insurance and health care delivery n287e spring 2006 professor: joanne spetz 26 april 2006
TRANSCRIPT
Insurance and health care delivery
N287E Spring 2006Professor: Joanne Spetz26 April 2006
But wait! Let’s talk about the problem set!
Return on Investment = Profit margin / Asset turnover rate
Profit margin = total margin = net income / sales
Asset turnover rate = total asset turnover = total revenue / total assets
But wait! Let’s talk about the problem set!
Return on Investment = Profit margin / Asset turnover rate
Profit margin = net income / sales = (operating revenue – operating
expense – nonoperating expense) / operating revenue
But wait! Let’s talk about the problem set!
Return on Investment = Profit margin / Asset turnover rate
Asset turnover rate = total revenue / total assets
= (operating revenue) / (current assets + fixed assets)
But wait! Let’s talk about the problem set!
Return on Investment = Profit margin / Asset turnover rate=
(revenue - expense) / revenue revenue (current+fixed assets)
= (revenue – expense) / (total assets)
This is the formula in the U of Missouri sheets!
And now back to our regularly scheduled presentation!
Going back to demand for medical care…
We believe: Health = h(m,X) Medical care is a “normal good”
If price rises, demand drops If income rises, demand rises
Medical care does not produce only health
Medical care also produces: Caring Validation
If price goes up…
Medical care
Other consumption Indifference curve
Price increase
Drop in medical care demand
If income goes up…
Medical care
Other consumption
Income increase
Increase in medical care demand
Changes in health status:
Change the utility functionChange the indifference curve
Medical care
Other consumption
healthy
sick
From this we can derive demand curves
Medical care
price
Normal demand
Demand for sick person
Demand for health care depends on…
PriceIncomeHealth statusAnd also… Quality of care Time required for care
Medical care is a group of products
Health = f(m1, m2, m3,…)All things equal, you want: Higher quality Care that takes less time
You decide on demand for medical care based on: marginal utility = marginal cost In theory!
Departure from theory
Health and illness are randomYou can establish a budget and consumption plan… And then get diagnosed with cancer So much for the budget!
Changes in health:
Changes in health Changes in demand for medical care Changes in spending on med care
Since health is random, spending on medical care will be random
Dealing with financial risk
Insurance protects against risk
Willingness to pay more than the average loss to insure against the loss is “risk aversion” This results from a utility function
with diminishing returns
Diminishing marginal utility
money
utility
$50 $100
•50% chance of getting $100•50% chance of getting $50
E(U) = .5*U($100)+.5*U($50)
E(U)
Diminishing marginal utility
money
utility
$50 $100
Utility of $75 is bigger than E(U)
E(U)U($75)
$75
In this case, we have a plan
If you win $100, pay $25 (net=$75)If you win $50, you receive $25 (net=$75)
Guaranteed $75
In fact, even U($70) is higher!
Insurance is demanded by the market when there is risk
Problems with insurance Moral hazard
Once you have insurance you take more risks
Smoking Skydiving
Insurance is demanded by the market when there is risk
Problems with insurance Moral hazard
You seek more care because it’s already paid
You can view this as a decrease in price of medical care
But you also have a decrease in “income” because of the premium you paid
More insurance problems…
Adverse selection You know more about your risk than
does your insurer Those with greatest risk want insurance You won’t seek insurance if your risk is
low Result: insurer gets a riskier group of
people than expected
How do you deal with these problems?
Moral hazard Copayments
Coinsurance (percent of bill) Indemnity payment (flat rate)
Deductibles Don’t insure small losses
How do you deal with these problems?
Moral hazard Upper limits on payments
Protects insurer from huge losses Serious health events are not insured
Managed care (more on this later…)
How do you deal with these problems?
Adverse selection Pre-existing condition exclusions
These rules may prevent people from switching jobs
Pooled purchasing of insurance “Group insurance” Common in the workplace due to tax
breaks Can obtain economy of scale
All insurance works through risk-pooling
Should smokers be in the same pool as non-smokers? What about the old and the young?
Larger pools get economy of scale Is this fair?
Many firms self-insure The insurance company handles
administration The company is a single risk pool
What about managed care?
Fee-for-service insurance Insurer pays the bills as presented
Health maintenance organization Insurer manages your care within closed
network of providers
Preferred provider organization Insurer gives you incentives to choose
preferred providers
Point-of-service plan
What is the social problem with health care?
Marginal cost/Marginal benefit
MB of health care
True cost of care
Price the patient sees
Optimalquantity
Actualquantity
Health costs in the U.S.
Year Annual health growth
Inflation GDP growth
1970
10.6% 5.6% 7.0%
1980
12.9% 12.5% 10.4%
1990
10.9% 6.1% 7.5%
1997
5.4% 1.7% 5.8%
2000
8.3% 3.4% 7.4%
Comparisons across nations
Female life exp.
Infant mort.
Spend per cap.
Spend per GDP
U.S. 79.4 7.1 $4373 13.0%
Australia
81.8 5.7 $2141 8.4%
Canada 81.7 5.3 $2428 9.2%
France 82.5 4.3 $2226 9.4%
Germany
80.7 4.5 $2616 10.7%
Japan 84.0 3.4 $1852 7.4%
Mexico 77.3 25.9 $452 5.4%
Sources of insurance
Employer-based insurance 2/3 of adults have this Often provides a choice of plans Group purchasing gives better rates Cost comes from your potential salary
Individual private insurance Can be expensive Adverse selection
Sources of insurance
Medicare Program for the elderly, to address
adverse selection Part A: hospital care Part B: outpatient/primary care Managed care plans Medi-Gap insurance (private)
Sources of insurance
Medicaid & Healthy Kids Medicaid
State-federal partnership Until 1990s, was linked to welfare Available up to 200% of poverty level for children
and pregnant women Covers nursing homes, pharmacy
Healthy Kids Private-style insurance for near-poor children Might be available for near-poor adults
What happens if you’re uninsured?
Hospitals are a major safety net Public hospitals – sliding scale for cost Other hospitals
Charity care categories Uncompensated care Hospitals pay for charity by cost-shifting
Doctors Public clinics Self-pay (if they’ll take you)
How much does access to care affect health?
Small effect of medical care on healthWealth and education improve health more than medical care Is this because you learn about health
when you obtain education? Or does this reflect your underlying
preferences?
Latino “paradox”
The high number of uninsured may warrant policy action
National health reform usually focuses on the uninsured Medicare Clinton Plan Medicare reform proposals in 2000
election
Price of health care also is a concern High inflation rate since 1960s
What about managed care’s effects?
Major literature reviews by Miller & Luft Equal numbers of better and worse
results Worse quality for Medicare HMO
enrollees with chronic conditions
Financial incentives to doctors have unclear effects on quality (Armour et al., 2001)
More managed care effects
Preventive care Better cancer screening (Haas et al.,
2002)
Mental health Colorado study found no difference
after managed care introduced (Cuffel et al., 2002)
Managed care & costs
Miller & Luft No clear hospital/physician resource
use differences
Managed care probably reduced costs through mid-1990s Excess payments negotiated out of
system
Resurgence of cost inflation in 2000s
Why is there high cost inflation?
Administrative costsHigh quality of carePrices of inputsNew technologies Incentive to develop new
technologies due to widespread insurance coverage
Hospitals compete by purchasing technologies (“medical arms race”)
How would managed care control costs?
Why would a provider contract with a HMO/PPO? Guarantee a group of patients Prevent competitor from getting
those patients Some benefits of HMO management
services (?)