Economic Issues Simulation Paper Essay Example


Understanding the Economic Issues for Health Maintenance Organizations (HMOs)

Understanding the economic issues for Health Maintenance Organizations (HMOs)


Health Maintenance Organizations (HMOs) and their enrollees are considered as two significant players within the market for health care. Due to the commonly experienced aspects such as supply and demand size uncertainties, adverse selection, asymmetric information as well as moral hazard decision-making in HMOs, the market for health care is perceived to be different from and more complex than the market for commodities (Greene, 2008).

This simulation shows the economic decision-making for HMOs in their service of health insurance and health care to their enrollees. Learners determine the amount of premium to charge in bearing various types of risks as well as on what services to offer as part of his or her health care plan. This is to ensure that HMOs profits and benefits to the enrollees are increased. In addition, the simulation provides the learner with the necessary information on how to make use of the cost-effectiveness analysis so as to choose services for inclusion (Enteen, 1996).

Castor Collins Health care plans are used as the case of study in this simulation. In the simulation, health care is analyzed against economics,
the demographics of the employees, the health care risk factors, and the premiums this insurance company is willing to pay is provided, an analysis of the potential utilization is presented. The selected plan to sell to the company is presented along with reasons as to why and reasons for not selecting the rest of other plans is also given.

Health Care against Economics

Health care is perceived to be the goods demanded by consumers, while economics provides the view that rational consumers make their own choices in order to maximize utility. For instance, if one decides to eat more chocolates, though, are considered bad for teeth, it suggests that him or her values utility in the expense of eating chocolate that caring for the teeth. Therefore, well managed care firms can be perceived to be suppliers of health insurance and health care. These firms incur various costs in providing their health care services to their respective enrollees as they earn revenue from their health insurance services. However, the market for health care is considerably different from the normal markets for other commodities and this complicates decision-making process in such markets. Through this simulation, such issues from the perspective of the Health Maintenance Organizations (HMO) are dealt with. This is achieved by designing some health care plans, choosing or rejecting the services to provide to individual sets of enrollees (Enteen, 1996).

Caster Collins Health care plans

Caster Collins Health plans was established as a regional HMO in 1999 within the state of Pantome. The organization provides both health insurance and the health care services to the enrollees through its statewide network of hospitals and physicians by use of the capitation model to compensate for its global network of health providers. Currently, Castor Collins has 100,000 enrollees within the state and is looking forward to raise this number.

As the Vice President, Strategy and Financial Planning at Castor Collins, I am tasked with the responsibilities of interacting with the new clients as well as formulating some health plans that suits their needs and actuarial work that includes pricing plans in relation to setting insurance premiums. A group of three of my colleagues supports me in this task of taking care of our clients. However, Castor Collins has focused on to maximize its profits and minimize the risks that the company is faced with.

Demographics of the people

(Jaffe, 1998).This takes into consideration the number of employees’ ages and the preexisting medical conditions
Constructit and E-editors are the companies that are currently looking for some insurance coverage for their employees as well as willing to pay for different premiums.
Currently Castor Collins has 100,000 enrollees and is looking forward to raise this number. However, increasing the enrollment numbers will involve the dedication of its chief vice president’s strategy and financial planning in order to interact with the new clients as well as formulate more health plans.

New Prescription Premium

After meeting with some two chosen groups people who managed to approach Castor Collins on the issues of health insurance, I discovered that Constructit which was the first group consist of 1,000 people, while E-Editors as the second group comprises of 1,600 people. Neither of the two groups owns employer insurance, indicating that individuals involve both groups who will pay for their own insurance. Each individual at Constructit has agreed to pay a maximum annual premium of $4,000, while at E-Editors each person is ready to pay a maximum annual premium of $4,500. Based on this, we have two different plans that are considered to be suitable for the two groups. This includes Castor Standard without preexisting medical conditions and Castor Enhanced that covers the preexisting conditions. In addition, suggestion has been made to mitigate the organization’s risks by customizing the Castor Enhanced so as to eliminate a few services identified with high utilization. With more attention given to maintaining revenue maximization and risk minimization, we aim to examine which of the three plans namely, customized plan, Castor Enhanced and Castor Standard that can be named as Castor Enhanced Minor.

In the plan, we will refer the health profiles of people at E-Editors and Construct, graph details icon and provide an explanation for it, compare the plans for costs and utilization in both plans as well as plan details for a more detailed work and copayments for the two plans. However, special attention will be given on the costs of both inpatient and outpatient services, utilization and earnings graph, premium and earnings for Castor Collins. This is in order to decide on the best plan to provide and which group to get, the kind of services to eliminate from the Castor Enhanced Minor, if accepted to provide it. Various icons such as clapboard to symbolize detailed scenario, minimize icon to switch to other applications, a? will be used for screen description, key icon to be used for definitions of important concepts and x icon to quit the simulation will be used if in doubt as illustrated below.

Economic Issues Simulation Paper

Since faulty prescriptions are considered to be a serious problem that the Castor Collins is trying to keep at a minimum risk, therefore, I chose the Castor Standard to be used for the Constructit. This is because the risk for the organization is lower and the return is also lower. However, it was discovered that the decision I made for Castor Collins was not rewarding enough since the risks were still high and the return was not sufficient to the expectation of the organization. This has created opportunity to have an expanded coverage (Greene, 2008).

Expanded Coverage

Castor Collins has made a decision to have an extended care for its health care facility and we are trying to determine an area that needs attention and the services to be used into the premium for this facility. Natural gas Company, largest petroleum refining factory in the state and petrochemicals are the new Dearden industries that have just given us a call, requesting as to offer with some insurance coverage and the health care services to all their group of companies. We are considering taking Castor Standard as the ideal plan and examining other services that we can add to our plan, for instance, some versions of care services will be added to the plan. Furthermore, exploration into the possibility of adding on the dental care as well as rehabilitative services will be considered. This is in order to offer the Dearden industries with a comprehensive coverage that includes as many services as possible.

For the dental care and the rehabilitative services that have the tendency of involving higher costs of provision, we plan to determine a copayment rate that enrollees will be required to pay. This is to enable us increase our earnings from the mere plans and provide a maximum possible benefit to the employees of Dearden industries. However, more attention will be paid on the premiums and earning for the Castor Collins organization, demand curve of each employee and the associated enrollee benefit index before making decisions on which services to add to our plan as well as the copayment to charge for each service offered as illustrated in the figure below (Greene, 2008).

Economic Issues Simulation Paper 1


The market for the health care shows that health is an economic good which is most needed by consumers similar to food. The demand for health by consumers is driven by the utility maximization similar to how choices of Health Maintenance Organizations (HMOs) are driven by profit maximization within their supply of the health care services. Due to the existing differences between the characteristics of health care markets and markets for other commodities, the simulation shows that the contributing factors complicate the economic decision-making within the health care markets.


Enteen, R., (1996). Health Insurance: How to Get It, Keep It, or Improve What You’ve Got. New York: Demos Vermande.

Greene, J. (2008). Members of Consumer-Driven Health Plans Choosing Less Care. Retrieved August 10, 2011, from Medical News Today Web.


Jaffe, A., (1998). Misinformation Leaves Public in the Dark about True Causes of Healthcare Cost Hikes. National Underwriter Property and Casually Risk and Benefits Management. New York. Demos Vermande.