E&F - lecture 4

Question 1

Health insurance might increase the demand for health care, why?

Answer 1

From the perspective of the consumer, health insurance reduces the prices of medical care. When there is full insurance, the price for the consumer is zero. So, the demand will go up.

Question 2

definition Moral hazard

Answer 2

“Moral hazard refers to the additional health care that is purchased when persons become insured”

Question 3

Two main factors driving moral hazard in health insurance:

Answer 3

1. consumers are sensitive to healthcare prices: if prices go down, demand will go up
2. insurance contracts tend to be incomplete in the sense of specifying the consumer’s efforts to avoid an insurance claim and to contain costs in the event of a claim.

Question 4

Why are health insurance contracts typically incomplete in the sense of specifying the consumer’s efforts to avoid an insurance claim and to contain costs in the event of a claim?

Answer 4

• Information asymmetry: insurers can not observe the efforts that a consumer takes or not takes to avoid a claim or maintain costs
• Transaction costs: even if insurers would be able to observe the consumer efforts, it might simply be too costly to check if each and every consumer makes the efforts.
• Regulation: many health insurance markets are to some extend regulated. So, health insurers are limited in the design of insurance contracts

Question 5

Moral hazard may impose a welfare loss

Answer 5

Moral hazard distorts the allocation of resources.
Assuming the allocation of resources is optimal when consumers are confronted with “real” prices (e.g. not distorted by insurance), moral hazard results in an inefficient allocation of resources.

Question 6

Brot-Goldberg et al. (2017) find that:

Answer 6

Consumers respond to spot prices rather than the true expected end-of-year price

Compared to full insurance cost sharing:
* reduces the demand for health care
* reduces the demand for health care across a broad range of services
* reduces the demand for both low- and high-value care
* did not motivate people to switch to cheaper providers
* somewhat motivated people to substitute higher-cost procedures with lower cost procedures

Question 7

What is the policy relevance of moral hazard?

Answer 7

• To the extent moral hazard is welfare decreasing (i.e. marginal costs > marginal benefits) it can be problematic via higher premiums. More specifically:
• In unregulated markets, higher premiums might reduce uptake of health insurance (which might lead to forgone welfare gains for risk averse consumers)
• In regulated markets, regulators will be confronted with higher costs (i.e. resources that cannot be spent on other sectors, which might lead to allocative inefficiency)

Question 8

How to balance the welfare gains of health insurance and the welfare loss of moral hazard?

Answer 8

In theory: make insurance contracts more complete
Make insurance contracts more complete in the sense of specifying the consumer’s efforts to avoid an insurance claim and to contain costs in the event of a claim.
However, this is difficult due to:
* Information asymmetry
* Transaction costs
* Regulation

In practice: consumer cost sharing
Deductible: consumers pay spending up to a certain threshold themselves before insurance kicks in (eigen risico)
Coinsurance: consumers pay a % of spending themselves
Copayments: consumer pay a fixed amount per treatment themselves (eigen bijdrage)

Question 9

Innovative forms of cost sharing

Answer 9

1. value-based insurance design (VBID)
2. a doughnut-hole at the margin

Question 10

Value-based insurance design (VBID)

Answer 10

The level of cost sharing varies with the value of treatments. Which treatment do you want consumers to pay out of pocket and what treatments don’t you want people to pay out of pocket

Why would value-based insurance design lead to a welfare gain over traditional forms of cost sharing?
If there is high value for the patient or society, you really don’t want patient to pay their treatment (vaccination). In all studies (RAND and Oregon) shows that when you apply traditional forms of cost sharing, people will consume less medical care. People will not only use less of unnecessary care, but also use necessary care. Consumers cannot distinguish between low and high value care.

Question 11

A doughnut-hole at the margin

Answer 11

Cost sharing is centered around the annual expected costs

The deductible start somewhere (depending on the individual’ s expected spending)
This means that the start can be at different prices

Why would a doughnut hole at the margin provide consumers with greater incentives to control healthcare spending than a traditional deductible?
- When people are price sensitive, they want to make sure they don’t meet the deductible. The range of spending incentive is longer than with the traditional deductible.
- Only necessary care is insured and everything unnecessary if going from your deductible. If it is started from the beginning and someone is sick and already knows the deductible must be paid, there is no incentive to not consume unnecessary care. If the doughnut hole is centered around the expected costs, it is no longer sure that a sick person pays the whole deductible. It creates an incentive to only use necessary care.

Under what assumptions?
- That we are able to predict health care spending, but that is uncertain
- You need to know the price of the health care
- Assume that people act in a rational way