FINAL EXAM Chapter 6 - Consumers typically gain from entering into pooling arrangements because the pooling helps reduce the variability of the expected loss. - Insurance companies often serve as intermediaries and develop and sell pooling arrangements to individuals. - Loading Fee - To the insurer, the difference between the total premium and medical benefits paid out, or pure premium. - As the price of insurance declines, actual utility increases relative to expected utility and the quantity demanded of health insurance increases. - Economic theory suggests people purchase more health insurance because of the preferential tax treatment of health insurance premiums. Tax exemption effectively serves as a subsidy for the purchase of health insurance. - Another factor affecting the amount of insurance coverage is the magnitude of the loss relative to income. - Final factor affecting the amount of health insurance demanded is the degree of risk aversion. - According to Nyman, medical insurance creates value by providing financial access to medical care that people could not afford otherwise. - The Health Insurance Product: Traditional versus Managed Care Insurance (MCO) o Prior to 1980s  Purchased through employers  Insurance premiums largely determined by community rating, in which the premium is based on the risk characteristics of the entire membership.  Main difference was the amount of the deductible and copayment.  Physicians operated in solo practices, enrollees dealt directly with individual physicians or local hospitals for care rather than with a network of providers. o After 1980s  By design they are supposed to emphasize cost-effective methods of providing comprehensive services to enrollees.  Integrated the financing and delivery of medical care.  Rely to a greater degree on experience rating of enrollees because of the resulting price competition. o Health Maintenance Organization (HMO)  Combines the financing and delivery of care into one organization.  A distinguishing feature of an HMO is that the assigned or chosen primary care provider acts as a gatekeeper and refers the patient for specialty and inpatient care.  Staff Model – physicians are directly employed by the organization on a salary basis, completely merges the insurer and provider functions. Because medical care is not reimbursed on a fee-for-service basis, physicians have little if any personal financial incentive to overutilize medical services.  Group Model – Provides physician services by contracting with a group practice. Normally the group is compensated on a capitation basis. Face a strong disincentive to overutilize medical services.  Network Model – Only difference between group and this is the HMO contracts with more than one group practice for physician services.  Individual Practice Association (IPA) Model – Contracts with a number of independent physicians from various types of practice settings for medical services. Physicians generally provide care in a traditional office setting and are normally compensated on a fee-for-service basis but at a discounted rate. o Preferred Provider Organization (PPO)  Exists when a 3rd party payer provides financial incentives to enrollees to acquire health care from a predetermined network of physicians and hospitals.  Incentive can be in terms of a higher coinsurance or a higher deductible when someone acquires medical care outside the network of health care providers.  To participate, physicians are promised a steady supply of patients.  GP is not a gatekeeper o Point-of-Service (POS) Provides generous coverage when enrollees use in-network services and cover out-of-network services at reduced reimbursement rates.  Assign each enrollee a primary caregiver who acts as a gatekeeper and authorizes specialty and inpatient care. - Financial Incentives and Management Strategies Facing Consumers/Patients o Some health insurance plans contain high deductibles and coinsurance as a way of containing medical prices. o Some plans set their premiums on an experience-rated basis as an incentive for subscribers to adopt more healthy lifestyles. o Insurers may adopt various management strategies to directly affect the consumer’s utilization of medical care.  Insurer may require prior medical screening to avoid insuring high-risk patients or exclude coverage for preexisting conditions.  Insurer may employ a primary care gatekeeper to determine whether further services are medically warranted. Pre-authorization - Financial Incentives and Management Strategies Facing Health Care Providers o In terms of financial incentives, the health insurance product may adopt different providers reimbursement practices, such as fee-for-service, capitation, bonuses and or withholds. o Insurers can also directly influence the delivery of medical care through various management strategies:  Selective contracting – When managed care plans contract solely with an exclusive set of providers.  Deselection of providers – Involves the establishment of the criteria and process by which health care providers will be included in or terminated from the network.  Physician Profiling – May be used to monitor performance in the selection or deselection process.  Utilization Review – “Seek to determine whether specific services are medically necessary and whether they are delivered at an appropriate level of intensity and cost.”  Practice Guidelines – Provide information to health care providers about the appropriate medical practice in certain situations.  Formularies – Contains a list of pharmaceutical products that physicians must prescribe whenever necessary. - Consumer-Directed Health Care Plans o Prior to the 1980s, competition among health care providers, such as hospitals, was driven largely by the quality concerns of patients who faced very low out-of-pocket prices. Many health economists argue that this patient-driven health care helped fuel rising health care prices and expenditures in earlier years. o After 1980s, payer-driven replaced patient-driven health care. o Consumer-driven health care – Insurers and policy-makers turned their attention to this to control health care costs. Higher deductible with the idea that consumers will use medical care more wisely and shop for high value medical care. Often combined with health