Health Insurance Supply Lecture 11 Assoc. Prof. Sencer Ecer HEALTH ECONOMICS

Supply Major function of insurance companies or government insurance: bear and spread risks. Not just processing claims They pool risks, reducing average risks, not just transferring them See Appendix C to Chapter 10 If risks are independent pooling is much better Correlated risks arise when insuring people who are subject to the same aggregate risks, such as ensuring only people in earthquake-prone areas against earthquake Health insurance is effective in pooling risk because risks are mainly independent, even though sometimes epidemics or contagious diseases arise

HI Production Function Loading fee is for administrative expenses Responds to input prices Costs depends on the structure of insurance policies High deductibles lead people not to submit minor claims, so less administrative costs The business of insurance is a fundamental financial intermediary, They collect money and pay pack later in time. In the mean time, they make money by using these funds So long as competitive forces are at play, these returns act as negative costs to reduce prices In the past in the US, the real rate of return has been 5% on average Thus, it is possible that insurance companies “pay” you for insuring with them, but doesn’t happen generally (negative loading fees)

Not-for profit insurance companies (Blue plans) Exempt from many taxes In Turkey, individual premium payments are exempt to some extent Not subject to holding minimum cash reserves and some other regulations Differences in insuring high risk events and organization possibility only at the state level (reducing EoS) limited Blue plans

Group Insurance Group Insurance helps achieve EoS and avoid Adverse Selection EoS: occurs because costs of insurance design do not change much with scale of insured group Table 11.1 Premium/Benefit = 1+L Higher price for non-group Access to group insurance affects demand Group size is a predictor of having insurance (recall paper by Ecer and Koc (2011)) Table 11.2 provides statistics on L w.r.t. group size Adv. Selection (AS): Groups eliminate AS themselves because they are gathered together for some other purpose not for buying insurance (and employment may necessitate some basic health)

Managed Care Organizations Mostly insurance companies (sometimes health care delivery organizations) Emerged to deal with moral hazard Interferes with the amounts and types of health care decisions Retains the reduction in risk that other types of insurance offer Helping out the patient to spend less but achieve the same results Such as, when there are two alternatives, generic and brand medicine, with same active ingredient, then MCO incentives or mandates choice of inexpensive generic drugs Does not trade off risk with price, so market mostly eliminated FFS plans, which are typically more expensive PPOs (a network of doctor discounts negotiated) and HMOs (capitation based payment) are widespread

MCOs -continued In MCOs, consumers knowingly restrict their choices in advance (like self-control models in the theory of consumption) Alternatives to MCO: Britain and Canada restrict access to care for various services or ration them by waiting lists. Turkey also has waiting lists for certain serious types of care. US also has some regulatory controls.

How MCOs Interfere with consumers Copayments -discussed before One may worry that co-payments may reduce the search for a lower price, but MCO has already agreed on a low price with the provider Second Opinion offer or requirement Second doctor can’t be paid for treatment, only for opinion May reduce doctor induced moral hazard Do you think this works well? Why?

MCO incentives for consumers SOPs have not worked well Patients are reluctant – even though the insurance plan signals that one’s doctor may be inducing supra optimal consumption Second Opinion comes form the same region Within-region similarity plays a role Collusion? Gatekeeper models: specialists are more expensive and research shows that they use resources more intensively, so PCPs substitute for them when both can treat an illness

How do MCOs interfere with doctors? Salary v FFS HMOs like Kaiser Permanente Either hires or contracts with doctors, may build own hospitals No financial incentives to induce demand In a capitation payments system, there is either salary, or Per patient, but all the necessary care for a year Works because: Doctors too have a market (they will be fired if they don’t perform well) and legal (they will be prosecuted as necessary) incentives to provide adequate care

Incentivizing doctors Volume business will not benefit in capitation system Incentivized to conserve resources Similarly, some doctors who have contracts with HMOs (agree to use HMO’s hospitals etc.) receive the residual from the fixed fees paid by patients Most savings come from hospitalizations RAND HIS confirms this supply side effect HMO used less resources than FFS Health Outcomes were at least as good

Balancing Incentives Salary: shirking and incentives to withhold treatment if doctor shares cost savings FFS system: overprescription Try to balance (no precise data)

Holdbacks Some of the payments (say, 15%) are held back until the end of the year If the total treatment costs within the plan exceed the target, then holdback is kept, otherwise, it is distributed in proportion to what the doctors made in that years Doctors share losses if they induce demand