H_11_05W_ Cost containment

H_11_05W_ Cost containment - HEALTH ECONOMICS Handout 11...

Info icon This preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
HEALTH ECONOMICS Handout 11 Cost Control Mechanisms Traditional FFS insurance was based on the following principles of “guild free choice” which led to the above problems. 1) Free choice of physician by patient. 2) No interference by insurer in what treatment physician prescribes. 3) No interference by insurer in the price of treatment. 4) Fee-for-service payment. Insurance provides a great benefit because it reduces risk. Yet insurance leads to several “problems.” 1) Moral hazard/welfare loss 2) Induced demand 3) Less consumer search (which leads to higher prices). This “problem” is a “macro” problem in that 1 person will not benefit if they search but others do not. Insurance arrangements can be understood in the context of how they address these issues. The cost control mechanisms typically involve movement away from the principles of “guild free choice” and/or movement away from full insurance (i.e. cost sharing). Cost Sharing: A digression on the optimal level of coinsurance (assuming coinsurance is the only available method to limit welfare loss). Graph 1 $ 0 1-C The vertical axis is the premium. The horizontal axis is (1 - % consumer pays). (More cost sharing is a move to the left on the horizontal axis). A zero profit policy would have the premium (r) such that: r = (1 + L) (1-C)*expected loss: L = loading factor; C = co-pay rate 1
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
If there were no moral hazard (and the load does not depend on the co-pay rate) this would be a straight line. When the insurer share rises, insurer costs rise for two reasons. 1) They pay a greater percent of the loss 2) The loss is higher because of moral hazard Hence with moral hazard, the premium rises faster than the portion of the loss paid by the insurer. Consumers have preferences for premiums and coinsurance rates. Holding the premium constant, individuals would like greater coverage holding the co-pay rate constant individuals would like lower premiums. These preferences can be depicted as indifference surfaces curved around the lower right (because premiums are “bads,” not “goods”). The optimal coinsurance rate/premium combination that still offers the insurer zero profits can be found by where an indifference surface is tangent to the zero profit curve. Graph 2 1-C 0 $ If there is no moral hazard and the tangency will be at the full insurance point (actually the indifference curve might be steeper than the zero profit line at this point). If there is moral hazard, the curves will cross at the full insurance point and individuals will substitute away from full insurance in exchange for a lower premium. This will move them to a higher indifference curve. --Cost sharing summary: Advantages: Reasonably easy to administer Preserves principles of guild free choice Reduces moral hazard Disadvantages: Does not control demand inducement (except to the extent that it encourages search) Increases risk (the reduction of which was the purpose of insurance) Utilization Review: 2
Image of page 2
Utilization review is simply a way of monitoring what treatments patients get.
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern