MEDICAL MEDICAL INSURANCE INSURANCE

IN IN HEALTH CARE HEALTH CARE

SYSTEMSSYSTEMS

Two CommentsTwo CommentsSecond comment: Most of us are not Second comment: Most of us are not aware of the financial burden we bear aware of the financial burden we bear for health care provided to ourselves for health care provided to ourselves and others. and others. • Self pay for a visit to a hospital ER, say for Self pay for a visit to a hospital ER, say for

a broken leg.a broken leg.• Employers pay on average 11% of salary for Employers pay on average 11% of salary for

health benefits. Roughly equals $2/hr.health benefits. Roughly equals $2/hr.• FICA-MFICA-M• A TV in most states, a pay check in A TV in most states, a pay check in

Delaware,…Delaware,…

“The figures, released early Tuesday by the U.S. Census Bureau, show that 15.2% of Americans didn't have coverage for all of last year, an increase of 2.4 million people from 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-care costs, which prompted some employers to drop coverage.”

Number of Americans Who Number of Americans Who LackLack

Health-Care Coverage Is Health-Care Coverage Is Rising:Rising:

Census Bureau Counts 43.6 Million, Census Bureau Counts 43.6 Million, WSJ 9/30/03WSJ 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 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 couldn't find jobs because of economic conditions.”

Mostly adults, not children – Mostly adults, not children – half are half are childless adults.childless adults.

What age group? What age group? Poor and near-poor – Poor and near-poor – 60% have incomes above 60% have incomes above

federal poverty levelfederal poverty level Workers and family members – Workers and family members – 80% in 80% in

families with at least 1 workerfamilies with at least 1 worker Unskilled laborers, service workers. Unskilled laborers, service workers.

Uwe Reinhardt, “working stiffs”Uwe Reinhardt, “working stiffs”

Who Are the Uninsured?Who Are the Uninsured?

Do the uninsured receive Do the uninsured receive necessary health care?necessary health care?

                     

Often No… Compared to the Often No… Compared to the Insured Population, the Insured Population, the

Uninsured...Uninsured... Have higher rates of preventable and/or untreated Have higher rates of preventable and/or untreated

illnessillness

Are less likely to receive care that they feel they Are less likely to receive care that they feel they needneed

Have more preventable hospitalizations Have more preventable hospitalizations

Have shorter hospital stays for the same conditionsHave shorter hospital stays for the same conditions

Are hospitalized sicker and have poorer health Are hospitalized sicker and have poorer health outcomes (including death)…outcomes (including death)…

The Uninsured…The Uninsured…

Are notAre not known to be a sicker or higher- known to be a sicker or higher-cost population. cost population.

Pay higher medical fees. Pay higher medical fees. (NYT, 4/2/01)(NYT, 4/2/01) “A “A New York gynecologist says he gets $25 for a New York gynecologist says he gets $25 for a routine exam for a woman insured by group routine exam for a woman insured by group health insurance and charges $175 for the health insurance and charges $175 for the same exam for a woman without insurance.”… same exam for a woman without insurance.”… ““The care of the poor once was supported by the The care of the poor once was supported by the

wealthy and the insured, but now the opposite wealthy and the insured, but now the opposite is happening.”is happening.”

Types of insuranceTypes of insurance Social insuranceSocial insurance

• MedicareMedicare• MedicaidMedicaid

Indemnity insuranceIndemnity insurance• Provides reimbursement for expenditures or Provides reimbursement for expenditures or

loss of incomeloss of income• Premiums (price) reflects expected loss (cost)Premiums (price) reflects expected loss (cost)

Hospitalization Physician services Major medical Dental Disability income protection Long-term care

Hospitalization Physician services Major medical Dental Disability income protection Long-term care

Health Insurance and the Health Insurance and the Consumer RoleConsumer Role

Consumers demand health insurance Consumers demand health insurance and often purchase it in marketsand often purchase it in markets

Two key issues that can lead to Two key issues that can lead to market failure: market failure: • Moral hazard Moral hazard • Adverse selectionAdverse selection

Key DefinitionsKey Definitions

Moral hazardMoral hazard Health insurance affects Health insurance affects consumer demand for health care – consumer demand for health care – higher utilization of covered serviceshigher utilization of covered services

Adverse selection Adverse selection When given a When given a choice, people who choose to purchase choice, people who choose to purchase insurance are likely to be a group with insurance are likely to be a group with higher than average losses. (Also higher than average losses. (Also applies to a choice between low-option applies to a choice between low-option and high-option plans.)and high-option plans.)

Both models of the demand for health Both models of the demand for health insurance presented assume workers insurance presented assume workers pay for and choose their own coverage. pay for and choose their own coverage.

The first model, the so-called The first model, the so-called conventional theory or standard gamble conventional theory or standard gamble model, assumes people purchase health model, assumes people purchase health insurance to avoid or transfer risk. In insurance to avoid or transfer risk. In this case, insurance serves as a pooling this case, insurance serves as a pooling arrangement to replace the high risk or arrangement to replace the high risk or variability of individual losses with the variability of individual losses with the reduced risk or variability associated reduced risk or variability associated with aggregated losses.with aggregated losses.

The second model, the Nyman The second model, the Nyman model, views people as desiring model, views people as desiring financial access to medical care that financial access to medical care that health insurance offers. In this case, health insurance offers. In this case, a pooling arrangement allows a pooling arrangement allows individuals, in the event they individuals, in the event they become ill, to receive a transfer of become ill, to receive a transfer of income from those who remain income from those who remain healthy.healthy.

The Demand for Health The Demand for Health InsuranceInsurance

Why do consumers value health Why do consumers value health insurance?insurance?• Illness, injury and disability are to a large Illness, injury and disability are to a large

extent random eventsextent random events• Hospitalizations, serious injury, and Hospitalizations, serious injury, and

rehabilitation and other advanced modern rehabilitation and other advanced modern treatments can be very expensivetreatments can be very expensive

• Most households are averse to riskMost households are averse to risk What is risk aversionWhat is risk aversion

What is Risk Aversion? What is Risk Aversion? A simple test to see if you are “risk A simple test to see if you are “risk

adverseadverse.” .” Which would you select? Which would you select?

* Your pay check, OR Your pay check, OR * Double your pay check for correctly picking Double your pay check for correctly picking

one coin flip. one coin flip. * Equal expected values; most of us are Equal expected values; most of us are risk risk

adverse andadverse and select the “certain” $500 option. select the “certain” $500 option. Risk aversionRisk aversion - the degree to which a - the degree to which a

certaincertain income is preferred to a income is preferred to a risky risky alternative with the same expected alternative with the same expected income.income.

Private Market Insurance: A Private Market Insurance: A Simple ExampleSimple Example

Start with 100 middle-aged executives sent by Start with 100 middle-aged executives sent by XXumma Corp. to Eastern Europe for a year.XXumma Corp. to Eastern Europe for a year.

Suppose we can predict that one was going to Suppose we can predict that one was going to have a heart attack, requiring a $50k CABG have a heart attack, requiring a $50k CABG procedure.procedure.

But, we don’t know who will be the unlucky one.But, we don’t know who will be the unlucky one. Form a club with each exec putting in $500. Form a club with each exec putting in $500.

““Actuarial fair premium” = 1/100 X $50,000Actuarial fair premium” = 1/100 X $50,000 Would executives be willing to pay a 10% mark-Would executives be willing to pay a 10% mark-

up (loading fee) just to get their premium money up (loading fee) just to get their premium money back (collectively) as a benefit payment? back (collectively) as a benefit payment?

Health InsuranceHealth Insurance

Main TypesMain Types• Fee-for-service (indemnity)Fee-for-service (indemnity)• Managed care (pre-paid)Managed care (pre-paid)

Key TermsKey Terms• DeductibleDeductible• Copay/CoinsuranceCopay/Coinsurance• Stop Loss Stop Loss • LimitLimit

Insurance: Declining Insurance: Declining Block Pricing Block Pricing (Out-of-Pocket (Out-of-Pocket

Spending)Spending)

OOPs

PF

0.2 PF

Co-Insurance

Deductible

Co-Pay

0

$

Spending$100 $5,000

Stop Loss

Pricing Blocks: Pricing Blocks: Deductibles, Copays and Deductibles, Copays and

LimitsLimitsOOPs

PF

0.2 PF

Co-Insurance

Deductible

Co-Pay

Spending$100 $5,0000

$Limit

QuestionQuestion

Why do we observe deductibles, co-Why do we observe deductibles, co-pays, limits, and exclusions?pays, limits, and exclusions?

Moral Hazard and Moral Hazard and DemandDemand

PF

P

CPF

D

DWL

Q1 QQU

Patterns of Insurance Patterns of Insurance CoverageCoverage

Type of Type of Health Health CareCare

Variance Variance of of

Financial Financial RiskRisk

Demand Demand ElasticityElasticity

(RHIE)(RHIE)

% of % of People People

Under 65 Under 65 InsuredInsured

Hospital Hospital CareCare

HighestHighest -0.15-0.15 8080

Surgical & Surgical & in-hosp in-hosp medicalmedical

HighHigh -0.15-0.15 7878

Outpatient Outpatient doctordoctor

MediumMedium -0.3-0.3 40-5040-50

DentalDental LowLow -0.4-0.4 4040The losses that are insured are: large, The losses that are insured are: large, infrequent, random, and not associated with infrequent, random, and not associated with a large moral hazard. a large moral hazard.

QuestionQuestion

You’re an insurance broker. You’re an insurance broker. Suppose the average health Suppose the average health

expenditure for an adult equals expenditure for an adult equals $6000.$6000.

To make a quick $4000, would you To make a quick $4000, would you accept $10,000 to provide health accept $10,000 to provide health insurance coverage for one adult?insurance coverage for one adult?

If not, what’s the minimum premium If not, what’s the minimum premium you’d accept?you’d accept?