Financing Systems Part 2 Social and Private Insurance

Unit 7

Outline

• 1) Multiple purposes of insurance

• 2) Private systems and “experience rating”

• 3) Methods to control over utilization

• 4) Varieties of public insurance– Providers on payroll– Contracting in– Contracting out

Part 1: Multiple purposes of insurance

Multiple Purposes of Insurance?

• For Society– Move money from the healthy to the sick– Move money from the rich to the poor

• For Individual– To be able to afford health care at all-thanks to the

cross subsidies engineered into the system– Make smooth predictable payments with certainty

instead of chaotic unpredictable and possibly large payments

• Called “consumption smoothing”

Why insurance is good

• Consider 2 income streams: A and B

• People prefer B over A

Two Income Streams with Same Mean Different Variances

-60-40-20

020406080

100

1 5 9 13 17 21 25 29 33 37 41 45 49

Time

Inco

me

A

B

Old forms of insurance persist

• All of the following insurance forms continue to co-exist because they fill important niches in our lives– Family– Kin– Village– Church– State– Formal

• Formal and state insurance systems can crowd out family and kin in taking care of us during shocks– Alienation of modern life

What Should be the Relative Coverage of Different Services?

• Prevention

• Plastic surgery

• Emergency care

• Cancer treatment

• Depends on how you answer “What is the purpose of insurance?”

Part 2: Experience or Community Rating

Advantages of Community Rating

• Controls adverse selection

• Enforces subsidies from the healthy to the sick

• Lower loading costs because no need to spend money cherry picking

Disadvantages of community rating

• The healthy people could get cheaper insurance– People who try to stay healthy pay the same

rates as people who don’t take care of themselves

• Some insurance companies prefer the high profits they can make if they cherry pick

Experience Rating

• Advantages– Savings for the healthy– Incentives for people

to stay healthy to get cheaper premiums

– Profits for some companies

• Disadvantages– Higher spending for

the sick– Premiums can

become unaffordable for the sick

– Adverse selection can destroy the insurance market

Part 3: Methods to Control Moral Hazard

Co-Payments

• If patients have to pay a portion of their fees that can lower the amount of moral hazard

• Co-payments can help control utilization

Disadvantages of Co-Pays

• Depends on which type of care people give up as they have to pay more– Patients may not know what type of care is

worthwhile and what type is not– The co-payments may discourage them from

seeking important and vital services

• RAND Health Insurance Experiment suggests that people forego both less and more valuable care

Capitation to control moral hazard

• Definition of capitation: Under capitation the provider is paid a flat amount for every patient in their practice regardless of how sick they become

• Capitated providers will try to restrain a patient’s utilization to save money

Disadvantages of capitation

• With capitation the provider and the patient are in conflict– The patient wants “insured” services and

requests them– The provider withholds services

• Anticipating these clashes can make patients prefer non-capitated providers

Part 4: Varieties of Public Insurance

Options for Public Systems

• Staff Model– Most common approach around the world– Public sector hires doctors and pays them a flat salary

out of Ministry of Health funds

• Contracting in– Performance incentives (bonuses) to salaried

government health workers

• Contracting out– Public sector makes an offer to private providers for

services (with performance incentives)

Staff Models

• Administratively simplest– Don’t need to measure performance– Don’t need to administer bonuses

• Centralized collection of revenue and payroll at center

• Easy to inject donor funds at center

Disadvantages of Staff Models

• Provider incentives similar to the capitated systems

• Providers don’t get more pay for working harder or providing quality

Contracting In

• Improves incentive structure for salaried providers

• Requires financing for honest supervisors to check performance

• Improved quality does not come free

Contracting Out

• Public sector collects tax revenue and uses it to insure special groups for the care they receive from private providers– The insurance executives can be public

employees or private insurers too

Government Tax Authority

Plan A) Private companies Administer the insurance payments

Plan B) Public Sector administers the insurance payments

Private Providers

Contracting Out

• Appropriate when private sector is too big to ignore– Need to have the ability to monitor the

providers – Tasks that are monitored need to be simple

enough to monitor

• Preserves heterogeneity of the providers in the system

Disadvantages of Contracting Out

• Concerns about sustainability– Contracts could alter how much they compete– Contracts may be based on non-sustainable

outside funding

• Concerns about adequate monitoring

Summary

• Purposes of insurance– Conflict between social goals and private

goals

• Experience rating vs. community rating– Advantages and disadvantages

• Solutions for moral hazard

• Interface between public finance and private medical care