1. MEDICAL INSURANCE IN HEALTH CARE SYSTEMS

2. Two Comments Second comment: Most of us are not aware of the financial burden we bear for health care provided to ourselves and others. Self pay for a visit to a hospital ER, say for a broken leg. Self pay for a visit to a hospital ER, say for a broken leg. Employers pay on average 11% of salary for health benefits. Roughly equals $2/hr. Employers pay on average 11% of salary for health benefits. Roughly equals $2/hr. FICA-M FICA-M A TV in most states, a pay check in Delaware,… A TV in most states, a pay check in Delaware,…

4. “The figures, released early Tuesday by the U.S. Census Bureau, show that 15.2% of Americans didn't have coverage for all of last year, an increase of 2.4 million people from 2001, when 14.6% were uninsured. The 5.8% rise in the uninsured resulted from a decline in the percentage of people covered by employer-based insurance -- 61.3% last year, down from 62.6% the year before. That deterioration, economists say, reflected increases in unemployment and the rise in health-care costs, which prompted some employers to drop coverage.” Number of Americans Who Lack Health-Care Coverage Is Rising: Census Bureau Counts 43.6 Million, WSJ 9/30/03

6. “Young adults were less likely than any other age group to have health insurance. Last year, 29.6% went without, up from 28.1% the year before. Health analysts attribute the increase to decisions by young, healthy workers to opt out of employer-sponsored health plans as employee contributions rise. In addition, they say, some younger workers couldn't find jobs because of economic conditions.”

8. Mostly adults, not children – half are childless adults. Mostly adults, not children – half are childless adults. What age group? What age group? Poor and near-poor – 60% have incomes above federal poverty level Poor and near-poor – 60% have incomes above federal poverty level Workers and family members – 80% in families with at least 1 worker Workers and family members – 80% in families with at least 1 worker Unskilled laborers, service workers. Unskilled laborers, service workers. Uwe Reinhardt, “working stiffs” Who Are the Uninsured?

10. Do the uninsured receive necessary health care?

12. Often No… Compared to the Insured Population, the Uninsured... Have higher rates of preventable and/or untreated illness Have higher rates of preventable and/or untreated illness Are less likely to receive care that they feel they need Are less likely to receive care that they feel they need Have more preventable hospitalizations Have more preventable hospitalizations Have shorter hospital stays for the same conditions Have shorter hospital stays for the same conditions Are hospitalized sicker and have poorer health outcomes (including death)… Are hospitalized sicker and have poorer health outcomes (including death)…

14. The Uninsured… Are not known to be a sicker or higher-cost population. Are not known to be a sicker or higher-cost population. Pay higher medical fees. (NYT, 4/2/01) “A New York gynecologist says he gets $25 for a routine exam for a woman insured by group health insurance and charges $175 for the same exam for a woman without insurance.”… Pay higher medical fees. (NYT, 4/2/01) “A New York gynecologist says he gets $25 for a routine exam for a woman insured by group health insurance and charges $175 for the same exam for a woman without insurance.”… “The care of the poor once was supported by the wealthy and the insured, but now the opposite is happening.” “The care of the poor once was supported by the wealthy and the insured, but now the opposite is happening.”

17. Types of insurance Social insurance Social insurance Medicare Medicare Medicaid Medicaid Indemnity insurance Indemnity insurance Provides reimbursement for expenditures or loss of income Provides reimbursement for expenditures or loss of income Premiums (price) reflects expected loss (cost) Premiums (price) reflects expected loss (cost)  Hospitalization  Physician services  Major medical  Dental  Disability income protection  Long-term care  Hospitalization  Physician services  Major medical  Dental  Disability income protection  Long-term care

19. Health Insurance and the Consumer Role Consumers demand health insurance and often purchase it in markets Consumers demand health insurance and often purchase it in markets Two key issues that can lead to market failure: Two key issues that can lead to market failure: Moral hazard Moral hazard Adverse selection Adverse selection

21. Key Definitions Moral hazard Health insurance affects consumer demand for health care – higher utilization of covered services Moral hazard Health insurance affects consumer demand for health care – higher utilization of covered services Adverse selection When given a choice, people who choose to purchase insurance are likely to be a group with higher than average losses. (Also applies to a choice between low- option and high-option plans.) Adverse selection When given a choice, people who choose to purchase insurance are likely to be a group with higher than average losses. (Also applies to a choice between low- option and high-option plans.)

23. Both models of the demand for health insurance presented assume workers pay for and choose their own coverage. Both models of the demand for health insurance presented assume workers pay for and choose their own coverage. The first model, the so-called conventional theory or standard gamble model, assumes people purchase health insurance to avoid or transfer risk. In this case, insurance serves as a pooling arrangement to replace the high risk or variability of individual losses with the reduced risk or variability associated with aggregated losses. The first model, the so-called conventional theory or standard gamble model, assumes people purchase health insurance to avoid or transfer risk. In this case, insurance serves as a pooling arrangement to replace the high risk or variability of individual losses with the reduced risk or variability associated with aggregated losses.

25. The second model, the Nyman model, views people as desiring financial access to medical care that health insurance offers. In this case, a pooling arrangement allows individuals, in the event they become ill, to receive a transfer of income from those who remain healthy. The second model, the Nyman model, views people as desiring financial access to medical care that health insurance offers. In this case, a pooling arrangement allows individuals, in the event they become ill, to receive a transfer of income from those who remain healthy.

27. The Demand for Health Insurance Why do consumers value health insurance? Why do consumers value health insurance? Illness, injury and disability are to a large extent random events Illness, injury and disability are to a large extent random events Hospitalizations, serious injury, and rehabilitation and other advanced modern treatments can be very expensive Hospitalizations, serious injury, and rehabilitation and other advanced modern treatments can be very expensive Most households are averse to risk Most households are averse to risk What is risk aversion What is risk aversion

29. What is Risk Aversion? A simple test to see if you are “risk adverse.” A simple test to see if you are “risk adverse.” Which would you select? Which would you select? * Your pay check, OR * Double your pay check for correctly picking one coin flip. * Equal expected values; most of us are risk adverse and select the “certain” $500 option. Risk aversion - the degree to which a certain income is preferred to a risky alternative with the same expected income. Risk aversion - the degree to which a certain income is preferred to a risky alternative with the same expected income.

31. Private Market Insurance: A Simple Example Start with 100 middle-aged executives sent by XXumma Corp. to Eastern Europe for a year. Start with 100 middle-aged executives sent by XXumma Corp. to Eastern Europe for a year. Suppose we can predict that one was going to have a heart attack, requiring a $50k CABG procedure. Suppose we can predict that one was going to have a heart attack, requiring a $50k CABG procedure. But, we don’t know who will be the unlucky one. But, we don’t know who will be the unlucky one. Form a club with each exec putting in $500. Form a club with each exec putting in $500. “Actuarial fair premium” = 1/100 X $50,000 Would executives be willing to pay a 10% mark-up (loading fee) just to get their premium money back (collectively) as a benefit payment? Would executives be willing to pay a 10% mark-up (loading fee) just to get their premium money back (collectively) as a benefit payment?

32. Health Insurance Main Types Main Types Fee-for-service (indemnity) Fee-for-service (indemnity) Managed care (pre-paid) Managed care (pre-paid) Key Terms Key Terms Deductible Deductible Copay/Coinsurance Copay/Coinsurance Stop Loss Stop Loss Limit Limit

33. Insurance: Declining Block Pricing (Out-of-Pocket Spending) OOPs PFPF 0.2 P F Co-Insurance Deductible Co-Pay 0 $ Spending $100 $5,000 Stop Loss

34. Pricing Blocks: Deductibles, Copays and Limits OOPs PFPF 0.2 P F Co-Insurance Deductible Co-Pay Spending $100 $5,000 0 $ Limit

36. Question Why do we observe deductibles, co-pays, limits, and exclusions? Why do we observe deductibles, co-pays, limits, and exclusions?

37. Moral Hazard and Demand PFPF P CP F D DWL Q1Q1 QQUQU

38. Patterns of Insurance Coverage Type of Health Care Variance of Financial Risk Demand Elasticity (RHIE) % of People Under 65 Insured Hospital Care Highest-0.1580 Surgical & in- hosp medical High-0.1578 Outpatient doctor Medium-0.340-50 DentalLow-0.440 The losses that are insured are: large, infrequent, random, and not associated with a large moral hazard.

39. Question You’re an insurance broker. You’re an insurance broker. Suppose the average health expenditure for an adult equals $6000. Suppose the average health expenditure for an adult equals $6000. To make a quick $4000, would you accept $10,000 to provide health insurance coverage for one adult? To make a quick $4000, would you accept $10,000 to provide health insurance coverage for one adult? If not, what’s the minimum premium you’d accept? If not, what’s the minimum premium you’d accept?