Chapter 6: Health Insurance Chapter 6 Health Insurance Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

Chapter 6: Health Insurance

Chapter 6

Health Insurance

Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin


Introduction

Principles of health insurance

Features of the health sector

The role of government

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Principles of Health Insurance

The Genesis of Health Insurance

• Government does not play a role in health insurance

• Do you buy health insurance from a private company?

• Risk aversion• How much should a private company charge as a premium?

• Actuarially fair premium

= (% risk)(high medical cost) + (% risk)(low medical cost)

• Expected value

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Price Equals Expected Medical Cost

Chance of a $61,000 Medical Bill

Chance of a $1,000

Medical Bill

Expected Medical Bill

High Cost Person 9% 91% $6,400

Low Cost Person 1% 99% $1,600

Table 6.1: Expected Medical Bills

Pi = (EMC)i

• The price charged to a person will vary with the person’s expected medical costs, not the person’s income.

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Moral Hazard and Price Responsiveness

Adverse Selection and Asymmetric Information

• Moral hazard: the use of medical care because they know the insurer will pay part of their bill.

• Price responsiveness

• Price elasticity

• Adverse selection: instead of a random sample selecting to enroll, a biased sample with higher medical costs is likely to enroll.

• Asymmetry of information

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Catastrophic Insurance

Table 6.2: Catastrophic Insurance v. Complete Insurance

Insurance coverage

Premium Out-of-Pocket Burden5% chance 95% chance

Total Burden5% chance 95% chance

None $0 $61,000 $1,000 $61,000 $1,000

Complete $4,800 $0 $0 $4,800

Catastrophic $3,400 $5,200 $1,000 $8,600 $4,400

• The patient has a deductible and then the insurance pays the remainder of the bill

• How do individuals choose health insurance?

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X% Insurance

• Insurance pays a specific percentage (X%) and the patient pays the remainder (100% - X%).

• Cost-sharing rate or coinsurance rate

Figure 6.1

100 110 120 Medical Care

P

S

$400

$300

$100

$50

$200

D

J

O

D’

F

D”

G

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The Impact of Insurance on Efficiency and Redistribution

Figure 6.2

110 Medical Care

P

S

H

MB

MSB$400

$300

$100

$50

$200

J

F

Inefficiency if there is no externality

$150

• FJH is the efficiency loss from not cutting medical care from J to H

• The size of FJH depends on how steep the MB curve is

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The Impact of Insurance on Efficiency and Redistribution

Optimal redistribution from the healthy to the sick

• Citizens’ preferences on redistribution of resources from the healthy to the sick are complex

Efficiency if there is a positive externality

• A corrective subsidy may increase efficiency

• The socially optimal quantity of health care is greater than the quantity consumed privately

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Limitation of Price and Supply by the Insurer

Figure 6.3

100 110 115 120 Medical Care

P

S

D

D’ D”$400

$300

$100

$50

$200

J

G

• G = 100% insurance

Q and P of medical care

O

• O = no insurance

F

• F = 75% insurance

• If max P = $100, and demand is D”, there will be a shortage of 20.

• If max P = $100, and demand is D’, there will be a shortage of 15.

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Features of Health Insurance Markets

Regulation by insurers• The insurer has an incentive to limit expenditures

Patients, doctors, and the principal-agent problem

• A fee-for-service (FFS) and health maintenance organizations (HMO) cause opposite risks for the patient

• The patient relies on the doctor for medical advice

Employer-provided health insurance

• Tax advantages and attractiveness to employees

• Most people obtain health insurance through work

• Allowable charges and refusal to pay

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Who Bears the Burden of Employer-Provided Health Insurance?

Figure 6.4

110 Labor

Cash Salary

S

D

$50,000

• Initial equilibrium when there is no health insurance offered

D’

• D decreases to D’$42,000

$8,000

• Now, $8,000 of health insurance is offered S’

• S decreases to S’

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Table 6.3: Cash Salary and Health Insurance for an Employee

OptionEmployee’s Compensation

Cash Insurance

Employee’s Purchase of Insurance

Employee’s Burden from Insurance

#1 $50,000 $0 $8,000 $8,000

#2 $42,000 $8,000 $0 $8,000

Who Bears the Burden of Employer-Provided Health Insurance?

• Short run versus long run burden

• Employees bear most of the burden of cost

Rising Medical Expenditures

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The Role of Government

The unemployed What about health insurance for…

Low wage workers

Retirees

• Medicaid and SCHIP are programs to help the poor

Medicaid and the State Children’s Health Insurance Program

• Poor people cannot afford medical care without help

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Alternative Public Policies for Working Families

Table 6.4: Proposed Tax Credit by Household Income for a Family of Four

Household Income Tax Credit

$0 $8,000

$50,000 $6,000

$100,000 $4,000

$150,000 $2,000

Responsible Health Insurance (RHI)

Consumer-driven health care and health savings accounts • The free market can work if each consumer bears more of the burden of his own medical care

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Government reinsurance

• Government commits to private insurers for X% of any huge medical bill

An employer mandate or an employer play-or-pay option

• Play-or-pay

• Employer mandate

Government insurance• Single-payer plan

Alternative Public Policies for Working Families

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Medicare for Retirees

• Government insurance for retirees

• How Medicare works

• Medicare regulation of hospital and doctor fees

• Medicare prescription drug coverage

• Income-related patient cost-sharing

• Rationing

6 - 17


Health Insurance in Other Countries: An International Perspective

Most high-income countries finance most medical care through taxed rater than private insurance premiums.

• Great Britain and the National Health Service (NHS)

• Canada and the single-payer system

• Taiwan and cost sharing

6 - 18


Principles of health insurance

Features of the health sector

The role of government

Summary

6 - 19


Preview of Chapter 7:

Tax Incidence and Inefficiency Incidence: Who bears the burden

People, not firms, ultimately bear all tax burdens

A tax on capital income

Inefficiency

A tax on wage income

The efficiency loss from a tax on a good

The efficiency loss from a tax on wage income

The efficiency loss from a tax on capital income

6 - 20

Chapter 6: Health Insurance Chapter 6 Health Insurance Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

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