Insurance and health care delivery

1. Insurance and health care delivery N287E Spring 2006 Professor: Joanne Spetz 26 April 2006

2. But wait! Let’s talk about the problem set! • Return on Investment = Profit margin / Asset turnover rate Profit margin = total margin = net income / sales Asset turnover rate = total asset turnover = total revenue / total assets

3. But wait! Let’s talk about the problem set! • Return on Investment = Profit margin / Asset turnover rate Profit margin = net income / sales = (operating revenue – operating expense – nonoperating expense) / operating revenue

4. But wait! Let’s talk about the problem set! • Return on Investment = Profit margin / Asset turnover rate Asset turnover rate = total revenue / total assets = (operating revenue) / (current assets + fixed assets)

5. But wait! Let’s talk about the problem set! • Return on Investment = Profit margin / Asset turnover rate = (revenue - expense) / revenue revenue (current+fixed assets) = (revenue – expense) / (total assets) This is the formula in the U of Missouri sheets!

6. And now back to our regularly scheduled presentation!

7. Going back to demand for medical care… • We believe: • Health = h(m,X) • Medical care is a “normal good” • If price rises, demand drops • If income rises, demand rises

8. Medical care does not produce only health • Medical care also produces: • Caring • Validation

9. If price goes up… Other consumption Indifference curve Price increase Drop in medical care demand Medical care

10. If income goes up… Other consumption Income increase Increase in medical care demand Medical care

11. Changes in health status: • Change the utility function • Change the indifference curve Other consumption healthy sick Medical care

12. From this we can derive demand curves price Demand for sick person Normal demand Medical care

13. Demand for health care depends on… • Price • Income • Health status • And also… • Quality of care • Time required for care

14. Medical care is a group of products • Health = f(m1, m2, m3,…) • All things equal, you want: • Higher quality • Care that takes less time • You decide on demand for medical care based on: • marginal utility = marginal cost  In theory!

15. Departure from theory • Health and illness are random • You can establish a budget and consumption plan… • And then get diagnosed with cancer  So much for the budget!

16. Changes in health: • Changes in health  • Changes in demand for medical care  • Changes in spending on med care  • Since health is random, spending on medical care will be random

17. Dealing with financial risk • Insurance protects against risk • Willingness to pay more than the average loss to insure against the loss is “risk aversion” • This results from a utility function with diminishing returns

18. Diminishing marginal utility • 50% chance of getting $100 • 50% chance of getting $50 utility E(U) E(U) = .5*U($100)+.5*U($50) $50 $100 money

19. Diminishing marginal utility utility U($75) E(U) Utility of $75 is bigger than E(U) $50 $75 $100 money

20. In this case, we have a plan • If you win $100, pay $25 (net=$75) • If you win $50, you receive $25 (net=$75) • Guaranteed $75 • In fact, even U($70) is higher!

21. Insurance is demanded by the market when there is risk • Problems with insurance • Moral hazard • Once you have insurance you take more risks • Smoking • Skydiving

22. Insurance is demanded by the market when there is risk • Problems with insurance • Moral hazard • You seek more care because it’s already paid • You can view this as a decrease in price of medical care • But you also have a decrease in “income” because of the premium you paid

23. More insurance problems… • Adverse selection • You know more about your risk than does your insurer • Those with greatest risk want insurance • You won’t seek insurance if your risk is low • Result: insurer gets a riskier group of people than expected

24. How do you deal with these problems? • Moral hazard • Copayments • Coinsurance (percent of bill) • Indemnity payment (flat rate) • Deductibles • Don’t insure small losses

25. How do you deal with these problems? • Moral hazard • Upper limits on payments • Protects insurer from huge losses • Serious health events are not insured • Managed care (more on this later…)

26. How do you deal with these problems? • Adverse selection • Pre-existing condition exclusions • These rules may prevent people from switching jobs • Pooled purchasing of insurance • “Group insurance” • Common in the workplace due to tax breaks • Can obtain economy of scale

27. All insurance works through risk-pooling • Should smokers be in the same pool as non-smokers? • What about the old and the young? • Larger pools get economy of scale • Is this fair? • Many firms self-insure • The insurance company handles administration • The company is a single risk pool

28. What about managed care? • Fee-for-service insurance • Insurer pays the bills as presented • Health maintenance organization • Insurer manages your care within closed network of providers • Preferred provider organization • Insurer gives you incentives to choose preferred providers • Point-of-service plan

29. What is the social problem with health care? Marginal cost/ Marginal benefit True cost of care Price the patient sees Optimal quantity Actual quantity MB of health care

30. Health costs in the U.S.

31. Comparisons across nations

32. Sources of insurance • Employer-based insurance • 2/3 of adults have this • Often provides a choice of plans • Group purchasing gives better rates • Cost comes from your potential salary • Individual private insurance • Can be expensive • Adverse selection

33. Sources of insurance • Medicare • Program for the elderly, to address adverse selection • Part A: hospital care • Part B: outpatient/primary care • Managed care plans • Medi-Gap insurance (private)

34. Sources of insurance • Medicaid & Healthy Kids • Medicaid • State-federal partnership • Until 1990s, was linked to welfare • Available up to 200% of poverty level for children and pregnant women • Covers nursing homes, pharmacy • Healthy Kids • Private-style insurance for near-poor children • Might be available for near-poor adults

35. What happens if you’re uninsured? • Hospitals are a major safety net • Public hospitals – sliding scale for cost • Other hospitals • Charity care categories • Uncompensated care • Hospitals pay for charity by cost-shifting • Doctors • Public clinics • Self-pay (if they’ll take you)

36. How much does access to care affect health? • Small effect of medical care on health • Wealth and education improve health more than medical care • Is this because you learn about health when you obtain education? • Or does this reflect your underlying preferences? • Latino “paradox”

37. The high number of uninsured may warrant policy action • National health reform usually focuses on the uninsured • Medicare • Clinton Plan • Medicare reform proposals in 2000 election • Price of health care also is a concern • High inflation rate since 1960s

38. What about managed care’s effects? • Major literature reviews by Miller & Luft • Equal numbers of better and worse results • Worse quality for Medicare HMO enrollees with chronic conditions • Financial incentives to doctors have unclear effects on quality (Armour et al., 2001)

39. More managed care effects • Preventive care • Better cancer screening (Haas et al., 2002) • Mental health • Colorado study found no difference after managed care introduced (Cuffel et al., 2002)

40. Managed care & costs • Miller & Luft • No clear hospital/physician resource use differences • Managed care probably reduced costs through mid-1990s • Excess payments negotiated out of system • Resurgence of cost inflation in 2000s

41. Why is there high cost inflation? • Administrative costs • High quality of care • Prices of inputs • New technologies • Incentive to develop new technologies due to widespread insurance coverage • Hospitals compete by purchasing technologies (“medical arms race”)

42. How would managed care control costs? • Why would a provider contract with a HMO/PPO? • Guarantee a group of patients • Prevent competitor from getting those patients • Some benefits of HMO management services (?)