Microeconomics : Policy Reading assignment Nov 7
1. Insurance with fixed spending A simple insurance situation, assumptions: Only one disease Sickness entails a fixed cost Insurance priced at its actuarial cost Ilkka Vuori & Perttu Kiviharju Individuals receive utility depending on their consumption and after-treatment health, u=u(x, h) Consumption: income, y, medical expenditures, m Medical spending restores a person to perfect health People get sick with probability p (budget constraint in the figure p=0.2, slope= -1/p) Risk averse individuals would like to smooth their marginal utility from income. Marginal utility is lower when healthy than sick because marginal utility falls when income increases (U > 0, U < 0) With health insurance, individual can transfer income from healthy state to sick states until marginal utility is equalized Premiums charged up front and expenditures reimbursed later With fixed spending, individuals get to higher indifference curve (point E in the figure, from point E) The optimal insurance policy is an indemnity policy Fixed amount for a particular condition when sick = the cost of the treatment No wasted resources Cutler, D., Zeckhauser, R. 2000. Handbook of Health Economics. Elsevier Science B.V.
Qn 2. Moral Hazard in Health Insurance Abhinav N Sigdyal Moral Hazard refers to a class of agency problems, where people engage in more risky behavior when the costs are born by someone else, than they would when they bear the costs themselves. In health insurance terms, people taking worse care of themselves when they have health insurance than when they don t or overspending the health care services more than they would if they had to pay for it, are examples of moral hazard. Moral Hazard is the substitution effect of people spending more on medical care when the price is low, not the income effect of people spending more on medical care because of insurance. Ch. 11: The Anatomy of Health Insurance p577 Moral Hazard arises because medical needs are not fully monitorable and different people with same condition have different optimal expenditures. Optimal coinsurance arrangements make patients pay for care up to the point where the marginal gains from less risk sharing are just offset by the marginal benefits from reduced provision of low valued care. Agency problems alleviated using two approaches: Demand Side: discourages excessive utilization by making people pay something when they consume medical care. Supply Side: discourages utilization by monitoring providers carefully, penalizing them if they are reckless, and giving them financial incentives to provide only essential care.
William Speirs 3. Adverse selection in health insurance markets Price discrimination not ethically//technically feasible, Those expecting to consume more healthcare will choose more generous policies Generous plans will attract the sick, less generous plans attract the people Too many sick people: premiums increase Incentive for plans to discriminate Inefficient market
4. Optimal co-insurance for health insurance Optimal insurancepolicy Actuarilly fair Maximizesexpected utility Takes existence of the moral hazard into account Optimal co-insurance Reduces overconsumption Provides sufficient risk sharing for consumers Pages586-587 provide more information
5.Explain the main components of the service benefit policy for health insurance Main components are The deductible The deductible is the amount that an individual pays before the insurance company pays anything The coinsurance rate The coinsurance rate is the percentage of the total bill above the deductible that a patient pays. The stop loss the maximum out-of-pocket payment by the person in a year. Page 584 in the article provides details
Question 6: What is supplier induced demand in health care? Microeconomis: Policy Readings 1 Anna-Leena Hetemäki The physician is more eager to provide more inclusive set of health services when they know that the customers are well reimbursed. Insurers would want to limit the care to an ultimately necessary limit Patient has a lower knowledge level considering her health Leans on the expert opinion Asks for excessive care Supplier induced demand
7. The benefits of the integration of the insurance and provision 1)Avoid making contingent claims contracts in medical sector. 2)More efficiency in using resources by regulating utilization on the supply side. Incentives conflict: service-benefit policy, threeplayer agency problem. Incentives Aligned: physicians fixed salary + monitor, responsible to both sides(insurer and patient), less unnecessary treatment. 3)Less stress on money-related demand side limitations. Lower the cost-sharing to get enrolled Elicit price discounts Yue Wang
Kseniia Gerasimova 8. Role of prospective payment in the treatment decisions A typical physician payment: Payment = R + r*cost Cost-based reimbursement Retrospective R=0 and r 1 Change Prospective r=0 and R>0 Predetermined -payment reimbursement 1. Number of admissions and transfers (generally decline) 2. Average length of stay or other inputs (decline) 3. Hospital profits (decline) 4. Quality of care Main concern: patient discharged from hospitals "quicker and sicker. Actually, we need more time to conclude this 07.11.2016 Article discussion 2
9.Equilibrium treatment decisions in managed care Under managed care, the physician has dual loyalties: one to the patient (more care) and one to the insurer (limit care) We can think that the physician bears a marginal cost for providing treatment in excess of some threshold Benefit: mitigates the issue of supplier-induced demand Conflict of interests between the physician and the patient Patient s demand likely is greater than physician s supply Contrasts the case of a generous indemnity insurance, which aligns interests Which level of care will be provided? Multiple possibilities: Short-side principle: quantity = min(demand, supply) Decisions made mostly by physicians - do patients settle for this? Bargaining process between the parties: quantity between the conflicting wishes Interpretation: explicit bargaining, or physician balancing between loyalties The outcome likely depends on particular medical situation E.g. the patient s information on treatments varies depending on the condition Lauri Kauppinen 31E12100 Microeconomics: Policy - Reading assignment 1
Emma Hakala & Miikka Silvonen 10. Optimal mix of demand- and supply side controls in treatment provision What are demand- and supply side controls? Demand side controls are means that aim to restrict unnecessary high demand, and supply side controls aim to control the intensity of care per each visit Demand- and supply side controls in treatment provision are needed in order to obtain a cost-effective and a total welfare maximizing outcome Without any controls the outcome is usually not optimal Neither demand- nor supply side cost containment yields an optimal allocation alone, hence both are needed The interaction between demand- and supply side controls is not clear: -trade offs between simple and complex systems There are three reasons for combining demand- and supply side controls 1. To control different features of medical interaction Patient cost sharing affects the probability that patient uses health care services Managed care can limit the level of service provided 2. Promote flexibility in types of treatment In the graph above: two types of demand for medical treatment: moderately ill and seriously ill patients which insurer can t distinguish With coinsurance policy, patients are required to pay c and equilibriums are levels Q m and Q s. Because of moral hazard, demand is too high With fixed quantity constraint Q, seriously ill patients receive too little medical care, while moderately sick receive more than enough Solution: Combine demand- and supply side controls. The moderately ill will be constrained by coinsurance policy payment c and the seriously ill patients will be provided optimal fixed quantity Q. Requirement: heterogeneity in treatments to achieve optimal results 3. Limit selection behaviour Providers are paid on a capitated basis which gives incentives to dump the most sickest patients Cost of sick patient is much higher since physicians are paid on per patient basis and not per treatment basis Incorporating cost sharing into insurance policy can limit theincentives to dump sick patients
11.CREAM SKIMMING (BY: OMOTOSO OLANIYI. ID:) Same literary concept as cherry picking Insurers practice cream skimming by attracting individuals who are not likely to need the insurance, such as the young and healthy, while avoiding the group of individuals that are likely to incur medical expenses, such as the aged and sufferers of chronic diseases. For example, insurers might avoid hospitals that care for aged people. The insurers thus abandon those really in need of the medical help. Providers of healthcare, i.e. hospitals and doctors, are also likely to do cream skimming if the risks are transferred to them by the insurers by virtue of a capitation, that is, if a fixed amount per client is paid to the healthcare provider by the insurer. The provider would want to avoid those whose health situation would incur treatments that would cost more than that amount, as that would lead to loss.
Teemu Riipi 12. Is there an analogy between the welfare state and the lifetime health insurance? Lifetime health insurance: an alternative approach to the idea of health insurance being renewed on a yearly basis Instead of rebuying insurance every year, a citizen could choose to buy health insurance for a lifetime This counteracts the welfare loss suffered from knowledge gained over time An individual buys level premium life insurance when they are younger and healthier, and the premium starts to become smaller when an individual grows older and health risks usually become also more apparent Being born in the Nordic welfare state, the society is the one doing the decision for the newborn citizen! Case Finland: every citizen in the nation is provided a lifetime health insurance, funded from tax income Kansaneläkelaitos KELA / Social Insurance Institution Customers: all permanent residents in Finland are covered
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