E&F - lecture 12 Flashcards
Equity
By equity I mean that a just and humane society can define a minimum standard of medical care that should be available to all its members -essentially all the cost worthy medical care that can effectively prevent or cure diseases, relieve suffering, and correct dysfunction.
(By “cost worthy” I mean that marginal benefits equal marginal costs for persons of average incomes) . (Enthoven, 1988)
Social Health Insurance
Health insurance is social insurance. Health insurance is appropriately understood as social insurance and not casualty insurance. (…) Social insurance assures universal financial access to the decent minimum and requires the well to share in the cost of care of the sick. The element of cross-subsidy is essential.
Source: Enthoven (1988b) p. 4-5.
Equity: complete autonomy rejected
- In a free market the outcome would be entirely based on individual choices;
- A free market would result in market failures (e.g., risk rating and risk selection; discontinuity of coverage; to be discussed later);
- A system with high ethical standards is necessary, with safegards to prevent abuse.
Equity: collective action is appropriate
- Collective action is appropriate because market failure is endemic in health insurance.
- Collective action is necessary and appropriate to assure that each person is protected from the high healthcare costs.
Equity: complete equality is rejected
- The ’decent minimum‘ limits the choice of the poor to the standard of care that is cost-worthy for the average person, thus more than they would choose if they were given the money and a choice of how to use it.
- Complete equality would limit the choice of those who could pay for more, and might prefer more.
- Complete equality would block innovation and diversity.
Efficiency
An efficient allocation of health care resources is one that minimizes the social cost of illness, including its treatment. This is achieved when the marginal dollar spent on health care produces the same value to society as the marginal dollar spent on defense, education, consumption, or other uses. Relevant costs include the suffering and inconvenience of patients as well as the resources used in producing care.
This goal should not be confused with minimizing or containing health care expenditures. A lower percentage of GNP spent on health care does not necessarily mean greater efficiency – it may mean that costs have been shifted to patients by delaying or denying care. (Enthoven, 1988)
Efficiency has been ignored
- In the Western European countries and North American democracies, social policy was initially preoccupied with equity, to extend equal financial protection and access to healthcare services to most or all of the population.
- Compare the three waves described by Cutler! (Equity, Cost containment and Efficiency)
Perfect efficiency is not attainable
- Health insurance and health care markets are not naturally competitive.
- Efficiency of perfect market is not attainable in healthcare:
– Information asymmetry;
– Uncertainty –> health insurance –> moral hazard;
– Medical services are largely locally provided, which limits the extent of competition.
Why has efficiency been ignored?
- There was not a great deal that medicine could do to alter the health status or outcomes of sick people. The really effective technologies – immunizations, antibiotics, and some surgery – were relatively simple and inexpensive.
- Total healthcare expenses relatively low.
- Differences in outcomes are difficult to define, measure, and value.
- Most people believe that more medical treatment is better than less.
Why is efficiency important now?
- The high level of HC expenses makes efficiency rewarding;
- There is choice among costly, effective treatments;
- Examples of huge efficiency differences (HMOs vs FFS; regional differences).
Equity and efficiency
Enthoven:
”I believe our ability to continue to pursue equity depends on our ability to improve efficiency in health care, and that the opportunities for doing so are substantial.”
‘Free market’-failures
- Risk rating and risk selection
- Market segmentation & product differentiation
- Information cost
- Discontinuity of coverage
- Free-riders
Why would an insurer apply risk selection (i.e. not accepting high risks) even if there are no legal restrictions on risk rating?
- Are the relevant risk factors known?
- If not, the insurer is not able to risk rate and therefore prefers to risk select
- Can they be measured?
- Not always
- Relation known between ‘loss’ & risk factors?
- Requires a lot of research
- What is socially more acceptable: rr or rs? Risk rating or risk selection
- Risk selection
- Transaction costs
- May be high
- How competitive is the market?
- If it not to competitive, they can afford it. Otherwise rr of rs
- Too small group; etc etc….
Risk rating and risk selection
In a free competitive insurance market insurers have to break even, in expectation, on each contract either by
- adjusting the premium to the consumer’s risk (risk-adjusted premiums),or
- by adjusting the accepted risk to the premium (risk selection), or
- Adjusting the product (product differentiation).
* The premium differences can easily go up to a factor 1000.
- Segmentation and product differentiation
- There are endless possibilities for differentiating insurance coverage from each other. This can be used as a tool for:
– Risk selection, and
– Segment the market to avoid price competition, i.e., differentiate the product in ways that make price comparison very difficult. - Although such segmentation can be responsive to consumer preferences, it comes at the expense of price competition, and may therefore reduce efficiency.
- Information costs
- Health insurance coverages are complex and difficult to understand, evaluate, and compare High information costs.
- People may find it costly in terms of their own time to achieve a sufficient understanding of the different health insurance options offered.
- High information costs reduce the price competition on the insurance market.
- Discontinuity of coverage
- In a free-market insurers might drop coverage of people who develop a chronic condition as soon as their contract period expires (discontinuity of coverage), or they may raise the premium to reflect the patient’s new condition (risk rating).
- In a free-market insurance contracts may contain a clause such as: no automatic coverage of newborns.
- Free-riders
- Free-riders: people who go without insurance in the belief that if they become really sick, someone will take care of them.
- They may wait until they are sick to buy health insurance.
Insurers usually use tools to protect themselves against such free-riders, such as risk rating, exclusion of preexisting medical conditions, and denial of coverage. But how effective?
Why is the theory and practice of managed competition relevant for countries with a public non-competitive healthcare system?
In all countries there are policymakers who advocate a competitive healthcare market with the argument that competition would increase efficiency.
Often, however, they do NOT understand the complexity of the managed competition model.
Managed Competition
The essence of managed competition is the use of the available tools to structure cost-conscious consumer choice among health plans in the pursuit of equity and efficiency in health care financing and delivery. The market in a system of managed competition should be viewed not as merely two-sided but as three-cornered, including consumers, health plans, and sponsors. Enthoven, JHPPL, 1988.
Health Plan: different meanings
Enthoven (1988):
Health plans integrate the financing and provision of care.
Synonyms: e.g. Health Maintenance Organizations (HMOs), Alternative Delivery Systems, Integrated Delivery Systems (IDS). insurers
Affordable Care Act (USA):
Health plan = a health insurance product.
When using the term ‘health plan’ clearly define it!
