Health Insurance I: Health Economics and Private Health Insurance

1. Health Insurance I: Health Economics and Private Health Insurance -Mar 4 Fed govt shutdown

2. 15.1 An Overview of Health Care in the United States

3. 15.1 An Overview of Health Care in the United States

8. 15.1 An Overview of Health Care in the United States

9. 15.1 An Overview of Health Care in the United States How Health Insurance Works: The Basics Individuals, or firms on their behalf, pay monthly premiums to insurance companies. In return, the insurance companies pay the providers of medical goods and services for most of the cost of goods and services used by the individual. There are three types of patient payments: • Deductibles. • Copayment. • Coinsurance.

10. 15.1 An Overview of Health Care in the United States Private Insurance nongroup insurance market The market through which individuals or families buy insurance directly rather than through a group, such as the workplace.

11. 15.1 An Overview of Health Care in the United States Private Insurance Why Employers Provide Private Insurance, Part I: Risk Pooling risk pool The group of individuals who enroll in an insurance plan. The goal of all insurers is to create large insurance pools with a predictable distribution of medical risk. The statistical law of large numbers states that as the size of the pool grows, the odds that the insurer will be unable to predict the average health outcome of the pool falls.

12. 15.1 An Overview of Health Care in the United States Private Insurance Why Employers Provide Private Insurance, Part II: The Tax Subsidy tax subsidy to employer-provided health insurance Workers are taxed on their wage compensation but not on compensation in the form of health insurance, leading to a subsidy to health insurance provided through employers. • TABLE 15-2

13. 15.1 An Overview of Health Care in the United States Private Insurance The Other Alternative: Nongroup Insurance The nongroup insurance market is not a well-functioning market. Nongroup insurance is not always available. Those in the worst health are often unable to obtain coverage (or obtain it only at an incredibly high price). State run exchanges to provide subsidized insurance to uninsured

14. 15.1 An Overview of Health Care in the United States Medicare Medicare A federal program that provides health insurance to all people over age 65 and disabled persons under age 65. Every citizen who has worked for ten years in Medicare-covered employment (and their spouse) is eligible for Medicare at age 65.

15. 15.1 An Overview of Health Care in the United States Medicaid Medicaid A federal and state program that provides health care for the poor. • Medicaid benefits are targeted at several groups: • Those who qualify for cash welfare programs. • Most low-income children in the United States. • Most low-income pregnant women. • The low-income elderly and disabled.

16. 15.1 An Overview of Health Care in the United States TRICARE/CHAMPVA TRICARE is a program administered by the Department of Defense for military retirees and the families of active-duty, retired, or deceased service members. CHAMPVA, the Civilian Health and Medical Program for the Department of Veterans Affairs, is a health care benefits program for disabled dependents of veterans and certain survivors of veterans. The Uninsured • Who are they? • The uninsured have lower-than-average incomes. • In 2007, nearly two-thirds of the uninsured came from families where one or more members were full-term workers. • Almost one-fifth of the uninsured are children.

17. 15.1 An Overview of Health Care in the United States The Uninsured Why are Individuals Uninsured? • Risk-averse individuals may be unwilling to purchase insurance if it is not available at an actuarially fair price. • Insurers may be unwilling to insure the worst risks because of fears of adverse selection. • They may be rationally forgoing insurance because the odds of illness are low. • They simply can’t afford the high costs of health insurance. • They are not appropriately valuing insurance coverage. uncompensated care The costs of delivering health care for which providers are not reimbursed.

18. 15.1 An Overview of Health Care in the United States The Uninsured Why Care About the Uninsured? First, there are physical externalities associated with communicable diseases. Second, there is a significant financial externality imposed by the uninsured on the insured. The third reason we might care whether individuals are uninsured is that care is not delivered appropriately to the uninsured.

19. 15.1 An Overview of Health Care in the United States The Uninsured Why Care About the Uninsured? Fourth, there are paternalism and equity motivations for caring about the uninsured. The final reason for caring about the uninsured is that becoming uninsured is a concern for millions of individuals who currently have insurance. job lock The unwillingness to move to a better job for fear of losing health insurance. Health insurance availability may inhibit productivity-increasing job switches.

20. M P I R I C A L E V I D E N C E 15.1 An Overview of Health Care in the United States E HEALTH INSURANCE AND MOBILITY Is job lock an important problem in reality? Initially, a large literature compared the mobility rate of those who have and do not have health insurance. A more sophisticated literature in the 1990s surmounted this problem in two different ways: • Studies used a difference-in-difference strategy that compared a treatment group of those who valued health insurance particularly highly with a control group of those who did not. • Studies examined the impact of state laws that allowed workers to continue to purchase their employer-provided health insurance for some period of time after leaving their jobs. The results from these studies support the notion that job lock is quantitatively important.

21. 15.2 How Generous Should Insurance Be to Patients? • The generosity of health insurance is measured along two dimensions: • Generosity to patients. first-dollar coverage Insurance plans that cover all medical spending, with little or no patient payment. • Generosity to providers.

22. 15.2 How Generous Should Insurance Be to Patients? Consumption-Smoothing Benefits of Health Insurance for Patients • The consumption-smoothing benefit from first-dollar coverage of minor and predictable medical events is small for two reasons: • Risk-averse individuals gain little utility from insuring a small risk. • Individuals are much more able to self-insure such spending than to self-insure large and unpredictable medical events.

23. 15.2 How Generous Should Insurance Be to Patients? Moral Hazard Costs of Health Insurance for Patients • FIGURE 15-3

24. 15.2 How Generous Should Insurance Be to Patients? Moral Hazard Costs of Health Insurance for Patients The “Flat of the Curve” • FIGURE 15-4

25. 15.2 How Generous Should Insurance Be to Patients? How Elastic Is the Demand for Medical Care? The RAND Health Insurance Experiment The best evidence on the elasticity of demand for medical care comes from one of the most ambitious social experiments in U.S. history: the RAND Health Insurance Experiment (HIE). The findings of the HIE were striking: • Medical care demand is price sensitive: individuals who were in the free care plan used about one-third more care than those paying 95% of their medical costs. • Those who used more health care due to the lower price did not, on average, see a significant improvement in their health. • For those who are chronically ill and don’t have sufficient income to easily cover copayments, there was some deterioration in health.

26. 15.2 How Generous Should Insurance Be to Patients? Why Is Insurance So Generous in the United States? Optimal Health Insurance The optimal health insurance policy is one in which individuals bear a large share of medical costs within some affordable range, and are only fully insured when costs become unaffordable

27. 15.2 How Generous Should Insurance Be to Patients? Why Is Insurance So Generous in the United States? Why are people either uninsured or “overinsured”? The Tax Subsidy Health insurance expenditures by employers are tax subsidized: payments to employees in the form of wages are taxed, while payments in the form of health insurance are not. This is a major reason health insurance is offered through firms.

28.  APPLICATION 15.2 How Generous Should Insurance Be to Patients? Health Savings Accounts Removing or capping the tax subsidy to employer-provided health insurance is a straightforward means of addressing overinsurance, but would be politically difficult because it would be attacked as a large tax increase on workers. health savings account (HSA) A type of insurance arrangement whereby patients face large deductibles, and they put money aside on a tax-free basis to prepay these deductibles. Unfortunately, HSAs have a number of disadvantages as well: • This new tax break will be expensive in terms of foregone tax revenue. • A flat deductible alone is not the right structure for encouraging the proper use of medical care. • If the right way to address overinsurance is to limit the employer exclusion, then HSAs represent the wrong direction for tax policy. 

29. 15.2 How Generous Should Insurance Be to Patients? Why Is Insurance So Generous in the United States? The Access Motive A second reason why insurance may be so generous is that the traditional analysis overstates the costs of moral hazard. Moral hazard is measured only by the substitution effect of social insurance programs. The income effect of social insurance programs, the extent to which you change behavior because you are richer, is not moral hazard. Psychological Motivations Finally, the third reason why insurance may be so generous is that there may be motivations for holding insurance that go beyond the simple expected utility model.

30. 15.3 How Generous Should Insurance Be to Medical Providers? retrospective reimbursement Reimbursing physicians for the costs they have already incurred. Managed Care and Prospective Reimbursement managed care An approach to controlling medical costs using supply-side restrictions such as limited choice of medical provider. Preferred Provider Organizations One fundamental failure in medical markets is that it is very difficult to shop for a medical provider. preferred provider organization (PPO) A health care organization that lowers care costs by shopping for health care providers on behalf of the insured.

31. 15.3 How Generous Should Insurance Be to Medical Providers? Managed Care and Prospective Reimbursement Health Maintenance Organizations health maintenance organization (HMO) A health care organization that integrates insurance and delivery of care by, for example, paying its own doctors and hospitals a salary independent of the amount of care they deliver. In the classic staff model, HMOs hire their own physicians and may have their own hospitals. prospective reimbursement The practice of paying providers based on what treating patients should cost, not on what the provider spends.

32. 15.3 How Generous Should Insurance Be to Medical Providers? The Impacts of Managed Care Spending The consistent finding of a very large literature in health economics is that HMOs spend much less per enrollee than do traditional retrospective reimbursement plans. Quality Do HMOs underprovide, or do they simply serve to correct some of the natural excesses of retrospective reimbursement? There is now an enormous literature on the impact of HMOs on patient treatment, and the answer is a definite maybe.

33. 15.3 How Generous Should Insurance Be to Medical Providers? How Should Providers Be Reimbursed? The advent of managed care has clearly lowered reimbursement to providers, but it has not measurably lowered the quality of care those providers deliver. The key question for the future is whether additional “tightening” of the prospective reimbursement system is needed.

34. 15.4 Conclusion Most individuals have private health insurance, and for those employed by large firms this is a well-functioning insurance market. For small firms and individuals there are more failures in the insurance market, one possible reason that almost 46 million Americans are uninsured. Risk-averse individuals greatly value the consumption-smoothing benefits of having their medical bills paid. There are clear moral hazard costs as well, both on the patient and provider side. Some cost sharing has been used to address moral hazard on the patient side, and managed care has arisen as a means of addressing moral hazard on the provider side. The success or failure of these approaches is not yet fully apparent.

35. What are key provisions in PPACA? Kaiser Family Foundation: http://www.youtube.com/watch?v=3-Ilc5xK2_E -How effective do you think the health cost control efforts will be? -What are the ways to expand the risk pool, besides the mandate? -what other reforms are needed?

37. The Atlantic Sept. 2009 How American Health Care Killed My Father by David Goldhill URL for this page is http://www.theatlantic.com/doc/200909/health-care <

38. Problems with Current efforts • Not following a rational business model • Reform is only targeting incremental change • -extending insurance benefits • -using bureaucratic rules to control costs • Need to deal with incentives

39. A problem with incentives Need to: -reduce (not expand) role of insurance -focus government role on things such as safety net, catastrophic coverage, enforce standards, competition -stop Ponzi scheme financing, hidden subsidies, unclear pricing, -focus on consumer driven Foundation of the health care problem

40. Health Insurance is not health care • Health insurance used for major illnesses and health care expenses • Health care began as non wage benefit during WWII • Moral Hazard issues are HUGE • -changes behavior of insuree and HC providers • -insured consume more HC • -HC providers provide more • -HC demand has no limit • Spend other people’s money differently than your own • Hard to control costs in this arrangement

41. Problems with current Health care system, contd. • Uncompetitive (hospital regulated) • Medicare costs are running away • Consumers don’t know price of what they are buying • Benefits of new Technology not passed on

42. Potential problems of comprehensive health care reform • Moral hazard • Distorted incentives • Bias toward treatment • Lack of transparency • Curbs on competition

43. How to address Health Care reform • Move away from comprehensive health insurance model • Address universal coverage by subsidizing insurance for low income • Consumer-focused health care reform • -cash pay for routine health care expenses • -HSA for major medical issues • -offer catasrophic health care policies • -more transparency in fees • Financing reform • -capture the $1.7 million of lifetime health care costs • --subsidize low income • g

44. Issues in shifting to a consumer-focused system • Shifting from health industry-complex to a consumer-based • Politics of transitioning