Homework 1 — Adverse Selection in Real Markets

Instructions

This homework is about health insurance markets and adverse selection, the material from the first module of the course. It is empirical only — the theory is assessed in class through the quizzes and the midterm. Here you work with real data and interpret it as a health economist.

You are expected to use an AI coding assistant. Use GitHub Copilot (free with your Emory GitHub account) or the tool of your choice, and let it write the R or Python. Producing the code is not the skill being graded. Directing the tool, checking that the output makes sense, and interpreting the result in the language of this course is. Read what the assistant gives you, make sure it actually answers the question, and explain what it means.

Submit a rendered notebook (Quarto, R Markdown, or Jupyter) containing your code, its output, and your written answers, together with the CSV file you build in Question 1. Each part is graded on this scale, scaled to the points shown for that part:

  • Full credit: correct, with sound economic reasoning.
  • Partial credit: close, with a minor error or thin reasoning.
  • Little credit: attempted, but the economic reasoning is missing or wrong.
  • No credit: no real work, or output pasted in with no interpretation.

Homework 1 is due by midnight on Friday, September 25.

Q1 — New Jersey’s individual market, 2000–2008 (15 pts)

New Jersey’s individual health insurance market is often used as an example of a “death spiral.” You will build a small dataset from the state’s own records and see whether the pattern holds.

  1. (6 points) Build the dataset. Using the New Jersey Department of Banking and Insurance IHC data, build a spreadsheet of monthly premiums and enrollments from 2000 to 2008. Focus only on family premiums for three specific plans: (1) Horizon Blue Cross / Blue Shield of NJ, Plan D, $1,000 deductible; (2) Aetna Life Insurance Company, Plan D, $1,000 deductible; and (3) Celtic Insurance Company, Plan C, $2,500 deductible. Use only the Individual Health Coverage (IHC) program, so you can ignore the small-employer premiums. Set up your file with one row per year, one column for each plan’s monthly premium, and one more column for the total year-end “standard” enrollment across the program. Save it as a CSV and submit it with your notebook.

  2. (3 points) Make the figure. Using the dataset you built, make a figure showing the three plans’ premiums over time, with enrollment shown as well. Describe what you see.

  3. (3 points) Interpret it. How could the pattern in your figure be read as evidence of adverse selection?

  4. (3 points) Your verdict. Could something else explain these patterns? Weighing that against the adverse-selection explanation, is this a death spiral or not? Defend your answer using the data.

Q2 — Medicare Advantage and fee-for-service, 2008–2023 (15 pts)

Data: two county-year files (on the shared OneDrive, linked from Canvas). medicare-ma-penetration.csv gives, for each county and year, total Medicare eligibles and the number enrolled in Medicare Advantage (MA). medicare-ffs-costs.csv gives, for each county and year, fee-for-service (FFS) enrollment and total FFS spending.

  1. (6 points) Build the national series. Merge the two files on county and year and roll the result up to national totals by year. Compute national MA penetration and FFS spending per enrollee, thinking carefully about how to turn county counts into a national rate, plot both over time, and describe the trends.

  2. (3 points) Read them together. Looking at MA penetration and FFS spending per enrollee together, what does the pattern suggest about who tends to move into Medicare Advantage and who stays in fee-for-service?

  3. (3 points) Risk adjustment. What is risk adjustment, as we covered it in class, and what problem does it aim to address in the Medicare Advantage market?

  4. (3 points) Beyond risk adjustment. Risk adjustment is not the only tool to combat adverse selection. Find one other policy that has been used or proposed to limit selection in Medicare Advantage, or to hold down fee-for-service costs, cite the source where you read about it, and explain in a few sentences how it would help. Use a credible health-policy source such as KFF, the Commonwealth Fund, Health Affairs, or a MedPAC report, not a general website or blog.