# Insurance and health care delivery N287E Spring 2006 Professor: Joanne Spetz 26 April 2006.

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Insurance and health care delivery N287E Spring 2006 Professor: Joanne Spetz 26 April 2006

But wait! Lets talk about the problem set! Return on Investment = Profit margin / Asset turnover rate Profit margin = total margin = net income / sales Asset turnover rate = total asset turnover = total revenue / total assets

But wait! Lets talk about the problem set! Return on Investment = Profit margin / Asset turnover rate Profit margin = net income / sales = (operating revenue – operating expense – nonoperating expense) / operating revenue

But wait! Lets talk about the problem set! Return on Investment = Profit margin / Asset turnover rate Asset turnover rate = total revenue / total assets = (operating revenue) / (current assets + fixed assets)

But wait! Lets talk about the problem set! Return on Investment = Profit margin / Asset turnover rate = (revenue - expense) / revenue revenue (current+fixed assets) = (revenue – expense) / (total assets) This is the formula in the U of Missouri sheets!

And now back to our regularly scheduled presentation!

Going back to demand for medical care… We believe: Health = h(m,X) Medical care is a normal good If price rises, demand drops If income rises, demand rises

Medical care does not produce only health Medical care also produces: Caring Validation

If price goes up… Medical care Other consumption Indifference curve Price increase Drop in medical care demand

If income goes up… Medical care Other consumption Income increase Increase in medical care demand

Changes in health status: Change the utility function Change the indifference curve Medical care Other consumption healthy sick

From this we can derive demand curves Medical care price Normal demand Demand for sick person

Demand for health care depends on… Price Income Health status And also… Quality of care Time required for care

Medical care is a group of products Health = f(m 1, m 2, m 3,…) All things equal, you want: Higher quality Care that takes less time You decide on demand for medical care based on: marginal utility = marginal cost In theory!

Departure from theory Health and illness are random You can establish a budget and consumption plan… And then get diagnosed with cancer So much for the budget!

Changes in health: Changes in health Changes in demand for medical care Changes in spending on med care Since health is random, spending on medical care will be random

Dealing with financial risk Insurance protects against risk Willingness to pay more than the average loss to insure against the loss is risk aversion This results from a utility function with diminishing returns

Diminishing marginal utility money utility \$50\$100 50% chance of getting \$100 50% chance of getting \$50 E(U) =.5*U(\$100)+.5*U(\$50) E(U)

Diminishing marginal utility money utility \$50\$100 Utility of \$75 is bigger than E(U) E(U) U(\$75) \$75

In this case, we have a plan If you win \$100, pay \$25 (net=\$75) If you win \$50, you receive \$25 (net=\$75) Guaranteed \$75 In fact, even U(\$70) is higher!

Insurance is demanded by the market when there is risk Problems with insurance Moral hazard Once you have insurance you take more risks Smoking Skydiving

Insurance is demanded by the market when there is risk Problems with insurance Moral hazard You seek more care because its already paid You can view this as a decrease in price of medical care But you also have a decrease in income because of the premium you paid

More insurance problems… Adverse selection You know more about your risk than does your insurer Those with greatest risk want insurance You wont seek insurance if your risk is low Result: insurer gets a riskier group of people than expected

How do you deal with these problems? Moral hazard Copayments Coinsurance (percent of bill) Indemnity payment (flat rate) Deductibles Dont insure small losses

How do you deal with these problems? Moral hazard Upper limits on payments Protects insurer from huge losses Serious health events are not insured Managed care (more on this later…)

How do you deal with these problems? Adverse selection Pre-existing condition exclusions These rules may prevent people from switching jobs Pooled purchasing of insurance Group insurance Common in the workplace due to tax breaks Can obtain economy of scale

All insurance works through risk-pooling Should smokers be in the same pool as non- smokers? What about the old and the young? Larger pools get economy of scale Is this fair? Many firms self-insure The insurance company handles administration The company is a single risk pool

What about managed care? Fee-for-service insurance Insurer pays the bills as presented Health maintenance organization Insurer manages your care within closed network of providers Preferred provider organization Insurer gives you incentives to choose preferred providers Point-of-service plan

What is the social problem with health care? Marginal cost/ Marginal benefit MB of health care True cost of care Price the patient sees Optimal quantity Actual quantity

Health costs in the U.S. YearAnnual health growth InflationGDP growth 197010.6%5.6%7.0% 198012.9%12.5%10.4% 199010.9%6.1%7.5% 19975.4%1.7%5.8% 20008.3%3.4%7.4%

Comparisons across nations Female life exp. Infant mort. Spend per cap. Spend per GDP U.S.79.47.1\$437313.0% Australia81.85.7\$21418.4% Canada81.75.3\$24289.2% France82.54.3\$22269.4% Germany80.74.5\$261610.7% Japan84.03.4\$18527.4% Mexico77.325.9\$4525.4%

Sources of insurance Employer-based insurance 2/3 of adults have this Often provides a choice of plans Group purchasing gives better rates Cost comes from your potential salary Individual private insurance Can be expensive Adverse selection

Sources of insurance Medicare Program for the elderly, to address adverse selection Part A: hospital care Part B: outpatient/primary care Managed care plans Medi-Gap insurance (private)

Sources of insurance Medicaid & Healthy Kids Medicaid State-federal partnership Until 1990s, was linked to welfare Available up to 200% of poverty level for children and pregnant women Covers nursing homes, pharmacy Healthy Kids Private-style insurance for near-poor children Might be available for near-poor adults

What happens if youre uninsured? Hospitals are a major safety net Public hospitals – sliding scale for cost Other hospitals Charity care categories Uncompensated care Hospitals pay for charity by cost-shifting Doctors Public clinics Self-pay (if theyll take you)

How much does access to care affect health? Small effect of medical care on health Wealth and education improve health more than medical care Is this because you learn about health when you obtain education? Or does this reflect your underlying preferences? Latino paradox

The high number of uninsured may warrant policy action National health reform usually focuses on the uninsured Medicare Clinton Plan Medicare reform proposals in 2000 election Price of health care also is a concern High inflation rate since 1960s

What about managed cares effects? Major literature reviews by Miller & Luft Equal numbers of better and worse results Worse quality for Medicare HMO enrollees with chronic conditions Financial incentives to doctors have unclear effects on quality (Armour et al., 2001)

More managed care effects Preventive care Better cancer screening (Haas et al., 2002) Mental health Colorado study found no difference after managed care introduced (Cuffel et al., 2002)

Managed care & costs Miller & Luft No clear hospital/physician resource use differences Managed care probably reduced costs through mid-1990s Excess payments negotiated out of system Resurgence of cost inflation in 2000s

Why is there high cost inflation? Administrative costs High quality of care Prices of inputs New technologies Incentive to develop new technologies due to widespread insurance coverage Hospitals compete by purchasing technologies (medical arms race)

How would managed care control costs? Why would a provider contract with a HMO/PPO? Guarantee a group of patients Prevent competitor from getting those patients Some benefits of HMO management services (?)

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