1、Health Insurance,Uninsured Insured,Two Comments,First of two comments: From Princeton Economist Uwe Reinhardt: “Why does a country that spends close to 70 percent more on health care per capita than the next most expensive health system in the world Germany still leave close to 18 percent of its pop
2、ulation without the economic, emotional and physiological benefits of health insurance coverage?,Two Comments,Second comment: Most of us are not aware of the financial burden we bear for health care provided to ourselves and others. Self pay for a visit to a hospital ER, say for a broken leg. Employ
3、ers pay on average 11% of salary for health benefits. Roughly equals $2/hr. FICA-M A TV in most states, a pay check in Delaware,“The figures, released early Tuesday by the U.S. Census Bureau, show that 15.2% of Americans didnt have coverage for all of last year, an increase of 2.4 million people fro
4、m 2001, when 14.6% were uninsured.The 5.8% rise in the uninsured resulted from a decline in the percentage of people covered by employer-based insurance - 61.3% last year, down from 62.6% the year before. That deterioration, economists say, reflected increases in unemployment and the rise in health-
5、care costs, which prompted some employers to drop coverage.”,Number of Americans Who Lack Health-Care Coverage Is Rising: Census Bureau Counts 43.6 Million, WSJ 9/30/03,“Young adults were less likely than any other age group to have health insurance. Last year, 29.6% went without, up from 28.1% the
6、year before. Health analysts attribute the increase to decisions by young, healthy workers to opt out of employer-sponsored health plans as employee contributions rise. In addition, they say, some younger workers couldnt find jobs because of economic conditions.”,Mostly adults, not children half are
7、 childless adults. What age group? Poor and near-poor 60% have incomes above federal poverty level Workers and family members 80% in families with at least 1 worker Unskilled laborers, service workers. Uwe Reinhardt, “working stiffs”,Who Are the Uninsured?,Do the uninsured receive necessary health c
8、are?,Often No Compared to the Insured Population, the Uninsured.,Have higher rates of preventable and/or untreated illness Are less likely to receive care that they feel they need Have more preventable hospitalizations Have shorter hospital stays for the same conditions Are hospitalized sicker and h
9、ave poorer health outcomes (including death),The Uninsured,Are not known to be a sicker or higher-cost population. Pay higher medical fees. (NYT, 4/2/01) “A New York gynecologist says he gets $25 for a routine exam for a woman insured by group health insurance and charges $175 for the same exam for
10、a woman without insurance.” “The care of the poor once was supported by the wealthy and the insured, but now the opposite is happening.”,Health Insurance and the Consumer Role,Consumers demand health insurance and often purchase it in markets Two key issues that can lead to market failure: Moral haz
11、ard Adverse selection,Key Definitions,Moral hazard Health insurance affects consumer demand for health care higher utilization of covered services Adverse selection When given a choice, people who choose to purchase insurance are likely to be a group with higher than average losses. (Also applies to
12、 a choice between low-option and high-option plans.),The Demand for Health Insurance,Why do consumers value health insurance? Illness, injury and disability are to a large extent random events Hospitalizations, serious injury, and rehabilitation and other advanced modern treatments can be very expen
13、sive Most households are averse to risk What is risk aversion,What is Risk Aversion?,A simple test to see if you are “risk adverse.” Which would you select? Your pay check, OR Double your pay check for correctly picking one coin flip. Equal expected values; most of us are risk adverse and select the
14、 “certain” $500 option. Risk aversion - the degree to which a certain income is preferred to a risky alternative with the same expected income.,Private Market Insurance: A Simple Example,Start with 100 middle-aged executives sent by XXumma Corp. to Eastern Europe for a year. Suppose we can predict t
15、hat one was going to have a heart attack, requiring a $50k CABG procedure. But, we dont know who will be the unlucky one. Form a club with each exec putting in $500. “Actuarial fair premium” = 1/100 X $50,000 Would executives be willing to pay a 10% mark-up (loading fee) just to get their premium mo
16、ney back (collectively) as a benefit payment?,Demand for Health Insurance Keys,Presence of aversion makes consumers willing to pay to spread risk with others. Insurance companies specialize in pricing risks, not in taking risks. Lesson from the theory of insurance: the losses that are insured are: l
17、arge, infrequent, random, and not associated with a large moral hazard.,Health Insurance,Main Types Fee-for-service (indemnity) Managed care (pre-paid) Key Terms Deductible Copay/Coinsurance Stop Loss Limit,Insurance: Declining Block Pricing (Out-of-Pocket Spending),Pricing Blocks: Deductibles, Copa
18、ys and Limits,Question,Why do we observe deductibles, co-pays, limits, and exclusions?,Moral Hazard and Demand,Practice Exercise,What is the relationship between price elasticity of demand and size of the moral hazard (deadweight loss)?,Question: If you designed a health care plan,Hospital Care Surg
19、ical & in-hosp medical Outpatient doctor Dental exams/cleaning Mental health Over the counter drugs Flu shots,Patterns of Insurance Coverage,The losses that are insured are: large, infrequent, random, and not associated with a large moral hazard.,Question,Youre an insurance broker. Suppose the avera
20、ge health expenditure for an adult equals $6000. To make a quick $4000, would you accept $10,000 to provide health insurance coverage for one adult? If not, whats the minimum premium youd accept?,You be the benefit consultant,Harvard University,Budget Problem,1994, Harvard University was facing a su
21、bstantial deficit in the employee benefits budget. Offered both HMO plans and a more expensive PPO health insurance plan. Harvard generously subsidized the more expensive, “high-option” PPO plans for employees. Needed to reduce employee benefit costs,1995, Harvard decide to contribute the same amoun
22、t to employee plans regardless of which type they chose. Employee contributions increased for both the HMO and PPO plans, but more severely in the more expensive PPO plans.,Harvards Strategy,Changes in Employee Premiums,Enrollment in the more generous, more expensive PPO plans decreased. What would
23、you predict about the characteristics of those employees who switched?,Employees Response:,Enrollment in the more generous, more expensive PPO plans decreased. What would you predict about the characteristics of those employees who switched? Those employees who switched tended to be younger and had
24、spent less on medical care the previous year.,Employees Response:,Final Results:,Due to decreased enrollment, premiums for the high option PPO plans increased, making the PPO option even more expensive = More employees were (voluntarily) “pushed out” of the expensive PPO plans = By 1997, the PPO pla
25、n was discontinued, completing the adverse selection “death spiral” in just three years.,Plan Enrollment,A Game: Pick One of the Following 3 Opportunities:,C1: $350 paid in cash C2: $1000 for correctly picking one coin flip C3: Flip the coin 1000 times. Your take equals: %heads X $1000.,To Better Un
26、derstand These Choices, It Helps to Know Your Risks,Group insurance reduces “secondary risk.” Two kinds of risk . . . Primary risk: calculated odds that a bad event will occur ($6000 expected value of health costs for an adult.) Secondary risk: chance that the actual payout doesnt equal the calculat
27、ed expected value. (The calculation proves to be wrong.) Larger numbers reduce secondary risk.,Adverse effects of adverse selection Start with a community-rated, self-pay health plan,Community of four with insurance premium = $3000 Person “A” with E(B) = $600 “B” E(B) = $2000 “C” E(B) = $4000 “D” E(
28、B) = $6000 Marginal analysis: E(B) vs E(C) Decision of healthier enrollees “A” and “B”? Avg. cost per enrollee increases. Premiums increase = “C” drops out. and this can create a “killer price spiral” Severe adverse selection can set in motion price spirals that theoretically can cripple or destroy
29、insurance markets.,Percentage of Uninsured Workers Ages 18-64, by Firm Size (1997),“Small-business profits are getting pinched because of price increases for employee health insurance. Among small companies that posted lower earnings in August vs. a year ago, 18% blamed higher insurance costs, says
30、a survey of 544 firms by the National Federation of Independent Business trade group. In a similar survey a year ago, 11% blamed health insurance costs for their earnings dip.”,Rising health costs take bite out of small biz USA Today 10/5/03,How to Price Insurance Policies?,Premium = f ( Expected va
31、lue of claims, loading costs ). Loading cost: administrative and other costs associated with underwriting insurance policies. Loading costs = (risk premium + administrative costs + marketing costs + profits) Loading costs = “price” of insurance,Typical Loading Fees by Group Size As a Percent of Bene
32、fits (Phelps, p. 343),Question: Why is Small Group Health Insurance So Expensive?,Per capita loading costs decrease as firm group size increases.Loading costs = (risk premium + administrative costs + marketing costs + profits) Small group purchasers have less bargaining power. Adverse selection.,Do
33、People Choose to Die?,Actuaries have found that statistically people who buy life insurance are more likely than average to die. Is this a “moral hazard” or an “adverse selection” problem?,Possible Solutions to the Adverse Selection Problem?,Waiting periods Preexisting condition exclusions Risk rati
34、ng (underwriting) Insurance that precludes individual selection according to subscribers perceptions of their own risk (Universal health insurance, employment-based insurance),Possible Solutions to the Moral Hazard Problem?,(Higher) co-payments (Higher) deductibles Utilization review Since size of moral hazard problems (DWL) increases with price elasticity of demand, offer less generous insurance for specific services with more elastic demand (e.g., mental health coverage).,
