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Market for health insurance umadhay

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  • NUR 751:Healthcare Economicsfor the DNPThe Market forHealth InsuranceDewar, D. (2010). Essentials of health economics. Sudbury, MA:Jones & Bartlett Learning Co.Tony Umadhay, PhD., CRNABarry University
  • The Insurance Market People buy insurance because they are risk-averse Buying insurance allows a person to pay a certainknown amount in order to transfer the risk of a muchlarger expenditure (in the case of an adverse event)to an insurer, known as a third party payer There are a number of types of risk associated withhealth Risk to ones health and life associated with illness ordisease Risk that if one undertakes treatment, it may or maynot cure or alleviate symptoms of disease The costs associated with the treatments of illnessand disease
  • The Insurance Market People can insure themselves against some or allof the financial loss associated with the treatmentof illness by buying health insurance policies Even people with extensive wealth buyinsurance due to the fact that most people arerisk-averse Economists define risk aversion as a characteristic ofpeoples utility functions: People are more likely to buy insurance for low probabilityevents involving large losses than high probability eventsassociated with small losses. Lottery (low probability of winning a large amount) That is a situation of risk aversion
  • Setting Insurance Premiums The price that an insurance company chargesfor an insurance policy, or premium, is based onthe expected payout (amount paid out onaverage for a large group of insured persons),plus administrative costs, reserve funds, andprofits or surpluses of the insured company Premiums charged generally exceed the fairvalue of the risk that the insurance companyhas assumed, where the fair value is theexpected payout
  • Setting Insurance Premiums The part of the insurance premium that exceedsthe fair value of the insurance is called theloading fee Suppliers of insurance will be more willing toenter market situations where they can make areasonable estimate of what their payouts willbe, or where they can assess the degree of riskthey are assuming
  • Experience versus CommunityRating One common method of pricing insurance isexperience rating Insurance companies base premiums on pastlevels of payouts, which is often done in thecase of car or homeowners insurance. Community rating applies when each memberof an insurance pool pays the same premiumper person or per family for the same coverage Community rating is inefficient in the sensethat the price of insurance to an individualsubscriber does not reflect the marginal costsof that individual to the insurer.
  • Moral Hazard Moral hazard refers to the phenomenon of apersons behavior being affected by his or herinsurance coverage Moral hazard is known to exist is in all typesof insurance markets People may be more careless with propertythat is insured The main way that moral hazard comesinto play in the health insurance market isthrough an increase in demand forhealthcare services utilized
  • Moral Hazard and the Structure ofHealth Insurance Contracts The reason that moral hazard operatesdifferently in the health insurance market than inother insurance markets is that health insurancecontracts differ from most other forms ofinsurance Instead of paying a sum of money to theinsured in the case of an adverse event, theyreduce the price of the health care associatedwith the adverse event or illness
  • Moral Hazard and the Structure ofHealth Insurance Contracts Major healthcare services contracts also differfrom most types of insurance in that theygenerally cover more than just unlikelycatastrophic events, also fulfilling a functionanalogous to that of a service contract on anautomobile they also include reimbursement for annualphysical exams, vaccinations, treatment forchronic conditions, and various types ofroutine tests
  • Cost Sharing to Offset Effects ofMoral Hazard Deductibles. A deductible is a level expenditurethat must be incurred before any benefits arepaid out Health insurance policies generally haveyearly deductibles, which is less effective inremoving moral hazard Coinsurance. Coinsurance is the proportion ofthe total expenditure that is paid by the insured Coinsurance helps to reduce the moralhazard factor for the insured that have spentmore than their deductible because healthcare is not free to them
  • Cost Sharing to Offset Effects ofMoral Hazard Use of Usual, Customary Fees to Limit Payments. Ithas become common practice for insurance policiesthat reimburse on the basis of fee-for-service to limitpayment for covered services to customary or usualfee within given geographic markets Managed Care. Care is actually managed orrationed using such mechanisms as gatekeepers,who are primary care physicians that make allreferrals to specialists, limit coverage to serviceproviders with whom the insurance company has acontractual agreement, and require precertificationor approval from the insurance company beforeservices are rendered
  • Cost Sharing to Offset Effects ofMoral HazardControls are on the supply side as wellas the use of risk-sharing arrangementswith providers of health care Stop-Loss Provisions. Many policies alsohave annual limits on out-of-pocketexpenditures (per person or per family)that must be borne by the insured
  • Adverse Selection Adverse selection exists when people with differenthealth-related characteristics than the average personincrease the amount of health insurance purchased People know more about their own health status thaninsurers, and this inequality of information is the basis forrisk to insurers In the health insurance market, high risk people are thosewith more severe health problems than the average person These people would be overrepresented in theinsurance markets, particularly those markets with moreinclusive policies This would drive up the premium because the highrisk persons would use more health care and drive offthose with better health from buying the insurancepolicies
  • Insurers Responses to SelectionProblems Insurers engage in positive selection, where thecompanies structure coverage to both avoidadverse selection and also to attract lower-than-average risk subscribers The disappearance of insurance options due tothe spiraling costs associated with adverseselection has been a serious problem in themarket for individual direct pay policies inregions that require community rating
  • Offsetting Adverse Selection Some economists have questionedwhether health insurance markets canreach equilibrium, given the role ofadverse selection Consumers no longer have much of theinformation advantage in choosing thebest package of insurance to cover theirfuture expenditures
  • Employer-Based Insurance Advantages of employer-based insurance Group insurance is important for offsettingadverse selection Community rating applies within theemployment group, which results in somedegree of risk sharing Economies of scale in administrative ratesare lower than those for individual or directpay policies Insurance companies may still use experiencerating to charge higher prices to higher-riskgroups .
  • Employer-Based Insurance Disadvantages of Employer-Based Insurance When health insurance is tied to employment,job loss involves the risk of losing access toaffordable health insurance The Consolidated Omnibus BudgetReconciliation Act of 1985 (COBRA) requiresemployers to offer former employees anoption of purchasing their former group healthinsurance coverage for up to 18 months aftertermination of employment This provides only a temporary solution andmay be unaffordable because theemployee must pay the entire premiumplus a two percent fee
  • Employer-Based Insurance Tying of health insurance to employmentreduces labor mobility and results in what isconsidered to be job lock. Researchconcludes that employer-provided insurancehas reduced labor mobility by about 25 to 30percent Health Insurance Portability andAccountability Act (HIPAA) of 1996addresses part of the problem by making itillegal for insurers to exclude any employeefrom a group plan on the basis of health-related factors or past claims history
  • Tax Treatment of Employer-Based Health Insurance Under federal and state income tax law, health insurancepremiums paid by employers as part of the workerscompensation package have been tax-free income toemployees and tax-deductible labor costs for firms since1954 This has led to worker preferences for higherproportions of their compensation packages in theform of health insurance, because firms can offerworkers compensation that represents more after-taxbenefits that a cash wage package costing the firm anequal amount
  • Optimal Insurance Contracts Constructing an optimal insu

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