   Ari reads reader T on card C. Which is the strongest objection to the $100 penalty?

   • The $100 penalty is below the $156 premium, so low-risk people who value the plan under $56 would rather pay it
   • A $100 penalty will not change what people do, since people who skip a plan will skip it whatever the cost
   • The $100 penalty collects money for the town rather than lowering the plan's claims, so it cannot help the plan
   • High-risk people would leave the plan to avoid the penalty, which would lower the average claim
4. 3.

   A writer says the spiral stops by Year 4 because only 150 low-risk people are left. What evidence would most challenge the writer, in Zee's view?

   • Whether high-risk people still value the plan, since if they left too the average claim would change
   • How many low-risk people there were in Year 1, since a smaller group would leave sooner than card B shows
   • Whether the Year 1 premium of $156 was set equal to the average claim, since a different premium might change the spiral
   • Whether the remaining low-risk people value the plan above the Year 4 premium of about $262

5. Use this

   Cards A to C on a premium tax (all made up for practice). Card A, "Before and after a tax (made up)". Written for this sheet. Table, columns | Before the tax | After the tax: Price buyers pay | $200 | $230; Price insurers keep after the tax | $200 | $180; Policies sold | 5,000 | 4,700. Note: the town charges insurers a $50 tax on each policy sold. Card B, "Elasticities from card A (made up)". Written for this sheet. Summary in our words, not a quotation: the buyers' price rose 15 percent and policies fell 6 percent, so demand elasticity is 0.4. The insurers' price fell 10 percent and policies fell 6 percent, so supply elasticity is 0.6. Card C, "Two statements (made up)". Written for this sheet. Summary in our words, not a quotation: Speaker U says the tax falls on insurers, because the law collects it from them. Speaker V says buyers pay all of it, because insurers can add it to the price. The town plans to raise the tax to $100.

6. 4.

   Esme uses card B to ask why buyers bear more of the tax than insurers. Which explanation is best supported?

   • The tax is $50 and the price rose $30, so buyers pay 60 percent because 30 is 60 percent of 50
   • Insurers can raise price freely since they collect the tax, so the buyers' share follows from collection
   • Supply is less elastic than demand, so insurers cannot escape the tax and the buyers' share must be smaller
   • Demand is less elastic than supply, 0.4 against 0.6, so buyers have fewer ways to escape the price rise
7. 5.

   The town expects $250,000 a year from the tax at $50 and plans a $100 tax. Ren tests the $250,000 figure using card A. What is the verdict?

   • Too low: buyers' price rose $30, so the tax raises $30 on each of 5,000 policies, which is $150,000 or more
   • Cannot be judged until the $100 tax is tried, since a $50 tax says nothing about the effect of a higher one
   • Correct: 5,000 policies × $50 is $250,000, and the number of policies sold does not change with a tax
   • Too high: only 4,700 policies are sold after the tax, so it raises about $235,000, not $250,000

8. Use this

   Cards A to C on an insurer's pricing (all made up for practice). Card A, "An insurer's books (made up)". Written for this sheet. Summary in our words, not a quotation: the insurer has 10,000 policies. Each earns $900 a year in premium and costs $780 a year in claims and running costs. A new group of 1,000 young drivers would each cost $1,100 a year. Young drivers would buy only at a price of $1,000 or less. Card B, "A state rule (made up)". Written for this sheet. Summary in our words, not a quotation: the state requires one price for every driver and requires insurers to accept every applicant. The price in the state is $900. Card C, "Two views (made up)". Written for this sheet. Summary in our words, not a quotation: Executive D says the insurer averages $120 profit a policy, so adding more policies adds more profit. Executive E says the rule will force the insurer to leave the state.

9. 6.

   Milo weighs executive D on card C against card A. Should the insurer add the young drivers at $1,000?

   • No: each new policy brings $1,000 of revenue but $1,100 of cost, so it loses $100 whatever the average profit
   • Yes: the insurer averages $120 profit a policy, so each added policy should add about that much profit
   • Yes: young drivers would pay $1,000, which is more than the $780 average cost of the insurer's current policies
   • No: $1,000 is below the $1,100 cost, so the insurer should also raise prices on its 10,000 current policies
10. 7.

    Luz applies card B to card A and executive E's claim. Which account of the rule fits the evidence best?

    • Young drivers would pay their own way at $900, so the rule would cost the insurer nothing
    • The insurer would still earn about $1,000,000: old policies make $1,200,000 and young drivers lose $200,000
    • The insurer would lose money overall, since each young driver's policy loses $200 at the $900 price
    • The insurer would be unaffected, since the rule sets the same $900 price it already charges its current policies
11. 8.

    Executive E says the rule will force the insurer to leave the state. What evidence would most challenge E, in Kira's view?

    • How many young drivers would apply, since fewer applicants would mean a smaller loss on them
    • The cost of each young driver's policy, since it shows how much each loses at $900
    • Whether young drivers would pay $1,000 elsewhere, since that is the price they accept
    • The insurer's total profit under the rule, since a positive total would give it a reason to stay

12. Use this

    Cards A to C on cost-sharing (all made up for practice). Card A, "A lottery study (made up)". Written for this sheet. Summary in our words, not a quotation: 4,000 families were assigned by lottery to Plan Free, with no cost-sharing, or Plan Share, where the family pays 25 percent of each bill. Visits a year averaged 5.0 for Plan Free and 4.0 for Plan Share. After three years, health scores on a 0 to 100 scale averaged 71.2 for Free and 71.0 for Share; the gap is within normal sampling noise. Card B, "A survey (made up)". Written for this sheet. Summary in our words, not a quotation: another 4,000 families chose their own plans. Families who chose Plan Free averaged 6.0 visits a year, and families who chose Plan Share averaged 3.5. Plan Free families were older on average. Card C, "Two claims (made up)". Written for this sheet. Summary in our words, not a quotation: Claim 1 says cost-sharing cuts the use of care without harming health. Claim 2 says the survey shows the same thing, with an even larger gap.

13. 9.

    Tala weighs the lottery and the survey on cards A and B. Which statement about their gaps is best supported?

    • The lottery gap of 1.0 visit is more credible, since chance made its groups alike
    • Neither says anything about cost-sharing, since families in both studies differ from one another in many ways
    • The survey gap of 2.5 visits is more credible, since a larger gap measures the effect of cost-sharing better
    • The two are equal, since each compares two groups of 4,000 families and counts their visits
14. 10.

    A policymaker reads card A and wants to move everyone to Plan Share. What evidence would most challenge the case, in Bo's view?

    • Whether average visits fall from 5.0 to 4.0, which card A already shows for Plan Share
    • Whether the survey's larger gap of 2.5 visits would also appear in the lottery
    • Whether the visits cut were the useful ones or the unneeded ones, and for which families
    • Whether families in Plan Share spend less on premiums, since insurers might pass on savings