Health Insurance Part 2. Health Policy Eric Jacobson

Transcription

1 Health Insurance Part 2 Health Policy Eric Jacobson

2 The Uninsured 44 million individuals in the U.S. are without any insurance coverage at all. They tend to have below-average incomes. Nearly two-thirds of the uninsured are in families with incomes below 200% of the poverty line. 70% of the uninsured are in families with a head of household who is a full-time, full-year worker. Over one-fifth of the uninsured are children.

3 The Uninsured Why should we care about the uninsured? Physical externalities associated with communicable diseases. Financial externalities: Uncompensated care is the costs of delivering health care for which providers are not reimbursed. $35 billion delivered in uncompensated care, roughly 2% of total spending. Inappropriate delivery of care (e.g., through emergency rooms). Paternalism and equity individuals may irrationally underinsure themselves by miscalculating the odds of getting sick. Finally, becoming uninsured is a concern for many.

4 The Uninsured This final concern, becoming uninsured, is an issue because of the great reliance on employer-provided health insurance. Job lock is the unwillingness to move to a better job for fear of losing health insurance. This can lead to a mismatch between workers and jobs, and can lower overall productivity.

5 Empirical Evidence Sources of evidence: Health insurance and mobility One strategy examines mobility rates for those who are covered/uncovered, holding constant the value individuals place on health insurance. Another strategy uses state-law changes that loosened job lock with COBRA continuation coverage. Studies have found evidence of job lock.

6 HOW GENEROUS SHOULD INSURANCE BE TO PATIENTS? As with other insurance, the optimal generosity will be determined by the trade off between consumption-smoothing and moral hazard. Generosity represents the share of medical spending that will be reimbursed by the health insurer.

7 HOW GENEROUS SHOULD INSURANCE BE TO PATIENTS? Risk-averse individuals will value health insurance as a means of smoothing their consumption with respect to the cost of medical events. Some events, like a check-up, are minor and predictable, while others, like a heart attack, are more expensive and unpredictable. Expected utility theory suggests that insurance is much more valuable for expensive, unpredictable events.

8 HOW GENEROUS SHOULD INSURANCE BE TO PATIENTS? The most generous insurance plans are ones that provide first-dollar coverage, reimbursing providers fully with little or no cost to the patient. Thus, first dollar coverage does not provide much more consumption smoothing than a plan that only pays for the higher costs of major medical events (catastrophic care).

9 Consumption Smoothing Benefits of Health Insurance for Patients The consumption smoothing benefits of first dollar coverage for minor and predictable events is small because: Risk-averse individuals gain little utility from insuring small risks. And individuals are much more able to selfinsure.

10 Moral Hazard Costs of Health Insurance for Patients Offsetting the consumption-smoothing benefits of health insurance to individuals is the risk of moral hazard. Feldstein (1973) analyzes the problem, as illustrated in Figure 2. 2

11 Figure 2 Price of each visit The right amount of health care is where D=S. Deadweight Loss $100 A B S=MC $10 Health insurance shifts the consumers demand, This over- leading to more consumption. leads to deadweight loss. C D Q 1 Q 2 Number of visits to doctor s office

12 Moral Hazard Costs of Health Insurance for Patients The fundamental trade-off of health insurance, then, is the gains in terms of consumption smoothing versus the costs in terms of the overuse of medical care.

13 Moral Hazard Costs of Health Insurance for Patients Moral hazard might then lead to flat of the curve medicine. Consider the relationship between an additional $1 of total spending on health care and the amount of marginal benefit from that spending. Initially, the marginal benefit is very high (e.g., influenza shots for the elderly, etc.), but it declines. Figure 3 illustrates such a curve.

14 Figure 3 $ of Marginal Health Benefits Initially, Further spending dollars of spending has diminishing lead to high returns. benefits. $5 A $1 B $0.10 C $1,000 $2,000 $5,000 $ of Medical Spending

15 Moral Hazard Costs of Health Insurance for Patients Productivity dwindles as spending on health care rises. From a societal perspective, spending should stop when the additional health benefit is smaller than the additional health cost. If individuals paid the full cost of their health care, the socially optimal amount, point B would be chosen. Moral hazard means that the last $1 of private spending will equal $1 of marginal health benefit, potentially far greater than the socially efficient amount. If individuals do not pay much for their additional health care, they will demand health care as long as the effectiveness curve is not perfectly flat. The flat of the curve area is therefore beyond point B, where each $1 of medical care buys less than $1 in improved health.

16 How Elastic Is the Demand for Medical Care? The RAND Health Insurance Experiment A critical question becomes: To what extent does moral hazard actually cause patients to consume more health care? Or, how elastic is the demand for health care? The RAND Health Insurance Experiment (HIE) was a true social experiment with random assignment of health plans with different policy parameters. The coinsurance rate varied from 0% to 95%. The out-of-pocket maximum was $1,000 for all participants (even the ones in the less generous plans). In addition, all families were given $1,000 to participate, so no one was made worse off from the experiment.

17 How Elastic Is the Demand for Medical Care? The RAND Health Insurance Experiment The HIE found that overall, each 10% rise in the price of medical care to individuals led them to use 2% less care, a small elasticity of That is, medical utilization is fairly insensitive to price. On the other hand, even with this low elasticity the implied deadweight loss from insurance coverage in the United States is in the range of $125 to $400 billion in current dollars.

18 Optimal Health Insurance The findings of a non-zero elasticity (e.g., moral hazard) and the significant deadweight loss that goes with it, suggest that the optimal health insurance policy is one in which, Individuals bear a large share of the medical costs within some affordable range, and Individuals are fully insured when costs become unaffordable.

19 Optimal Health Insurance One example of a plan like this is Feldstein s (1973) Major Risk Insurance plan in which: Individuals make a 50% copayment on all services until they reach 10% of their income on medical care, and Receive full insurance thereafter.

20 Why Is Insurance So Generous in the U.S.? In general, insurance in the U.S. is much more generous than Feldstein s proposal. See Figure 4. 4

21 Figure 4 Quality of Health Insurance Except for the uninsured, most Americans have generous health coverage. 44 million Population

22 Why Is Insurance So Generous in the U.S.? Why is insurance so generous? Tax subsidy: Eliminating the tax subsidy may not be the most appropriate policy today, however. Rather capping the subsidy for a basic plan might be more sensible. Access motive: Offering health insurance has both income and substitution effects. Both result in increased expenditure. Psychological motivations: There may be motivations for holding insurance. Health insurance may help individuals overcome time inconsistent behavior.

23 HOW GENEROUS SHOULD INSURANCE BE TO MEDICAL PROVIDERS? There is also moral hazard on the provider side. Even if an insurer could perfectly assess a patient s true level of illness, the cost to treat that illness can vary considerably. Thus, insurers have often reimbursed medical providers according to their reported costs of treatment.

24 HOW GENEROUS SHOULD INSURANCE BE TO MEDICAL PROVIDERS? Patient-side moral hazard refers to the extra care demanded for illness because insurers cover the cost of medical treatment. Provider-side moral hazard refers to the extra care provided for illness because insurers reimburse health care providers based on costs.

25 HOW GENEROUS SHOULD INSURANCE BE TO MEDICAL PROVIDERS? Retrospective reimbursement is a payment arrangement reimbursing physicians for the costs they have already incurred. This system removes any incentive for providers to treat their patients cost-effectively. If a physician s objective is to maximize health of the patients, then this system will likely yield flat of the curve medicine. In addition, if physicians are also concerned about income maximization, this sort of reimbursement only exacerbates the moral hazard.