Exam 2 Health Economics 10 28 2015 US Health Care System Functions of Insurers Risk Bearing Assessing probability of loss and setting premium Insurers pool independent risks and diversify away losses accruing to individuals Underwriting accordingly Underwriting ACUARIAL FAIR PREMIUM PROFIABILTY OF LOSS x SIZE OF LOSS Marketing Claims Processing Loss prevention Monitoring utilization and negotiating payment to providers o Risk adverse individuals benefit form risk pooling because this lowers variability in income o Health Ins Premium can be based Location Age Family Size Tobacco Status Employer Based Coverage Pros o Economies of scale o Mitigates adverse selection problems Cons o Subject to federal Not State law o Value of Insurance not taxed o Lose job Lose Insurance o Job Lock don t want to quit o Cannot satisfy personal preferences FFS Fee for Service vs Managed care FSS was pre 1980s o Premiums are based on geographic location not on individual risk factors o Enrollees choose hospital physician o Insurer pays usual customary or reasonable charge Managed Care Organization MCO o Premiums based on experience rating Risk factors that are illegal now since 2014 o Network care o Two predominate types HMO health maintenance org PPO preferred provider organization o Enrollee is assigned a primary care provider PCP is the gatekeeper HMO vs PPO HMO o Providers are usually paid salary PPO o PCP is not gatekeeper o Enrollee has financial incentives to stay in network o Network providers receive reduced FFS in exchange for high volume of patients The Affordable Care Act Minimum Essential Coverage Is TEN essential medical health benefits New Regulations on Private insurance o No annual dollar limits o Cover children until 26 o Can t deny because of preexisting conditions o Premiums only based on Location Age Tobacco Status Family or Individual o Minimum medical loss ratio Payout Premium 80 85 o Health Insurance Provider Fee 8 Billion in 2014 Who is eligible for market place tax credits o Tax Credits towards premiums Income 100 400 FDL o Affordable minimum essential coverage not available through employer o Not qualify for Medicaid CHIP or Medicare Note FPL 2015 11 770 Individual 15 930 Family of Two 24 250 Family of Four Shared Responsibility o Report insurance status on federal taxes o Payments if uninsured 2015 Greater of o EX 325 per adult 162 50 per child 2 of income above federal tax filing threshold Capped at the cost of the national average premium for a bronze plan Jim single with no dependents does not have minimum essential coverage for any month during 2015 and does not qualify for an exemption For 2015 Jim s household income is 40 000 and his filing threshold is 10 300 To determine his payment using the income formula subtract 10 300 from 40 000 The result is 29 700 Two percent of 29 700 equals 594 Jim s flat dollar amount is 325 Jim s annual national average premium for bronze level coverage for 2015 is greater than 2 484 Because 594 is greater than 325 and is less than 2 484 Jim s shared responsibility payment for 2015 is 594 or 49 50 for each month he is uninsured OR Eduardo and Julia are married and have two children under 18 They do not have minimum essential coverage for any family member for any month during 2015 and no one in the family qualifies for an exemption For 2015 their household income is 70 000 and their filing threshold is 20 600 To determine their payment using the income formula subtract 20 600 from 70 000 The result is 49 400 Two percent of 49 700 equals 988 Eduardo and Julia s flat dollar amount is 975 or 325 per adult and 162 50 per child The family s annual national average premium for bronze level coverage for 2014 is 9 936 Because 988 is greater than 975 and is less than 9 936 Eduardo and Julia s shared responsibility payment is 988 for 2015 or 82 33 per month each month the family is uninsured Exemptions from Fees o Coverage unaffordable greater then then 8 of house hold income o Income below federal tax filing threshold o Short Coverage gap less then 3 months o Income 138 of FPL if state did not expand Medicaid o Hardship Federal Tax filing threshold 10 150 filing singly 20 300 filing jointly Explore unintended consequences and altered incentives under the ACA o EV Probability of that outcome x Value of that out come Demand for Private Health Insurance Expected Values Coin flip game o Tails I pay you 100 o Heads You pay me 50 EV to me 0 5 100 0 5 50 25 EV to you 0 5 100 0 5 50 25 Roulette o Red you win 10 o Not Red you lose 10 EV red 0 4737 10 0 5263 10 0 53344 Actuarially Fair Price of Insurance o Premium Actuarially Fair Premium Loading Fee o Actuarially Fair Premium The expected value of the insurance pay out The expected value of the loss for full coverage Probability of Pay out x Size of Pay out o Loading Fee includes marketing claims processing and capital cost Risk Levels A Risk Adverse B Risk Neutral C Risk Loving FDA History Remember only risk averse individuals benefits see a rise in utility from buying actuarially fair insurance Remember only risk averse individuals are willing to pay more than the actuarially fair price for insurance o Created in 1938 in response to drug deaths o 1962 Kefauver amendments Drugs need approval Manufacturers must prove safety and efficacy o 1992 Prescription Drug User Fee Act Fees to guarantee review time Standard and Priority Status For novelty or unmet needs FDA must review 90 of Priority in 6 months Standard in 10 months o From Preclinical Trails to Market 8 probability of success 7 6 to 19 years Clinical Trials 125 Million Product Liability o Lawsuits Defective Design Defective Manufacturing Defective warnings o FDA Minimum standards Failure to warn Static Efficiency o Two safety interventions FDA Regulates Liability Law If both increase costs but do not lead to more overall safety inefficient Removing Failure to warm liability would Lower Prices How much Increase Quantity Increase Social Welfare If 5 of costs Prices fall 3 2 Qd increases 4 If 50 of costs Prices fall 40 Qd increases 66 Dynamic Efficiency o Speed vs Safety Trade off o 10 28 2015 10 28 2015