HEALTH INSURANCE 101

Kao-Ping Chua, M.D., Ph.D.

Assistant Professor of Pediatrics and Public Health Sciences

November 10, 2015

Outline

Theory Flow of money in U.S. health care Economics of health insurance

Practice Choosing a health insurance plan Reading a health care bill

Flow of money in U.S. health careEconomics of health insurance

Theory

Individuals/Businesses

Government

Health Service Providers

Private Insurers

Premiums

Taxes

Out-of-pocket payments

Provider payments: Medicare,

Medicaid/CHIP

Provider payments:

private health insurance

Public employee premiums

Flow of money in U.S. health care

Individuals/Businesses

Government

Health Service Providers

Private Insurers

Premiums

Taxes

Out-of-pocket payments

Provider payments: Medicare,

Medicaid/CHIP

Provider payments:

private health insurance

Public employee premiums

Flow of money in U.S. health care

Individuals/Businesses

Government

Health Service Providers

Private Insurers

Premiums

Taxes

Out-of-pocket payments

Provider payments: Medicare,

Medicaid/CHIP

Provider payments:

private health insurance

Public employee premiums

Flow of money in U.S. health care

Individuals/Businesses

Government

Health Service Providers

Private Insurers

Premiums

Taxes

Out-of-pocket payments

Provider payments: Medicare,

Medicaid/CHIP

Provider payments:

private health insurance

Public employee premiums

Flow of money in U.S. health care

Individuals/Businesses

Government

Health Service Providers

Private Insurers

Premiums

Taxes

Out-of-pocket payments

Provider payments: Medicare,

Medicaid/CHIP

Provider payments:

private health insurance

Public employee premiums

Redesigning the system

?

???

?

?

IndividualsHealth Service

ProvidersOut-of-pocket payments

100% private financing: no insurance

IndividualsHealth Service

Providers

Private Insurers

Premiums

Out-of-pocket payments

Provider payments:

private health insurance

100% private financing: private insurance

Individuals

Government

Health Service Providers

Taxes

Provider payments:

public insurance

100% public financing

Individuals/Businesses

Government

Health Service Providers

Private Insurers

Premiums

Taxes

Out-of-pocket payments

Provider payments:

public insurance

Provider payments:

private health insurance

Mixed public/private financing

Flow of money in U.S. health careEconomics of health insurance

Theory

Health insurance basics

Why is health insurance necessary? Sickness is unpredictable hard to budget for health care

costs Health care is expensive typically can’t borrow sufficient

money Median household income in U.S.: $52,000 Average cost of vaginal birth: $18,000

If no health insurance: Health care need large losses bankruptcy > 50% of bankruptcies in U.S. due to medical costs

Health insurance: Pay regular premiums into pool of money that funds a group’s health care costs Healthy subsidize the sick but obtain “piece of mind”

Health insurance basics

Should health insurance be like car insurance? Car insurance focuses on catastrophic costs, not

routine costs like oil changes Premium driven by individual risk (driving

history/type of car); less by group risk

Health insurance basics

View 1: car insurance is a good model for health insurance (consumer-driven health care model) Cover against catastrophic costs – don’t pay for

routine physicals, etc. Less concerned about spreading risk; more concern

about a “fair” premium to the individual Policy examples

Tax credits to buy high-deductible individual insurance (ACA health insurance marketplaces)

Health insurance basics

View 2: car insurance is not a good model for health insurance (public health model) Goal of health insurance should be to promote

health pay for routine physicals, etc. Focus on social welfare and spreading risk; healthy

should subsidize the sick Policy examples

National health insurance Plans with minimal/no cost-sharing Guaranteed issue

Health insurance basics

The two central problems in health insurance Moral hazard

Adverse selection

Moral hazard

Definition: when insured, people make different choices than they would if they were not insured because they don’t bear the full costs of their choices

Focus on “ex post” moral hazard Because people don’t bear the full costs of health care

under insurance, they will use more health care

Moral hazard

Assumptions Costs/benefits can be quantified in $ For any good, each additional unit of consumption

provides less benefit (diminishing returns) People maximize utility: if a doctor’s visit costs

$100, people will go to the doctor until the benefit of another visit is <$100

People only consider the cost of additional consumption for themselves, not the cost to society (i.e. insurers) No problem for efficiency if these costs are the same

Moral hazard

Health insurance induces inefficiency by allowing people to obtain health care at less than the cost to society Example: under insurance, patient pays $20 for each

visit, but each visit still costs $100 to produce Result: more visits and higher costs to society than in the

situation without insurance

Empirical evidence on moral hazard: RAND health insurance experiment Free care plan: ~2 more office visits per person per year

and 25% higher hospitalization rate than in 95% coinsurance plan

Moral hazard

Bigger problem for “discretionary” services Example 1: You have gastroenteritis x 1 day. You

could probably do OK with self-care, or you could get 1 L NS in the ER, which costs $1500. Would you go to the ER if: Insurance covered everything and you paid $0? You had no insurance and had to pay full-price?

Example 2: You have cancer and need chemotherapy, which costs $10,000. Would you get chemotherapy if: Insurance covered everything and you paid $0? You had no insurance and had to pay full-price?

Fundamental tradeoff between efficiency and risk protection

Moral hazard

Countries deal with moral hazard in different ways U.S.: “demand-side rationing”

Cost-sharing (co-pay, co-insurance, deductible) Non-coverage of benefits Limits on coverage

Other developed countries Some cost-sharing and non-coverage Mostly supply-side rationing (e.g., waitlists)

Moral hazard

Opposing view Consuming health care has non-financial costs such as

time costs, emotional costs, side effects Choice to obtain more utilization is driven largely by

doctors Some moral hazard may be “good”

Allows people to get high-value or even life-saving health care that they would not otherwise be able to afford

Intermediate view Impose cost-sharing on lower-value services

(discretionary ER visits) and no cost sharing on higher-value services (chemotherapy)

Adverse selection

At any given premium and level of generosity of benefit coverage, sicker individuals who think they will incur more costs are more likely to purchase insurance, while healthier individuals who think they will incur less costs are less likely to purchase insurance

Conditions People can choose whether to purchase insurance People have a choice between competing plans People know their own health better than insurers Insurers set premiums at average cost due to

imperfect information

Simplified example (year 1)

Only one plan (plan 1) Premium: $100/year 100 people sign up: 90 healthy, 10 sick Total funds available = $10,000 The 10 sick people use $1,000/year in health care

services; the healthy people use $0 Results:

The sick “gain” $900/year and are happy with plan The healthy “lose” $100/year but gain peace of mind and

are happy with plan given the lack of alternatives Average cost = $100/enrollee The insurer has $0 profit (and incurs overhead costs)

Simplified example (year 2)

Plan 2 enters market; offers less generous coverage but lower premium ($50/year)

Plan 1 premium = $100/year (average cost from year 1)

Results The 90 healthy people leave for Plan 2 The 10 sick people stay in Plan 1 because of its better

generosity 10 sick people in Plan 1 pay $1,000 total in

premiums, but still incur $1,000 each year ($10,000 total)

Insurer in Plan 1 loses $9,000 (plus overhead)

Simplified example (year 3)

Plan 1 premium = average cost from year 2 ($1,000/year)

Results: Plan 1 cannot attract healthy people (“good risks”) because the

premium is so high Some sick people cannot afford premium and switch to plan 2

despite less generous coverage Over time, plan 1 shrinks and ultimately disappears from

market (death spiral) Over time, plan 2 becomes more expensive and some healthy

people choose to become uninsured Adverse selection increases uninsurance among

people with low risk when there is a choice not to buy insurance

Risk selection

How private insurers avoid “bad risks” (risk selection) Underwriting

Reject those with pre-existing conditions or exclude certain benefits

Defined enrollment periods Prevents people from signing up for insurance when they

get sick Limit ability to switch between plans mid-year

Prevents people from signing up for more generous insurance when they get sick

Selective marketing Gym memberships Location on top floor of buildings without elevator

Implications

In a completely privatized system, adverse selection + risk selection = lack of affordable or desirable insurance plans for high-risk individuals

Solution 1: pool large numbers of people in public insurance programs to spread risk Other Western countries rely mostly on public insurance U.S. - specific public insurance programs

Elderly and some disabled non-elderly adults (Medicare) Poor (Medicaid)

Solution 2: individual mandate and guaranteed issue Everybody gets insurance; forces healthy people into pool

to subsidize sick average cost and premiums lower

Individuals/Businesses

Government

Health Service Providers

Private Insurers

Premiums

Taxes

Out-of-pocket payments

Provider payments: Medicare,

Medicaid/CHIP

Provider payments:

private health insurance

Public employee premiums

Redesigning the system

?

???

?

?

IndividualsHealth Service

ProvidersOut-of-pocket payments

100% private financing: no health insurance

What are the challenges of this system?Health care is expensive and sickness is unpredictable lots of bankruptcy

IndividualsHealth Service

Providers

Private Insurers

Premiums

Out-of-pocket payments

Provider payments:

private health insurance

100% private financing: private insurance

What are the challenges of this system?Adverse selection and risk selection high uninsurance

Individuals

Government

Health Service Providers

Taxes

Provider payments

100% public financing

What are the challenges of this system?Would get very expensive (moral hazard) rationing

WHO, 2008

Choosing a private health insurance planReading a health care bill

Practice

Definitions and key concepts Charge

What provider charges, not what they expect to get paid Arbitrarily high (starting point for negotiations with

insurers) Like a sticker price at a car dealership

Allowed charge The amount the insurer pays (after discounts) Determined by hardcore negotiations Uninsured pay 100% of the charge

Facility vs provider charges Facility: bill for use of hospital services (overhead,

ancillary staff, etc.) Provider: bill for provider services

Definitions and key concepts Cost-sharing – patient’s portion of the bill

Deductible: amount you have to pay before coverage Individual vs family deductible

Co-pay: fixed amount per visit or service Co-insurance: fixed percentage of allowed charge

Out of-pocket maximum: level of OOP spending after which cost-sharing is 0%

High-deductible health plan/health savings account HDHP: minimum $1300/$2600 deductible for

single/family coverage HSA – tax-free payroll deductions for health care

expenditures

Definitions and key concepts Health maintenance organization (HMO)

Restricted network of providers; no coverage outside of network

Utilization management (e.g., pre-authorization) PCP as gatekeeper requires referrals to specialists

Preferred provider organization (PPO) Allows patients to see doctor of their choice Cost-sharing is higher out-of-network than in-network No referrals needed for specialty care Typically higher premiums and cost-sharing than HMO

Congratulations!

You now know more than the vast majority of Americans about health insurance

Loewenstein, Journal of Health Economics 2013: Only 14% of subjects correctly answered 4 multiple-choice questions on deductibles, co-pays, co-insurance, and OOP maximum

Poor comprehension suboptimal choices “Status quo” bias – stick with insurance plan you

already have

Pre-tax monthly payrolldeduction, individualMaroon: $290Maroon Savings: $115UCHP: $128

Pre-tax monthly payrolldeduction, familyMaroon: $565Maroon Savings: $344UCHP: $350

Assuming individual coverage and no previous expenses that count towards the deductible, calculate the patient’s portion of the bill for the following services under each plan.

A $100 non-preventive in-network office visit to PCP?

Maroon Plan: $100

Maroon Savings Plan: $100

UCHP: $10

A $350 non-preventive in-network office visit to a specialist?

Maroon: $250 + 20% of $100 = $270

Maroon Savings: $350

UCHP: $20

A $350 non-preventive out-of-network office visit to a specialist?

Maroon: $250 plus 35% of $100 = $285

Maroon Choice: $350

UCHP: $350

A $1,000 in-network hospitalization?

Maroon: $250 + 20% of $750 = $400

Maroon Choice: $1000

UCHP: $250

A $4,000 in-network hospitalization?

Maroon: $250 + 20% of $3750 = $1000

Maroon Choice: $2000 + 20% of $2000 = $2400

UCHP: $250

A $10,000 in-network hospitalization?

Maroon: $250 + 20% of $9750 = $2200>OOP max of $2000 pay $2000

Maroon Choice: $2000+20% of $8000 = $3600>OOP max of $3000 $3000

UCHP: $250

Assuming choice is not important, which of the three plans is most likely to attract:

1) The least well-off patients?UCHP – low premium and least cost-sharing

2) The sickest patients?UCHP – low premium and least cost-sharing

Which of the two Maroon plans is more optimal for:

1) Young, healthy people who think they are unlikely to use health care next year?

Maroon Savings Choice – low premium, deductible doesn’t matter, HSA

2) People who predict they will only need a $4,000 procedure next year?

Maroon Savings Choice – will pay $1400 more for the surgery, but HSA and lower premium make Maroon Savings Plan more attractive

3) Single mom who just found out she is pregnant (assume birth costs $18,000)?

Maroon Savings Choice - will hit OOP maximum ($1000 more in Maroon Savings), but HSA and lower premium make Maroon Savings Plan more attractive

Maroon vs. Maroon savings

Is it ever better to enroll in the Maroon plan over the Maroon savings plan? Yes, but rarely

Why do people enroll in Maroon when it’s not optimal? Imperfect information about predicted utilization

and prices Poor comprehension of insurance Cognitive shortcut: people hate deductibles (large

losses are unpalatable and cause cash flow issues)

Healthcare.gov demonstration

Choosing a health insurance planReading a health care bill

Practice

Personal example

Routine annual physical exam to establish care with PCP at U of C

What do you think were the total charges?a) $0-$500b) $501-$1000c) $1001-$1500d) $1501-$2000e) > $2000

Received screening bloodwork (CMP, lipids) and flu shot

Now what do you think the charges were?

My U of C annual physical bill

I had a Maroon Plan (20% coinsurance) and had spent $0 towards deductible

What did I owe?a) $0b) $0-$100c) $101-$500d) $501-$1000e) > $1000

My U of C annual physical bill

BCSBIL Explanation of Benefits, 1/2

BCSBIL Explanation of Benefits, 2/2

BCBSIL’s explanation of EOB

Charge Allowed chargeMy portion (20%of

allowed charge)

Blood draw $51 $21.88 $4.38

CMP $423 $181.47 $36.29

Lipid panel $397 $170.31 $34.06

Flu vaccine $52 $22.31 $0

Facility fee for medical visit $244 $104.68 $20.94

Flu vaccine administration $116 $49.76 $0

Total $1283 $550.41 $95.67

BCBSIL’s explanation of EOB

Charge Allowed chargeMy portion (20%of

allowed charge)

Blood draw $51 $21.88 $4.38

CMP $423 $181.47 $36.29

Lipid panel $397 $170.31 $34.06

Flu vaccine $52 $22.31 $0

Facility fee for medical visit $244 $104.68 $20.94

Flu vaccine administration $116 $49.76 $0

Total $1283 $550.41 $95.67

Why did I pay anything given these were preventive?

Summary

Choosing between insurance plans and understanding health care bills requires a considerable amount of sophistication

Patients have no idea what their bill is going to be and will have a hard time detecting errors

Better to be insured than uninsured

Administrative waste

What does this mean for you? Learn to practice cost-conscious medicine early

on Most privately insured patients have deductibles

~ 46% with employer-sponsored insurance have deductibles > $1000

Patients trust you with their finances; your relationship will be better if you are thoughtful about what you order

Even patients with no/limited cost-sharing incur travel, time, childcare costs for each visit and test you order

Cost-conscious medicine is the wave of the future