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Classen_HealthEcon_Class15 - Risk Pooling and Forms of Risk...

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Unformatted text preview: Risk Pooling and Forms of Risk Pooling and Forms of Health Insurance Class 15 Loyola University Chicago Prof. Tim Classen February 23, 2011 Class Outline Moral Hazard Risk Pooling Forms of Health Insurance Fee for Service into Managed Care Moral Hazard Moral Hazard Moral Hazard results when people change health behaviors or health care system use after insured Policies to mitigate MH Deductibles Co­payments/coinsurance Customary/usual fees Managed care (e.g., pre­approval) Health Savings Accounts Example of Effect of Insurance Example of Effect of Insurance on Demand for Health Care Price $100 Demand Welfare loss due to Moral Hazard Demand w/insurance Qd = 20 – (P/5) or P = 100 – 5Qd Assume 20% coinsurance so at price of $50, patient pays $10/visit MC = $50 $10 10 18 20 Quantity of Physician Visits 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 Traditional Indemnity Insurance Traditional Indemnity Insurance In traditional indemnity policies, sometimes called Fee For Service (FFS): Third­party payers (health insurance co.) reimburse the insured on the basis of fees charged for services received Insurance companies do not restrict patients with respect to which providers they can use Risk sharing is between insurers and subscribers (patients), not between insurers and providers Fundamental Issues in Shift Fundamental Issues in Shift from FFS to Managed Care Policies or attempts to change health care use may be: Trying to reduce growth in spending Managed care Quality efforts Trying to improve cost­effectiveness of health care Indemnity (or Fee­For­Service (FFS)) health insurance provided few incentives to limit care Reimbursement based on procedures gives incentive to over­treat (imperfect agency) PPOs and HMOs PPOs and HMOs The term “health maintenance organization” (HMO) is applied to MCOs that offer care through a single, fairly limited network as opposed to the larger, less restricted network associated with most PPOs. In addition to network size, two other restrictions distinguish partially managed PPOs from more tightly regulated HMOs: Mandatory authorization for hospitalization Primary physicians acting as gatekeepers Distribution of Health Plan Enrollment for Covered Workers, by Plan Type, 1988-2010 * * * * * * * Distribution is statistically different from the previous year shown (p<.05). No statistical tests were conducted for years prior to 1999. No statistical tests are conducted between 2005 and 2006 due to the addition of HDHP/ SO as a new plan type in 2006. Source: Kaiser/HRET Survey of Employer­Sponsored Health Benefits, 1999­2010; KPMG Survey of Employer­Sponsored Health Benefits, 1993, 1996; The Health Insurance Association of America (HIAA), 1988. Employees With a Choice of Health Plans, 1988-2005 In recent years, fewer employees have a choice of conventional FFS plans. A growing share have a choice of PPOs and POS plans. 1988 1996 2002 2005 100 90 80 Percent of Employees 70 60 50 40 30 20 10 0 Conventional FFS HMO PPO POS ^ Information was not obtained for POS plans in 1988. Source: KFF/HRET Survey of Employer-Sponsored Health Benefits, 2000-2005; KPMG Survey of Employer-Sponsored Health Benefits: 1988, 1993, 1996. 90 82 74 64 52 46 50 44 45 34 30 28 14 18 12 ^ Types of HMOs Types of HMOs Staff Model HMOs (Closed Panel) Group Model HMOs Employ health care providers directly Providers are employees of the HMO Provide care exclusively to HMO enrollees. Contract with one or more group practices Each group primarily treats the HMO’s enrollees. Contract with one or more group practices and/or Independent Practice Associations (IPAs) Network may or may not provide care exclusively for the HMO’s enrollees. Contract with physicians in solo practice, or with associations of physicians that in turn contract with their enrollee physicians Solo practice physicians in IPA model may have a significant number of patients who are not HMO enrollees. Network Model HMOs Independent Practice Association (IPA) Model HMOs Other types of Managed Care Other types of Managed Care Point­Of­Service (POS) Plan Preferred Provider Organization (PPO) Either prepaid or fee­for­service Enrollees choose to receive a service from participating or a non­participating provider Level of coverage is generally reduced (or cost­sharing is increased) for services associated with the use of non­ participating providers. More gatekeeping from PCP than PPO More similar to fee­for­service health plan Contracts with providers at discounted fees to enrollees Enrollees may seek care from non­participating providers but generally are financially penalized for doing so by the loss of the discount and subject to larger copayments and deductibles Incentives in Managed Care on Incentives in Managed Care on Demand Side Lower premiums than FFS, but maintain lower financial risk as well Similar to Pre­commitment Copayments Base insurance choice on expected use of medical care MCO constrains level of possible care MCO searches for lowest cost providers, rather than patients searching Provides incentives for provider to join MCO And for provider to reduce costs due to capitation Gatekeeping Second Opinion requirements HMO Gatekeeping HMO Gatekeeping Under a gatekeeper system, patients must receive all their primary care from a single physician. Any specialist referrals, surgery, prescriptions, and hospitalizations must be approved in advance by the gatekeeper primary physician. In many cases, gatekeeper physicians are paid a capitation rate by the HMO. HMOs sometimes also use withholds, in which a pool of money is held back and distributed to providers only if total expenses for the year end up at or below acceptable levels. ...
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