Session 2 Hour 2 Flashcards

1
Q

Risk Aversion

A

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)
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2
Q

Risk Pooling

A
  • 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
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3
Q

Risk Spreading

A
  • 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
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4
Q

Anatomy of a health insurance policy: Who it covers

A
  • 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)
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5
Q

Anatomy of a health insurance policy: Where the money comes from

A
  • 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
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6
Q

Underwriting in the Individual Market

A

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
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7
Q

Anatomy of a health insurance policy: What it covers, Benefit design

A
  • Covered services
  • Limits on covered services (# of visits or # of days)
  • Factors influencing covered services:
  • Covered providers
  • Contracting relationship
  • Administrative rules
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8
Q
  • HMO
A
  • PCP required? YES
  • Out of network coverage? NO (only emergency)
  • Referral to see specialist? YES (exceptions)
  • Cost? $
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9
Q
  • EPO (exclusive provider organization)
A
  • PCP required? YES
  • Out of network coverage? NO (only emergency)
  • Referral to see specialist? YES (exceptions)
  • Cost? $
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10
Q
  • POS (point of service)
A
  • PCP required? YES
  • Out of network coverage? YES (costs more)
  • Referral to see specialist? NO
  • Cost? $$
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11
Q
  • PPO
A
  • PCP required? NO
  • Out of network coverage? YES (costs more)
  • Referral to see specialist? NO
  • Cost? $$$
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12
Q
  • Basics of Benefit Design (deductible, copay, coins, etc)
A

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
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