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Chapter 11The Organization of Health Insurance Markets

Chapter 11The Organization of Health Insurance Markets. 1.Employer Provision of Health Insurance: Who Pays 2. Employer-Based Health Insurance and Labor Supply 3. The Uninsured-An Analytical Framework 4. Insurance, technological change, and higher costs. Employer Provision of Health Insurance.

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Chapter 11The Organization of Health Insurance Markets

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  1. Chapter 11The Organization of Health Insurance Markets 1.Employer Provision of Health Insurance: Who Pays 2. Employer-Based Health Insurance and Labor Supply 3. The Uninsured-An Analytical Framework 4. Insurance, technological change, and higher costs

  2. Employer Provision of Health Insurance • The largest segment of the American population health insurance is provided through the workplace. The reason this began was wage and price control in World War II. Health insurance were used to provided flexibility in worker compensation. • Economists start their analysis of impact of health insurance by looking at the labor market. Assume that the market wage is $20 per hour without health insurance. Now workers accept money wage $19 per hour but negotiate a health insurance benefit worth $1 per hour, costing $1 for the employer to provide. Thus, the number of workers employed reminds unchanged even lower money wage in labor market.

  3. Lee (1976) • In Figure 11-2, at equilibrium point b, the equilibrium wage is W1 and the equilibrium quantity of labor demanded and supplied at L1. • Now suppose that workers in the market negotiate a health insurance benefit worth $z/hour at that marginal, and it costs employers exactly $z/hour to provide. Then, the demand curve will shift downward by exactly $z’ to D’. Similarly, the supply curve will shift downward by exactly $z’ to S’. Workers have taken their benefit in lower money wage (W2), and the same number of workers, L1, is employed at the same net wage (W2+z=W1). • If the average benefit is worth $z’/hour, or less to the workers than $z/hour that it costs to provide, then the new supply of labor curve, S”, will have fallen by less than the demand for labor. Our new equilibrium at C’ yields wage W3, which is higher than W2.

  4. How the tax system influences Health Insurance Demand • Tax benefit: John earns 1000 per week. Marginal tax rate is 28%. Insurance cost=60option 1: 1000*(1-28%)-60=660 option 2 (employee insurance)(1000-60)*(1-28%)=677 • As marginal tax rate increase, consumers have incentive to increase employer health expenditure. Employers also benefit from the falling level of social security taxes. • Figure 11-31. the 45 degree budget line: a $1 of insurance trade for $1 in wage. A point with wage (W0) and insurance (I0) • 2. The subsidy of health insurance lowers the price of insurance=> budget line rotatesA’ point with wage (W1) and insurance (I1)

  5. The Trade-off between wages and insurance: Empirical Tests • Morrisey (2001) notes that most empirical studies thus far associates heath insurance with higher, rather than lower, wages. The reason is that compensation (wages plus insurance) is based on productivity, employers spend considerable effort identifying workers who are best motivated, more dependable, more high skilled, so the substitution between wages and insurance may be swamped by the productivity effect. • Gruber and Krueger (1992) examine worker’s compensation insurance, and Gruber (1994) looks at mandated maternity benefits coverage. Both studies support that groups that are paid more in benefits receive lower wage (group effect). • Jensen and Morrisey (2002) argue that wages and benefits are simultaneously determined. Their result are not statistically significant and the magnitudes of the effects vary substantially across data subsets.

  6. Employer-based Health Insurance and Labor supply • Health insurance may also affect worker mobility between jobs. This job lock may have several economics effects:(1) less productive workers may stay at jobs for insurance reasons only, leading to decreased economic output because they would not be replaced by more productive workers.(2) Even if all workers are equally productive, some workers may stay in jobs for fear losing the health insurance benefits to the exclusions of those who would else fill the jobs.(3) Those who do change jobs may denied coverage, face higher premiums, only obtain insurance subject to a waiver that excluded coverage of their health condition.

  7. The Uninsured-The working uninsured • Consider now the working uninsured. Employee’ remuneration may be considered as net wage, Wn, an hourly sum that equals the sum of money wage, W, plus insurance, IoWn=W+Io • Figure 11-4 shows the equilibrium employment point A for the profit-maximizing firm (value of the marginal product equals the wage rate). Suppose many business may be able to afford to pay only small, or zero, I (because there is usual high loading cost for small firm). To compete with other firms, they must match the Wn; thus, their W is lager than the wage level of other firms. • McLaughling and Zellers (1994) summarize three major types of barriers to small business provision of health benefits.(1) Affordability- particularly in low-wage industries(2) Insurance preexisting conditions-exclusion of specific individual or company(3) Insurance Redlining-redlined industries employ old workers, seasonal workforces, or workforce paid by commission.

  8. The Impact of mandated Coverage • Many groups have advocated that the federal or state government mandated some, more, or particular types of coverage. Firms responses to the increased marginal cost resulting from insurance (I) have two adverse effect:(1) the company stop offering insurance entirely because it is too expensive. The firm then may have to raise the wage to keep employees, who have to pay their own insurance.(2) To the extent that mandated coverage reflects increases worker benefits (I1>I0 in Figure 11-4). It must either increases net wage, Wn, or decrease base wage, W. The former will result in new equilibrium, B. Some additional unemployment amount (L0-L1) will be yield. Alternatively, if base wage, W, falls to maintain net wage, Wn. The workers have less money to spend on other goods (crowd-out effect)

  9. Madrian (1994) • Madrian uses a simple matrix of the probability of jobs mobility to considers the impact of job locks. Because job lock is caused by the potential loss of health insurance coverage with changing jobs, one would not expect those with coverage through both their own employment and an outside job face job lock.

  10. Testable issue (1) : Madrian tests for the magnitude of job locks by examining whether those workers with employer-provided health insurance and other coverage are more likely to change jobs that those without alternative (cell d)-(cell b)>0 However, if a man is in cell d, it may be due to the insurance provided by his wife, who may be providing income as well; all else being equal, the additional income could lead to increased mobility Testable issue (2): whether having other health insurance increases mobility more for those who have employment-based insurance than for those who do not. (d-b)-(c-a)>0 Estimate of job locks (d-b)=26.1% (d-b)-(c-a)=31.1%

  11. Insurance, Technological Change, and Higher Cost • The Cost-Increasing Bias HypothesisBecause increases health insurance usually the out-of-pocket portion of the bill, the patient may be willing to spend considerably more when insured. Consumers may realize that premium will tend to raise if all patients act, but they will make use of new, good and expensive technology beyond MR=MC. • Two types of Innovations(1) Process innovations : improvements to existing treatment processes that make them less costly(2) Product innovation : improvements through the introduction of new products which could make the treatment more costly even when lowering the cost of improvements to the patient’s well-being. Insurance can encourage new products and influence innovations toward those that increases costs

  12. The Godderis model (1984) • Figure 11-5 shows the theoretical relationship of improvements in health, dH, to changes in health expenditures, dM. As shown, the relationship is labeled dH(dM). Health care innovation may be either cost increasing (dM>0) or cost decreasing (dM<0). Thus, health improvements are a increasing and concave function of cost change.For example, D1 shows that an innovation may raised health by dH1 and reduce treatment cost by dM1. An alternative innovation, D2, may increase costs by dM2, but substantially increases health by dH2. • By investing in a given innovation, the provider seeks to increase profit. Assume each additional unit of health is $1, the provider charge a full price per unit of dH/Z for the innovation. Thus, profit function is : Extra Profit=dH/Z-dM.The isoprofit equation for Profit level A is: A=dH/Z-dM=> dH=Z(A+dM). The isoprofit line is linear equation is a linear equation with intercept (ZA) and slope (Z). In panel A, the equilibrium will be at point E. When the insurance coverage becomes more generous, coinsurance rate Z fall, implying that the highest extra profit will be attained at E’. In other words, the innovator has switched from an emphasis on cost-reducing innovations to cost-increasing innovations.

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