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Iowa Bankers Association Continuing Education 2008: InClass Seminar

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Title: Iowa Bankers Association Continuing Education 2008: InClass Seminar


1
Iowa Bankers Association Continuing Education
2008 In-Class Seminar
  • Instructor Mark L. Power
  • University Professor
  • Principal Financial Group Finance Professor
  • Department of Finance
  • Iowa State University
  • (mpower_at_iastate.edu)
  • 6 Continuing Education Credits 4 Basic CECs and
    2 Ethic CECs

2
Iowa Bankers Association Continuing Education
2008 In-Class Seminar
  • Topic I Ethical Issues and The Mitigation of
    Risk Induced Information Asymmetries A
    Qualitative and Quantitative Analysis.
  • Part A A qualitative approach
  • Part B Financial analysis
  • Topic II The Condition of Health Care in the
    United States
  • Part A Health Care Systems in Developed
    Countries
  • Part B Systemic Health Care Goals and Reform
    Proposals
  • Findings of Iowa Commision on Affordable Health
    Care
  • Topic III An Analysis of State of the Bond
    Insurance Market during the Sub-Prime Lending
    Crisis in the United States.

3
Topic I Ethical Issues and The Mitigation of
Risk Induced Information Asymmetries
  • Topic Objectives
  • Review business ethics concepts theory
  • Discuss the concept of ethics as it pertains to
    the procurement of insurance
  • Simulate insurance market ethical dilemmas
  • Understand the importance of transparent
    information exchange to the insurance device
  • Show economic consequences of information
    asymmetry

4
Insurance Ethics
  • Insurance Ethics is the study of how personal and
    corporate morality influence the behavior of
    the participants in the process for procurement
    of insurance.

5
Ethics Models and Insurance Markets
  • Self Interest/ Egoism
  • If it furthers my interest it is right!
  • Stakeholder Management
  • Capital Market Stakeholders
  • Shareholders, suppliers of capital, banks
  • Highest return
  • Product Market Stakeholders
  • Customers, suppliers, host communities, unions
  • Lowest price and full coverage
  • Organizational Stakeholders
  • Employees, managers, non-managers
  • High total compensation and job security

6
Ethical Problems in Insurance Markets
  • Ethical problems tend to occur when three factors
    come together
  • Pressure
  • Perceived opportunity
  • A way to rationalize the act as appropriate

7
Ethics in Insurance
  • Focus Areas
  • Insurance markets
  • Insurance regulation
  • Insurance intermediaries
  • Insurance agent compensation
  • Insurance buyers individual and corporate
  • Example of ethical dilemmas in insurance due to
    Interaction of
  • Pressure
  • Perceived opportunity
  • Behavior rationalization

8
Topic I Qualitative and Financial Implications
of Information Asymmetry in Insurance Markets
  • Our focus
  • Qualitative analysis of information disclosure
  • Impact of information disclosure (lack of
    disclosure) on market participants
  • Ethical dilemmas created when information is
    needed to make financial decisions

9
Dynamic Insurance Market A Simulation Approach
  • Market participants
  • Insurance companies (underwriters)
  • Prospective insureds
  • Capital providers
  • Regulators
  • Type of insurance incentive to procure is very
    high auto liability (mandatory or homeowners
    coverage (lender required)

10
Insurance Market Simulation
  • Groups are formed and facts provided for
  • Handouts
  • Insurance companies (underwriters)
  • Prospective insureds
  • Capital providers
  • Regulators (market observers)

11
Insurance Market Simulation Based on Eckles and
Halek (2007), RMIR, V.10,1,93-105.
  • How the market works
  • Multiple rounds of buying and selling
  • Each insurer can accept or reject, but only sell
    a maximum of two policies during each round
  • Insureds are not required to buy insurance, but
    have only one buying opportunity
  • Insurers must raise capital after each round of
    buying and selling
  • Regulators observe and make corrections to the
    market, ex post
  • Insurance company profit is equal to the price of
    the policy sold minus the risk appropriate ex
    post policyholder loss
  • In later rounds, assumptions will be relaxed and
    actual losses will be randomly determined

12
Market Simulation Information Based on Eckles and
Halek (2007), RMIR, V.10,1,93-105.
  • Insurer Revenue and Expense Forecasts

13
Insurance Market Simulation Based on Eckles and
Halek (2007), RMIR, V.10,1,93-105.
  • Forecasted Net Profit

14
Insurance Market Simulation Based on Eckles and
Halek (2007), RMIR, V.10,1,93-105.
  • Return on Capital

15
Insurance Market Simulation Based on Eckles and
Halek (2007), RMIR, V.10,1,93-105.
  • Prospective policyholder information
  • All prospective insured have the same level of
    wealth (W), which equals 20,000
  • All prospective insured have the same level
    utility function where U(W) vW
  • Each risk type faces the same potential loss of
    10,000.
  • Probability of loss is unique where the
    probability of loss for high, medium, and low
    risks is 0.12, 0.10, and 0.08 respectively.

16
Insurance Market Simulation Based on Eckles and
Halek (2007), RMIR, V.10,1,93-105.
  • Prospective policyholder information

17
Insurance Market Simulation Based on Eckles and
Halek (2007), RMIR, V.10,1,93-105.
  • Capital Provider information Invest in mutual
    fund like account where expected return is 9 or
    provide capital to the insurance market where the
    expected return is as follows

18
Topic I Part A Financial Implications of
Information Asymmetry in Insurance
  • Determinants of Fair Premiums 4 Determinants
  • Expected Claim Costs
  • Administrative Costs
  • Investment Income
  • Fair Profit Loading
  • Examine each factor separately
  • Assume independent and identical exposures

19
Expected Claim Costs
  • The premium that just covers expected claim costs
    is called the pure premium
  • Example
  • Large number of homogeneous buyers, i.e. each has
    the same loss distribution
  • Possible Loss Probability
  • 0 0.95
  • 10,000 0.05
  • Pure Premium 500

20
Premium Must Cover Expected Claim Costs
  • To cover claim costs, on average, premiums must
    equal 500.
  • if premium 480, the insurer will lose money,
    on average
  • if premium 640, the insurer will make profits,
    on average (competition would prevent this)
  • Conclusion
  • Fair Premium must cover expected claim costs

21
Investment Income
  • Key Point
  • Fair premium is reduced to reflect investment
    income on premiums
  • Equivalently,
  • Fair Premium Present Value of Expected Costs

22
Example to Illustrate Effect of Investment Income
  • Assume
  • no administrative costs
  • one year policies, premium received at beginning
  • certain claim costs 100 paid according to
    table below
  • Fair Premium

23
Effect of Investment Income Varies Across Lines
of Business
24
Administrative Expenses
  • Fair Premium must cover administrative costs,
    such as
  • marketing
  • underwriting
  • loss adjustment
  • premium taxes
  • underwriting income taxes
  • etc.

25
Expense Loadings as a Percentage of Premium

26
Effect of Uncertainty Profit Loading
  • Uncertainty gt claim costs could exceed premiums
  • insolvency is possible
  • We know that Insurers hold capital to reduce the
    likelihood of insolvency
  • Capital providers ultimately bear the risk
    associated with insurance operations (insolvency
    risk)
  • Capital providers require compensation for risk

27
Conclusion
  • Fair Premium
  • PV of Expected Claim Costs
  • PV of Expected Administrative Costs
  • Fair Profit Loading
  • Note fair premiums depend on
  • Expected losses
  • Unpredictability of losses

28
Numerical Example Insurer Perspective
  • 100,000 with prob. 0.02
  • Loss 20,000 with prob. 0.08
  • 0 with prob. 0.90
  • Find Fair Premium if
  • policy provides full coverage
  • underwriting costs 20 of pure premium
  • claims are paid at end of year
  • interest rate 8
  • claim processing costs 5,000
  • fair profit 5 of pure premium

29
Numerical Example Insurer Perspective
  • Solution
  • pure premium 3,600
  • PV of expected claims 3600/1.08
  • underwriting costs fair profit (0.20 0.05)
    x 3,600 900
  • expected claim processing costs 5,000 x 0.10
    500
  • PV of expected claim processing costs 500/1.08
  • Fair premium 900 4,100/1.08 900 3,796
    4,696

30
Implications of Heterogeneous Buyers
  • What if there are two groups of buyers?
  • No longer identical exposures, adverse selection
    becomes a problem, and parameter uncertainty
    exists, underwriting may become necessary
  • One Group (Preferred Risk)
  • Possible Loss Probability
  • 0 0.95
  • 10,000 0.05
  • Another Group (Substandard Risk)
  • Possible Loss Probability
  • 0 0.90
  • 10,000 0.10

31
Implications of Heterogeneous Buyers
  • Assume initially that
  • Equal number of each type
  • Losses are Independent
  • Full Insurance is mandatory
  • Costless to distinguish among risks

32
Implications of Heterogeneous Buyers
  • Initial Scenario
  • Equal Treatment Insurance Company is only insurer
  • Premium for everyone 750
  • Does Equal Treatment cover its costs?
  • _____, the SS Risks pay less than their expected
    cost, but the P Risks pay more

33
Implications of Heterogeneous Buyers
  • New Scenario allow competition
  • Competition from Selective Insurance Company
  • If Selective assumes Equal Treatment will
    continue to charge 750, how does Selective set
    price to maximize profits,
  • Premium to Preferreds
  • Premium to Sub standards
  • Profitable?

34
Implications of Heterogeneous Buyers
  • What happens to Equal Treatment?
  • It would experience adverse selection
  • Thus, Equal Treatment will have to classify or
    lose money

35
Implications of Heterogeneous Buyers
  • Key Points
  • Profit Maximization
  • gt Risk Classification
  • Competition
  • Lack of Classification
  • gt Adverse Selection
  • Competition

36
Implications of Heterogeneous Buyers
  • What if full insurance is not mandatory?
  • Recall, Initial Scenario
  • Equal Treatment is only insurer
  • Equal Treatment charges 750 to everyone
  • What do Preferred Risks do?
  • may purchase less insurance from Equal Treatment,
  • S Risks still buy full insurance from Equal
    Treatment
  • ? Equal Treatment experiences adverse selection

37
Remember Pricing Example 1
  • 100,000 with prob. 0.02
  • Loss 20,000 with prob. 0.08
  • 0 with prob. 0.90
  • Find Fair Premium if
  • policy provides full coverage
  • underwriting costs 20 of pure premium
  • claims are paid at end of year
  • interest rate 8
  • claim processing costs 5,000
  • fair profit 5 of pure premium

38
Pricing Example 1
  • Solution
  • pure premium 3,600
  • PV of expected claims 3600/1.08
  • underwriting costs fair profit (0.20 0.05)
    x 3,600 900
  • expected claim processing costs 5,000 x 0.10
    500
  • PV of expected claim processing costs 500/1.08
  • Fair premium 900 4,100/1.08 900 3,796
    4,696

39
Pricing Example 2 Insurer requires a Deductible
  • (actual discrete probability distribution)
  • 100,000 with prob. 0.02
  • Loss 20,000 with prob. 0.08
  • 0 with prob. 0.90
  • (Insurer Perspective of distribution)
  • 80,000 with prob. 0.02
  • Loss 0 with prob. 0.98
  • Find Fair Premium if
  • policy has a 20,000 deductible
  • underwriting costs 20 of pure premium
  • claims are paid at end of year
  • interest rate 8
  • claim processing costs 5,000
  • fair profit 5 of pure premium

40
Pricing Example 2
  • Solution
  • pure premium 0.02 x 80,000 1,600
  • PV of expected claims 1600/1.08
  • underwriting costs fair profit (0.20 0.05)
    x 1,600 400
  • expected claim processing costs 0.02 x 5,000
    100
  • PV of expected claim processing costs 100/1.08
  • Fair premium 400 1,700/1.08 400 1574
    1,974

41
Comparison of the Two Examples
  • Note difference in loading on the two policies
  • Full coverage Deductible
  • Premium 4,696 1,974
  • Expected claim cost 3,600 1,600
  • Dollar loading 1,096 374
  • Percentage loading 30.4
    23.4
  • (relative to exp. claim cost)
  • Difference is due to the deductible policy
    eliminating small predictable claims and the high
    processing costs on that claim type
  • Also allows the Preferred Risks to identify
    themselves because they would be more likely to
    buy partial insurance

42
Implications of Heterogeneous Buyers
  • Key Points
  • Profit Maximization
  • gt Risk Classification
  • Risk Management Alternatives
  • to Insurance
  • (assume marginal benefit gt marginal cost of
    underwriting)
  • Lack of Classification
  • gt Adverse Selection
  • Risk Management Alternatives
  • to Insurance

43
Insurance Market Simulation Based on Eckles and
Halek (2007), RMIR, V.10,1,93-105.
  • Round One Observations
  • Insurance companies (underwriters)
  • Prospective insureds
  • Capital providers
  • Regulators

44
Insurance Market Simulation Based on Eckles and
Halek (2007), RMIR, V.10,1,93-105.
  • Round Two Observations
  • Insurance companies (underwriters)
  • Prospective insureds
  • Capital providers
  • Regulators

45
Insurance Market Simulation Based on Eckles and
Halek (2007), RMIR, V.10,1,93-105.
  • Round Three Observations
  • Insurance companies (underwriters)
  • Prospective insureds
  • Capital providers
  • Regulators

46
Insurance Market Simulation Based on Eckles and
Halek (2007), RMIR, V.10,1,93-105.
  • What did we learn?

47
Comments
  • It is in the best interest of all parties in the
    insurance mechanism to have a full and good faith
    disclosure of information and as much
    transparency in the process as possible with out
    undue regulatory intervention and control.
  • Yours?

48
Topic II The Condition of Health Care in the
United States
  • Topic objectives
  • Part A Determine objectives and understand the
    Health Care System (HCS)
  • Part B Become familiar with HCS reform proposals
  • Part C Summarize the findings of the Iowa
    Legislative Commission on Affordable Health Care
    Plans

49
Part A Determine objectives and understand the
Health Care System
  • All health care systems must have the following
    components in common
  • Delivery
  • Financing
  • Consumption

50
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51
Systemic Goals and Concerns
  • Perspective
  • Individual, self-employed, small business
  • Large employer
  • Unions (collective bargained groups)
  • Retirees
  • Government/Political
  • Insurance company (private market)
  • Care givers Doctors, hospitals, nurses, etc.
  • Have I missed any groups?

52
Systemic Goals and Concerns
  • Perspective______________________
  • Delivery Goals/Concerns
  • Financing Goals/Concerns
  • Consumption Goals/Concerns

53
Ideal HCS Paradigm
  • Our Best Fit or What do we want?
  • Delivery
  • Financing
  • Consumption

54
HCS Financing Facts
  • The healthcare system is not fully-publicly
    funded but is a mix of public and private
    funding.
  • In 2004,
  • private insurance paid for 36 of personal health
    expenditures,
  • private out-of-pocket payments were 15,
  • federal, state, local governments paid 44.

55
Health Insurance Coverage Facts
  • Most Americans (59.7), receive their health
    insurance coverage through an employer, although
    this percentage is declining.
  • Costs for employer-paid health insurance are
    rising rapidly
  • since 2001, premiums for family coverage have
    increased 78, while
  • wages have risen 19 and
  • inflation has risen 17,
  • Workers with employer-sponsored insurance also
    contribute in 2007, the average percentage of
    premium paid by covered workers is 16 for single
    coverage and 28 for family coverage.
  • In addition to their premium contributions, most
    covered workers face additional payments when
    they use health care services, in the form of
    deductibles and copayments.

56
Facts about the Uninsured
  • In 2006, 47 million people in the U.S. (15.8 of
    the population) were without health insurance for
    at least part of the year.
  • Among the uninsured population, nearly 38 million
    were employment-age adults (ages 18 to 64), and
    more than 27 million worked at least part time.
  • About 37 of the uninsured live in households
    with incomes over 50,000.
  • According to the Census Bureau,
  • 36.7 million of the uninsured are legal U.S
    citizens
  • Another 10.2 million are non-citizens
  • It has been estimated that nearly
  • one fifth of the uninsured population is able to
    afford insurance,
  • almost one quarter is eligible for public
    coverage, and
  • the remaining 56 need financial assistance

57
HCS Paradoxes
  • World Health Organization (2000) ranked the U.S.
    health care system
  • first in both responsiveness and expenditure,
  • 37th in overall performance and
  • 72nd by overall level of health (among 191 member
    nations included in the study
  • CIA World Factbook
  • ranked the United States 41st in the world for
    lowest infant mortality rate
  • 45th for highest total life expectancy
  • However, a 2006 CDC study reported that
    approximately 66 of survey respondents said they
    were in "excellent" or "very good" health

58
National Health Expenditure data
http//www.cms.hhs.gov/NationalHealthExpendData/2
5_NHE_Fact_Sheet.aspTopOfPage
  • Historical NHE, including Sponsor Analysis, 2006
  • NHE grew 6.7 to 2.1 trillion in 2006, or 7,026
    per person, and accounted for 16 of Gross
    Domestic Product.
  • Medicare spending grew 18.7 to 401 billion in
    2006, 19 percent of total NHE.
  • Medicaid spending fell 0.9 to 309 billion in
    2006, or 15 percent of total NHE.
  • Private spending grew 5.4 to 1.1 trillion in
    2006, or 54 percent of total NHE.
  • Hospital expenditures grew 7.0 in 2006, a slower
    rate than the 7.3 in 2005.
  • Physician/clinical services growth slowed to 5.9
    in 2006, from 7.4 in 2005.
  • Prescription drug spending growth increased 8.5
    in 2006, from 5.8 in 2005.
  • At the aggregate level in 2006, businesses (25
    percent), households (31 percent), other private
    sponsors (3 percent), and governments (40
    percent) paid for about the same share of health
    services and supplies as they did in 2005.

59
National Health Expenditure data
http//www.cms.hhs.gov/NationalHealthExpendData/2
5_NHE_Fact_Sheet.aspTopOfPage
  • Projected NHE, 2007-2017
  • Growth in NHE is expected to remain steady at 6.7
    percent in 2007 and average 6.7 percent per year
    over the projection period (2006-2017).
  • The health share of GDP is projected to reach
    16.3 percent in 2007 and 19.5 percent by 2017.
  • Medicare spending is projected to grow 6.5 in
    2007 and average 7.4 per year over the
    projection period.
  • Medicaid spending is projected to grow 8.9 in
    2007 and average 7.9 per year over the
    projection period.
  • Private spending is projected to grow 6.3 in
    2007 and average 6.2 per year over the
    projection period.
  • Spending on hospital services is projected to
    grow 7.5 in 2007 to 697 billion. Average growth
    of 6.9 per year is expected for the entire
    projection period.
  • Spending on prescription drugs is projected to
    grow 6.7 in 2007 to 231 billion. Average growth
    of 8.2 per year is expected for the entire
    projection period.

60
National Health Expenditure data
http//www.cms.hhs.gov/NationalHealthExpendData/2
5_NHE_Fact_Sheet.aspTopOfPage
  • NHE by Age Group, Selected Years 1987, 1996,
    1999, 2002, and 2004
  • Per person personal health care spending for the
    65 and older population was 14,797 in 2004, 5.6
    times higher than spending per child (2,650) and
    3.3 times spending per working-age person
    (4,511).
  • In 2004, children accounted for 26 percent of the
    population and 13 percent of PHC spending.
  • The working-age group comprised the majority of
    spending and population in 2004, at 52 percent
    and 62 percent respectively.
  • The elderly were the smallest population group at
    12 percent of the population, and accounted for
    the remaining 34 percent of spending in 2004.
  • Spending for those 85 years and older relative to
    spending for all other age groups, decreased from
    1987 to 2004, mainly due to a slowdown in nursing
    home spending.
  • Medicare enrollment growth is anticipated to be a
    stronger influence on future spending growth than
    the changing age-mix of the Medicare population.

61
National Health Expenditure data
http//www.cms.hhs.gov/NationalHealthExpendData/2
5_NHE_Fact_Sheet.aspTopOfPage
  • NHE by State of Residence, 1991-2004
  • In 2004, per capita personal health care spending
    ranged from a high of 6,683 in Massachusetts to
    3,972 in Utah, where spending was the lowest.
  • In 2004, the highest per capita spending occurred
    in Massachusetts, Maine, New York, Alaska and
    Connecticut, with spending 20 percent or more
    above the U.S. average.
  • In 2004, the states with the lowest spending per
    capita were Utah, Arizona, Idaho, New Mexico and
    Nevada, with spending 14 percent or more below
    the U.S. average.
  • Medicare expenditures per beneficiary were
    highest in Louisiana (8,659) and lowest in South
    Dakota (5,640) in 2004.
  • Medicaid expenditures per enrollee were highest
    in Alaska (10,417) and lowest in California
    (3,664) in 2004.

62
National Health Expenditure data
http//www.cms.hhs.gov/NationalHealthExpendData/2
5_NHE_Fact_Sheet.aspTopOfPage
  • NHE by State of Provider, 1980-2004
  • California's aggregate personal health care
    spending was the highest in the nation,
    representing 10.8 percent of total U.S. personal
    health care spending in 2004.
  • Wyoming's aggregate personal health care spending
    was the lowest in the nation, representing just
    0.1 percent of total U.S. personal health care
    spending in 2004.
  • All states except Delaware and Wyoming spent 10
    percent or more of their Gross State Product on
    health care in 2004.
  • On average, between 2000 and 2004, aggregate
    personal health care spending grew the fastest in
    Nevada (12.2 percent) and the slowest in
    Louisiana (6.0 percent).

63
How US HCS Compares
64
HCS Paradigms in the U.S.
  • Open Choice
  • HMO IPA or Group
  • National or Staff HMO
  • Expanded Choice
  • Third-party Payer

65
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70
Goodness of Fit Evaluation of HCS
  • Points
  • Lack of standardization
  • Regulatory issues
  • Number of uninsured persons is increasing
  • HC Costs are increasing
  • Quality and Access is problematic
  • Shortages exist supply/demand issues
  • Consumption is inevitable
  • Timing is some what within our control
  • Incentives are misaligned
  • Premiums are correlated to the freedom to choose
  • Ability to pay?

71
Part B HCS Reform Proposals
  • Health Care for America
  • Heritage Foundation
  • Obama
  • McCain
  • Ours?

72
Health Care for America Economic Policy Institute
  • Three central elements
  • open to any legal U.S. resident without good
    workplace coverage
  • employers (and the self-employed) must either
    purchase coverage comparable to Health Care for
    America for all their workers or pay a relatively
    modest payroll contribution (6 of payroll) to
    fund Health Care for America coverage for all
    their employees
  • Americans who remain without insurance must
    purchase private coverage or buying into the
    Health Care for America Plan.

73
Heritage Foundation
  • Personal ownership and portability barriers
  • The federal tax treatment of health care
    subsidizes employer-sponsored insurance (ESI),
    but not health insurance policies purchased by
    individuals and families in the non-group
    market.
  • In many states, the state policies and
    regulations that shape and direct health
    insurance markets do not facilitate the purchase
    of affordable health plans or allow for the
    portability of health plans.
  • The large public programs, including Medicaid and
    the State Children's Health Insurance Program
    (SCHIP), are not designed to enable individuals
    and families to move easily from public
    assistance to private health insurance. In other
    words, getting off public assistance is
    difficult, regardless of the person's desire to
    do so.

74
Heritage Foundation
  • Policymaker fix for Churning and Uninsured
  • Congress should change federal tax law to provide
    direct tax relief to individuals and families for
    the purchase of health insurance coverage.
  • Until Congress makes these changes, state
    policymakers should redesign state health
    insurance markets to promote personal ownership
    of health plans.
  • State and federal policymakers should reform
    public health programs.

75
McCains Proposal
  • Problems
  • Cost and cost increases
  • Medicare
  • Lack of personal responsibility
  • Lack of systemic accountability
  • Vision a system that offers high quality care,
    that respects individual dignity and is available
    at reasonable cost

76
McCains Proposal
  • Reform goals
  • pay only for quality medical care,
  • having insurance choices that are diverse and
    responsive to individual needs, and
  • restoring our sense of personal responsibility

77
Obamas Proposal
  • Obama plan will
  • (1)establish a new public insurance program,
    available to Americans who neither qualify for
    Medicaid or SCHIP nor have access to insurance
    through their employers, as well as to small
    businesses that want to offer insurance to their
    employees
  • (2) create a National Health Insurance Exchange
    to help Americans and businesses that want to
    purchase private health insurance directly
  • (3) require all employers to contribute owards
    health coverage for their employees or towards
    the cost of the public plan
  • (4) mandate all children have health care
    coverage
  • (5) expand eligibility for the Medicaid and SCHIP
    programs and
  • (6) allow flexibility for state health reform
    plans.

78
Obamas Proposal
  • Obama plan features
  • (1) OBAMAS PLAN TO COVER THE UNINSURED.
  • ?? Guaranteed eligibility. (note this is not a
    mandate)
  • ?? Comprehensive benefits. Federal Employees
    Health Benefits Program (FEHBP) like
  • ?? Affordable premiums, co-pays and deductibles.
  • ?? Subsidies.
  • ?? Simplifying paperwork and reining in health
    costs.
  • ?? Easy enrollment.
  • ?? Portability and choice.
  • ?? Quality and efficiency.

79
Obamas Proposal
  • (2) NATIONAL HEALTH INSURANCE EXCHANGE.
  • (3) EMPLOYER CONTRIBUTION.
  • (4) MANDATORY COVERAGE OF CHILDREN.
  • (5) EXPANSION OF MEDICAID AND SCHIP.
  • (6) FLEXIBILITY FOR STATE PLANS.

80
Our Key Items in any Proposal
81
Part C Iowa Legislative Commission on Affordable
Health Care Plans
  • Created by 2007 Iowa Acts, HF909, Section 127
    (http//www.legis.state.ia.us/aspx/Committees/Comm
    ittee.aspx?id208)
  • Charge
  • Review
  • Analyze, and
  • Make recommendations on health care issues
  • Goal develop a plan to make health insurance
    coverage more available and affordable for Iowas
    small business and families

82
Part C Iowa Legislative Commission on Affordable
Health Care Plans
  • The commission was comprised of
  • five state senators and five state
    representatives
  • nine public members representing various
    organizations as designated in the legislation
    and appointed by the Legislative Council
  • five consumers appointed by the Governor
  • and four nonvoting, ex officio members who are
    the Commissioner of Insurance, Director of the
    Department of Human Services, and the Director of
    Public Health, or their designees and a
    representative of the Iowa Dental Association.

83
Iowa Legislative Commission on Affordable Health
Care Plans
  • Themes from Public Forums
  • Health Care Reform. Reform should be based on
    the following principles do no harm affordable
    access avoid
  • nationwide models, one size does not fit all act
    in concert with neighboring states emphasize the
    value of the system
  • to the public and provide listening posts to get
    public input.
  • Dental Care. Reimbursement to dentists under
    the Medicaid program is insufficient. The problem
    will become more
  • severe as more dentists are retiring than are
    entering the profession. Dental services are
    essential to prevent a variety
  • of health problems. The I-Smile Program should be
    expanded and reimbursed similar to the hawk-i
    Program.
  • Medicaid Reimbursement. A consistent theme
    among service providers is that Medicaid
    reimbursement is insufficient.
  • Home Care. One presenter emphasized that home
    care is the solution, providing cost-effective
    service and delaying or
  • avoiding nursing home care. Home care service
    providers are carefully screened and provide
    excellent service. Low
  • pay and the lack of insurance result in a rapid
    turnover of these service providers. Only about
    25 percent have health
  • insurance.
  • Physician Care. Low reimbursement rates
    discourage physicians from locating in Iowa.
    Often new physicians have
  • over 150,000 in loans this burden discourages
    them from going into primary health care, when
    they can make more
  • money in a specialized area. Tort reform would
    help by capping noneconomic damages.
  • Child Health Care. A child's healthy
    development requires adequate health care. Such
    care can prevent future, more
  • serious problems. A model must be developed to
    ensure coverage for all children.
  • Lifestyle Choices. A recurring theme was the
    impact of lifestyle choices on health costs. To
    reduce tobacco use the

84
Iowa Legislative Commission on Affordable Health
Care Plans
  • Themes from Public Forums
  • Home Care/Respite Care/Direct Care Workers.
    Home care is preferred by consumers, is readily
    accessible, is cost
  • effective, and is being delivered to an
    increasing number of Iowans as the population
    ages. However, an increasing
  • number of these services are uncompensated due to
    a new Medicaid reimbursement formula and funding
    shortfalls.
  • Home care provides persons with disabilities with
    the opportunity to live independently and
    accomplish life goals. There
  • is sufficient funding in the health care system,
    but it should be realigned to provide more
    cost-effective care and allow
  • individuals to remain in their homes. The rules
    for hospice could be rewritten to allow for a
    period of one year rather
  • than six months as a basis to determine if a
    person is terminally ill. Respite care is
    critical for families caring for family
  • members with chronic and terminal illnesses, such
    as ALS. Direct care workers often do not have
    health care
  • coverage. Direct care workers and all other
    Iowans should have access to coverage.
  • Preexisting Conditions and Debt. The issue of
    preexisting conditions should be reviewed, as
    they often make
  • coverage unavailable or unaffordable. Those with
    health care debt are sometimes denied care due to
    the debt.
  • Medical Home/Primary Care. The medical home
    should be used to provide access to affordable
    and timely health
  • care. Primary care should be emphasized and
    should be used as the gatekeeper instead of the
    emergency room. High
  • debt loads and lower reimbursement often deter
    new practitioners from practicing primary care,
    so incentives are
  • needed.
  • Medically Fragile Children. Premature babies,
    babies born with birth defects, and children
    injured in accidents are
  • being saved today with advances in technology.
    This presents life-long medical challenges.
    Hospitals are concerned
  • that they may become the care facility for these
    children and lose needed acute care beds. Both
    the public and private

85
Iowa Legislative Commission on Affordable Health
Care Plans
  • Themes from Public Forums
  • Transparency. Wellness and health promotion are
    important, quality costs less, and health care
    transparency will help
  • create needed change. Transparency consists of
    comparative public reporting of health care
    provider performance on
  • quality, patient safety, and price/cost. Many
    efforts include the Leapfrog Group measures.
    Specific action items should
  • be included in the Commission's final report to
    address improving quality and eliminating waste
    to sustain current
  • coverage and to expand coverage in Iowa.
    Additionally, reform should include transparency
    and public reporting,
  • including the measures endorsed by the National
    Quality Forumthe Leapfrog Group Patient Safety
    Measures and
  • their policy on Never Events.
  • Affordability. In order for health care to be
    accessible to all, the issue of affordability
    must be addressed. Iowa has one
  • of the lowest percentages of uninsured, and also
    has some of the lowest insurance rates. Much of
    health care reform
  • must be addressed at the national level, but the
    state can address areas such as wellness by
    providing incentives to
  • engage the unhealthy and by providing for the
    exchange of personal health information. The
    state should also look into
  • reinsurance.
  • Existing Program Improvement. The rules for
    HIPIOWA should be changed to remove the
    sixth-month waiting period
  • for eligibility. Eligibility for adults,
    including income guidelines under Medicaid,
    should be revisited. Costs for health care
  • services are more expensive for those who have
    the least ability to pay and are self-pay. There
    is inefficiency in the
  • Medicaid system that should be addressed.
  • Dental Services. The provision of dental
    services is a major step in prevention of disease
    and would reduce the state's
  • financial outlay for dental care and health care
    in the long term. The I-Smile Program would
    provide dental services to

86
Iowa Legislative Commission on Affordable Health
Care Plans
  • Themes from Public Forums
  • Continuing Medical Education (CME). CME should
    be structured for the specialty and should focus
    on what is new
  • and necessary for a specialty in a manner similar
    to elder/child abuse training. Practitioners
    should be tested on what
  • they have learned before they can be relicensed.
    In Wisconsin the practitioners have to
    demonstrate that they are
  • implementing the newest practices into their own
    practice.
  • Recommendations from AFSCME. Health care plans
    should be more flexible to cover medically
    necessary
  • procedures that are often viewed as elective,
    such as gastric bypass surgery. Changing
    formularies should be limited.
  • Workers should be allowed to select their own
    doctor in determining workers compensation
    claims. Any single payor
  • plan should be similar to Medicare.
  • Pharmacists. Pharmacists provide a valuable
    service. Some examples include diabetes
    education, collaboration with
  • physicians, insulin pump training, smoking
    cessation, medication therapy management which is
    only currently
  • reimbursed under Medicaid and Medicare Part D,
    and vaccination programs. Pharmacists often do
    rounds with doctors
  • in hospitals to provide the collaborative
    approach.
  • Wellness and Chronic Care Management. The
    health care system should be reoriented to
    support wellness and
  • preventive measures. Individuals need to take
    responsibility for their own health employers
    can help employees by
  • providing education, screenings, and by working
    to ensure that benefit plans encourage proper
    health management
  • and recognize the importance of prevention and
    wellness and government, through public policy,
    should provide
  • incentives, such as tax credits, for employers to
    implement wellness programs.
  • Racial Disparity. Health reform should take
    into consideration the racial disparities in
    health outcomes.

87
Iowa Legislative Commission on Affordable Health
Care Plans Health Insurance in Iowa
  • Iowa Insurance Division (IID) of the Department
    of Commerce. (Ms. Susan Voss, Commissioner of
    Insurance)
  • Regulatory power of IID affects 25 percent of
    health care insurance dollars spent in Iowa.
  • IID regulates health insurance in the individual,
    small employer (2-50 employees), and large
    employer (over 50 employees) markets.
  • Small employer group health insurance market has
    28 insurance carriers, but that six of those
    carriers sell over 90 percent of the insurance.
  • currently 28 insurance mandates in Iowa which
    compose an estimated 10-15 percent of the
    insurance premium rate
  • IID does not pre-approve rates but each insurance
    carrier certifies that its rates meet certain
    statistical guidelines.
  • Approximately 85-86 percent of each health
    insurance premium dollar is spent directly on
    health care costs with the remainder paying for
    administrative costs and profits of the insurer.
  • Individual insurance market is similar to the
    small group market in terms of coverage and
    mandates.
  • Approximately 9.1 percent of the population
    uninsured, Iowa is among the states for the
    lowest number of uninsured.
  • About 5 percent of children under 18 are
    uninsured in the state and about 11 percent of
    adult Iowans are uninsured.
  • In 2007 in House File 790 established parameters
    for allowing health insurance carriers to create
    new classes of business for associations or
    groups of associations and to provide incentives
    to employers who encourage healthy living efforts
    such as smoking cessation, weight loss, and
    chronic disease management.

88
Iowa Legislative Commission on Affordable Health
Care Plans Charity Care in Iowa
  • Summary (HDRAC)
  • 2001-2006 uninsured patients accounted for
  • 4 percent of all hospital admissions,
  • 13 percent of ER visits, and
  • 2 percent of ambulatory surgeries in Iowa
  • Costs associated with uninsured patients
    represented
  • 3 percent of acute hospitalization costs,
  • 11 percent of ER costs, and
  • 2 percent of ambulatory surgery costs in Iowa
    and
  • in aggregate Iowa hospitals charity care amounted
    to 111 million in 2005 and 125 million in 2006.

89
Iowa Legislative Commission on Affordable Health
Care Plans Hospital Finance
  • Summary (IHA)
  • While all hospitals are required to charge
    everyone the same rates,
  • no two payers pay the same rates
  • government payers pay below cost
  • commercial payers negotiate rates and
  • charity care and underpayment impact costs for
    everyone else.
  • Charity care includes care that is delivered to
    an uninsured as well as an underinsured patient.
  • Underpayment by government programs impacts
  • quality of care,
  • hospitals' abilities to attract and keep
    providers, and
  • results in a cost shift to other payers.

90
Iowa Legislative Commission on Affordable Health
Care Plans Rural Health Findings
  • Iowa Rural Health Association Health Survey
    Summary
  • vast majority of Iowans report they are in good
    health,
  • more say their health is improving rather than
    declining,
  • most feel good even if they have a serious health
    problem or condition,
  • most who are insured are satisfied with their
    current insurance coverage, and
  • most agree on the importance of wellness and
    prevention
  • most agree on taking individual responsibility
    for health behaviors in reducing health care
    costs.

91
Iowa Legislative Commission on Affordable Health
Care Plans Final Recommendations
  • Commission recommends the following action steps
    in 2008
  • 1. Develop and implement a plan for covering all
    children and fully funding Medicaid and hawk-i.
  • 2. Establish the structure necessary to implement
    health care coverage for all Iowans through
    creation of the Health Care Exchange, a
    quasi-public, private agency that will develop,
    oversee, and implement universal coverage for all
    Iowans lead health care quality, safety, and
    cost reduction initiatives and create a
    transition plan until universal coverage is fully
    executed, to ensure that all Iowans have access
    to private insurance at a predetermined rate
    ceiling and without preexisting conditions
    exclusions.

92
Iowa Legislative Commission on Affordable Health
Care Plans Final Recommendations
  • 3. Define what constitutes health care coverage
  • Define minimum specifications for health care
    coverage plans that balance flexibility,
    affordability, and comprehensiveness by covering
    wellness, prevention, and diagnosis covering
    catastrophic expenses providing a reasonable
    level of basic care and including prescription
    drugs and dental care.
  • Define parameters for affordability and levels
    of subsidization of private insurance premiums by
    utilizing a progressive scale of subsidization
    based on income. In defining what constitutes
    "affordable," the following recommendations
    should be considered
  • Any affordability schedule should be a
    conservative measure, and should utilize a
    progressive scale as incomes increase. Using a
    conservative schedule will prevent harming people
    who are struggling financially.
  • People with very low incomes can pay only
    small amounts toward health care and no financial
    penalties should be imposed upon them. Research
    shows that many low-income people struggle to pay
    for basic necessities and are likely to have
    negative cash flow. In Massachusetts, studies
    indicate that families below 300 percent of the
    FPL may not have enough earnings to cover even
    basic needs.
  • The upper-bound of affordability should be set
    at about 8.5 percent of income. Data shows that
    people with higher incomes can reasonably afford
    health insurance at 8.5 percent of income. People
    with unsubsidized, nongroup premiums currently
    pay an average of 8.5 percent of their income on
    health insurance.
  • Determine costs and funding sources for
    universal coverage.

93
Iowa Legislative Commission on Affordable Health
Care Plans Final Recommendations
  • 4. Continue defining and planning how medical
    homes can be established for all Iowans, but in
    2008 commit to a program of securing medical
    homes for a defined population.
  • 5. Create a statewide telehealth system using the
    Iowa Communications Network and private dedicated
    health care systems to deliver a mechanism for
    transmitting digital data on patient care and to
    develop the standards necessary for use of that
    mechanism by all health care professionals.

94
Iowa Legislative Commission on Affordable Health
Care Plans Final Recommendations
  • 6. Implement consumer-driven, medical provider
    quality improvement, and cost containment
    strategies that will have more of an immediate
    impact on health care costs.
  • Continue overall planning around wellness,
    prevention, and diagnosis, but in 2008 commit to
    a focused, concentrated effort on a defined
    population.
  • Begin to create a system for all medical
    providers to disclose prices and performance
    quality.
  • Undertake a project in 2008 to develop and
    implement consensus guidelines to address one or
    two of the most significant chronic diseases.
  • Strengthen the certificate of need process.
  • Create an Office of Health Care Insurance
    Consumer Advocate.
  • Direct and support efforts that help consumers
    take more responsibility in the prevention or
    management of health problems. This includes
    improving health literacy to increase the
    communication and interaction between health care
    providers and patients and programs that
    encourage consumers to be responsible for their
    own wellness.
  • Begin an effort in 2008 to catalogue,
    communicate, and insure statewide compliance with
    key medical best practices.
  • Move forward with implementing educational
    workforce incentive programs.

95
Iowa Legislative Commission on Affordable Health
Care Plans Final Recommendations
  • 7. Contract with The Lewin Group to create an
    economic model of the Commission's health care
    proposal. This will provide the Legislature and
    the Governor with the closest estimate of the
    costs necessary to implement the Commission's
    action steps. After the estimates have been
    determined and the scope of the reform is decided
    by legislative action, it is the Commissions
    belief that the state should initially fund the
    legislative reforms by the best mix of
    recommendations determined in the report of The
    Lewin Group.
  • 8. The Commission knows that sustainability is
    absolutely essential for an improved health care
    system to last. The Commission wants to move
    slowly but deliberately toward permanent and
    sustainable sources of revenue. The Commission
    believes that this has to be a shared
    responsibility between the patient, payer,
    provider, and federal and state government.

96
Iowa Legislative Activity on Health Care Reform
Legislative Updates
  • Sen. Hatch
  • 1. Universal Health Care Coverage, including
    provisions for medical home, telemedicine and
    cost containment.
  • 2. Wellness
  • 3. Establishment of a Health Care Insurance
    Consumer Advocate Office
  • 4. Initiatives to reduce the health care
    workforce shortage
  • 5. Whistleblower protections

97
Iowa Legislative Activity on Health Care Reform
House File 2539
  • Bipartisan effort that passed 97-0 in Iowa House
  • First, it sets a goal that every Iowa child will
    have health insurance by the end of 2010, but did
    not mandate coverage.
  • Second, every Iowan will have a patient centered
    medical home, where one medical provider will
    focus on prevention and chronic care management
    to reduce costs and know all the medications,
    treatments, and history to avoid medical errors.
  • Third, young adults will be able to stay on their
    parents insurance policy until they are 25 years
    old or they graduate from college, whichever is
    later.
  • Iowans with pre-existing conditions will also
    continue to receive insurance coverage if they
    leave group insurance and enter the individual
    insurance market.
  • In an effort to reduce costs and improve quality,
    the bill also creates a Health Information
    Technology System to create real-time access to
    medical records.

98
DMR Opinion March 25, 2006
  • Ensure all kids have access to coverage
  • Adopt proven tactics for boosting enrollment
  • Limit costs to ensure affordability for families
  • Require reporting of errors, other measures of
    quality
  • Be bold Make history with meaningful reform
  • What do you think?

99
Topic III The Bond Insurance Markets Reaction
to the Sub-Prime Lending Crisis.
  • Topic objectives
  • Review the issues behind the sub-prime lending
    problem
  • Examine the scope, scale, purpose of the bond
    insurance market from a historical and emerging
    perspective
  • Identify major bond insurers and their financial
    vulnerability to subprime loans and related
    issues

100
Rising Foreclosures A Perfect Storm (Edmiston
and Salneraitis, 2007, 4th, Economic Review,
Kansas City Federal Reserve)
  • Foreclosure Rate (FR) Observations
  • Economic conditions and foreclosure rate in
    general, move in opposite (good/bad) directions
  • Increase in FR during the 1980s is generally
    attributed to
  • High interest rates
  • Weak real estate markets
  • Regional energy issues
  • Data suggest a leveling FR until 1995, followed
    by an increase peaking in 2002 due to the
    recession in 2001
  • 2002 2006 was similar in trend to the mid-1990s
  • Current surge began in early 2006

101
Foreclosure Chart
102
Foreclosures by State
103
Foreclosures by State
104
Historical Causes and Types of Defaults and
Foreclosure
  • Two-step process
  • Missed payment, delinquency, default
  • Then step two foreclosure
  • Ruthless (profitable) defaults
  • Pure wealth-maximization play mortgagor
    exercises the option to put the property on the
    lender and receives value because the property is
    worth less than the outstanding balance on the
    mortgage
  • Prevalent when LTV is high and property value is
    declining (Ambrose/Capone, 1998)
  • Negative equity value explains 90 of variation
    in foreclosures over time (Foster/VanOrder, 1984)

105
Historical Causes and Types of Defaults and
Foreclosure
  • Positive equity defaults
  • Balance of the mortgage exceeds value of property
    less transaction costs (positive equity value is
    less than selling costs)
  • Liquidity constrained households effected
  • Interest rate jumps
  • ARMs
  • Loans with a teaser rate

106
General Observation on Recent Interest Rates and
Originations
  • Falling interest rates on FRM drove mortgage
    originations (primarily refinancing)
  • Mortgage industry and capacity expanded
  • Interest rates started to go up and refinancing
    declined and mortgage brokers looked to subprime
    market
  • Booming demand for real estate and investors
    chasing high yields significantly expanded
    subprime mortgage market
  • Questionable Risk Management?

107
Interest Rates and Originations
108
Recent Foreclosures
  • Edmiston and Salneraitis, 2007 state that spike
    in foreclosures in the period since 2006 is
    unusual due to
  • Solid income growth
  • Historically low unemployment rates
  • They present evidence that the surge is due to
    three conditions that have created a perfect
    storm in the mortgage market

109
ThePerfect Storm
  • Ingredients for the perfect storm
  • Significant increase in Subprime loans, which
    typically have a higher foreclosure rate
    (2003335 billion vs. 2006600 billion)
  • Significant increase in nontraditional mortgages,
    such as ARMs, 2/28 or 3/27 hybrid ARMs, 3/1option
    ARMs, interest-only ARMS…
  • Equity value conundrum due to
  • High LTV ratios at origination (90 to 125)
  • Equity extraction
  • Stagnant or falling home prices

110
Growth in Nonprime Originations
111
Foreclosures by Loan Type
112
Mortgage Reset Costs
113
Impact of the Confluence of Conditions
  • The simultaneous interaction of declining home
    prices and rising LTVs, payment resets, and
    increased market share of subprime mortgages left
    many HOs with only a default option
  • Problem is acute in
  • Markets where housing was very expensive
    (irrational exuberance)
  • Low-and moderate-income communities (marginal
    home buyers)

114
Financial Risk Mitigation and Bonds
  • Bonds are rated by rating agenc
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