The role of insurance in health careUnit 3 begins nowTodayWhy is health care important?Why is insurance important to study?How health insurance worksGrowth of employer-provided insuranceSlide 8Types of insuranceInsurance, the old wayInsurance for your generationHMOsPPOsPOS plansDealing with job lockNew directions for health insurance?One idea on restructuring benefitsPooling and riskExpected value exampleWhy buy insurance? ExampleWhy buy insurance?Loading feeAnother problem: Adverse selectionExampleA naïve offerWhat really happens?Solving the adverse selection problemUn-solving the adverse selection problemOne more problem: Moral hazardMoral hazard issuesHealth careSlide 3220 percent co-insuranceWhat about a percentage co-payment?Only a co-paymentWhat is optimal?Deadweight loss due to 20% coinsuranceFlat-of-the-curve medicineSome final issuesExternalitiesGraying of the populationImproved technologyReimbursement policiesSummaryThe role of insurance in health careToday: Why health care is important to study; The advantages and disadvantages of private insuranceUnit 3 begins nowUnit 3  health care & income redistributionChapter 9 (most of today’s lecture)Why health care is important to studyThe role of health care insurance in the United StatesChapter 10The role of government in the health care industryChapter 11Social Security issues, including long-run problemsChapters 12-13Income redistribution issuesTodayChapter 9 (and a little bit of Chapter 10)Why is health care important?How health insurance is administered in the United StatesAdvantages and disadvantagesRisk smoothing with health insuranceThe problems of adverse selection and moral hazardDeadweight loss of health insuranceWhy is health care important?Health care has steadily used up more of the US GDP percentage share over the last 50 yearsThis trend will likely continue in due to the retirement of the baby boomer generationCurrently, about 1 out of every 7 dollars of GDP is used to spend on healthEstimate for 2017: 1 out of every 5 dollarsSee also Figure 9.1, p. 181Why is insurance important to study?Private health insurance provides over a third of all health care funds in the USSmall improvements in efficiency of health care delivery could lead to billions of dollars of savingsPrivate health insurance provides 35 percent of health care funds in the United States in 2004See also Figure 10.2, p. 207How health insurance worksInsurance premiumPeople buy insurance due to risk aversion and often get reduced cost through workWorking Americans usually buy insurance from employersCompanies sell insurance since they do not have to sell at the actuarially fair priceSpecified benefitsFull insurance?Co-payments and/or coinsurance?Deductibles?Growth of employer-provided insurancePolicies during WWIIWage and price controls resulted in non-wage incentives to workers1940s: Private health insurance grew significantly9.1% of Americans in 194050.3% in 1950Tax structureHealth insurance is not taxedGrowth of employer-provided insuranceAdverse selectionIf everybody has health insurance, there are no adverse selection problemsLow administrative costsGroup plans in a big firm could have one worker taking care of all employeesTypes of insuranceCost-based reimbursement (fee-for-service)Managed care arrangementsHealth Maintenance Organizations (HMOs)Preferred Provider Organizations (PPOs)Point-of-service (POS)Managed care arrangements try to keep costs downCo-payments, deductibles, coinsurance, oversight of servicesInsurance, the old wayCost-based reimbursementMost health care administered this way until the early 1980sProvides payments for all servicesMoral hazard problemsNo incentive to keep health care costs downIncreased health care costs to societyLeads to higher premiumsInsurance for your generationToday’s insurance plans have different methods to keep costs downMany employees have choices of one of many plans offered by the employerMore flexibility means higher premiumsHMOsLittle flexibilityAll services must be approved by the HMOYou typically cannot consult the doctor of your choice in case of catastrophic illnessLower in cost than other comparable optionsOften accepts fixed payment per patientKnown as capitation-based reimbursementExample: Kaiser PermanentePPOsMore flexibility in choice of doctors“In-network” costs are lowerA doctor in the network accepts a lower feeDoctor gets steady supply of patients“Out-of-network” costs are much higherHigher deductibles and/or co-paymentsYou can often use a world-class hospital if you are willing to pay part of itPOS plansSimilar to a PPOMain differences from a PPOEach patient has a primary physicianPrimary physician oversight keeps costs down relative to a PPOThe primary physician provides referrals to see specialistsDealing with job lockJob lockIf a new job does not offer insurance due to a pre-existing condition, the worker will stay at the old jobHealth Insurance Policy Portability and Accountability Act of 1996 (Kennedy-Kassenbaum Act)Provides provisions to reduce job lockMixed successNew directions for health insurance?As health care costs continue to increase, consumers must pay for it one way or anotherNew methods to keep premiums downExplicit reductions in benefitsMore drug tiersSee readings on class website for more on thisRestructuring of benefitsOne idea on restructuring benefitsSharing costs between patient and insurer can help keep costs downA health insurance model to try to reduce health care demandProvide a yearly fund to each person or familyCarries over to the following year if not usedAfter the yearly fund is used, up to $5,000 of expenses must be made out-of-pocketAfter out-of-pocket expenses are paid, 90% of expenses are coveredInsurance for years with truly high expensesPooling and riskPoolingRisk of a single person or family is highRisk of insuring a big population is lowNote Law of Large NumbersAssumes independent risk from person to personRecall expected valueExpected value (EV) = (probability of outcome 1) * (Payout in outcome 1) + (probability of outcome 2) * (Payout in outcome 2) + … + (probability of outcome n) * (Payout in outcome