Session 2 Hour 2 Flashcards
Risk Aversion
Which would you prefer?
- Your $2,000 paycheck
Or
- Flipping a coin and doubling your paycheck ($4,000) if you get a head ($0 if you get a tail)
- Most people prefer option A because we are risk averse: certain income is preferred over a risky alternative with the same expected income (a gamble)
Risk Pooling
- 100 people in class. 1 out of the 100 will fall and break a leg in the next 12 months
Each of us faces a probability:
- Not falling (99% probability, $0 cost)
- Falling and breaking a leg (1% probability), incurring $10,000 for an ER visit/treatment
Uncertainty: Have no loss with 99% probability, but have a loss of $10,000 with a 1% probability
Risk Pooling:
- Each of us contributes $100 to a pool, the pool collects $10,000
- One person falls and incurs $10,000; the pool pays for it
- Collectively, we have transformed an uncertain situation into a certain one by risk pooling
- We have the certainty that we will lose $100
- If this was an insurance policy, the $100 would be the actuarial fair PREMIUM
- UCSD asks for $105 per person because of the costs associated with administration
- The extra $5 is called the LOADING FEE
Risk Spreading
- Instead of risk pooling, we risk pooled across all UCSD, we would expect 1%*40,000= 400 students falling in a year
- It is much more likely that 2 out of our class 100 fall in a year than 800 out of 40,000 UCSD students fall
- The risk is spread across a larger population (risk spreading)
- Principle: The larger the number of people in a risk pool, the more accurate the estimates will be of what will actually take place
- Premiums are higher for insuring a small group (i.e. a small company) than a large one because health insurers need to compensate for the increased risk associated with insuring a small group
Anatomy of a health insurance policy: Who it covers
- Beneficiary or member: all individuals enrolled in a health insurance plan
- Primary policy holder: individual who registered the insurance policy –“owns it”
- Dependents: other beneficiaries on the policy (spouse, children)
Anatomy of a health insurance policy: Where the money comes from
- Insurers deal with adverse selection through underwriting and rate-making process to determine a premium based on risk
Current approach to premium calculation: Experience-rating
- Premiums based on prior or current utilization of a group
- For example, historically, higher premiums for individuals with pre-existing conditions
Underwriting in the Individual Market
In the individual market, underwriting makes insurance very expensive for sick patients
- Affordable Care Act (ACA) limited the variables that insurers can use for underwriting in the individual market to location, age, family size, and smoking status
- The key change is that insurers are not allowed to underwrite based on pre-existing conditions
- This was supposed to ensure affordability of insurance to sicker individuals
- However, this requires of healthy individuals in the pool to spread the risk of sicker individuals -> Individual mandate
Anatomy of a health insurance policy: What it covers, Benefit design
- Covered services
- Limits on covered services (# of visits or # of days)
- Factors influencing covered services:
- Covered providers
- Contracting relationship
- Administrative rules
- HMO
- PCP required? YES
- Out of network coverage? NO (only emergency)
- Referral to see specialist? YES (exceptions)
- Cost? $
- EPO (exclusive provider organization)
- PCP required? YES
- Out of network coverage? NO (only emergency)
- Referral to see specialist? YES (exceptions)
- Cost? $
- POS (point of service)
- PCP required? YES
- Out of network coverage? YES (costs more)
- Referral to see specialist? NO
- Cost? $$
- PPO
- PCP required? NO
- Out of network coverage? YES (costs more)
- Referral to see specialist? NO
- Cost? $$$
- Basics of Benefit Design (deductible, copay, coins, etc)
Cost-sharing provisions
- Deductible: fixed amount the beneficiary (or the family) have to pay out-of-pocket before insurance coverage applies
- Co-payments: fixed amount the beneficiary has to pay for a certain service
- Coinsurance: percentage the beneficiary has to pay for a certain service
- Tiered cost-sharing, often employed for drugs
- Out of pocket maximum: total amount the beneficiary (or the family) can pay in a year for covered services