3 Basic Steps in Economic Evaluation

1
Chapter 11 The Private Health Insurance
Industry Health Economics
2
Health Insurance Industry Structure
The Competitors (millions covered in 1995)

• Market has a large of health insurance
  companies of different types.
• Commercial (for-profit) (76.6 million people
  covered)
• BCBS (65.6 million covered)
• HMOs (59.1 million covered 20 of population)
• 1) 51 National managed care firm.
• 2) 13 Blue Cross/Blue Shield
• 3) 36 Independent ownership/sponsorship
• Self-insured companies (61.0 million covered)
• In 1995 185.3 million people (70.5 of the
  population) had some sort of private health
  insurance.

3
Health Insurance Industry Structure
Many different insurers in the private health
insurance market commercial blue cross blue
shield (tend not to compete with each other)
not-for-profit HMOs and other managed care Group
and individual 2450 companies write group
policies 690 companies write individual
policies non BCBS HMOs dominate group market
(45 share) BCBS dominate the individual market
(50 share)
4
Health Insurance Industry Structure

• Nationwide 4 firm concentration ratio is 22
  (less than 40 considered for oligopoly
• In most states, a few companies dominate the
  market
• more competition nationally than locally
• in 33 states, the 3 largest companies have 50
  share
• all states, smallest 50 share less than 9 of
  market
• local concentration ratios much higher
• Conclusion Oligopoly market structure
• self-insurance a viable alternative for large
  firms

5
Dominant Insurer Model
Treat its demand as the residual from other firms
-- so it follows the heavy red line, giving the
MRacme line, and then they maximize profits.
Residual fringe firms charge the same.
Sf
Dacme
P
MCacme
D
Qacme
MRacme
Qtotal
6
Health Insurance Industry Structure
Are there economies of scale to insurance
provision?
1) Evidence from cost regressions (cross
section) (Blair et. al. 1975) OPCOST
.464 - . 0000002P - .0003GI/T other factors.
(34.32) (3.152)
(19.693) R2 .589, N 307 insurance
companies OPCOST average administrative costs
total operating cost/health
premiums written P premiums
written GI/T group insurance
premiums/premium written

• Coefficient on P economies of scale
• Coefficient on GI/T lower admin. cost for
  group policies

7
Health Insurance Industry Structure
Who is the Consumer?
Majority of commercial insurance purchased by
groups. (e.g. employers or union
representatives). Why? 1) Monopsony buying
power 2) Group expert makes informed choices 3)
In large group, health status uncorrd w/ emp.
status.

• Commercial group insurance premiums unregulated,
  unlike benefit/premium ratios of individuals.

8
Mandated Employer Insurance the workers view
Wages
In an efficient labor market, the total
compensation paid a worker is the workers value
of the marginal product. This is paid in wages
and benefits. Workers self-select into jobs
with their utility maximizing optimal combination
of wages and HI. If HI is mandated, to H2,
workers get a lower utility.
U1
U2
H2
HI
H1
9
Health Insurance Industry Conduct
Price Components

• Ex ante, insurance comp. does not know exact
  amount of benefits any individual will receive.
• E(Ben) Ben e

10
Health Insurance Industry Conduct (cont.)

• Price competition forces insurer to balance
  marginal cost saving vs. marginal admin. costs.

11
Health Insurance Industry Conduct (cont.)

• Do managed care organizations (MCOs) actually
  lower health insurance premiums?
• MCOs, especially HMOs, lower medical costs 15-
  20 through medical costs.
• 1993 average family monthly premium for
  conventional insurance 439, vs. 415 for HMO
  insurance.

12
HMOs and monopsony power
Notice, MC is not clearly lower, just amount paid
to providers. There is a DWL, and too little
care is given, Q1 instead of Q0. Also welfare
transfers between providers and company.
MFC
S
P0
P1
D
Q1
Q0
13
Health Insurance Industry Conduct (cont.)

• However, the higher monthly premiums for
  conventional insurance may just reflect the
  decision of sicker individuals to buy more
  generous insurance policies.
• Regression analyses that control for health
  status differences find no significant difference
  in premiums between conventional and HMO premium.
  Why??
• 1) Admin. costs may outweigh cost saving
• 2) HMOs may shadow price.
• 3) Lack of consumer price consciousness.

14
Pricing Strategies

• Community rating - premium based on risk
  characteristics of entire membership.
• Rates for each individual do not vary according
  to health history or health status.
• Low risk individuals subsidize high-risk
  individuals.
• Disadvantages
• 1) low risk individuals discouraged from
  purchasing insurance premium that are too high.
• 2) no incentive for individuals to adopt
  healthy lifestyle.

15
Pricing Strategies (cont.)

• Experience rating - premiums for individuals (or
  groups of individuals) vary by risk status (e.g.
  age, gender, industrial occupation, prior
  illness).
• Individuals or groups of individuals pay price
  closer to expected medical costs.
• Disadvantages
• 1) unfair to make sickest pay more
• - illness uncontrollable.
• 2) encourages cherry picking

16
Non-Price Business Strategies

• Cherry-picking and benefit denial.
• Once an insur. comp. sets health insurance
  premiums, there is an incentive to keep low-risk
  consumers and exclude high-risk consumers.
• e.g. demand even higher premiums for patients w/
  chronic health problems or high-risk conditions
  (e.g. hypertension, diabetes)
• or, exclude coverage for pre-existing conditions.
• More problem for individual vs. group policies.

17
Non-Price Business Strategies (cont.)

• Limited enrollment period to deal w/ adverse
  selection.
• a) High risk consumers may know more about their
  own health than insurers.
• b) High risk consumers may get into cheaper
  plans designed for lower risk persons.
• c) High cost eventually drives up premiums,
  until high-risk consumers switch to next cheaper
  plan.
• d) Instability -- high adjustment costs for
  insurers.

18
Health Insurance Industry Performance
Output (Quantity of Health Insurance)

• 42.6 m 15.5 of the population remains
  uninsured.
• young adults, unmarried adults, minorities,
  part-time self-employed, poor less likely to be
  insured.
• Resulting inefficiencies.
• a) uninsured eventually receive emergency care

• insured indirectly subsidize uninsured health
  care.
• inefficient vs. planned financing mechanism.

b) uninsured may wait too long for care, when
earlier treatment may have been cheaper.
19
Health Insurance Industry Performance (cont.)

• One measure of the health insurance price is
  the amount of premiums the insurance company
  receives, divided by the amount of medical
  benefits paid out.
• Using this measure, the relative price of
  health insurance has declined over time.
• The overall price hasnt fallen, because medical
  care expenditures are rising dramatically.

20
Health Insurance Industry Performance
Price of Private Insurance in the United
States, Selected Years, 1950-1995
Insurance Companies .

Self
Insured Blue Cross Year Total Group
Individual and HMOs Blue Shield 1950
1.62 1.44 2.01 ---
1.17 1960 1.57 1.23
2.47 --- 1.08 1970 1.26
1.09 2.11 --- 1.04 1980
1.18 1.12 1.73 1.07
1.03 1990 1.22 1.19 1.55
1.11 1.12 1995 1.22 1.19 1.46
1.08 1.13
Source Source Book of Health Insurance Data
1997-1998, Washington DC Health Insurance
Association of America, Table 2.5
21
Health Insurance Industry Performance (cont.)

• Job lock - Health insurance often tied to
  workers job.
• New job may require long waiting period for
  enrollment, no coverage for pre-existing
  conditions, less generous coverage.
• Cooper Monheit (1993) - Married men who expect
  to lose health insurance 23 less likely to
  change jobs.

22
Health Insurance Industry Performance (cont.)
analogy restaurant bill splitting.
23
Health Insurance Industry Performance (cont.)

• Over-insurance/Moral Hazard (cont.)

Causes and Implications 1) Consumer pays
coinsurance only 2) Less incentive to practice
healthy lifestyle/preventive medicine 3)
Greater willingness to experiment w/ new,
expensive technologies 4) Less incentive to
monitor providers 5) Less incentive to comparison
shop Practical Solution increase copayment,
w/ stop-loss
24
Moral Hazard and HC use
Without HI pay P0, demand q0. With HI pay 0,
demand q1. Bill splitting MC to consumer is
only the portion of bill paid by him so order
more expensive menu.

a
b
MC
P0
d
q
q1
q0
25
Cost Containment

• Industry has been slow to adopt cost containment.

• Tax exemption on employer-sponsored health
  insurance reduced consumers demand for lower
  premiums.
• Health insurance also used by employers as a
  symbol of their generosity.

• Eliminating tax exemption may help to restrain
  cost growth.

26
Conclusions

• The health insurance industry is structurally
  competitive.
• However, price and non-price strategies still
  lead to disparities in access to appropriately
  priced health insurance.
• The cost of health insurance continues to rise.
• In part due to rising costs of medical care.
• But also due to moral hazard problems.