Session 2 Hour 1 Flashcards
Health insurance market in the US is fragmented
In the US, there are a variety of third party payers:
- Government-run: Medicare, Medicaid, CHIP
- Insurance companies
- Self-insured plans (employers contract directly with providers, providers provide health care services to employees, employers bear the financial risk)
Each type of third party has its own rules as of:
- What it covers
- Where the money comes from
- Population covered
Adverse Selection: Individuals know more about their health status than health insurers
- Sicker individuals are more likely to purchase insurance
- Individuals with higher risk are more likely to purchase insurance (i.e. genetic predisposition to cancer or smokers)
Adverse selection is a problem for insurers:
If they combine individuals with dissimilar risk on the pool:
- Those with lower expected cost (healthier individuals) will get very high premiums and leave for more affordable options
- High utilizers will have relatively lower premiums, and be attracted to the plan, ultimately increasing costs and leading to losses for the insurer
Adverse Selection: Insurers response
- Insurers response: premium setting based on risk
Moral Hazard (definition)
- Refers to the situations in which the existence of insurance increases the probability of consuming a health service or the amount of the expenses incurred, or both
Moral Hazard (change in behavior, what happens to premium, what is the implication)
- This responds to a rational behavior: individuals consume more if cost is shared with other individuals
- This excess of use makes the premium rise
- Implication: introduction of copayment and cost-sharing to reduce overconsumption associated with insurance
Moral hazard also refers to…
- the change in behavior triggered by the issuance of an insurance policy.
- This increases the probability of a loss or a loss larger than the normal loss
- The insurer bears the burden of the risks, which in the long-term increases the premium
- Ex: purchasing life-insurance and going sky diving
Healthcare Market Violations of Ideal Market Conditions
- Third party financing (Insurance)
- Uncertainty
- Information asymmetry
- Principle-agent relationship
- Lack of price transparency
- Lack of competition
- Barriers to entry
- Externalities
Lack of Competition
Highly concentrated markets in:
- Provision of insurance
- Health care institutions
- Health care providers
- Pharmaceutical manufacturers