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Understand the concepts and principles of health insurance, the role of risk pooling, benefits, sellers, buyers, types, and challenges in health insurance markets.
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بـازار بيمـه سلامت Markets for Health Insurance Kambiz Monazzam, M.D Dec 2004
سرآغـاز گفتـار نـام خـداسـت كه رحمت گر و مهربـان خلق راست ستايـش بود ويــژه كردگــار كه بر عالمين است پروردگـار كه بخشنـده و مهربـان است نيز بود صاحب عرصهرسـتخـيز تـرا مي پرستـيم تنهـا و بـس نداريم ياور به غير از تو كـس بـشو هــادي مـا به راه درست ره آنكهمنعم ز نعـمات توست نه آنان كه خشمت برايشان رواست نه آنهاكه هستندگمره زراست
Risk How can we treat it? • Saving • Borrowing • Family & Friends • Charity • ? INSURANCE
Who take care of people when they need medical care; but, they can not afford ?
When / Why Insurance is created? • High Risks • People is aware of the risks • Risks are unpredictable at individual level • People inability to overcome the risks
The basic Principle behind Insurance: Are you risk averse? Risk Aversion: The desire to replace an uncertain loss with a steady and certain premium payment
Health Insurance: Aims To protect people from • the high costs • associated with low probability • serious illness or injury
Health Insurance: What is it? • Step 1: premiums collected when people are healthy, willing and able to pay. • Step 2: Fund pooling • Step 3: Insured people entitled to receive a defined package of services. • Step 4: The Fund compensate losses of contributors who experience serious illness or injury (or pay to providers to serve them).
Is insurance a trade-off? • Individual view • trade-off between • Time periods • Different possible states • Society view • Method of risk pooling • Distribute Financial loss to many people • Make cross-subsidy
What’s the Benefits: • Risk pooling helps buyers avoid a large, unpredictable loss at times of serious illness or injury • Pooling a large number of similar events helps sellers to improve the predictability of the event and lays the basis for insurance markets • Society benefits because of • Increased sense of personal security, • Protection of households from catastrophic financial loss • Indebtedness at times of serious injury and illness.
Who are the sellers and buyersof health insurance? • Sellers: relatively large organizations • Sellers of insurance may own a network of providers or may contract out. • Buyers tend to be Employers or GOV (on behalf of their employees), self-employed workers and other individuals who VOLUNTARILY join HI schemes. • Insurance coverage may be limited to the contributors, such as employees, but usually also includes their household dependents.
Types of Health Insurance: • Private Health Insurance • Social Health Insurance • NGO Insurance Funds • Community Funds • National Insurance
Insurance Characteristics: • Membership + collection of funds: Voluntary / Mandate / competition • Risk pools • Service delivery & contract with providers • Major problem / benefits • Admin. costs • Financial motivation
PrivateInsurance: • Many organizations compete for the financial contributions of members • The private insurance organizations usually contract with providers, under competitive arrangements, to provide services • Risk pools may become fragmented • Admin. costs tend to be very high • Financial Motivation: make a profit, pay shareholders
Who gets Private Insurance in Competitive Markets? • Those willing and able to pay (the relatively well off) • Workers (and their dependents) in the formal sector, less so the informal sector • Relatively poor households for whom government or some other entity pays their premiums to join
Basic Problems 1:Adverse Selection Asymmetry ofInformation • People who are relatively ill seek to join insurance plans more so than do people who are relatively healthy. • Since 70% of health insurance expenditures are represented by only 20% of members, having a large share of relatively ill people can bankrupt a health insurance scheme.
Combating Adverse Selection • Accepted strategy: Create waiting period so not just the relatively ill gain membership first • Accepted strategy: ‘Risk rate’ members and charge premiums accordingly • Unacceptable strategy: ‘Crème skimming’ to identify and enroll those who are relatively healthy and wealthy while trying to exclude those who are relatively ill and poor
Combating Crème Skimming • Require private insurers to have open enrollment periods • Outlaw discrimination of members on basis of age or medical condition
Basic Problems 2:Moral Hazard • When people pre-pay for a package of health entitlements, they may be motivated to OVERLY demand and use services, thus placing great pressure on providers • This occurs because insurance reduces or removes price barriers to health care.
Effect of Insurance Policy on Demand Demand with Insurance price OPP Demand E P1 P2 quantity Q1 Q2 OPP = out-of-pocket
Combating Moral Hazard • Require a co-payment at times when people demand service, thus giving them a reason to consider if they really want the service (cost consciousness) • Require a ‘deductible’ of X Rials that people must first pay from their own pockets before insurance pays providers.
Basic Problems 3:Imperfect InformationAsymmetry ofInformation • Buyers are often ill-informed and confused about their entitlements, resulting in many grievances • The service entitlements contained in different packages are often varied + hard to comprehend • Choice and location of providers that members are entitled to use if ill or injured may be poorly understood • Quality of product may not be homogeneous (e.g.., different levels of malpractice)
Combating Imperfect Information: A US Example • The National Committee for Quality Assurance (NCQA), a private accreditation body for HMO’s issues report cards based on about 50 standardized measures of a plan’s performance (such as childhood immunization rates, breast cancer screening, and asthma inpatient admission rates. • BUT, less than 20% of surveyed respondents made much use of such information. Most important to them was details on plan benefits and out-of-pocketcosts.
Basic Problems 4:Induced Demand Asymmetry ofInformation • Increase in number of physicians does not lead to decreased price or per capita cost of health, the picture is completely reverse. • There is a positive relationship between the physician density & price. • There is an incentive for physicians in some payment mechanisms to shift the demand, not as an agent of patient, but by own interests. • Many countries with FFS payment experience high utilization rates of health services even after controlling for differences in age, sex & population Are doctors perfect Agents?
Combating Induced Demand: • Changing the physicians incentives through payment mechanisms; FFS to Capitation / Capitation + Bonus • Use of an expert third party for purchasing • A controlling body to assure the quality / verity of services (e.g. Clinical Practice Guidelines, …..)
Basic Problems 5:Entry + Exit Requirements • Legal permission to operate a health insurance organization is difficult to obtain, due to organizational and financial and budgetary requirements that must be met. This may result in few HI organizations, collusion, and price fixing • Exit may be restricted because HI organizations have collected money on behalf of individuals, have obligations, and may be seen as socially desirable entities – socially – even if they are inefficient.
Other Basic Problems : 6. Administrative or Technical Efficiency 7. Inclusion, Exclusion + Equity 8. Grievance Procedures
Winners + Losers in Competitive Health Insurance Markets • Winners = buyers who are willing + able to pay, get good service, and maximize their utility through choice • Winners = sellers who have a broad risk pool, low admin costs, and make a profit • Losers = those left out because they can’t afford to join, excluded because of provider crème skimming, or members of poorly functioning plans • Losers = sellers that can’t attract enough members, or suffer from adverse selection, and go bankrupt. • Losers = society, insofar as fragmented markets and exclusion of households weakens the sense of social solidarity
Government Action to Protect Possible Losers • Regulate the sellers (entry + exit) • Regulate the providers (quality, standards) • Regulate information markets (entitlements) • Regulate grievance procedures
Social Health Insurance • Government mandates that all formal sector employees contribute set premiums, regardless of their health status • Risk pools can be large (all formal sector employees) • Entitlement to standard benefit package by all enrolled members • SH organization usually contracts with providers, under competition, to serve clients • Admin costs tend to be moderate • Financial Motivation: Revenue from premiums covers all costs to serve members
NGO Insurance Funds • Special interest organizations may collect funds voluntarily • NGO funds may own or contract with providers • Risk pools may be small • Adverse selection is a big problem • Admin. costs likely moderate • Financial motivation: revenue from premiums covers all costs to serve contributors
Community Funds • Voluntary membership + collection of funds • Usually contract with providers or make special negotiated arrangements with local providers (limited competition) • Risk pools likely small • Adverse selection is a big problem • Admin. costs moderate • Financial motivation: revenue from premiums covers all costs to serve contributors
National Insurance • Government financed through taxes (and/or mandated payroll taxes) • Risk pool satisfies Law of large numbers • Universal access to standard benefit package • Use of public and private providers, through contracting, and competitive conditions • Administrative costs relatively low • Financial motivation: revenue from premiums covers all costs of serving contributors
Comparison of Two Models: Canada versus USA
Features of the Canadian Model • Gov’t has the mandate to collect and pool revenues and does it well • Prevents a two-tier system, one for rich vs. one for poor, in financing/provision of basic health entitlements • Costs to administer the system are borne by 10 provinces, representing population of each province. • Government allows private providers to serve clients and reimburses them under negotiated fee arrangements • Allows voluntary insurance for limited health goods and services, BEYOND the basic entitlements, that Canadians really desire
Features of US Model • Major presence of competitive private insurance companies • Government Insurance coverage for the poor and elderly in the form of Medicaid and Medicare • Competition for both private finance and provision • Many private and employer sponsored insurance pools • Ability and willingness to pay is key
Major complaint made of Canada Model: • Waiting times longer in Canada than US • Gatekeeper role of GP in Canada prevents consumers from having immediate access to specialists • More controls on high tech in Canada • Canada not as inclined to respond to individual utility maximization as in USA
Why Fees + Hospital Costs are Lower in Canada • Provincial governments act as large purchasers of services and are successful at negotiating fee levels between physician’s organizations and provincial governments (as payer) • Regulation of hospital costs by provincial governments, includes capital expenditures • Provincial limits on capital costs associated with expensive new technologies.
Features of the Iran Approach: • 23.4 million covered through SSO, mainly in urban areas • 3.1 million covered by other institutions like Imam Khomeini Foundation • 29.1 million covered through MSIO, mostly government workers, farmers, students • 5.4 million not covered by any form of insurance • Empirical evidence shows more people uncovered
Waiting Periods in Iran • Only for the self-employed in MSIO. -- a three month waiting period before individuals are covered for inpatient care
Co-Payments in Iran: • MSIO & SSO AFMSIO co-payments are set at about 30% for outpatient and 10% for inpatient care for all individuals. But rural households must pay 25% for inpatient care. • SSO beneficiaries face no cost-sharing provided they use SSO facilities • No co-payments for PHC network
Most Countries Have Mixed Systems: • Social health insurance is often in place, representing 20-30% of formal sector workers • Cooperatives health insurance is often in place for rural plantation workers • Community health funds collect premiums and pay for services for minimum health entitlements • Private health insurance companies compete for relatively well-off clients • Government almost always acts as ‘insurer of last resort’ for the relatively poor
A Few Summary Points • Health insurance financing and provision is extremely complex • Making use of competitive markets for provision of health insured services (via contracting) makes more sense than for financing of health insurance • Maximizing size of risk pools gains benefits from the ‘law of large numbers’ and minimizes duplication of administrative costs associated with managing manage many smaller risk pools • Government and NGO watch-dog organizations have a major role to regulate “insurance markets” and protect consumers
Evolution of Health Care Financing and Provision Systems at Various Stages of Economic Development
