Question
There is a 1 percent chance that you will have healthcare bills of $100,000, a 19...
There is a 1 percent chance that you will have healthcare bills of $100,000, a 19 percent chance that you will have healthcare bills of $10.000. a 60 percent chance that you will have healthcare bills of $500, and a 20 percent chance that you will have healthcare bills of SO. a Suppose now you have a policy with a $5,000 deductible. What will your expected out-of-pocket spending be? What will your expected insurance benefits be Assuming that the premium equals 116 percent of expected insurance benefits do you prefer the policy with a $5.000 deductible or complete coverage (6 points)
Answers
a)
Out of pocket exepenses in case of medical bills of $100000=$5000
Out of pocket exepenses in case of medical bills of $10000=$5000
Out of pocket exepenses in case of medical bills of $500=$500
Expected out of pocket expenses=1%*5000+19%*5000+60%*500=$1300
Insurance benefit in case of medical bills of $100000=100000-5000=$95000
Insurance benefit in case of medical bills of $10000=10000-5000=$5000
Insurance benefit in case of medical bills of $500=$0
Expected Insurance benefit=1%*95000+19%*5000+60%*0=$1900
Annual premium=1900*116%=$2204
Total expected expense in case of a insurance policy with $5000 deductible =1300+2204=$3504
Let us consider the case with full coverage
Insurance benefit in case of medical bills of $100000=$100000
Insurance benefit in case of medical bills of $10000=10000
Insurance benefit in case of medical bills of $500=500
Expected Insurance benefit=1%*100000+19%*10000+60%*500=$3200
Annual premium=3200*116%=$3712
Total expected expense in case of a insurance policy with full coverage =0+$3712=$3712
We can see that expected expense is more in case of full coverage. I will go for $5000 deductible policy
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