Presentation on theme: "Chapter Nine Public policy agenda => Health care is unique"— Presentation transcript:
1Chapter Nine Public policy agenda => Health care is unique Life or deathPrivate mkt alone cannot be trusted to detrmine heath care outcomeWhy?Remark: Other goods are crucial for survivalLarge expenditure and increasingRemark: also smartphones expenditures
2U.S. Expenditures of Selected Goods and Services as Share of GDP (1960-2010) Source: Centers for Medicare & Medicaid Services, National Health Expenditure Data, and National Income and Product Accounts
3Examples Medicaid (low income people) Why Gov’t involvement 1. Uncertainty in life => reduce risk => Social InsuranceSocial insurance - government programs that provide insurance to protect against adverse eventsExamplesMedicaid (low income people)Medicare (insurance elderly disabled)Social SecurityUnemployment Compensation
4How Health Insurance Works Insurance premium: money paid to an insurance company in exchange for compensation if an adverse event occurs / the greater the more the compensationPeople are willing to pay for insurance because of-1) Expected Value=(probability of outcome 1)*(Payout in outcome 1) + (probability of outcome 2)*(Payout in outcome 2) +… + (probability of outcome n)*(Payout in outcome n)-2) Risk smoothing: paying money in order to guarantee a certain level of consumption should an adverse event occur
5Example of Expected Value Computation Draw cards from deck of cardsDraw heart and receive $12Draw spade, diamond or club and lose $4Probability of drawing heart = 13/52 = ¼Probability of drawing spade, diamond or club = 39/52 = ¾EV = (1/4)($12) + (3/4)(-$4) = $0
6Why Buy Insurance?Insurance OptionsIncomeProbability of Staying HealthyProbability of Getting SickLost Income if She Gets Sick(A)(B)(C)Income if She Stays HealthyIncome if She Gets SickExpected ValueOption 1: No Insurance$50,0009 in 101 in 10$30,000$20,000$47,000Option 2: Full Insurance ($3,000 premium to cover $30,000 in lossesAlthough both yield same EV, Option 2 is preferred due to risk-smoothing.
7Expected value: income 0,950450,120247Expected value: health expenditure303
8Do People Buy Insurance? Actuarially Fair Insurance Policy: Insurance premium = expected payout:=> WHY PAYING THEN? CERTAINTY!Risk Aversion: a preference for paying more – a risk premium - in order to guarantee compensation if an adverse event occursDiminishing marginal utility: more is better but…U is concave… risk adverse: pain from losing larger than utility from gaining
9Why People Buy Insurance UtilityUBUDUDUCCExpected UtilityRisk SmoothingAUA20,00047,00050,000Income
10Do People Buy Insurance with Loading Fees? Actuarially Fair Insurance Policy: Insurance premium = expected payout:Loading fee: the difference between an insurance premium charged by a company and the actuarially fair premiumCurrent average loading ratio for private insurance companies=1.209-10
11Do People Buy Insurance with Loading Fees Do People Buy Insurance with Loading Fees? Actuarially Fair Insurance Policy: Insurance premium = expected payoutRisk AversionRisk PremiumLoading Fee
12The Role of Risk Pooling Our risk is endorsed by the insurerPooling to reduce risk =>o/wise it is stuck w/ individual riskInsurance in a small populationInsurance in a large populationLaw of large numbersMore people in=> more predictable the final outcome => charge a fair premiumRemark: we are dealing w/ equal individual risk
13Asymmetric information Why might Government Intervention be needed in the Health Insurance Market?Asymmetric informationSituation in which one party engaged in an economic transaction has better information than the other partyAn individual knows her own illness risk, but insurer does notResults in Adverse SelectionThe phenomenon under which the uninformed side of a deal gets exactly the wrong people trading with itIn charging everyone the same premium, high risk individuals have a higher probability of buying while low-risk individuals do not => DEATH SPIRALTable 9.2 pag 183 and read pag 185: Switzerland case and footnote on effective relevance of adverse selection
14Does Adverse Selection Justify Government Intervention? Experience rating: Private companies can perform some screening offering different premium but…Who will then insure those at high genetical risk? Will they be offered an insurance at all?Scientific progress and equity issueCommunity rating: Gov’t intervention, mandatory participation and same premiumcriticism: CR it is not fair while ER not so discriminatoryNeed to strike the balance b/n fairness and incentiveConclusion: Gov’t intervention justified
15Insurance and Moral Hazard Moral hazard: when obtaining insurance against an adverse outcome leads to an increase in the likelihood of the outcome (we cannot monitor the behaviour of the insured)Even if insured would in principle incur the same risk , people are risk adverse and premium is fair=> incentive to increase risky behaviourOr seek out more health care services (not needed ?!)=> Efficiency problem (also asymmetric info)Strategies for reducing moral hazardDeductible: out-of-pocket payment of health costs before the insurance company paysCo-payment: a fixed amount paid by the insured for a medical serviceCo-insurance: a % of the cost of a medical service that the insured must pay
16Expenditures in the absence of insurance Overconsumption of medical services due to insurance coverage: Moral HazardExpenditures in the absence of insurancePrice per unitAdditional expendituresinduced byinsuranceabSmAxes and labels1st click – Dm2nd click – Sm,3rd click - brown rectangle4th click - .2P05th click - gray rectangle6th click – deadweight loss triangle7th click – “Flat-of-the-curve medicine”P0h.2P0DmM0M1Medical services per year
17Deadweight Loss Expenditures in the absence of insurance Price per unitDeadweight LossabSmAxes and labels1st click – Dm2nd click – Sm,3rd click - brown rectangle4th click - .2P05th click - gray rectangle6th click – deadweight loss triangle7th click – “Flat-of-the-curve medicine”P0h.2P0DmM0M1Medical services per year
18Additional Considerations Flat-of-the-curve medicine: US 2.5 as much as others, however difficult to compare (R&S )Quality: different life style /difficult comparison (O’ Neil 2007)The elasticity of demand for medical services => drawing this curve… medical advise? Vertical curve? No inefficiencies from M.H. Why?Discretional expenditure /Ethical integrity of physiciansEmpirical study by Anderson, Dobkin and Gross (2010) quasi experimental: losing insurance implies substantial reduction in health care utilisation => expanding coverage to curretly uninsured people => increase in demand for health service
19All third party payment systems generate moral hazard Does moral hazard justify government intervention in health insurance market?All third party payment systems generate moral hazardthere is a trade off, a generous system, reducing risk, more protection and more MH.Paying out of the pocketPublic no better than private (unlike A.S.)9-1919
20Information problems by patients Other Market Failures in the Health Care Market that might Justify Government InterventionInformation problems by patientsLack of information by consumers about the needed treatment and competency of physicianFull reliance / No other mkt is like that=> It is a rationale for many government regulations? Accreditation granted by American Medical AssociationExternalities of Health CareNegative (excess antibiotics) and positive (flu vaccine)
21Efficient but also equitable provision of Health Care Equity Considerations PaternalismHealth care decisions are too complicated to be left in people’s own hands: Wrong expectations or wrong tastes (not sufficiently risk adverse)The Problem of the Uninsured: Is health insurance too expensive?- Who are the uninsured?16% population of which 32 % age group 18-24Of which 39% earn more than 50,000 $=> Are people buying enough insurance? Are premium too expensive?32% of those below poverty line do not have itMuch anxiety about them in US
22High Health Care CostsSource: Organization for Economic Cooperation and Development [2012a].
23Causes of Health Care Cost Inflation The Graying of AmericaIncome GrowthImprovements in quality and medical technologyCommodity Egalitarianism view: some special commodities should be distributed to everyone. There is in fact a strong consensus in the society that everyone should have access to at least basic medical services.
24The Health Care Market – main issues/points Government-provided insurance (known as social insurance) makes up a large and increasing proportion of the federal budget.The U.S. spends a large percent of its GDP on health – 17.9% in Government-provided health insurance has been an increasing percentage of the U.S. federal budgetReasons for growth include aging of population, growth in income, third-party payments, and technological changeFor a risk-averse person, an insurance plan that charges an actuarially fair premium increases expected utility because it allows risk smoothing.The more risk averse an individual is, the more he or she is willing to pay for an insurance policy.
25By pooling individuals into one insurance program, an insurance company can lower risk from a societal point of view.Adverse selection arises when those being insured know more about their risk than the insurance company. This prevents the insurance company from charging premiums that are in line with each individual's expected losses. If the insurance company instead charges an average premium across all customers, the low-risk people will tend to drop out of the plan, and the insurer makes less money.In theory, government can address adverse selection by providing universal health insurance coverage and charging uniform premiums. This is inefficient but would eliminate sorting by risk.
26Moral hazard arises when obtaining insurance leads to changes in behavior that increase the likelihood of the adverse outcome.There is a trade-off in providing insurance: the more generous the insurance policy, the greater the protection from the financial risks of illness but the greater the moral hazard as well. Efficient insurance balances the gains from reducing risk against the losses associated with moral hazard. This can be accomplished by requiring high out-of-pocket payments for low-cost medical services and more generous benefits for expensive services.Justifications for government intervention in the health insurance market include adverse selection, moral hazard, commodity egalitarianism, and health care externalitiesAbout 16 percent of the US population at any given time lacks health insurance. The proportion of the uninsured population under 65 years old has been growing over time.US health care expenditures as a percentage of Gross Domestic Product have been growing rapidly over time. They currently make up 18 percent of GDP.Possible reasons include the aging of the population, growth in income, the prevalence of third-party payments, and technological change. The evidence points to technological change as a primary factor.
27About 16 percent of the US population at any given time lacks health insurance. The proportion of the uninsured population under 65 years old has been growing over time.US health care expenditures as a percentage of Gross Domestic Product have been growing rapidly over time. They currently make up 18 percent of GDP.Possible reasons include the aging of the population, growth in income, the prevalence of third-party payments, and technological change. The evidence points to technological change as a primary factor.
28HMWK5 (assess the insurance plan) and 6 and 9 (!) page 199