The Anatomy of Health Insurance

David Cutler

Richard Zeckhauser

Five Lessons on Health Insurance

Risk spreading v.s. incentives Integration of insurance and provision Competition and consumer identity Information and long-term insurance Health insurance and health

Why Health Insurance?

Medical expenditure is extreme volatile 1% use 25% exp 5% use 50% exp 20% use 75% exp

Difficult to self-insured because some people are sicker than others

Health insurance is relatively new (at the end of 19th century) since treatment was not very effective before

健康保險歷史回顧

我國社會醫療保險計畫之演進

1950 勞工保險開辦 1958 公務人員保險開辦 1985 農民保險開辦 1990 低收入戶保險開辦 1995 全民健康保險開辦

0

30

60

90

120

150

1960 1970 1980 1990 2000

per

cap

ita

GN

P in

US

$100

0

20

40

60

80

100

Co

vera

ge

rate

(%

)

per capita GNP Coverage Rate

Withdraw from UN

US De-Recognition

Democratic Progressive Party

Full Congress Election

President Election

Taiwan’s NHI

THE BIRTH OF TAIWAN’s NHI

NHI Law

OBJECTIVES OF TAIWAN’S NHI

Equal access to adequate health care Control health care costs at a reasonable level Promote the efficient use of health care resources

全民健保組織架構

全民健康保險基本架構

保險對象保險對象 醫事服務機構醫事服務機構

中央健康保險局中央健康保險局

繳保險費繳保險費

部分負擔部分負擔

醫療服務醫療服務

核付費用 核付費用 申請醫療費用申請醫療費用

發健保卡發健保卡

全民健保制度設計

公辦公營 單一保險人 全民納保 勞工雇主政府三方付費 部分負擔 法定給付範圍 ---正面表列與負面表列 財務平衡機制 ---量出為入、量入為出、法定調節

各年齡層醫療費用分布89年 7 月至 90年 6 月

0

10000

20000

30000

40000

50000

60000

70000

80000

女男

八十八年醫療費用保險對象使用情形

人 $ 人 $

8% 0 1% 24%

49% 7% 5% 48%

75% 21% 10% 60%

20% 75%

低使用者 高使用者

8%完全未使用， 49%使用 5,000元以下

低使用者 vs高使用者

保險的作用

1 個癌症病患 6 個健康的人 1 個洗腎病患 40 個健康的人 1 個血友病患 67 個健康的人

A Basic Economic ModelA Basic Economic Model

Health as a consumer durable good: Utility = U (X, Health)

X represents “other goods and services” H is a stock -- every action will affect health On its own or combined with other goods and

services, the stock of H generates a flow of services that yield satisfaction=utility

HEALTH OVER THE LIFE CYCLEHEALTH OVER THE LIFE CYCLE

TIME

HEALTH

BIRTH

Hmin

Appendicitis

Auto Crash

Cancer (radiation therapy)

Cancer complications

A Basic Economic Model A Basic Economic Model (cont.)(cont.)

Health=H(Profile, Medical Care, Lifestyle, Socioeconomic Status, Environment)

If an individual has a heart attack, then overall health decreases, regardless of the amount of medical care consumed The total product curve for medical care shifts

down

As a person ages, both health and the marginal product of medical care are likely to fall The total product curve shifts down and flattens

out

Insurance with Fixed Spending

One person: U(x, h) U’>0, U’’<0

One illness sick with probability p fixed treatment cost: m H(h, m)=H(1, m)=H(0,0)

Two states Sick (s): U(y-m, H(1,m)) Health (m): U(y, H(0,0))

Without insurance

With insurance

Fair insurance: π= pm

Comparing With and Without Insurance

Taking Taylor’s expansion, we have

aversionreiskabsoluteoftcoefficienU

U

mm

The insurance plan specifies the amount of money transferred to the bad state

Problem with Fixed Spending

Complete information All the sicknesses known All the treatment known No wasted resources in the policy

The insurance specifies the amount of money being transferred during the sickness (contingency plan)

The policy completely insures the health, but s it possible to insure someone’s health?

Moral Hazard Def : moral hazard refers the likely malfeasance of an

individual making purchases that are partly or fully paid for by others.

① Moral hazard conflicts with risk-spreading

Buy more than should if paid the full price.

② Moral hazard is a substitution effect, not income effect.

Insurance policy

( ( ( )), [ , ( )]) ( )

( ( )) self paid

( , ( )) health status

IV U y c m s H s m s f s ds

c m s

H s m s

First Best (s is observed)

For a given s:

( )

( ) ( , [ , ]) ( )

m H x

x x

H U E U x y pm

where

E U U y pm H s m f s ds

Second Best (s is not observed)

sUmcUH xhm )(

Adverse Selection

Adverse Selection

Begin with an example

Two types: High (H) , 50% Low (L) , 50%

Three insurances Generous (G) Moderate (M) Basic (B)

Efficient outcome H type chooses G plan L type chooses M plan An separating equilibrium

Once a separating equilibrium occurs, H type has incentives to join M plan Not efficient

Cross Subsidy Suppose we tax $1.25 for M plan to subsidy G plan H is better L is better too