Economics of Healthcare A Brief Introduction

This chapter introduces the concept of insurance as a product and explores why people want to purchase insurance in general (and health insurance in particular). The main discussion centers around explaining that health insurance (and all insurance) is primarily financial protection: health insurance does not protect your health but instead protects your wealth from health-related risk. The chapter then moves on to discuss the operations of an insurance company: how premiums are set, the difference between correlated and uncorrelated risk, group insurance, and experience rating. The chapter ends by discussion moral hazard in the context of an individual with insurance coverage. The end of chapter supplement provides a mathematical example of why someone who is risk averse would want to purchase insurance.