Health Econ Final

Three major parts of the ACA

1.Medicaid expansion 2.An individual insurance mandate 3.Cuts to Medicare spending

Rules of managed competition

1.Minimum standards: each insurance contract is required to meet a minimal standard of care; There are also limits on copayments and deductibles. 2.Open enrollment: insurers may not reject any eligible customers, even if they are unhealthy. 3.Compulsory participation: customers are mandated to have and pay for insurance coverage at all times. 4.Community rating: insurers can not set premiums using risk rating; instead they must be community rated.

What three conditions must hold for moral hazard due to insurance to occur?

1.The cost of a risky or wasteful action to an individual is reduced, usually as a consequence of insurance. 2.Asymmetric information prevents an insurer from adequately pricing the action. 3.That individual responds to the price distortion by changing his behavior—either by taking more risks or demanding more covered goods and services.

The rise of managed care

A 1973 federal law established the term health maintenance organization (HMO) to denote vertically-integrated managed care organizations like Kaiser Permanente. Another type of managed care option is the preferred provider organization (PPO). U.S. consumers and employers have gradually migrated from expensive fee-for-service insurers toward cheaper managed care HMOs and PPOs

Compulsory insurance

A mandate (a legal requirement that everyone in a population purchase private insurance) confronts adverse selection by effectively banning it. •For example, even healthy customers who would prefer to opt out are legally required to buy into the system. But a mandate is not free for governments and does not absolve them of regulating the market. A mandate can be expensive, and many citizens cannot afford it. •Thus, mandates are usually either coupled with subsidies to the poor or paid for with payroll taxes. A mandate must also be carefully defined or it may be completely ineffective.

Adverse selection in compulsory insurance markets

Adverse selection may arise in Bismarck systems if frail customers disproportionately enroll in certain funds that provide the most generous coverage. •This could result in a separating equilibrium or even an adverse selection death spiral Adverse selection can also become extremely destabilizing if firms are not allowed to adjust their premiums (as is the case in Israel). •In the face of adverse selection and fixed premiums, insurers simply have no incentive to provide quality care for the sick (van de Ven et al. 2007).

Risk selection

Adverse selection refers to the behavior of insurance customers, while risk selection refers to the behavior of insurance providers. Risk selection occurs when insurers seek to enroll low-risk customers and seek to avoid high-risk customers - we called this "cream skimming" Not only does risk selection put sick customers in a disadvantaged position, it is also wasteful from a social perspective. The extent of risk selection in practice is unknown, as it is almost impossible to observe directly.

The US Medicare program cont.

All American citizens over 65 years of age, and severely disabled Americans who have been out of work for two years, are eligible to enroll. Medicare is expensive because it covers populations that are less healthy than the general population, which tend to demand lots of medical care. It also reimburses for any procedure that is shown to be medically effective, irrespective of cost. Finally, it sets premiums far below an actuarially fair level. This means it needs large outside sources of funding (taxes on the young).

Implications of Arrow's theorem

Arrow's theorem suggests it does not make sense to speak of an "optimal" health policy for a country because societies may not have preferences that can be optimized in the traditional sense. Nevertheless, political decisions do get made and various national health policies have emerged.

Uninsurance

As of 2012 there are 50-60 million people in the U.S. who are not covered by any health insurance program, and are termed uninsured. The uninsured can pay for medical care out-of-pocket, but they face the risk of catastrophic health bills and often end up deferring care until it becomes an emergency. The persistence of uninsurance has been a key driver of health policy reform in the U.S.

Cost control in Medicaid

Because Medicaid is means-tested, cost-sharing is somewhat limited, so states have tried to find other ways to control costs, including: -Limits on eligibility -Setting reimbursement rates low -Restricting access to some RX drugs -Cost-effectiveness Analysis (CEA) -Managed care, or changes to delivery method or payment structure

Impossibility theorem cont.

But this analogy between an individual and a society is not quite right. A society - composed of many people - is fundamentally different from a single person. •For example, each individual in a society is presumed to have consistent and transitive preferences. nWithout transitive preferences, welfare economics falls apart. •However, economist Ken Arrow has proved that societies do not necessarily have transitive preferences, even when everyone in them does. nHis finding is known as Arrow's impossibility theorem.

Cost-effectiveness analysis

CEA entails gathering information about treatment options and determining which options produce the most additional health for the least cost. •CEA limits moral hazard by reducing spending on inefficient, costly treatments. •But CEA also makes insurance contracts less "full" for patients, because some services are no longer covered. •This tradeoff can be worthwhile because it makes the entire system cheaper. But denying coverage for some treatments may be unappealing for political reasons. While some governments have embraced CEA, others have reacted by shunning it altogether.

Job Lock example

Consider an employee who is bound to a wheelchair by multiple sclerosis (MS). ¤Despite his higher health care costs, his wages have not been cut because of "wage pass-through" since his diagnosis (his company would have been sued). ¤Suppose this employee would be a better fit for a new job opportunity elsewhere. ¤However, his potential new employer, observing his wheelchair, lowers his offered wage to compensate for an anticipated rise in health care premiums. ¤This lower offer deters the worker from switching jobs, and he stays - unhappily and inefficiently - at his current one.

Medicaid

Covers children, the aged, blind, and/or disabled and others eligible to receive federally-assisted income ¤Last category is referring to Supplemental Security Income (SSI) ¤In most states receiving SSI is sufficient for qualifying for Medicaid. ¤Medicaid is considered a "means tested" program Medicaid programs are state-administered and state programs often have unique name

Medicare

Covers individuals aged 65 and up and/or individuals with certain disabilities ¤ 65+ can qualify for Medicaid as well (called dual eligible) ¤20% of Medicare recipients also receive Medicaid ¤31% of Medicare spending is on individuals who are dual eligible Medicare is federally administered.

Firm-specific human capital

Def: knowledge and experience gained from working at a particular firm that is highly relevant there but irrelevant at other companies. ¤Workers with firm-specific human capital can be much more productive at their firm than anywhere else. The accumulation of firm-specific human capital can mean that an employee who is invaluable to one firm would be just mediocre at another firm. ¤If so, wages the worker earns in her current job would exceed what she could earn at another company.

Controversy: Which theory is correct?

Empirical evidence shows people buy more medical care when insured ¤The controversy is whether or not this additional utilization is inefficient ¨If the conventional theory is correct, then people's priceelasticity of demand for medical care will be the major driver of increased utilization among the insured ¨If Nyman's theory is correct, then people's income elasticity of demand for medical care will be the major driver Surely empirical evidence can resolve this problem... ¨Empirical evidence presented by Nyman and other supports Nyman ¨Empirical evidence presented by Finkelstein and others supports the conventional view ¨Both sides believe the evidence presented by the other side to be incorrect for various reasons

Do we have evidence of ex ante and/or ex post moral hazard in health insurance?

Ex Ante: ¨RAND HIE: people on the free plan more likely to show up at the hospital with broken bones or drug abuse ¨Ghana: insured households less likely to use mosquito nets, key for preventing malaria ¨Seguro Popular: low-income Mexicans assigned to receive free insurance were less likely to get a flu shot and cancer screenings Ex Post: ¨Stanford employees: after a 1967 change that required a new 25% copay, visits to the doctor declined by 24% ¨RAND HIE: those on the free plan more likely to visit hospital ¨Germany: introducing deductibles leads to greatly decreased health expenditures ¨Canada: people with prescription drug coverage visit doctor more often

Cost sharing

Example: the US Medicare system does not fully cover patient costs. This forces enrollees to either economize or purchase supplemental private insurance.

Are there upsides to moral hazards?

Extra preventative care •Evidence from RAND HIE, Oregon Medicaid Experiment, and elsewhere •This is a beneficial effect if and only if people generally consume less preventative care than they "should" The income effect •Insurance makes people "richer" by making expensive surgeries or treatments affordable when they may have been unaffordable without insurance •Does this mean moral hazard can be efficient?

Cost-effectiveness analysis Medicare

Finally, there is a major cost control tool that Medicare is prohibited from using: cost-effectiveness analysis. ¤Any treatment that is proven effective in scientific studies - regardless of cost - is covered by Medicare. It seems likely that Medicare could reap substantial budgetary savings from CEA, but so far there has been little political will to introduce CEA into Medicare's coverage determinations.

Gatekeeping and queuing

Gate-keeping entails a tiered system of doctors that patients must visit in a specified order. •This keeps costs down by eliminating frivolous appointments and focusing limited resources on patients who truly need care. Public insurance systems also control costs by limiting the total number of specialists available. However, when demand for specialists' services outstrips supply, queues result. Queue-based systems may be more equitable than a cost-sharing system if it means that rich and poor alike must wait for care. •But queuing systems risk provoking political backlash.

Does managed care work?

Gottfried and Sloan (2002) find that there is no systematic difference in health outcomes between managed care organizations and fee-for-service plans. Managed care organizations do keep costs lower. One important caveat is that managed care plans tend to attract healthier customers due to adverse selection.

2010 Health Care Reform

In March 2010, the US congress passed the Patient Protection and Affordable Care Act (the ACA), colloquially known as "Obamacare." Most parts of the law went into effect by 2014. The law has thousands of provisions but three major parts: ¤Medicaid expansion ¤An individual insurance mandate ¤Cuts to Medicare spending

How should moral hazard be controlled?

In a private market, private insurers compete to offer customers the optimal mix of insurance coverage and moral hazard control. But when governments enter the insurance market, lawmakers and policymakers assume responsibility for these tough decisions. -The experience of many countries has shown that moral hazard control is controversial and politically treacherous Again, several tools available: ¤Health technology assessment (HTA) ¤Cost sharing ¤Gatekeeping and queuing ¤Prospective payments

Limiting access to new technologies

In recent years, many Bismarck countries have also moved to incorporate HTA into their health care systems in order to limit the use of wasteful technologies.

Price Subsidy vs Income Transfer: The effect of insurance on general welfare

In the conventional model of health insurance, in the absence of insurance, an individual pays price p1 to receive quantity q1. If the individual is fully insured, they pay a price of zero and receive a quantity of q0. This results in a deadweight loss equal to the area of the triangle above the demand curve in figure 6-3. Nyman suggests that there is an income and a behavioral response to having health insurance that changes this picture. In Nyman's model, an uninsured person facing price of zero will purchase more of a good than an insured person. This is represented by q0 and q2 in figure 6-4. This is because an uninsured person facing a price of zero will be more eager to over-utilize free medicine knowing that they may have to pay for medicine later. However, at a price above zero, the insured person will, of course, consume more medical care than the uninsured person. Nyman represents this difference as an income effect shifting the demand curve out. If the insured individual was asked to pay a price pf P1 for care, they would demand a quantity of qN. An uninsured person will demand q1. However, in actuality, the insured person pays a price of zero and does, indeed, consume q2. Thus, the income effect (also called the access effect or the efficient moral hazard) of insurance is the change in quantity from q1 to qN. The price effect (also called the inefficient moral hazard) is the change in quantity from qN to q2. So the total effect of insurance moving from q1 to q2 involves both an income and a price effect.

The fee-for-service model

In the middle of the 20th century and into the 1980s, the U.S. private insurance market was dominated by indemnity insurance. Coverage for specific treatments was rarely denied, even costly ones that provided minimal benefits. The fee-for-service model did little to contain moral hazard, and provided ample incentive for physician-induced demand.

Differing inherent levels of health

It is not clear whether all countries share the same health production frontier (with some countries like the U.S. inefficiently below the frontier) or whether the U.S. is on a completely different HPF than the European countries. ¤One possibility is that the U.S. and other countries have different populations with different inherent health states. If so, the U.S. would be on a different HPF than the other countries.

The American model

Major characteristics: ¤ Private health insurance markets: -The non-elderly and non-poor seek insurance on the private market, which is centered around employer-based health insurance pools. ¤ Partial universal health insurance: -Subsidized universal health insurance is provided to two vulnerable subpopulations: the elderly (through Medicare) and the poor (through Medicaid). ¤ Private health care provision: -Most hospitals and doctor's clinics are private. While there is some antitrust regulation, there are few legal restrictions on where doctors can practice and hospitals can open. There are also no direct price controls enforced by the government.

What is managed care?

Managed care: a philosophy of health insurance that employs tactics intended to reduce moral hazard, physician-induced demand, and premiums. These tactics include: ¤gatekeeping - patients can only visit specialists or surgeons after receiving approval from a primary care doctor. ¤coverage networks and vertical integration - patients can only receive care from a specified list of providers. ¤monitoring - doctors and hospitals are monitored for costs and health outcomes. ¤salaries and fixed payments - the insurer pays a fixed amount for care; not fee-for-service. ¤denials of coverage - care may not be covered if it is not cost-effective.

Medicaid in US

Medicaid is a public insurance program that provides highly subsidized insurance coverage to low-income families who have no insurance. Unlike Medicare, which is run by the U.S. federal government and administered uniformly across the country, Medicaid is run jointly by the federal and state governments. State governments have wide latitude to set budgets, determine eligibility rules and decide how generous their local Medicaid program is. In 2009, Medicaid covered 62.5 million people - about a fifth of the U.S. population - and its expenses totaled about $400 billion nationwide. Low income alone does not qualify one for Medicaid in most states. Various other factors including martial status, number of children, pregnancy, disability, health and immigration status can affect eligibility.

Cost control in Medicare

Medicare includes several mechanisms designed to mitigate moral hazard and control costs. A more significant cost control mechanism is the Diagnosis Related Group (DRG) system. Under this system, Medicare pays a fixed amount to hospitals based upon the diagnosis the patient has when admitted to the hospital, rather than on his length of stay or the extent of care given. The DRG system of hospital payment transfers risk from the government to hospitals and eliminates incentives for hospitals to provide unnecessarily expensive care to patients

The US Medicare program

Medicare is a government insurance program that provides insurance coverage to 48 million elderly and disabled people (as of 2012). The Medicare program consists of four parts: 1.Part A pays for enrollees' hospital care. 2.Part B pays for outpatient care and physician services. 3.Part C provides an option for Medicare enrollees to receive their health insurance from a private plan, rather than through Plans A and B. 4.Part D pays for enrollees' prescription drugs.

Employer-sponsored health insurance

Most insured non-elderly Americans receive coverage through employer-sponsored plans. This insurance is not "free", since it is actually part of the worker's total compensation package. ¤The cost of premiums are taken out of the worker's wages. The fact that the costs of insurance effectively come out of the worker's wages is known as wage pass-through. ¤So for the same type of job and skill-level, jobs without employer-sponsored insurance plans may offer higher wages than jobs with them.

The health policy trilemma

Nations have three broad goals in mind when designing health policy Any attempt by a nation to move closer to one of these three goals necessarily involves a tradeoff that moves that nation further away from another goal. •For example, any hypothetical policy that combats adverse selection and increases equity would either increase costs or lower health for some. There will always be tradeoffs, so there will never be a perfect health care system where all three goals are maximized Furthermore, people disagree about how important each of these three is. ¤Some countries value social equity very highly, and are willing to pay more in taxes to achieve it. ¤Others place a higher value on health, and are willing to tolerate more moral hazard or monopoly pricing to secure it.

Is a premium a type of cost-sharing measure?

No

Eliminating risk selection

Option 1: Ex-post cost-based compensation •Sickness funds with sicker customers and higher expenditures are reimbursed with transfers from funds that had healthier customers and lower expenditures. •This erases risk selection, but it also removes any incentive for insurance funds to treat their patients efficiently. Option 2: Risk adjustment •Transfers are based on ex ante risk assessments and not actual cost outcomes. •Thus, insurance funds that draw unhealthy customers are reimbursed based on how expensive their customers are expected to be, not on how expensive they actually are. •This reduces incentives for cream-skimming, while maintaining efficiency.

Clinical Distortion Example 1

Prices are set too high •In Japan, official prices for most pharmaceuticals are deliberately set higher than the price charged by drug companies. •Consequently, Japanese physicians often opt to sell higher-priced drugs, to the point where Japanese pharmaceutical expenditures constituted nearly 30% of all health care spending in 1993.2 •By contrast, this figure was only 11% that same year in the United States.

CD Example 2

Prices are set too low •When Cochlear implant technology was first developed, the U.S. Medicare and Medicaid systems priced reimbursement for the procedure at very low levels. •Any doctor performing a cochlear implantation would have to buy an expensive implant and perform the difficult surgery, only to be reimbursed at a rate less than the cost of the device itself. •As a result, only a limited number of deaf people had cochlear implants placed in the U.S., while the device proliferated in Japan (where reimbursement rates were set higher).

What are monitoring and gate-keeping?

Some insurance companies try to observe and guide the preventative measures their customers take, while others choose to supervise the medical care that customers receive. ¤Motivation - Incentive programs with payouts if you: - see a nutritionist - do yoga once a week - get a cholesterol and blood pressure screening ¤Gatekeeping ¤Your insurance company won't cover care from specialists unless you have a referral from a primary care physician

Means-tested insurance

Subsidized health care for the poor. -Example: Medicaid in the U.S. It attempts to improve equity by providing health care to those who otherwise could not afford it. The costs of expanding subsidized insurance for the poor are basically identical to the costs of expanding public health insurance in other ways: higher tax burdens and greater moral hazard.

The story of Kaiser Permanente

The Kaiser managed care plan began as a communal insurance pool for workers in California shipyards during World War II. Henry Kaiser realized it would be cheaper to provide medical care for his employees directly, rather than paying for it at outside hospitals. In the decades after Kaiser Permanente was founded, more insurers began offering managed care plans.

Private insurance markets

The Rothschild-Stiglitz model model predicts that in private markets, only the frail customers are insured fully and much of the population is underinsured. •Under certain conditions, a completely private market can unravel completely, leading to uninsurance for everyone. This option minimizes government involvement, but it results in maximal adverse selection. Taxpayers are happy with low tax bills, but many citizens cannot buy full insurance. -Instead they fret about the medical bills they might rack up if they become ill or injured.

Job Lock

The confluence of employer-sponsored health insurance, wage-pass through, and sticky wages is known as job-lock. Through job lock, employer-sponsored health insurance distorts labor markets and can reduce social welfare.

Universal public insurance

The government provides insurance to all citizens, and finances it with taxes. This policy option is appealing because it side-steps adverse selection and ends uninsurance. It also furthers the goal of equity because the poor pay little or nothing for coverage. However, with universal public insurance, steps must be taken to control moral hazard, which can explode the government budget if left unchecked. Higher taxes are the main cost of public insurance. Further, most taxes distort behavior by discouraging labor and commerce, so the entire economy may become less efficient as a result. -But some argue that universal public insurance is more efficient than private insurance markets because of low overhead costs. Higher taxes are one cost of public insurance.

What is Arrow's impossibility theorem? What implications does it have for creating a health policy for a country?

The task of designing a national health system is at its heart an optimization problem, not dissimilar to the task of an individual in the Grossman model. •Societies must decide how much time and money they want to spend on improving their health, and how much time and money they want to spend on other national priorities - like education and the military. •Then they must chart a strategy for achieving the level of health they want, both cheaply and efficiently.

Prospective payments

The traditional method for paying for health care is retrospective payments. •Such payments are made after a service is rendered, and the amount paid depends on how much health care is received. In a fee-for-service system, doctors have no reason to deny patients a service because the costs are too high. •This system fosters trust between patients and doctors, but creates incentives for physician-induced demand. An alternative system designed to reduce moral hazard is prospective payments. Since the early 1980s, governments around the world have embraced prospective payment schemes as an effective way to reduce moral hazard and physician-induced demand. But prospective payment systems come at a price. •Doctor-patient relationships turning adversarial •In one study conducted after the U.S. Medicare program implemented prospective payments in 1984, patient mortality increased significantly at a subset of hospitals in the months after the transition.

Employer-sponsored insurance

Under such a system, employers are required or encouraged to offer a private insurance contract to all of their employees. Job-specific human capital provides a strong incentive for healthy employees with a low risk of illness to pool with high risk, unhealthy employees. This mitigated adverse selection. Drawbacks: can create labor market inefficiencies, and not appropriate for unemployed populations (children, retirees, disabled).

Bismark Model

Universal insurance: All or nearly all of the population has health insurance coverage, either through a plan sponsored by an employer or through the government. No one is denied access to insurance based on inability to pay or poor health status. Community rating Insurance is financed through taxes (based on income), not premiums (based on health status) This means the rich and healthy subsidize the poor and sick The insurance system operates under managed competition - to be discussed later Regulated, private health care provision Many hospitals are private Physicians operate privately, not public employees But, prices are set by the government in negotiation with providers Private providers do not have the option of offering services at higher (or lower) prices ¤Examples: Germany, Japan, Switzerland, Netherlands

What are the main problems that arise in healthcare markets and health insurance markets?

We have learned about the problems that arise in both these markets ¤Markets for health care services -Oligopoly pricing -Monopoly rents for doctors and specialists -Medical arms races ¤Health insurance markets -Adverse selection and underinsurance -Moral hazard and technology overuse

What makes moral hazard possible?

asymmetric information

What is ex post moral hazard?

behavior changes that occur after an insured event happens and make recovering from that event more expensive. ¤using expensive drugs instead of generics ¤knee replacement surgery instead of painkillers

What is ex ante moral hazard?

behavior changes that occur before an insured event happens and make that event more likely. ¤leaving the stove on ¤skipping the flu vaccine

What is Moral Hazard?

the tendency for insurance against loss to reduce incentives

Tactics for risk selection

¤Advertise specifically to certain groups ¤Close offices in high-cost regions ¤Reward agents who find sick customers and convince them to switch to other plans ¤Ignore calls from sick customers who want to sign up ¤Provide deficient care to the sickly in hopes of chasing them away ¤Hold sign-up sessions in buildings that are not accessible to the disabled

An individual insurance mandate

¤All citizens who do not have insurance through work or another public insurance program must buy insurance on a state-wide private market ¤This is designed to combat adverse selection, much in the manner of Bismarck managed competition ¤People with low incomes will receive subsidies

Cost-sharing: coinsurance and copayment

¤Coinsurance: insurance provision in which enrollees pay a percentage of each medical bill, and the insurer covers the remaining portion. ¤Copayment: insurance provision in which enrollees pay only a fixed amount, called a copay (see graphs on word doc)

Cuts to Medicare spending

¤Extending insurance coverage to millions is not cheap -Expected to cost about $200 billion per year ¤To help pay, Medicare is cut by $50 billion per year, but cuts are not specified by the law ¤Instead, cuts will be made by an independent board called IPAB with an unusual amount of freedom ¤IPAB may invoke HTA, which would be a first for Medicare

American Model

¤Private markets in a central role ¤No mandate for universal insurance ¤No price controls ¤Public insurance for select groups: elderly and poor ¤Emphasis on liberty ¤Examples: unique to the US (other nations had similar systems in previous decades)

Beveridge model

¤Single-payer insurance ¤Public provision of health care (physicians are government employees) ¤Very little cost sharing at point of service ¤Emphasis on equity Examples: UK, Scandinavia, Canada, Australia, NZ

Medicaid expansion

¤the ACA expands Medicaid coverage dramatically by forcing states to cover broader classes of people ¤Estimated to add 17 million to Medicaid roles ¤But, a 2012 US Supreme Court ruling says that states can opt out of this part of the law

Nyman's theory of the effect of insurance on individual utility

¨According to Nyman, the Conventional model underestimates the increase in utility gained from insurance ¨In Nyman's model loss occurs when an individual is sick, but insurance payouts does NOT move them back to the same state they were in when healthy - there is still some loss of utility that cannot be regained.

Nyman's model of Health Insurance Demand

¨An alternative view of moral hazard was proposed by John Nyman in the late 1990s. ¤People buy health insurance to obtain additional income when ill. ¤Because not all who pay in become ill, the consumer needs to pay in only a fraction of the cost of his or her medical care when ill. ¤Insurance is a transfer of income from the many healthy to the few ill ¤This transfer is as much a income transfer as a price subsidy, and a lump sum income transfer need not lead to inefficient moral hazard ¨ ¨Undoubtedly people buy more medical care when insured ¤The controversy is whether this excess utilization is inefficient overutilization or is efficient

What role does the price elasticity of demand for healthcare play in whether or not/how much moral hazard occurs?

¨An individual faces some risk of a bad event X, and his actions can increase or decrease its likelihood ¨He holds an insurance contract that will help pay some or all of the costs of X, if it occurs. Thus his price of X is now lower. ¨In response to the price distortion, he changes his behavior in a way that increases the chance of X or increases the costs of recovering from X. ¨The insurance company cannot observe this behavior change - there is an information asymmetry. Otherwise the contract would have been written to discourage the riskier behavior. ¨The individual's riskier behavior creates a social loss, because the costly event X occurs more than it would have without insurance.

The American Model as a mix of models

¨Different parts of the American healthcare system have aspects of the three major models: ¤The Beveridge model - single-payer, public provision -The US Veterans Affairs Health Care System -The Us Indian Healthcare System ¤The Bismarck model - compulsory private payers, private provision -Similar to US provision for poor (Medicaid) and elderly (Medicare)subgroups -The ACA health insurance mandate would have made the US model similar to the Bismarck approach ¤The out-of-pocket model - private payers, private provision -Most Americans get health insurance through employer-sponsored insurance plans -Uninsured Americans pay out-of-pocket if not covered by an employer, private insurance, or publicly-provided insurance.

How does risk adjustment work?

¨Example: A 52-year-old diabetic man signs up for a German sickness fund. ¨At the end of the year, a central German agency calculates the average health expenditures of all 52-year-old diabetic men across Germany. ¨Suppose the average cost for this population is €12,000, but the average cost nationwide is €5,000 ¨Then, the sickness fund gets a check for €7,000 ¨Meanwhile, funds with unusually healthy customers have to pay into the central fund

Managed Competition

¨Health insurance markets in Bismarck nations follow a "managed competition" model. ¨Insurance is not run by the government but instead multiple private, non-profit entities called sickness funds. ¨There are four major rules in managed competition markets.

Deductibles

¨In addition to coinsurance and copayment, many insurers also include deductibles as part of their offered plans. ¨Deductibles set minimal levels of expenses below which the insurer does not help reimburse medical expenses. ¤Example: A person insured with a deductible of $1,000 pays for his first thousand dollars of health care expenditures out-of-pocket. His insurance policy then helps pay for expenses beyond the thousandth dollar. ¨Requiring insurance enrollees to pay a deductible can limit or eliminate the moral hazard from insurance. However, if the deductible is low enough, moral hazard may still persist.

Risk rating vs. community rating

¨Risk rating: charging different premiums to different customers based on their personal risk of needing health care. ¨The alternative is community rating, which entails charging everyone in an insurance pool the same premium.

How do insurance companies try to limit moral hazard?

¨The extent of moral hazard depends on both how sensitive demand is to price and the amount of price distortion caused by insurance. ¨Insurers cannot alter customers' price sensitivity (which is a property of their demand functions), but they do have ways to reduce the price distortion due to insurance

What role does asymmetric information play in whether or not/how much moral hazard occurs?

¨There is price distortion in insurance markets because insurance companies cannot monitor everything patients do and price their actions accordingly. ¤For example, it would be impractical for an insurance company to count how many cheeseburgers its customers eat ¤Similarly, insurers cannot tell if a patient really needed to see his doctor ten times in the last month

Why price controls?

¨We have already discussed the major problem of oligopoly power in hospital and physician markets ¨Price controls are prices negotiated between providers and purchasers ¨Essentially, a price control negotiation allows the purchasers of health care (sickness funds) to band together and exercise monopsony power ¨This can counterbalance oligopoly power and lower prices, but prices set by a central agency can distort medical decision making

What is social loss?

•Consider an individual who loves cheeseburgers but is at risk for a heart attack. •Without health insurance: his cost for each cheeseburger includes both the price of the burger and the increased chance of a heart attack •With health insurance: the cost of each cheeseburger declines, since the insurer picks up the costs of heart attack care. •In this case, social loss takes the form of extra money, labor, time, and effort that others expend on caring for heart attacks caused by cheeseburger overconsumption

Differential wage pass through

•Differential wage pass-through can occur whenever employers can observe elevated health risks among their employees. •Technically, passing lower wages through to sicker workers is illegal in the US, but wage discrimination is difficult to detect, and there is evidence that people who have higher expected medical expenditures do earn less.

Adverse Selection

•In Beveridge nations, where everyone is automatically insured in the same pool, adverse selection does not exist. •But Bismarck systems are not immune to adverse selection. •The compulsory nature of insurance enrollment prevents the worst of adverse selection. •People are prevented from leaving the pool completely when they are healthy. •This guarantees that there are always healthy people paying into the system to subsidize care for the sick. •But if people can choose among several insurance plans within a Bismarck system, adverse selection can appear.

Limiting access to specialists

•In order to limit health care expenditures, many Bismarck countries have initiated gatekeeping reforms.

What role does insurance play in whether or not/how much moral hazard occurs?

•Insured people take risks with their health that similar uninsured people would not take, and demand more expensive treatment from their doctors when they get sick. •Moral hazard isthe downside of health insurancebecause it raises society's level of health care expenditures

Differential wage pass through examples

•Maternity benefits: Women of childbearing age saw their salaries fall relative to both men and older women in the years following the passage of a 1976 law mandating maternity care coverage for employer-sponsored insurance plans. •Obesity: in jobs with employer-sponsored health insurance, the obese earn much less than their thin coworkers. In jobs with no insurance, the obese and thin earn about the same wage.

Negotiated fee schedules

•Negotiating fee schedules is one policy employed by Bismarck countries to control health care spending. •Setting health care prices is complicated since the range of possible activities is so broad and varied. •Both private and public providers are bound by these price negotiations, and must charge these prices—no more and no less. •Fee schedules gives policymakers the power to influence the behavior of health care providers. Manipulation of the fee schedule serves as one of the primary mechanisms by which governments regulate the supply of medical services, the use of care, and the level of aggregate health care spending

Clinical Distortions

•The process for setting prices would ideally result in a price for each activity equal to its marginal costs of production. •Inevitably, the process of government price-setting produces some prices that do not match the actual marginal costs and benefits of care. •Such price mismatches can introduce distortions in the way that doctors elect to treat their patients.