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CHAPTER 15:

Health Insurance I: Health Economics and Private Health Insurance

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

Health Insurance I: Health Economics and Private Health Insurance

15.1 An Overview of Health Care in the United States

15.2 How Generous Should Insurance Be to Patients?

15.3 How Generous Should Insurance Be to Medical Providers?

15.4 Conclusion

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

Health Care Spending in the OECD Nations, 2017

Health care spending is much higher in the United States than in the typical industrialized nation.

Figure 15-1

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

APPLICATION: Finding the Inefficiency in U.S. Health Care: U.S. Rankings in Health System Outcomes

The United States is a major outlier in international terms when it comes to health care spending.

Figure 15-3

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CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

APPLICATION: Finding the Inefficiency in U.S. Health Care: Breakdown of Health Care Overspending

Figure 15-4 88

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

APPLICATION: Finding the Inefficiency in U.S. Health Care: Wasted Administrative Spending

• Arises primarily from the fragmented nature of our health care insurance and delivery system. o The administrative costs of private insurance in the United

States average about 15%, more than twice the average for other developed nations.

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

APPLICATION: Finding the Inefficiency in U.S. Health Care: High Prices

The United States pays higher prices on average for services and drugs.

Figure 15-5

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

APPLICATION: Finding the Inefficiency in U.S. Health Care: Why Are Prices So Much Higher?

Prices are higher because: • Other nations impose much stronger regulatory controls on the

prices of medical services and drugs. • Medical goods and services in the United States reflect a hybrid

mix of public price setting and private competition, which results in higher overall prices.

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

APPLICATION: Finding the Inefficiency in U.S. Health Care: Unnecessary or Inefficiently Delivered Services

There is the higher intensity with which U.S. patients are treated, leading to both unnecessary and inefficiently delivered care. • Enormous variation is observed even within the United States in

health care utilization—variation that appears unrelated to health care outcomes.

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

Distribution of the U.S. Population Across Health Insurance Types

People (millions) Total population 320.4 Private 216.2

Employment-based 178.5 Direct purchase 52.0

Public 119.4 Medicare 53.4 Medicaid 62.3 Tricare/CHAMPVA 14.6

The uninsured 28.1 Data from: U.S. Bureau of the Census (2018b), Table 1.

Table 15-1

675

throughNon group insurancemarket

8 I

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

How Health Insurance Works: The Basics

• Individuals, or firms on their behalf, pay monthly premiums to insurance companies.

• In return, the insurance companies pay the providers of medical goods and services for most of the cost of goods and services used by the individual.

• There are three types of patient payments: o Deductibles—limit to cost individual pays o Copayment—fixed payment individual pays o Coinsurance—percentage of each bill individual pays

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

Why Employers Provide Private Insurance, Part I: Risk Pooling

• One reason employers provide insurance is to pool risks. o Risk pool: The group of individuals who enroll in an

insurance plan.

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

Why Employers Provide Private Insurance, Part II: The Tax Subsidy 1

• Employers also provide insurance because it is subsidized. • Tax subsidy to employer-provided health insurance: Workers

are taxed on their wage compensation but not on compensation in the form of health insurance.

Marginal Product,

Wage

Employer Health Insurance Spending

Pre-Tax Wage

After-Tax Wage

Personal Health Insurance Spending

After-Tax, After- Health Insurance

Income

Nancy $30,000 0 $30,000 $20,000 $4,000 $16,000

Kate 30,000 $5,000 25,000 16,666 0 16,666

Table 15-2

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

Why Employers Provide Private Insurance, Part II: The Tax Subsidy 2

The subsidy to employer-provided health insurance is generally not well understood. • Subsidy to employees, not employers.

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

The Other Alternative: Nongroup Insurance

• The nongroup insurance market was traditionally not a well- functioning market. • Nongroup insurance was not always available. • Those in the worst health were often unable to obtain

coverage (or obtain it only at an incredibly high price). • A central feature of the ACA was an effort to reduce these

barriers to the nongroup insurance market.

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

The Uninsured

Who are they?

• There are 28 million in the United States without any insurance coverage.

• The uninsured have lower-than-average incomes. • In 2016, nearly three-quarters of the nonelderly uninsured

came from families where one or more members were full-time workers.

• About 13.3% of the uninsured are children.

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

Why Care About the Uninsured? 1

There are several reasons to care about the uninsured.

• Physical externalities

• Financial externalities: uncompensated care

• Paternalism and equity motivations

• Job lock: may inhibit productivity-increasing job switches.

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

How Generous Should Insurance Be to Patients?

• The generosity of health insurance is measured along two dimensions: o Generosity to patients o Generosity to providers

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

Consumption-Smoothing Benefits of Health Insurance for Patients

• Most generous plans (to patients) provide first-dollar coverage. o First-dollar coverage: Insurance plans that cover all medical

spending, with little or no patient payment.

• The consumption-smoothing benefit from first-dollar coverage of minor and predictable medical events is small for two reasons: o Risk-averse individuals gain little utility from insuring a small

risk. o Individuals are much more able to self-insure such spending

than to self-insure large and unpredictable medical events. • On the other hand, the moral hazard costs are large.

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

Moral Hazard Costs of Health Insurance for Patients Figure 15-6

PMB SMB

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

The “Flat of the Curve” Figure 15-7

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CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

How Elastic Is the Demand for Medical Care? The RAND Health Insurance Experiment

RAND Health Insurance Experiment (HIE): Evidence on the elasticity of health care demand o Medical care demand is price sensitive: Free care plan used

one-third more care than 95% coinsurance plan. o Yet more generous plans did not improve health . . . o except for low-income, chronically ill people. o These findings largely supported by subsequent quasi-

experimental studies.

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

Optimal Health Insurance

Optimal health insurance: • Trades off moral hazard against risk protection. • First-dollar coverage bad for moral hazard, not very valuable risk

protection. • Therefore, optimal health insurance policy:

o Individuals bear a large share of medical costs within some affordable range.

o Fully insured only against very large costs.

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

Why Is Insurance So Generous in the United States? 2

• Most coverage appears more generous than is optimal, and many people don’t have coverage.

• Why are people either uninsured or “overinsured”? • The tax subsidy: For people with employer-sponsored health

insurance, better to take payment in insurance than in wages.

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

How Generous Should Insurance Be to Medical Providers?

• One payment system is retrospective reimbursement. o Retrospective reimbursement: Reimbursing physicians for

the costs they have already incurred.

• Encourages overutilization since providers are paid regardless of necessity or value of care.

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

Managed Care and Prospective Reimbursement 1

• Managed care: An approach to controlling medical costs using supply-side restrictions, such as limited choice of medical provider.

• One form of managed care are preferred provider organizations. • PPOs • HMOs

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

Managed Care and Prospective Reimbursement 1

o Preferred provider organization (PPO): A health care organization that lowers care costs by shopping for health care providers on behalf of the insured.

o Avoids difficulty of the shopping for doctors.

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

Managed Care and Prospective Reimbursement 2

o Health maintenance organization (HMO): A health care organization that integrates insurance and delivery of care by, for example, paying its own doctors and hospitals a salary independent of the amount of care they deliver.

o In the classic staff model, HMOs hire their own physicians and may have their own hospitals.

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

Managed Care and Prospective Reimbursement 3

• Managed care organizations are paid by prospective reimbursement, not retrospective.

• Prospective reimbursement: The practice of paying providers based on what treating patients should cost, not on what the provider spends.

• Payment is the same regardless of spending, so there is an incentive to reduce costs.

• Just as retrospective reimbursement offers incentives for excessive care, prospective reimbursement offers incentives for insufficient care. o By delivering less care, the physician pockets a larger share

of the payment.

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

The Impacts of Managed Care

• Spending o HMOs spend much less per enrollee than do traditional

retrospective reimbursement plans. o But HMOs have a strong incentive to select low-cost

patients. o Studies that use random assignment to HMO still find cost

savings. • Quality

o Many studies have shown no consensus on whether HMOs provide lower-quality care.

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

How Should Providers Be Reimbursed?

• The advent of managed care has clearly lowered reimbursement to providers, and it has not measurably lowered the quality of care those providers deliver.

• The key question for the future is whether additional “tightening” of the prospective reimbursement system is needed.

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

Learn by Doing: Practice Question 2

Which of these statements are true concerning health insurance?

I. Optimal health insurance would have no copayment past a certain level of expenditure.

II. The government subsidizes individuals who buy health insurance through their employer.

III. Retrospective reimbursement can lead to underprovision of care.

a) I & II only

b) I & III only

c) II & III only

d) I, II, & III

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

Learn by Doing: Practice Question 2 (Answer)

Which of these statements are true concerning health insurance?

I. Optimal health insurance would have no copayment past a certain level of expenditure.

II. The government subsidizes individuals who buy health insurance through their employer.

III. Retrospective reimbursement can lead to underprovision of care.

a) I & II only (correct answer)

b) I & III only

c) II & III only

d) I, II, & III

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

Conclusion

• Most individuals have private health insurance; for large firms, this is a well-functioning insurance market.

• For small firms and individuals, there are more market failures, contributing to 28 million Americans uninsured.

• Risk-averse individuals greatly value the consumption- smoothing benefits of having their medical bills paid.

• There are clear moral hazard costs as well on both the patient and the provider side.

• Cost sharing has been used to address moral hazard on the patient side, and managed care has arisen as a means of addressing moral hazard on the provider side.

CHAPTER 15: Health Insurance I: Health Economics and Private Health Insurance

Video

United States Census bureau: Disparities in Health Insurance (8 min)

https://www.census.gov/library/stories/2018/09/who-are-the- uninsured.html

Drug prices: What’s the prrescritpion for lowering drug prices? (TED Talk (12 min) https://www.youtube.com/watch?v=T-vmubRjrho