317_L16, Feb 12, 2008, J. Schaafsma 1 Review of the Last Lecture Finished our discussion of why there is a demand for health insurance today begin our discussion of the case for public rather than private health insurance

317_L16, Feb 12, 2008, J. Schaafsma 2 V.2(b) Why Public Universal Health Insurance in Canada? by early 1960’s health insurance in Canada: - private - major losses (hospital/medical costs) - high deductible (control load factor) - co-insurance (reduce moral hazard) - optional

317_L16, Feb 12, 2008, J. Schaafsma 3 Hall Commission, 1964 Hall Commission (Royal Commission on Health Services, 1964, Chaired by Justice Emmet Hall) recommended: - public health insurance, - no deductible, - no coinsurance - universal coverage. Why so different from what we had?

317_L16, Feb 12, 2008, J. Schaafsma 4 Why Public Universal Health Insurance? Reason =>Market Failure. what is market failure in the health insurance market (not the same as market failure in HC market)  individuals are able and willing to pay a fair premium (expected loss plus reasonable load factor) but insurance coverage not offered at such a premium. four sources of market failure in private health insurance market: - decreasing admin costs as # subscribers  - pre-existing conditions - adverse selection - moral hazard will discuss each one and why it causes failure in the private health insurance market

317_L16, Feb 12, 2008, J. Schaafsma 5 Lower Admin Costs in Public Health Insurance decreasing admin cost in rate setting: once rates set  applies to entire population  average fixed cost  as # of subscribers   gov’t insurance plan will potentially have the lowest average fixed cost. potentially lower admin costs for gov’t also due to: - lower provider compliance cost. Why? - marketing expenses and commissions reduced/eliminated - no need for competitive advertising - piggy-back premium collection onto tax system

317_L16, Feb 12, 2008, J. Schaafsma 6 Admin Costs and Health Insurance Market Failure: Part 1 with market fragmentation  high admin costs  large load factor  premium >> than expected loss  little interest in buying insurance at that premium  would buy if premium lower market failure in the sense that there is a demand for health insurance at a reasonable premium but a competitive market can’t supply it at that premium  load factor too large however, if load factor could be reduced  premium closer to expected loss  more interest in purchasing insurance. public insurance  potentially the lowest load factor  premium potentially closest to expected loss.

317_L16, Feb 12, 2008, J. Schaafsma 7 Admin Costs and Health Insurance Market Failure: Part 2 declining unit costs as number of policy holders increases may result in a private monopoly  monopoly price charged there will be some who won’t purchase insurance at a monopoly price (P too high) but would purchase insurance at a reasonable premium  no such policy offered  market failure.

317_L16, Feb 12, 2008, J. Schaafsma 8 How Large are Load Factors? individual policies 60 – 80 % of expected loss medium groups (11–100 persons) 20 – 30 % of expected loss large groups (201 – 1000 persons) 8 – 15 % of,, very large groups (> 1000 persons) 5 – 8 % of,, source: Phelps, Health Economics, 3 rd edition, p. 343 Provincial health insurance potentially has a very low load factor (Why?)  premium very close to expected loss

317_L16, Feb 12, 2008, J. Schaafsma 9 Second Source of Failure in the Health Insurance Market: Pre- existing Conditions insurance covers risk of ill health for insured period, e.g. one year if one gets ill  covered as long as insurance in force what if one were to lose coverage e.g., was part of a group plan at work and became unemployed? might be able to buy insurance privately but the pre-existing condition would likely not be covered. private plans  cover risk of a loss on an annual basis (pool risk one year at a time)  may result in loss of coverage over time not a problem in a universal public plan  covered for life (pool life time risk)

317_L16, Feb 12, 2008, J. Schaafsma 10 Pre-existing Conditions and Market Failure annual insurance contracts will lead to loss of comprehensive coverage for some no insurance available for risk of losing coverage even if willing to pay a reasonable premium  market failure Public universal insurance gets around this market failure  in for life  no loss of coverage  premium can be set accordingly. really a life time insurance contract with annual payments, i.e., are pooling life time risks rather than pooling risks a year at a time.