Health economics reading list:
Topic 1: Health insurance
Theory text: (Springer 2009)
The UK and Italy have taxed financed national health services with permanently employed physicians
who provide their services to patients free of charge. In other countries, social health insurance
covers all or at least the majority of citizens, who often do not have a choice of insurer. This causes
deviations from market allocations and this is justified by claiming that health goods present
particular features rendering them different from other goods. This causes a market failure where
the equilibrium does not correspond to a Pareto optimal allocation in non-regulated markets.
Empirical: (Cutler and Zeckhauser, 1998)
Individuals who expect high health care costs differentially prefer more generous and expensive
plans and those who expect low costs choose more moderate plans. This is called adverse selection
and this can lead to 3 different types of inefficiencies: prices to participants will not reflect marginal
costs, hence on a benefit cost basis individuals will select the wrong health plans, desirable risk
spreading is lost and health plans will manipulate their offerings to deter the sick and attract the
healthy.
2 case studies: Harvard University and the Group Insurance Commission of Massachusetts.
Concluded that adverse section is real and growing issue in a world where moat employers offer
multiple alternative insurance policies. Both groups offered a costly, generous plan and several
HMOs, both have a long term commitment to providing high quality insurance costs over time. But
the recent experiences of these differ due to how they chose to subsidise different health plans.
Premiums offered in Harvard University were so similar for different plans, the additional cost to the
employee of the PPO was generally low. Between 1992 and 1994, employees paid an average of
about $400 to $500 to enrol in the PPO instead of a HMO (however this is without tax, this is a pre-
tax figure so the contribution would be smaller post tax). In the mid 1990’s the University faced a
budget deficit due to the rising cost of health benefits. In around 1995, an equal contribution rule
was implemented where the additional cost of more expensive plans is now paid by the employee
Insurers will have incentives to attract healthy insureds and repel sick insureds, a process called risk
selection. Denying enrolment to sick or high cost people is usually prohibited by employers, so they
may use more subtle methods. Utilization management – burdensome processes for referrals or
follow up visits, or high co-payments are ways to disproportionally discourage high-intensity users.
Discounts for membership in health clubs might attract the right people (low intensity users).
In 1994, the Group Insurance Commission conducted an informal study of the mental health services
of 10 HMOs they offered their enrolees. Each claimed to enrolees to offer the minimum mental
health coverage mandated by the state. 8 plans however offered more generous benefits for critical
cases. They did not advertise this fact because they wanted to avoid being selected against
(Slavin,1997)
Conclusion of this paper:
Most Americans receive health insurance through plans that are administrated by and subsidised by
employers. Typically, charges to employees depend on the plan they choose – the higher the
premium to the employer, the higher the charge to employees. The result is that people who choose
, more generous insurance policies must pay to subsidise the sicker people who choose the more
expensive policy. This arrangement invites adverse selection.
The experiences of Harvard University, which provides equal contributions across plans and the
Massachusetts Group Insurance Commission (GIC), which subsidises 85 percent of premiums
regardless of plan cost, show that adverse selection is a real-world concern. Harvard’s PPO crashed
in a death spiral when it implemented an equal contribution rule. Adverse selection was so great
that the most generous policy could not be offered at a reasonable price. The GIC has avoided such a
situation, in part by not moving to an equal contribution rule and in part by undertaking steps to
reduce the costs of the most generous plan. This has been challenging, however, and adverse
selection remains a concern.
To get the right insureds to take the right plan, employees who are given a choice across plans
should be charged the differential in cost that applies for them. The mixes of insureds in the actual
plans should not affect charges to employees; only the cost savings for a particular individual should
affect his decision. In such a system, employers will vary the premium across plans based on ex ante
differences in demographics and observed health status across plans, and may make further
corrections to payments based on ex post claims experience. Careful empirical assessment is
essential to guide this process. For example, two of our most important findings about the GIC were
surprises: spending above $25,000 per year accounted for only 8 percent of the difference in costs
between the insurance and HMO policies, and the vast majority of adverse selection resulted from
the movement of low-risk employees. Implementing a carefully designed and empirically informed
risk-adjustment system is essential to make health insurance competition work well.
Health Insurance and the Demand for Medical Care: Evidence from a Randomize...: EBSCOhost
(Manning et al, 1987)
Over the past 4 decades, medical care costs have grown about 4 percent per year in real terms and
the share of GNP devoted to medical care has increased from 4.4 percent in 1950 to 10.7 percent in
1985, (Waldo et al, 1985). This rapid increase has been due to the spread of health insurance, which
has generated demand for higher quality and an increased quantity of medical services, (Feldstein,
1971,1977).
Rand experiment has helped to remove uncertainty of whether insurance is endogenous or
exogenous, (Newhouse, 1974).
Critique: may be better to estimate pure coinsurance elasticity by analysing variation in the demand
for episodes of care rather than annual expenditure per person (Keeler and Rolph, 1982; Keeler et
al., 1987).
For children, price elasticities for inpatient services are not measurably different from zero, hence
for them there is no measurable moral hazard.
The Oregon Experiment — Effects of Medicaid on Clinical Outcomes - ProQuest (Baicker et al, 2013)
In seminar 1
Limitations: in person interviews so may face some bias when answering
Topic 1: Health insurance
Theory text: (Springer 2009)
The UK and Italy have taxed financed national health services with permanently employed physicians
who provide their services to patients free of charge. In other countries, social health insurance
covers all or at least the majority of citizens, who often do not have a choice of insurer. This causes
deviations from market allocations and this is justified by claiming that health goods present
particular features rendering them different from other goods. This causes a market failure where
the equilibrium does not correspond to a Pareto optimal allocation in non-regulated markets.
Empirical: (Cutler and Zeckhauser, 1998)
Individuals who expect high health care costs differentially prefer more generous and expensive
plans and those who expect low costs choose more moderate plans. This is called adverse selection
and this can lead to 3 different types of inefficiencies: prices to participants will not reflect marginal
costs, hence on a benefit cost basis individuals will select the wrong health plans, desirable risk
spreading is lost and health plans will manipulate their offerings to deter the sick and attract the
healthy.
2 case studies: Harvard University and the Group Insurance Commission of Massachusetts.
Concluded that adverse section is real and growing issue in a world where moat employers offer
multiple alternative insurance policies. Both groups offered a costly, generous plan and several
HMOs, both have a long term commitment to providing high quality insurance costs over time. But
the recent experiences of these differ due to how they chose to subsidise different health plans.
Premiums offered in Harvard University were so similar for different plans, the additional cost to the
employee of the PPO was generally low. Between 1992 and 1994, employees paid an average of
about $400 to $500 to enrol in the PPO instead of a HMO (however this is without tax, this is a pre-
tax figure so the contribution would be smaller post tax). In the mid 1990’s the University faced a
budget deficit due to the rising cost of health benefits. In around 1995, an equal contribution rule
was implemented where the additional cost of more expensive plans is now paid by the employee
Insurers will have incentives to attract healthy insureds and repel sick insureds, a process called risk
selection. Denying enrolment to sick or high cost people is usually prohibited by employers, so they
may use more subtle methods. Utilization management – burdensome processes for referrals or
follow up visits, or high co-payments are ways to disproportionally discourage high-intensity users.
Discounts for membership in health clubs might attract the right people (low intensity users).
In 1994, the Group Insurance Commission conducted an informal study of the mental health services
of 10 HMOs they offered their enrolees. Each claimed to enrolees to offer the minimum mental
health coverage mandated by the state. 8 plans however offered more generous benefits for critical
cases. They did not advertise this fact because they wanted to avoid being selected against
(Slavin,1997)
Conclusion of this paper:
Most Americans receive health insurance through plans that are administrated by and subsidised by
employers. Typically, charges to employees depend on the plan they choose – the higher the
premium to the employer, the higher the charge to employees. The result is that people who choose
, more generous insurance policies must pay to subsidise the sicker people who choose the more
expensive policy. This arrangement invites adverse selection.
The experiences of Harvard University, which provides equal contributions across plans and the
Massachusetts Group Insurance Commission (GIC), which subsidises 85 percent of premiums
regardless of plan cost, show that adverse selection is a real-world concern. Harvard’s PPO crashed
in a death spiral when it implemented an equal contribution rule. Adverse selection was so great
that the most generous policy could not be offered at a reasonable price. The GIC has avoided such a
situation, in part by not moving to an equal contribution rule and in part by undertaking steps to
reduce the costs of the most generous plan. This has been challenging, however, and adverse
selection remains a concern.
To get the right insureds to take the right plan, employees who are given a choice across plans
should be charged the differential in cost that applies for them. The mixes of insureds in the actual
plans should not affect charges to employees; only the cost savings for a particular individual should
affect his decision. In such a system, employers will vary the premium across plans based on ex ante
differences in demographics and observed health status across plans, and may make further
corrections to payments based on ex post claims experience. Careful empirical assessment is
essential to guide this process. For example, two of our most important findings about the GIC were
surprises: spending above $25,000 per year accounted for only 8 percent of the difference in costs
between the insurance and HMO policies, and the vast majority of adverse selection resulted from
the movement of low-risk employees. Implementing a carefully designed and empirically informed
risk-adjustment system is essential to make health insurance competition work well.
Health Insurance and the Demand for Medical Care: Evidence from a Randomize...: EBSCOhost
(Manning et al, 1987)
Over the past 4 decades, medical care costs have grown about 4 percent per year in real terms and
the share of GNP devoted to medical care has increased from 4.4 percent in 1950 to 10.7 percent in
1985, (Waldo et al, 1985). This rapid increase has been due to the spread of health insurance, which
has generated demand for higher quality and an increased quantity of medical services, (Feldstein,
1971,1977).
Rand experiment has helped to remove uncertainty of whether insurance is endogenous or
exogenous, (Newhouse, 1974).
Critique: may be better to estimate pure coinsurance elasticity by analysing variation in the demand
for episodes of care rather than annual expenditure per person (Keeler and Rolph, 1982; Keeler et
al., 1987).
For children, price elasticities for inpatient services are not measurably different from zero, hence
for them there is no measurable moral hazard.
The Oregon Experiment — Effects of Medicaid on Clinical Outcomes - ProQuest (Baicker et al, 2013)
In seminar 1
Limitations: in person interviews so may face some bias when answering
