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Classen_HealthEcon_Class14 - Supply of Supply of Health...

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Unformatted text preview: Supply of Supply of Health Insurance Class 14 Loyola University Chicago Prof. Tim Classen February 21, 2011 Class Outline Supply and Design of Health Insurance Basis for Premiums Trends in HI Premiums Adverse Selection & Moral Hazard Risk Pooling Pricing of Health Insurance Pricing of Health Insurance Insurers have expectations of how much health care (m*) policy holders will use Premium = (1+loading fee) X Expected payouts = (1+L) X (1­C) X pm X m* Loading fees reflect risk for insurers Loads are very large for individual plans (60­ 100%) vs. 5­20% for group plans L = 0 is “actuarially fair” insurance But insurance companies have operating costs Average Annual Worker and Employer Contributions to Premiums and Total Premiums for Family Coverage, 1999­2010 $5,791 $6,438* $7,061* $8,003* $9,068* $9,950* $10,880* $11,480* $12,106* $12,680* $13,375* $13,770* * Estimate is statistically different from estimate for the previous year shown (p<.05). Source: Kaiser/HRET Survey of Employer­Sponsored Health Benefits, 1999­2010. Cumulative Changes in Health Insurance Premiums, Workers’ Contribution to Premiums, Inflation, and Workers’ Earnings, 1999-2010 Source: Kaiser/HRET Survey of Employer­Sponsored Health Benefits, 1999­2010. Bureau of Labor Statistics, Consumer Price Index, U.S. City Average of Annual Inflation (April to April), 1999­2010; Bureau of Labor Statistics, Seasonally Adjusted Data from the Current Employment Statistics Survey, 1999­2010 (April to April). Problems for Health Insurers Problems for Health Insurers Asymmetric Information Leads to Adverse Selection (ex., used car market) People most adverse (least desirable) to an insurance company’s profitability are most likely to select, or apply for, the insurance being offered Higher rates of illness than forecast by actuaries (premiums must be adjusted) Design a variety of plans to attract different risks to different plans (or positive selection) Moral Hazard Reduces welfare loss of healthy from being pooled with unhealthy in uniform plans Change health behaviors or system use after insured Policies for Moral Hazard Policies for Moral Hazard Deductibles Co­payments/coinsurance Customary/usual fees Managed care Health Savings Accounts Risk Pooling Risk Pooling Private health insurance utilizes a concept known as risk pooling. Offer protection to a large group (pool) while knowing that only a small fraction of the people in the pool will have serious and expensive illnesses. By insuring people in groups, insurance companies can use the premiums of people who do not need medical services to pay for the expenses of those who suffer illness or injury. Risk Pooling Reduces Variation Risk Pooling Reduces Variation In a given year, any individual could have very high or very low medical expenses, depending on his or her lifestyle choices, the chance that he or she will develop a serious illness, or the chance that he or she will be in an accident. In comparison to individual medical expenses, medical expenses for large group are much less variable, since at any one time, expenses for those who are sick are offset by the premiums paid by those who remain healthy. Risk Pooling Example Risk Pooling Example Individual possible annual health costs Outcome Probability $2,500 0.20 Loss = $0 0.80 Expected value = $500 Standard deviation = SQRT [.2*(2500­500)2 + .8*(0­500)2] = $1000 Risk Pooling Example Risk Pooling Example with 2 People Pooling arrangement changes distribution of accident costs for each individual Cost/person Probability $1,250 $0 (.8)(.8) = .64 (.2)(.8)(2) =.32 (.2)(.2) = .04 $2,500 Assume losses are uncorrelated Expected Cost = $500/person Risk Pooling with 5 People Risk Pooling with 5 People Pooling Arrangement between 5 people Cost/Person Probability $2,500 0.00032 $2,000 0.0064 $1,500 0.0512 $1,000 0.2048 $500 0.4096 $0 0.3277 Expected Loss = $500 Standard Deviation = $447 Risk Pool with 2 Patients Risk Pool with5 Patient 1 90% 80% Likelihood of expenditure 70% 60% 50% 40% 30% 20% 10% 0% $0 $500 $1,000 $1,250 $1,500 $2,000 $2,500 Expenditures Distribution of Expected Costs for Insurer $1,000 $900 $800 Expected Costs $700 $600 $500 $400 $300 $200 $100 $0 1 1,001 2,001 3,001 4,001 5,001 6,001 7,001 8,001 9,001 Lower Bound 95th Pct Confidence Interval Upper Bound 95th Pct Confidence Interval Number of Policyholders ...
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