Kinh tế học - The demand for medical insurance

The Demand for Medical InsuranceProfessor Vivian HoHealth Economics Fall 2009These slides draw from material in Santerre & Neun, Health Economics: Theories, Industries and Insights, Thomson, 20071Topics to cover:A theoretical model of health insuranceWhen theory meets the real world...2LogicThe consumer pays insurer a premium to cover medical expenses in coming yearFor any one consumer, the premium will be higher or lower than medical expensesBut the insurer can pool or spread risk among many insureesThe sum of premiums will exceed the sum of medical expenses3Characterizing Risk AversionRecall the consumer maximizes utility, with prices and income givenUtility = U (health, other goods)health = h (medical care)Insurance doesn’t guarantee health, but provides $ to purchase health careWe assumed diminishing marginal utility of “health” and “other goods”4In addition, let’s assume diminishing marginal utility of incomeUtilityIncome5Assume that we can assign a numerical “utility value” to each income levelAlso, assume that a healthy individual earns $40,000 per year, but only $20,000 when ill$20,000$40,0007090IncomeUtilitySickHealthy6UtilityIncome$20,000$40,0009070Utility when healthyUtility when sickAB7Individual doesn’t know whether she will be sick or healthyBut she has a subjective probability of each eventShe has an expected value of her utility in the coming yearDefine: P0 = prob. of being healthy P1 = prob. of being sick P0 + P1 = 18An individual’s subjective probability of illness (P1) will depend on her health stock, age, lifestyle, etc.Then without insurance, the individual’s expected utility for next year is:E(U) = P0U($40,000) + P1U($20,000) = P0•90 + P1•709For any given values of P0 and P1, E(U) will be a point on the chord between A and BUtilityIncome$20,000$40,0007090AB10Assume the consumer sets P1=.20Then if she does not purchase insurance: E(U) = .80•90 + .20•70 = 86E(Y) = .80•40,000 + .20•20,000 = $36,000Without insurance, the consumer has an expected loss of $4,00011UtilityIncome$20,000$40,0009070AB$36,000C•••8612The consumer’s expected utility for next year without insurance = 86 “utils”Suppose that 86 “utils” also represents utility from a certain income of $35,000Then the consumer could pay an insurer $5,000 to insure against the probability of getting sick next yearPaying $5,000 to insurer leaves consumer with 86 utils, which equals E(U) without insurance13UtilityIncome$20,000$40,0009070AB$36,000C•••86$35,000•D14At most, the consumer is willing to pay $5,000 in insurance premiums to cover $4,000 in expected medical benefits$1,000  loading fee  price of insuranceCoversprofitsadministrative expensestaxes15Determinants of Health Insurance DemandPrice of insuranceIn the previous example, the consumer will forego health insurance if the premium is greater than $5,000Degree of Risk AversionGreater risk aversion increases the demand for health insurance16UtilityIncome$40,000$20,000ABIf there is no risk aversion, utility = expected utility, and there is no demand for insurance17Income Larger income losses due to illness will increase the demand for health insuranceProbability of ILLNESSConsumers demand less insurance for events most likely to occur (e.g. dental visits)Consumers demand less insurance for events least likely to occurConsumers more likely to insure against random events18UtilityIncomeThe horizontal distance between the utility function and the chord represents the loading fee that the consumer is willing to pay19Estimates of Price & Income Elasticities for Demand for Health Ins.Price elasticities b/w -.03 and -.54At the individual levelEnrollment or premium expenditureElastic or Inelastic demand?Income elasticities b/w 0.01 and 0.13 From S&N, Table 6-220Estimates of Price & Income Elasticities for Demand for Health Ins.What about when employees are choosing between the menu of plans offered by their employer?Range of choices is more limitedPrice elasticites are found to range between -2 and -8.4, depending on age, job tenure, medical risk categoryDowd and Feldman 1994, Strombom et al. 200221Assumptions underlying the theoretical model of health insurance demandConsumers bear the full cost of their own health insuranceInsurance companies can appropriately price policiesIndividuals can afford health insurance/health careThe above 3 assumptions do not always hold in the real world22The majority of Americans have employer-provided health insuranceEmployer-paid health insurance is exempt from federal, state, and Social Security taxesEmployee will prefer to purchase insurance through work, rather than on his own23Example: Insurance and take-home pay when income is $1,000 per week and income tax rate is 28%Employee Purchased $1,00028% tax after tax 720insurance net pay 670Employer Purchased $1,000insurance subtotal 95028% tax net pay 68424Employer Health Insurance Coverage of U.S. Population (percent)25Consequences for costs“Too many” services were covered by insuranceCoverage of more small claims increased administrative costsEmployers offering more than 1 plan often fully subsidized the more expensive plans26Empirical EvidenceLong & Scott (1982)Regression analysis of the determinants of % of compensation paid to employees as health insurance Annual U.S. data 1947-1979N=32 27Empirical EvidencePCTHLINS = -8.64 + .0284 MTR + .0498 RFRAMINC (6.22) (3.98) (1.14) -.0094 UNION + .088 PCTFEM + .1283 PCTSERV (.57) (3.72) (5.52) R2 = .9968PCTHLINS = % of compensation as health insuranceMTR = average marginal tax rateRFAMINC = average real family incomeUNION = % of labor force unionizedPCTFEM = % employees femalePCTSERV = % employees in service industries 28Empirical EvidenceHow does an increase in the marginal tax rate affect the worker’s compensation package?The implied elasticity of PCTHLTINS with respect to MTR is 0.41. If a cut in the income tax rate is approved, will demand for health insurance rise or fall?29Physicians & Managed CareTraditional fee-for-service gives physicians incentive to “overutilize” medical servicesManaged care: A broad set of policies designed by 3rd-party-payers to control utilization and cost of medical care:utilization reviewalternative compensation schemesquality control30Managed care and Physician IncentivesHMOs are a type of managed care organization, but there are a variety of HMOsStaff model: Physicians employed by HMO on a salary basisNo incentive to over-provide careGroup model: HMO contracts w/ group practice, which is paid by capitationIncentive to limit services31Network model: HMO contracts w/ >1 group practice, all paid by capitation.Incentive to limit servicesIPA model: HMO contracts w/ multiple docs in various practices; paid by discounted fee-for-serviceSome incentive to over-utilize32Types of Managed Care Orgs 33Preferred Provider OrganizationInsurer contracts w/ multiple physicians: but enrollees can pay higher deductible or copay to see physician outside networkDiscounted fee-for-serviceSome incentive to over-utilize34Point-of-Service Plan (POS)Insurer contracts w/ multiple physicians: but enrollees can pay higher deductible or copay to see physician outside networkLike a PPOHowever, enrollees are also assigned a primary caregiver who acts as a gatekeeper to specialists and inpatient care35Source: Kaiser Employer Health Benefits 2006 Annual Survey, Section 536Practice QuestionIf you had the choice between a traditional FFS plan with a 10% copay and a staff HMO with no copay, at what percentage difference in premiums (10%, 20%, 30%) would you be indifferent between the 2 plans? Do you think your choice is a function of your age/health status?If you were elderly and/or sick, which plan would you prefer if they cost the same amount? Why?37Provider Management StrategiesSelective contractingMCOs will contract with an exclusive set of providersBased on quality or cost-effective practice patternsPhysician profilingMCOs monitor physicians’ track record regarding referrals, quality, patient satisfaction38Provider Management StrategiesUtilization review“determine whether specific services are medically necessary and whether they are delivered at an appropriate level of intensity and costPractice guidelinesInform providers of the appropriate medical practice in certain situationsFormulariesrestricted list of drugs physicians may prescribe39Performance of MCO’s: Are they “good” or not??Ideally, MCOs should encourage preventive and coordinated primary care, which reduces the need for more expensive specialty/inpatient careBut most MCOs are concerned with short-term profitabilityWhy pay for cholesterol-lowering pills when the enrollee is likely to leave your HMO years before he has a heart attack?40Performance of MCO’s: Are they “good” or not??In general, studies show that HMOs provide medical cost savings of 15-20%, mostly through reduced hospital careThe impact of HMOs on quality of care is less definiteHealth care providers treat patients belonging to a variety of plans41