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Health Insurance – Part 2

Health Insurance – Part 2. Eric Jacobson. Key Definitions. Adverse selection – Enrollees may seek to join a health plan at a premium that reflects a lower level of risk than their own. Risk selection – Occurs when insurers attempt to attract more favorable risk group.

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Health Insurance – Part 2

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  1. Health Insurance – Part 2 Eric Jacobson

  2. Key Definitions • Adverse selection – Enrollees may seek to join a health plan at a premium that reflects a lower level of risk than their own. • Risk selection – Occurs when insurers attempt to attract more favorable risk group. • Moral hazard – Any change in individual behavior due to insurance that increases expected losses, such as higher utilization of covered services. (Seat belts, Lipitor, low copayments)

  3. Adverse Selection • Sicker individuals more likely to: • Demand insurance • Demand more generous insurance, given a choice of plans • Largely due to “asymmetric info” (individuals vs insurers). • This process, called adverse selection (or self-selection), complicates the issue of how much choice to offer consumers in the health care market.

  4. Consequence of Adverse Selection and Community Rating: • Persons with poorer-than-average health status apply for, or continue, insurance coverage to a greater extent than do persons with average or better health expectations. • Experience Rating?

  5. An Example of Adverse Selection 100 People 1 Person 30% chance of needing $100k treatment Pure Premium = ? (asymmetric info) 1% chance of needing $100k treatment Pure Premium = $1,000

  6. Adverse effects of adverse selectionStart with a community-rated, self-pay health plan • Community of four with insurance premium = $3000 Person “A” with E(B) = $600 “B” E(B) = $2000 “C” E(B) = $4000 “D” E(B) = $6000 • Marginal analysis: E(B) vs E(C) • Decision of healthier enrollees “A” and “B”? • Avg. cost per enrollee increases. • Premiums increase => “C” drops out. • …and this can create a “killer price spiral” Severe adverse selection can set in motion price spirals that theoretically can cripple or destroy insurance markets.

  7. Key Definitions • Adverse selection • Risk selection • Moral hazard – Any change in individual behavior due to insurance that increases expected losses, such as higher utilization of covered services. (Seat belts, Lipitor, low copayments)

  8. P PF DWL CPF D QU Q1 Q Moral Hazard and Demand

  9. What Should Be Covered? Balance among (at least) three theoretical considerations: • Risk aversion • Limiting moral hazards • Encouraging preventive care

  10. Patterns of Insurance Coverage The losses that are insured are: large*, infrequent*, random*, and not associated with a large moral hazard.

  11. Possible Solutions to the Adverse Selection Problem? • Waiting periods • Preexisting condition exclusions • Experience rating (underwriting) • Insurance that precludes individual selection according to subscribers’ perceptions of their own risk (Universal health insurance, employment-based insurance)

  12. Possible Solutions to the Risk Selection Problem? • Risk adjusted premiums

  13. Possible Solutions to the Moral Hazard Problem? • (Higher) co-payments • (Higher) deductibles • Medical savings accounts – similar to 401(k) plans • Utilization review and case management • Since size of moral hazard problems (DWL) increases with price elasticity of demand, offer less generous insurance for specific services with more elastic demand (e.g., mental health coverage).

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