Introduction to Options
Draw the payoff diagrams for the following:
A. A high deductible health insurance plan with a maximum out of pocket expense of $12,000 a year
B. A traditional health insurance plan with no deductible but a co-pay of 10% on all healthcare expenses, no maximum out of pocket expenditure limit is specified
C. No health insurance coverage
What is the underlying? What type of option is a healthcare insurance ( please specify long or short, call or put, or a combination)?
Assume that the net liquid asset is the household portfolio is $P where P> $12,000. How does your answer change where P< $12,000.
Hint: Ability to declare personal bankruptcy is a put option.
What kind of behavior do you expect to see by healthcare providers and consumers based on the information above and for the different plan types?