Introduction to Health Insurance Policy

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1 Introduction to Health Insurance Policy Len Nichols, Ph.D. Director, Health Policy Program New America Foundation National Health Policy Forum February 21, 2008 Washington, DC 1

2 Overview Insurance as a Policy Issue The Health Insurance Landscape Key Concepts Basic Insurance Market Policy Options 2

3 Why ARE We Here? Insurance Matters Uninsured IOM Constituents stories Insurance is complicated Contingent commodity Idiomatic language Insurance is understandable 3

4 What IS Health Insurance? Promise to pay in response to particular events, which may or may not happen Premium/contract buys access to that contingent payment Not pre-payment for known services Promise to pay facilitates access to providers 4

5 Number of Insured Persons Through Time Population Privately Insured BC/BS Source: HIAA Source Book, 1994, EROP,

6 Sources of Coverage Today Private Employer-based Direct purchase 27.1 Public 80.3 Medicare 40.3 Medicaid 38.3 Military 10.5 Uninsured 47.0 Source: millions of persons, March 2007 CPS, 2006 data. 6

7 Why is ESI Dominant? Tax preferences Economies of scale Risk pooling Administrative Provider price discounts Econs of scale alone => offering firms would have to pay more to make worker whole than they have to extract in wages to contribute to premiums 7

8 12000 What Does ESI Cost? $12, (73%) Employer Employee 4000 $ (85%) Single Family 8

9 Market Segments ESI Large group (3/4) Small group (1/4) Individual/non-group 3-5% nationally, ranges up to 10% Fundamental differences among them Selling costs Risks of adverse selection 9

10 Key Concepts Spending distribution is highly skewed 1/30, 10/70, 20/80, 3/50 (Show next slide now) 10

11 Illustrations of Spending Variance Average Total Expenditure $3,082 Average for year olds $1,460 Average for year olds $5,579 Median total expenditure $ th percentile year old male $ 0 75 th percentile year old female $6,059 Maximum expenditure $966,587 Source: MEPS, Household component, 2003 data 11

12 Key Concepts Spending distribution is highly skewed 1/30, 10/70, 20/80, 3/50 (Show next slide now) Asymmetric information Adverse selection Moral hazard Stinting 12

13 More Key Concepts Asymmetric info + expenditure skewness => insurers must protect themselves from adverse selection Expenditure skewness means that pooling is necessary Pooling and 3 rd party payment means moral hazard will be present Managed care / bundled payment makes stinting a risk 13

14 Competing Pooling Theories Libertarian Communitarian Blend: Modified Community Rating 14

15 Competition in Insurance Markets Price and Quality Standard assumption is P depends on Q Quality in HI determined by: services covered/excluded cost-sharing providers quality, efficiency and prices 15

16 P Price and quality in ice cream Ben and Jerry s store brand ice milk Q 16

17 Problems with HI Markets Price and quality signals are muddied by risk selection Risk selection varies with comprehensiveness Lower risk prefer lower comprehensiveness, higher risk need/prefer more coverage So, Price is also a function of the average risk of enrollees in specific insurance product What you pay depends on whom you buy with Sellers not always willing to sell to next customer 17

18 P Price and quality in HI Actuarial Value (AV) Zero co-pay, MN Catastrophic (d = $5,000); Or many excluded services AV IFF everyone buys each policy Q 18

19 P Price and quality in HI RS Actuarial Value (AV) AV IFF everyone buys each policy Q RS if risks sort themselves, but all buy at CR 19

20 P P H Price and quality in HI RS Actuarial Value (AV) P L Segmented low risk AV IFF everyone buys each policy Q RS if risks sort themselves, but all buy at CR P < P if underwriting/pricing variance allowed 20

21 What do we know about the nongroup market? Loads are much higher (15-30%) Take-up rate much lower (25% vs. 90%) Search costs are high Variance in premium \ benefit offers is large It works for some/many/most? It cannot work well for seriously ill, low income Reforms produce large tradeoffs There is market failure in the inability of low risk to find policies offered at prices near their E[c] Source: Pauly and Nichols, Health Affairs web exclusive, 10/23/02 21

22 Promoting Different Types of Competition in Insurance Markets NO regulation: value added for healthy by segmenting/excluding higher risks Maximum product variation Minimal care management/coordination Heavier regulation: value added mostly through more efficient provider networks Less product variation Maximum incentive to optimize care delivery management 22

23 Conclusion Some rules necessary for insurance markets to work at all, for all Policy debate is over which rules Group markets allow economies of scale Individual markets allow more freedom Competing visions of Justice also matter, maybe the most 23

Health, Private and Public Insurance, G 15, 16. U.S. Health care > 16% of GDP (7% in 1970), 8% in U.K. and Sweden, 11% in Switzerland.

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