1. Health Insurance Supply
Lecture 11
Assoc. Prof. Sencer Ecer
HEALTH ECONOMICS

2. Supply
Major function of insurance companies or government insurance: bear and spread risks.
Not just processing claims
They pool risks, reducing average risks, not just transferring them
See Appendix C to Chapter 10
If risks are independent pooling is much better
Correlated risks arise when insuring people who are subject to the same aggregate risks, such as ensuring only people in earthquake-prone areas against earthquake
Health insurance is effective in pooling risk because risks are mainly independent, even though sometimes epidemics or contagious diseases arise

3. HI Production Function
Loading fee is for administrative expenses
Responds to input prices
Costs depends on the structure of insurance policies
High deductibles lead people not to submit minor claims, so less administrative costs
The business of insurance is a fundamental financial intermediary,
They collect money and pay pack later in time.
In the mean time, they make money by using these funds
So long as competitive forces are at play, these returns act as negative costs to reduce prices
In the past in the US, the real rate of return has been 5% on average
Thus, it is possible that insurance companies “pay” you for insuring with them, but doesn’t happen generally (negative loading fees)

4. Not-for profit insurance companies (Blue plans)
Exempt from many taxes
In Turkey, individual premium payments are exempt to some extent
Not subject to holding minimum cash reserves and some other regulations
Differences in insuring high risk events and organization possibility only at the state level (reducing EoS) limited Blue plans

5. Group Insurance
Group Insurance helps achieve EoS and avoid Adverse Selection
EoS: occurs because costs of insurance design do not change much with scale of insured group
Table 11.1 Premium/Benefit = 1+L
Higher price for non-group
Access to group insurance affects demand
Group size is a predictor of having insurance (recall paper by Ecer and Koc (2011))
Table 11.2 provides statistics on L w.r.t. group size
Adv. Selection (AS): Groups eliminate AS themselves because they are gathered together for some other purpose not for buying insurance (and employment may necessitate some basic health)

6. Managed Care Organizations
Mostly insurance companies (sometimes health care delivery organizations)
Emerged to deal with moral hazard
Interferes with the amounts and types of health care decisions
Retains the reduction in risk that other types of insurance offer
Helping out the patient to spend less but achieve the same results
Such as, when there are two alternatives, generic and brand medicine, with same active ingredient, then MCO incentives or mandates choice of inexpensive generic drugs
Does not trade off risk with price, so market mostly eliminated FFS plans, which are typically more expensive
PPOs (a network of doctor discounts negotiated) and HMOs (capitation based payment) are widespread

7. MCOs -continued
In MCOs, consumers knowingly restrict their choices in advance (like self-control models in the theory of consumption)
Alternatives to MCO: Britain and Canada restrict access to care for various services or ration them by waiting lists. Turkey also has waiting lists for certain serious types of care. US also has some regulatory controls.

8. How MCOs Interfere with consumers
Copayments -discussed before
One may worry that co-payments may reduce the search for a lower price, but MCO has already agreed on a low price with the provider
Second Opinion offer or requirement
Second doctor can’t be paid for treatment, only for opinion
May reduce doctor induced moral hazard
Do you think this works well? Why?

9. MCO incentives for consumers
SOPs have not worked well
Patients are reluctant – even though the insurance plan signals that one’s doctor may be inducing supra optimal consumption
Second Opinion comes form the same region
Within-region similarity plays a role
Collusion?
Gatekeeper models: specialists are more expensive and research shows that they use resources more intensively, so PCPs substitute for them when both can treat an illness

10. How do MCOs interfere with doctors?
Salary v FFS
HMOs like Kaiser Permanente
Either hires or contracts with doctors, may build own hospitals
No financial incentives to induce demand
In a capitation payments system, there is either salary, or
Per patient, but all the necessary care for a year
Works because: Doctors too have a market (they will be fired if they don’t perform well) and legal (they will be prosecuted as necessary) incentives to provide adequate care

11. Incentivizing doctors
Volume business will not benefit in capitation system
Incentivized to conserve resources
Similarly, some doctors who have contracts with HMOs (agree to use HMO’s hospitals etc.) receive the residual from the fixed fees paid by patients
Most savings come from hospitalizations
RAND HIS confirms this supply side effect
HMO used less resources than FFS
Health Outcomes were at least as good

12. Balancing Incentives
Salary: shirking and incentives to withhold treatment if doctor shares cost savings
FFS system: overprescription
Try to balance (no precise data)

13. Holdbacks
Some of the payments (say, 15%) are held back until the end of the year
If the total treatment costs within the plan exceed the target, then holdback is kept, otherwise, it is distributed in proportion to what the doctors made in that years
Doctors share losses if they induce demand