ECON 440 Lecture Notes - Lecture 17: Essential Health Benefits, Risk Pool, Adverse Selection
13 Jun 2018
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Department
Course
Professor
Strategies we can use to reduce adverse selection tend to reduce competition and choices,
and vice versa
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Competition (Choice) vs Adverse Selection
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Individuals may be in the "wrong" plan
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Limited risk pooling
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Missing market for generous coverage
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Three social welfare losses
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e.g. the ESI setting: they offer multiple plans, range of generosity, premium costs, etc.
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Citizens often have a choice of insurance plans
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In the US, emphasis is put on the value of choice (partly political, partly cultural decision)
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Second Fundamental Tradeoff in Health Economics
e.g., essential health benefits
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Standardizing plans
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Mandated benefits
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In the limit, single insurance plan (no choice, no competition)
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Regulation
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Employers or government can try to keep middle-types in the more generous plan by
subsidizing the premium for people
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This is so that when premiums start to diverge, subsidies can keep the risk pool more
balanced between these options
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Subsidize premium for more generous plan
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Have to be able to identify who is healthy and who is sick ex ante
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Difficult to do in practice, especially for the highest-cost patients in a given year
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But, the financial compensation may incentivize insurers not to avoid less-healthy
people (limiting strategic avoidance/behavior)
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Risk adjustment: pay insurers more for sicker patients (ex-ante or ex-post) for having ended
up with a sicker than average risk pool
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Payment
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There's money put aside to compensate insurers who cover the highest-cost patients
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In the extreme, highest E(costs) patients could be insured separately by a different
entity
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Highest-cost patients are paid for out of a separate fund (essentially ex post risk adjustment)
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Reinsurance
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Strategies to Avoid Adverse Selection
What impact would the merger have on market share; competition?
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Checking whether certain mergers should be allowed or not
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Anti-trust
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Medicare Advantage and Part D
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Medicaid
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Within public programs: (legislation mandates that choice be made available)
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Exchanges are structured to provide individuals with more choice - choices are laid out
in a way to facilitate comparison
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Health Insurance Exchanges
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Range of generosity, premium costs, etc.
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Employers offer multiple plans
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Choice of private HI plans
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Consumer-driven health plans (consumer-centric)
Innovations in insurance coverage
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Strategies to Promote Choice and Competition in Insurance
Lecture 17 - Competition in Health Insurance Markets
Wednesday, March 14, 2018
10:06 AM
ECON 440 Page 1
Facing higher OOP costs will make the consumer make better choices about the care
they consume
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Reduction of MH consumption
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Consumer-driven health plans (consumer-centric)
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Puts emphasis on covering more valuable services more generously
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Value-based insurance
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Cost reflects the value of the healthcare service
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Variable cost-sharing
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The physician has information, and can make decisions about which care is best
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Managed care
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Variation in what a health insurance plan looks like given people more choice and creates
opportunities for selection to occur…
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If we left the market unregulated, plans will be more profitable as they avoid the sickest
enrollees
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Strategy to increase efficiency (maximum value for money) in health insurance markets
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Rewards plans that do the best job of improving quality, cutting costs, and satisfying
patients with more enrollees and more revenue
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What we want to do is reward the plans that provide better quality insurance at a lower price
with more enrollees
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How can we have competition, and manage it in a way that the market works better than an
unregulated market?
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What effect does competition in the private market have?
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i.e., competition forces them to respond adequately to purchaser demands
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Divide insurers in each community into competing economic units and use market forces to
motivate them to develop efficient delivery systems
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Government (Medicare), employers
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Health Insurance Purchasing Cooperatives (Clinton)
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Commonwealth Choice (MA)
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Health Insurance Exchanges (Obama)
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Switzerland, the Netherlands
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Sponsor above plans, above providers
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Relies on a "sponsor" to structure, monitor, and adjust the market for competing health plans
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In a structured way, the sponsor is trying to get insurers to compete with each other
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Managed Competition (provider-centric)
Community-rated premia: probability of a loss and risk of loss is calculated from the risk
pool
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e.g. having some middle-ground where the premium for the highest risk people can
only be 2x as high as the premium for low risk people (similar to ACA)
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Continuous coverage, community-rate premia, no exclusions based on pre-existing conditions
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e.g. pricing, tax-credits
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Individuals have subsidized access to the cheapest plan
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Establish market rules and regulations to ensure access to all/nearly all people who would like to
buy insurance
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e.g. the ACA bases its premium subsidies on bronze (low) and silver (moderate) quality
plans - if the individuals want more generous plans, they're responsible for the
difference in pay (i.e. they pay the MC of the decision)
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Consumers are responsible for any price difference if they choose more expensive plans
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Enables people to make informed decisions so they can respond accurately to
price/quality elasticity
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Plans are standardized and information publicized to facilitate comparisons on price and
quality
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High-powered incentives: $1 saved means $1 to the individual
Create price-elastic demand
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Managed Competition - Sponsor's Role
ECON 440 Page 2
Document Summary
Lecture 17 - competition in health insurance markets. Strategies we can use to reduce adverse selection tend to reduce competition and choices, and vice versa. In the us, emphasis is put on the value of choice (partly political, partly cultural decision) Citizens often have a choice of insurance plans e. g. the esi setting: they offer multiple plans, range of generosity, premium costs, etc. In the limit, single insurance plan (no choice, no competition) Employers or government can try to keep middle-types in the more generous plan by subsidizing the premium for people. This is so that when premiums start to diverge, subsidies can keep the risk pool more balanced between these options. Risk adjustment: pay insurers more for sicker patients (ex-ante or ex-post) for having ended up with a sicker than average risk pool. Have to be able to identify who is healthy and who is sick ex ante.
