HCMG 1010: Midterm 1 Exam 100%
Solved!!
Premium pricing considerations - ANSWERS- "fair" premium = P(sick) x P(cost)
- BUT: in reality, need to account for:
1) human behavior
2) moral hazard (consumer will act different when they have health care)
3) adverse selection (patient knows more than the doctor)
Adverse Selection - ANSWERS- arises when there is information asymmetry: patients
know more than insurers
- consumer knows more about their risk than insurer
- medical spending is skewed and concentrated
- demand for insurance is uneven across risk types
- risk pool determines premiums and risk signals may be weak
- premiums do not reflect actual risk
Health care spending = highly concentrated - ANSWERSTop 1% of HC spenders spend
20% of total health expenditures
Top 50% of HC spenders spend 97% of total health expenditures
Adverse Selection Spiraling Effect - ANSWERS- actual risk pool is imbalanced in terms
of risk types (more riskier ppl than average risk of population)
- collected premiums = too low to cover medical costs, so the next year, insurers raise
premiums
- more low-risk shoppers forgo insurance (thus causing premiums to increase even
more following year)
- even more low-risk shoppers forgo insurance --> creates extreme pricing issues
Examples of adverse selection in action - ANSWERS1) Harvard University Employee
HC Plans (1994):
- offered two plans: HMO (less $ and less generous) and PPO (more $ and more
generous)
- initially, 18% of employees chose PPO, then decreased in following years, since low-
risk individuals opted for the HMO instead
- premiums for PPO skyrocketed as those with more health risks were concentrated in
the PPO plan, while low risk individuals chose the HMO
- show adverse selection: patient knows more than the insurers, so those with more
health problems want more comprehensive coverage
Ways to limit adverse selection - ANSWERS1) group insurance (ESHI) - sell to
employer groups rather than to individuals, allows for built in pool of relatively
healthy/diverse adults (insurers know they are healthy enough to work)
,2) public policy
3) insurers can seek "advantageous selection"
Moral hazard - ANSWERS- arises when patients act differently (seek more medical
care) because they know they have insurance
two types:
- ex-ante moral hazard (before medical event - like not playing contact sport when you
don't have insurance)
- ex-post moral hazard (after medical event - getting excessive tests done when sick
because you have insurance)
Two requirements for ex-post moral hazard - ANSWERS1) price distortion (don't feel full
cost of treatment when covered by insurance)
2) price sensitivity (increase consumption of HC costs if costs go down)
Price sensitivity determines extent of moral hazard - ANSWERSEmpirical studies done
to show this:
1) RAND HIE - showed that patients use less HC when their coinsurance is higher
(when they have to pay greater fraction of HC costs); use more HC when they have free
care plan (when they do not have to pay anything)
2) Oregon Medicaid expansion - patients who won lottery to get Medicaid used more
HC than those in control group
Insurers can adjust benefit design by... - ANSWERS- controlling quantity or price
- decrease quantity of HC used/promote high value care use vs low value care (can do
this through cost sharing - more skin in the game or managed care - need
preauthorization and can only see selected drs, which results in less HC being used
because its harder to obtain)
- control prices via promoting low priced services, selective contracting, and tiered
networks
Types of benefit designs within insurance plans - ANSWERS- indemnity insurance =
traditional model, broad networks, leads to high HC costs
- managed care plans = more controls on usage of HC, includes PPOs, HMOs, HDHPs
PPO (Preferred Provider Organization) - ANSWERS- tiered networks (variable copays
and coinsurance)
- can be paired with narrow network
- broad choice within network, don't need referrals
- EPO: no coverage for out of network providers
HMO (Health Maintenance Organization) - ANSWERS- limits coverage: can only see
drs who work for/contract with HMO
- Often use gatekeeping (like drs needing to write you a referral to see a specialist)
, - prior authorization (need insurance company to approve treatments before treatment
is given)
- sometimes vertical integration (Kaiser Permanente)
- General idea: decrease unnecessary utilization from restrictions coming from the
insurer
HDHP (High Deductible Health Plan) - ANSWERS- employees pay lower premium in
exchange for higher deductible; idea is that consumers will use less care and seek out
more high-value care, since they have more skin in the game
- consumer-driven HC - "empower the shopper" to shop around and find cheapest
providers (will increase competition and force drs to provide more high value care)
- HDHPs often combined with Health Savings Accounts
- heavy dose of cost sharing
HMO Background - ANSWERS- increased throughout 1990s
- showed no diff in health outcomes
- plans do have lower utilization and hold down costs
- early 2000s: HMO backlash - ppl did not like insurers gatekeeping care!!!
- state governments pursue anti-HMO regulations/laws
- HC costs begin to rise faster again
- new idea: reduce costs by changing consumer behavior --> introduction of high
deductible health care plans
HDHP with HSA - ANSWERS- combo can lower upfront costs with increased health
spending flexibility but high deductibles and HSA spending limitations may results in
unexpected costs
- HSA deposits are tax-deductibles, roll over, can earn interest, and can be used for
medical expenses, often tax-free, but money not spent on qualified medical expenses
after age 65 are taxed at your current tax rate
- personal and employer contributions are not taxed
- funds can be invested with interest tax-free
- can spend tax-free money on medical expenses (pay 20% on non-qualifying expense,
penalties waived when 65+ but money spent is taxed at current tax rate)
- deductible has to be met before HDHP covers anything
- max contribution limit per year
HSA vs FSA (other tax-advantage accounts) - ANSWERS- benefit: pre-taxed money is
put into account, so will get discount equal to your income tax percentage
- risk: will lose if you do not spend the money in the account in that given year, since
money cannot be rolled over or invested
Pros/Cons HDHP (+HSAs) - ANSWERSPros:
- consumers expected to use less care
- providers lower price, increase competition
Cons:
- spending beyond the deductible might happen
Solved!!
Premium pricing considerations - ANSWERS- "fair" premium = P(sick) x P(cost)
- BUT: in reality, need to account for:
1) human behavior
2) moral hazard (consumer will act different when they have health care)
3) adverse selection (patient knows more than the doctor)
Adverse Selection - ANSWERS- arises when there is information asymmetry: patients
know more than insurers
- consumer knows more about their risk than insurer
- medical spending is skewed and concentrated
- demand for insurance is uneven across risk types
- risk pool determines premiums and risk signals may be weak
- premiums do not reflect actual risk
Health care spending = highly concentrated - ANSWERSTop 1% of HC spenders spend
20% of total health expenditures
Top 50% of HC spenders spend 97% of total health expenditures
Adverse Selection Spiraling Effect - ANSWERS- actual risk pool is imbalanced in terms
of risk types (more riskier ppl than average risk of population)
- collected premiums = too low to cover medical costs, so the next year, insurers raise
premiums
- more low-risk shoppers forgo insurance (thus causing premiums to increase even
more following year)
- even more low-risk shoppers forgo insurance --> creates extreme pricing issues
Examples of adverse selection in action - ANSWERS1) Harvard University Employee
HC Plans (1994):
- offered two plans: HMO (less $ and less generous) and PPO (more $ and more
generous)
- initially, 18% of employees chose PPO, then decreased in following years, since low-
risk individuals opted for the HMO instead
- premiums for PPO skyrocketed as those with more health risks were concentrated in
the PPO plan, while low risk individuals chose the HMO
- show adverse selection: patient knows more than the insurers, so those with more
health problems want more comprehensive coverage
Ways to limit adverse selection - ANSWERS1) group insurance (ESHI) - sell to
employer groups rather than to individuals, allows for built in pool of relatively
healthy/diverse adults (insurers know they are healthy enough to work)
,2) public policy
3) insurers can seek "advantageous selection"
Moral hazard - ANSWERS- arises when patients act differently (seek more medical
care) because they know they have insurance
two types:
- ex-ante moral hazard (before medical event - like not playing contact sport when you
don't have insurance)
- ex-post moral hazard (after medical event - getting excessive tests done when sick
because you have insurance)
Two requirements for ex-post moral hazard - ANSWERS1) price distortion (don't feel full
cost of treatment when covered by insurance)
2) price sensitivity (increase consumption of HC costs if costs go down)
Price sensitivity determines extent of moral hazard - ANSWERSEmpirical studies done
to show this:
1) RAND HIE - showed that patients use less HC when their coinsurance is higher
(when they have to pay greater fraction of HC costs); use more HC when they have free
care plan (when they do not have to pay anything)
2) Oregon Medicaid expansion - patients who won lottery to get Medicaid used more
HC than those in control group
Insurers can adjust benefit design by... - ANSWERS- controlling quantity or price
- decrease quantity of HC used/promote high value care use vs low value care (can do
this through cost sharing - more skin in the game or managed care - need
preauthorization and can only see selected drs, which results in less HC being used
because its harder to obtain)
- control prices via promoting low priced services, selective contracting, and tiered
networks
Types of benefit designs within insurance plans - ANSWERS- indemnity insurance =
traditional model, broad networks, leads to high HC costs
- managed care plans = more controls on usage of HC, includes PPOs, HMOs, HDHPs
PPO (Preferred Provider Organization) - ANSWERS- tiered networks (variable copays
and coinsurance)
- can be paired with narrow network
- broad choice within network, don't need referrals
- EPO: no coverage for out of network providers
HMO (Health Maintenance Organization) - ANSWERS- limits coverage: can only see
drs who work for/contract with HMO
- Often use gatekeeping (like drs needing to write you a referral to see a specialist)
, - prior authorization (need insurance company to approve treatments before treatment
is given)
- sometimes vertical integration (Kaiser Permanente)
- General idea: decrease unnecessary utilization from restrictions coming from the
insurer
HDHP (High Deductible Health Plan) - ANSWERS- employees pay lower premium in
exchange for higher deductible; idea is that consumers will use less care and seek out
more high-value care, since they have more skin in the game
- consumer-driven HC - "empower the shopper" to shop around and find cheapest
providers (will increase competition and force drs to provide more high value care)
- HDHPs often combined with Health Savings Accounts
- heavy dose of cost sharing
HMO Background - ANSWERS- increased throughout 1990s
- showed no diff in health outcomes
- plans do have lower utilization and hold down costs
- early 2000s: HMO backlash - ppl did not like insurers gatekeeping care!!!
- state governments pursue anti-HMO regulations/laws
- HC costs begin to rise faster again
- new idea: reduce costs by changing consumer behavior --> introduction of high
deductible health care plans
HDHP with HSA - ANSWERS- combo can lower upfront costs with increased health
spending flexibility but high deductibles and HSA spending limitations may results in
unexpected costs
- HSA deposits are tax-deductibles, roll over, can earn interest, and can be used for
medical expenses, often tax-free, but money not spent on qualified medical expenses
after age 65 are taxed at your current tax rate
- personal and employer contributions are not taxed
- funds can be invested with interest tax-free
- can spend tax-free money on medical expenses (pay 20% on non-qualifying expense,
penalties waived when 65+ but money spent is taxed at current tax rate)
- deductible has to be met before HDHP covers anything
- max contribution limit per year
HSA vs FSA (other tax-advantage accounts) - ANSWERS- benefit: pre-taxed money is
put into account, so will get discount equal to your income tax percentage
- risk: will lose if you do not spend the money in the account in that given year, since
money cannot be rolled over or invested
Pros/Cons HDHP (+HSAs) - ANSWERSPros:
- consumers expected to use less care
- providers lower price, increase competition
Cons:
- spending beyond the deductible might happen
