The Private Health Insurance Industry Professor Vivian Ho Health Economics Fall 2007 These slides draw from material in Santerre & Neun, Health Economics,

The Private Health Insurance IndustryThe Private Health Insurance Industry

Professor Vivian Ho

Health Economics

Fall 2007

These slides draw from material in Santerre & Neun, Health Economics, Theories, Insights and Industry Studies, Thomson 2007

OutlineOutline

Industry structure Industry conduct Industry performance

Health Insurance Industry Health Insurance Industry StructureStructure

Persons <65 with Private Health Insurance Coverage, Persons <65 with Private Health Insurance Coverage, Selected Years, 1984-2003Selected Years, 1984-2003

Year Year Number (millions)Number (millions) % of Population% of Population

19841984 157.5157.5 76.8%76.8%19951995 164.2164.2 71.371.320002000 174.0174.0 71.571.520012001 175.3175.3 71.271.220022002 172.4172.4 69.469.420032003 173.6173.6 68.968.920042004 177.1177.1 68.868.8

Source : Health, United States 2006


Uninsured Persons <65, Selected Years, 1984-2003Uninsured Persons <65, Selected Years, 1984-2003

Year Year Number (mil’s)Number (mil’s) % of Population% of Population

19841984 29.8 29.8 14.5%14.5%19951995 37.1 37.1 16.116.120002000 41.4 41.4 17.017.020012001 40.3 40.3 16.416.420022002 41.7 41.7 16.816.820032003 41.6 41.6 16.516.520042004 42.2 42.2 16.416.4

Source : Health, United States 2006


The CompetitorsThe Competitors

Large # of health insurance companies of Large # of health insurance companies of different typesdifferent types1.1. Commercial (for-profit) Commercial (for-profit) 2.2. BCBSBCBS3.3. Managed Care/HMO’sManaged Care/HMO’s4.4. Self-insured companiesSelf-insured companies


1.1. Commercial Health Insurers Commercial Health Insurers

~ 2,151 insurers in group health insurance ~ 2,151 insurers in group health insurance marketmarket

~ 643 insurers in individual health insurance ~ 643 insurers in individual health insurance marketmarket

(Chollet, et al. 2003)(Chollet, et al. 2003)

Often exempt from state property taxes, have lower Often exempt from state property taxes, have lower premium taxespremium taxes Can pass on savings to consumersCan pass on savings to consumers Higher demand from lower prices also Higher demand from lower prices also market share, so can negotiate discounts with market share, so can negotiate discounts with

providers providers


2. 2. Blue Cross Blue Shield Blue Cross Blue Shield 52 in 1998, organized regionally as not-for-profits52 in 1998, organized regionally as not-for-profits

tend not to compete with each othertend not to compete with each other

Blue Cross - hospital insuranceBlue Cross - hospital insurance Blue Shield - physician insuranceBlue Shield - physician insurance

Health Insurance IndustryHealth Insurance IndustryStructureStructure

3. Managed Care Insurers

Nation’s 10 largest managed care firms had 48% of all HMO enrollees in 2002

Five Largest:1. WellPoint, Inc.2. United Health Group, Inc.3. Aetna, Inc.4. Health Care Services Corp. 5. CIGNA HealthCare, Inc.

Source: www.kff.org

http://www.kff.org/


3. Managed Care Insurers (cont.)

HMOs : HMOs : Covered 71 million in 2006Covered 71 million in 2006

Penetration varies widely by region Penetration varies widely by region (lowest in South, highest in the coasts)(lowest in South, highest in the coasts)

Source: www.kff.org

http://www.kff.org/


4. 4. Self-insured plans (large employers)Self-insured plans (large employers)

Enrolled 78% of covered workers in 2006Enrolled 78% of covered workers in 2006 Exempt from premium taxes (as high as 2%)Exempt from premium taxes (as high as 2%) Under 1974 Employment Retirement Income Security Act, Under 1974 Employment Retirement Income Security Act,

exempt from state mandate benefitsexempt from state mandate benefits

Type of Self-insured PlanType of Self-insured Plan

1) Administrative Services Only (ASO)1) Administrative Services Only (ASO) Employer establishes self-funded health plan, pays an insurance Employer establishes self-funded health plan, pays an insurance

carrier to process claimscarrier to process claims

2) Minimum Premium Payment (MPP)2) Minimum Premium Payment (MPP) Employer self-funds, but purchases stop-loss insurance for Employer self-funds, but purchases stop-loss insurance for

excessive claimsexcessive claims


The most up-to-date information on market concentration is at the state levelMuch insurance regulation is at the state levelMuch data from state insurance depts

See handout, Robinson, Health Affairs 2004 Vol. 23(6):11-24 State-level insurance markets are oligopolistic


Are there economies of scale to insurance provision?Are there economies of scale to insurance provision?

•Coefficient on P : economies of scale•Coefficient on GI/T : lower admin. cost for group policies

1) Evidence from 1) Evidence from cost regressionscost regressions (cross section) (cross section) (Blair et. al. 1975)(Blair et. al. 1975)

OPCOST = .464 - . 0000002P - .0003GI/T + other factors.OPCOST = .464 - . 0000002P - .0003GI/T + other factors. (34.32) (3.152) (19.693)(34.32) (3.152) (19.693)

RR2 2 = .589, N = 307 insurance companies = .589, N = 307 insurance companiesOPCOST = average administrative costsOPCOST = average administrative costs = = total operating costtotal operating cost//health premiums writtenhealth premiums written P = premiums writtenP = premiums written GI/T = GI/T = group insurance premiumsgroup insurance premiums//premium writtenpremium written


Who is the Consumer?Who is the Consumer?

Commercial group insurance premiums unregulated, unlike benefit/premium ratios of individuals

Majority of commercial insurance purchased by Majority of commercial insurance purchased by groups. (e.g. employers or union representatives)groups. (e.g. employers or union representatives)

Why?Why?

1) Monopsony buying power1) Monopsony buying power2) Group expert makes informed choices2) Group expert makes informed choices3) In large group, health status uncorr’d w/ emp. 3) In large group, health status uncorr’d w/ emp.

statusstatus

Health Insurance Industry Health Insurance Industry ConductConduct

Price ComponentsPrice Components

Premium = E(Ben) + Admin + Tax + ProfitPremium = E(Ben) + Admin + Tax + Profit

Loading Fee Ex ante, insurance comp. does not know exact Ex ante, insurance comp. does not know exact

amount of benefits any individual will receive. amount of benefits any individual will receive. E(Ben) = Ben + eE(Ben) = Ben + e

Common measure of price : Premium-to-benefit Common measure of price : Premium-to-benefit ratio. ratio.

= 1 += 1 +Admin + tax + profit + eAdmin + tax + profit + ePremiumPremium

BenBen BenBen

Health Insurance Industry Health Insurance Industry Conduct (cont.)Conduct (cont.)

Price competition in 2 forms drives down premiumsPrice competition in 2 forms drives down premiums1) Normal price comp. competes away profits1) Normal price comp. competes away profits2) Managed care contains health care costs 2) Managed care contains health care costs

benben

But managed care is costly; e.g. utilization reviewBut managed care is costly; e.g. utilization review

admin. Costs loading feeadmin. Costs loading fee

Price competition forces insurer to balance Price competition forces insurer to balance marginal cost saving vs. marginal admin. costsmarginal cost saving vs. marginal admin. costs

Health Insurance Industry Health Insurance Industry Conduct (cont.)Conduct (cont.)

Do managed care organizations (MCOs) actually Do managed care organizations (MCOs) actually lower health insurance premiums?lower health insurance premiums?

MCOs, especially HMOs, lower medical costs 15- MCOs, especially HMOs, lower medical costs 15- 20% through reduced hospital costs20% through reduced hospital costs

Employer health plans 8 to 10% lower in metro Employer health plans 8 to 10% lower in metro areas with 45%= vs. <25% HMO penetrationareas with 45%= vs. <25% HMO penetration

MCOs lower costs, & savings passed MCOs lower costs, & savings passed on to on to consumers in competitive marketsconsumers in competitive markets

Pricing StrategiesPricing Strategies

Community rating - premium based on risk Community rating - premium based on risk characteristics of entire membershipcharacteristics of entire membership Rates for each individual do not vary according to Rates for each individual do not vary according to

health history or health statushealth history or health status

Low risk individuals subsidize high-risk individualsLow risk individuals subsidize high-risk individuals

Disadvantages :Disadvantages :

1) low risk individuals discouraged from purchasing 1) low risk individuals discouraged from purchasing insurance premium that are too highinsurance premium that are too high

2) no incentive for individuals to adopt healthy lifestyle2) no incentive for individuals to adopt healthy lifestyle

Pricing Strategies (cont.)Pricing Strategies (cont.)

Experience rating - premiums for individuals (or Experience rating - premiums for individuals (or groups of individuals) vary by risk status (e.g. age, groups of individuals) vary by risk status (e.g. age, gender, industrial occupation, prior illness)gender, industrial occupation, prior illness) Individuals or groups of individuals pay price closer to Individuals or groups of individuals pay price closer to

expected medical costsexpected medical costs

Disadvantages :Disadvantages : 1) “unfair” to make sickest pay more 1) “unfair” to make sickest pay more - illness uncontrollable- illness uncontrollable 2) encourages “cherry picking”2) encourages “cherry picking”

Non-Price Business StrategiesNon-Price Business Strategies

Cherry-picking and benefit denialCherry-picking and benefit denial Once an insur. comp. sets health insurance Once an insur. comp. sets health insurance

premiums, there is an incentive to keep low-risk premiums, there is an incentive to keep low-risk consumers and exclude high-risk consumersconsumers and exclude high-risk consumers

e.g. demand even higher premiums for patients w/ e.g. demand even higher premiums for patients w/ chronic health problems or high-risk conditions chronic health problems or high-risk conditions (e.g. hypertension, diabetes)(e.g. hypertension, diabetes)

or, exclude coverage for pre-existing conditionsor, exclude coverage for pre-existing conditions

More problem for individual vs. group policiesMore problem for individual vs. group policies

Non-Price Business Strategies Non-Price Business Strategies (cont.)(cont.)

Limited enrollment period to deal w/ Limited enrollment period to deal w/ adverse adverse selectionselection

a) High risk consumers may know more about their a) High risk consumers may know more about their own health than insurersown health than insurers

b) High risk consumers may get into cheaper plans b) High risk consumers may get into cheaper plans designed for lower risk personsdesigned for lower risk persons

c) High cost eventually drives up premiums, until c) High cost eventually drives up premiums, until high-risk consumers switch to next cheaper planhigh-risk consumers switch to next cheaper plan

d) Instability -- high adjustment costs for insurersd) Instability -- high adjustment costs for insurers

Guaranteed RenewabilityGuaranteed Renewability

Guaranteed renewability requires the insurer to:sell another policy on the anniversary date

of the current periodcharge a premium for that policy that is not

affected by any individual loss experience or change in the insured person’s characteristics during the current period

Santerre and Neun, Copyright ©2007 by Thompson South-Western. All rights reserved.


Higher premiums are charged when an insurance contract offers guaranteed renewability

Guaranteed renewability protects individuals from large jumps in premiums due to the onset of a chronic conditiondoes not protect against age adjustments



Guaranteed renewability reduces the likelihood of adverse selectioncream skimming also becomes less likely

However, if buyers possess inside information when purchasing their initial policies, adverse selection can still occur



The Health Insurance Portability and Accountability Act (HIPAA) of 1996 requires guaranteed renewabilitymost states require that premiums be the

same for all individuals within the same rating class


Health Insurance Industry Health Insurance Industry PerformancePerformance

insured indirectly subsidize uninsured health careinsured indirectly subsidize uninsured health care inefficient vs. planned financing mechanisminefficient vs. planned financing mechanism

45.8 m = 15.7% of the population remains 45.8 m = 15.7% of the population remains uninsureduninsured young adults, unmarried adults, minorities, part-young adults, unmarried adults, minorities, part-

time & self-employed, poor less likely to be time & self-employed, poor less likely to be insuredinsured

Resulting inefficienciesResulting inefficienciesa) uninsured eventually receive emergency carea) uninsured eventually receive emergency care

Output (Quantity of Health Insurance)

b) uninsured may “wait too long” for care, when earlier b) uninsured may “wait too long” for care, when earlier treatment may have been cheapertreatment may have been cheaper

Health Insurance Industry Health Insurance Industry Performance Performance (cont.)(cont.)

One measure of the health insurance “price” is the amount of premiums the insurance company receives, divided by the amount of medical benefits paid out

Using this measure, the relative “price” of health insurance has declined over time The overall price hasn’t fallen, because medical

care expenditures are rising dramatically


Price of Private Insurance in the United States, Price of Private Insurance in the United States, Selected Years, 1950-1995Selected Years, 1950-1995

Insurance Companies .Insurance Companies .

Self Insured Blue Cross &Self Insured Blue Cross &

Year Total Group Individual and HMOs Blue Shield Year Total Group Individual and HMOs Blue Shield

19501950 $1.62 $1.44 $2.01 --- $1.17 $1.62 $1.44 $2.01 --- $1.171960 1.57 1.23 2.47 ---1960 1.57 1.23 2.47 --- 1.08 1.0819701970 1.26 1.09 2.11 --- 1.26 1.09 2.11 --- 1.04 1.0419801980 1.18 1.12 1.18 1.12 1.73 1.73 $1.07 $1.07 1.03 1.0319901990 1.22 1.19 1.22 1.19 1.55 1.55 1.11 1.11 1.12 1.1219951995 1.22 1.19 1.22 1.19 1.46 1.08 1.13 1.46 1.08 1.13

Source : Source Book of Health Insurance Data 1997-1998, Washington DC : Health Insurance Association of America, Table 2.5


•More recent data suggests a different picture

•See Robinson, Health Affairs, Exhibit 3

Health Insurance Industry Health Insurance Industry Performance (cont.)Performance (cont.)

Job lock - Health insurance often tied to worker’s Job lock - Health insurance often tied to worker’s jobjob

New job may require long waiting period for New job may require long waiting period for enrollment, no coverage for pre-existing enrollment, no coverage for pre-existing conditions, less generous coverageconditions, less generous coverage

Cooper & Monheit (1993) - Married men who Cooper & Monheit (1993) - Married men who expect to lose health insurance 23% less likely to expect to lose health insurance 23% less likely to change jobschange jobs


analogyanalogy : restaurant bill splitting : restaurant bill splitting

Over-insurance/Moral HazardOver-insurance/Moral Hazard Def’n : Def’n : Insured person no longer bears full cost of her Insured person no longer bears full cost of her

actions may probability or magnitude of loss actions may probability or magnitude of loss covered by insurancecovered by insurance


Causes and Implications :Causes and Implications :

1) 1) Consumer pays coinsurance onlyConsumer pays coinsurance only2) Less incentive to practice healthy lifestyle/preventive 2) Less incentive to practice healthy lifestyle/preventive medicinemedicine3) Greater willingness to experiment w/ new, expensive3) Greater willingness to experiment w/ new, expensive technologiestechnologies4) Less incentive to monitor providers4) Less incentive to monitor providers5) Less incentive to comparison shop5) Less incentive to comparison shop

Practical SolutionPractical Solution : increase copayment, w/ stop-loss : increase copayment, w/ stop-loss

Over-insurance/Moral Hazard (cont.)Over-insurance/Moral Hazard (cont.)

Cost ContainmentCost Containment

Industry has been slow to adopt cost containmentIndustry has been slow to adopt cost containment Tax exemption on employer-sponsored health Tax exemption on employer-sponsored health

insurance reduced consumer’s demand for lower insurance reduced consumer’s demand for lower premiumspremiums

Health insurance also used by employers as a Health insurance also used by employers as a symbol of their generositysymbol of their generosity

Eliminating tax exemption may help to restrain cost Eliminating tax exemption may help to restrain cost growthgrowth

ConclusionsConclusions

The health insurance industry is oligopolistic

Price and non-price strategies still lead to disparities in access to appropriately priced health insurance

The cost of health insurance continues to riseIn part due to rising costs of medical careBut also due to moral hazard problems

Documents

The Private Health Insurance Industry Professor Vivian Ho Health Economics Fall 2007 These slides draw from material in Santerre & Neun, Health Economics,