Healthcare exam 2 - Christina Rennhoff PDF

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Christina Rennhoff...

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Outline for Exam 2 Below is a rough outline of topics that we have discussed since exam 1. You are responsible for all material discussed in class since Exam 1. I. Physicians --This was on our last test, do not study a. Agency  The physician acts on behalf of the patient  Perfect Agent: physician behaves as the patient would if the patient was informed (medically) as the physician

My demand curve is my marginal benefit curve If my doctor was acting as a perfect agent, they would provide me the amount of care I demand when I am paying $10 (Q*)  Perfect physician does not get rid of moral hazard  The patient is only paying $10 (copay), but the doctor is making $100 (copay and insurance)  Fuchs (1978) o Increase in supply of physicians → increase price of physician services o Rice (1983)  Lower fees for physician services → increase in quantity of services provided b. Target Income Theory  T=p*q o If p decreases, they increase q to reach their target (and vice versa)  Physicians have a target income and they are abusing their knowledge to set higher prices c. Supplier Induced Demand  Physicians engage in some persuasive activity to shift the patient’s demand curve in or out according to the physician’s self interest  

We are still unsure about this idea of supplier induced demand Insurance companies don’t like idea of supplier induced demand because it can increase premiums  ***Insurance companies become more stingy about which medications and treatments are ‘actually covered II. Moral Hazard: health insurance increases the demand for health care a. Ex ante and ex post  Ex Post moral hazard: conditional on my health, I will choose to consume more care because the out-of-pocket price is lower if I have insurance (Pauly)  Ex Ante moral hazard: If i have health insurance that pays for care when I am sick, I have less incentive to maintain my health (Ehrlich & Becker, 1972) b. Effect of coinsurance rate and copay on demand  

c. Welfare loss due to moral hazard

d. Price sensitivity and moral hazard

 Elastic demand: higher response to moral hazard (more sensitive) III. Insurance a. Terms  Cost sharing: patient pays for part of medical bill  Deductible: amount of money you must spend in order to receive health insurance  Coinsurance rate: health care cost sharing between you and your insurance company  Copay: a payment made by a beneficiary in addition to that made by an insurer  Pure premium: (actuarial fair premium) expected health care expenses = (probability of illness) x (health care expenses)  Premium: the premium you pay is the pure premium + the load  Load: administrative expenses, marketing, profit, etc.  Medical loss ratio: amount an insurance company spends on medical expenses divided by total amount of premiums collected o US has low ratio bc we have high admin expenses b. Risk Aversion: the displeasure of losing a dollar exceeds the pleasure associated with gaining a dollar  Diminishing marginal utility is based on risk aversion (if you have DMU you are risk averse)

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^^ most she is willing to pay for full insurance is $2,000 o If she buys a full insurance plan, she has no uncertainty  Risk premium: the amount you are willing to pay beyond the pure premium to get rid of uncertainty

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Gets smaller as probability of illness goes down (don’t get much gain from health insurance) As probability goes towards 100% it goes down too (less uncertain still) Risk averse, risk loving, risk neutral:

c. Adverse Selection  When asymmetric information exists in health insurance markets (buyer of health insurance has more knowledge)  The buyers know HC expenditures exactly, sellers only know distribution

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Lemon’s Principle

o Lemons = sick people; they drive everyone out  Asymmetric Information o Seller has more information than buyer  Adverse Selection Death Spiral (shown in picture above) d. Experience Rating / Community Rating  Premium is made up of two parts: o load→ admin expense, marketing etc o Claims experience→ expected HC expenditures for this group  They come up with claims experience by either experience rating or community rating  Experience rating → the idea that people pay different premiums based on the specific risk of the individual  Community rating → everyone pays the same premium (in the community)  New York implemented this but it actually drove up premiums because healthy people left IV. Managed Care Traditional plans (what people had before managed care came about)  Traditional FFS plan (Fee for Service)  Freedom to see any provider  Most services covered  Flat coinsurance rate  Providers paid FFS a. Characteristics of managed care  Insurance companies started to control what physicians you go to, what services you get, what medications, etc o Type of care o Provider o How long you stay in hospital o Types of drugs  Provider networks  Lower cost sharing for generic rrs brand names o Drug formulary → list of drugs covered by insurance company  Utilization review  Physician gatekeeper → they have to approve seeking a specialist  Capitated payment systems o Characteristic of some managed care plans (HMO) o Provider gets fixed amount a month/year regardless of how many times patient sees them o Incentivizes provider to not provide extra health care  Also try and keep them healthy so they don’t have to see them  Negotiated discounted fees  Characteristic of some managed care plans  Providers agree to keep large volume of patients  Limited provider networks b. Types of managed care plans  HMO’s o Health maintenance organization o Most restrictive o Restricted provider network o Stringent utilization review

Gatekeeper No coverage for care sought by out of network provider Providers are paid capitated payments PPO’s Preferred provider organizations Least restrictive Providers are paid a discounted negotiated fee No gatekeeper Less stringent utilization review than HMO plan Coverage for care sought by out of network provider with higher cost sharing POS’s Point of service In between Like HMO but you have coverage for care sought by an out of network provider with higher cost sharing c. How has managed care performed?  Everyone used to be on traditional plans now everyone is on some type of managed care plans (HMOs, PPOs, POSs) o Incentive for less care o Quality of care has not been compromised o People are less satisfied o Shorter length of stay o Use less expensive resources o Improved preventative care  When it was introduced health care expenditures on a % of GDP stopped growing at first → then started rising again d. Managed Care Backlash  Loosening of cost containment measures  People demanded larger networks of providers  Regulation on Managed care: o Established minimum lengths of stay in the hospital o Determined which procedures could be performed in an outpatient setting o Loosening of regulations basically → expenditures started going up Accountable Care Organizations o New trend today (after managed care) o Management of diseases o Coordinated care o All different kinds of doctors/physicians/specialist under one organization o Pay a flat fee for all of it o You can track someone’s care over time  Integrated computer systems Medicare o Federally funded social health insurance for the elderly (65+ years)  Also serves people with kidney dialysis  And those that are disabled (2 year waiting period) o o o  o o o o o o  o o o

V. Medicare a. Parts of Medicare  Part A:

o o o o

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Hospital insurance Nonvoluntary program automatically enrolled at age 65 Substantial cost sharing (deductible + coinsurance rate) Funded by pay as you go system  FICA  1966: .175% by er and ee total .35%  2013: 1.45% paid by er and ee total 2.9%  ACA (2014)  For individuals with incomes above $200,000 and families with incomes above $250,000  FICA tax (2014)  2.35% for income exceeding the threshold (ee portion)  er portion remains at 1.45% Part B: (supplemental health insurance → voluntary program but 95% of elderly participate)  Pay a premium  Higher income individuals pay a higher premium  Deductible/coinsurance rate  Traditional insurance plan  Funded by general tax revenues (not insurance companies) Part C: (supplemental health insurance)  “Medicare Advantage”  Supplemental health insurance through a private managed care plan  Funded by general tax revenues  Becoming more popular (associated with lower premiums)  Lower income individuals would be drawn to this (speculated)  ACA: lowered funding for Medicare Advantage Plans Part D:  Prescription Drug Coverage  Offered by insurance companies  Formulary = list of drugs offered under a specific coverage plan  Wasn’t part of Medicare at first but there became a need  Part C and D are mutually exclusive (you cannot have both)  “Part D Donut hole” → in 2010  A deductible of $310  If your spending was $311-2830: 25% coinsurance rate (74% of people)  If it was $2831-6440: No coverage (22% of people stayed in this “hole”)  Greater than $6440: 5% coinsurance rate (4% of people)  This incentivized people to keep their prescription drug costs under $2830 but then sympathizes for people that actually need it  ACA closed the Donut hole (it’s gradual but there is still some coverage gap but the goal was to have continuous coverage) Problem with Medicare:  Increasing number of elderly → with a significantly larger group of elderly people vs. people working, the people working are paying much more than this group of elderly people did  Substantial cost sharing

b. Funding c. Provider Reimbursement

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Hospital reimbursement: o In 1970 (when it first started)  Hospitals were reimbursed  Cost plus: cost to treat patient plus some more (normally a percentage)  This caused costs to be really high because hospitals weren’t incentivized to keep costs down  Early 80’s  Changed DRG payment system  DRG = Diagnostic Related Group  Hospital paid one flat fee based on diagnosis  Physician Reimbursement:  UCR (Usual Customary Rate)  Looked at prevailing rate in geographic areas  Made an incentive for physicians in area to raise rates (inflation)  Early 90’s, changed to RBRVS  RBRVS = Resource Based Relative Value Scale  Considers time, effort, and resources to produce physician services and assigns each service a number of points  Reimburses a flat dollar amount per point

VI. Article posted to Blackboard: Newhouse, Joseph and Anna Sinaiko.. 2008. “What We Know and Don’t Know about the Effects of Cost Sharing on the Demand for Medical Care – and So What?”  Rand health experiment found that: o Free care induced substantially greater use of services with little or no benefit in health → Additional use of services caused by moral hazard were not beneficial  These authors interpretation of this result was different: 1. It could be a potential measurement error 2. Another interpretation was that more cost sharing reduced both efficacious and non-efficacious care  Some of the free care you get is beneficial and some is not à so they cross each other out so there is no overall effect on health  Look at graphs on moral hazard in article (the welfare loss triangle)  Plans don’t look like this anymore (not just a flat coinsurance rate anymore)  We use this data but results are outdated because health insurance now is a lot more complicated (drug formularies, doctor networks, managed care etc.) than they were in 1980s when this was run  Cross price elasticities  Health care is extremely heterogeneous (so many parts of health care ie. Doctors, hospitals, drugs and they all have their own cross price elasticities)  They raised the cost sharing on drugs→ people stopped buying the drugs→ but those people ended up spending 17x the savings on other health care expenditures  But reducing money on pharmaceutical drugs would increase consumption and in the future prevent possible invasive surgeries  Alludes to the fact that spending money now will avert later medical expenses (preventative care) Student Group Presentation 2018 Adverse Selection in the Health Insurance Market  Asymmetric Information o Health insurance buyers have better information about their health than the sellers  Sellers = more risk averse = avoidance of insuring high cost patients

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Effect on Insurance Companies  Screen out high cost patients  Max profits = many low cost patients and few high cost patients  Keeps premium low = increases customers  Strategies to dissuade high cost patients Adverse Tiering  High risk individuals/chronic conditions = high cost sharing tier  To prevent high cost patients from enrolling  May 2014: formal complaint: HIV users dissuaded Results of HIV Adverse Tiering Study  12/48 of health insurance = adverse tiering  Enrollees in adverse tiering plans had costs up to 3x higher  Believed this is not limited to few conditions/plans Problems from Adverse Tiering  Excessive financial burden for high risk patients/chronic conditions  Severely decreases profit for insurance providers that do not engage in adverse tiering  High cost patients will enroll with the non adverse tiering insurance companies causing costs to rise and profits to fall

VII. Student Group Presentations 1. Using Drugs to Discriminate - Adverse Selection in the Insurance Marketplace 1. Discrimination in Health Care

1. Affordable Care Act (ACA): Instituted age-adjusted community rating and mandated that plans insure all 1. Eliminating discrimination based on preexisting conditions 2. New method emerging to dissuade high-cost patients from enrolling: adverse tiering 1. Evidence to suggest that it is being used to dissuade HIV patients from enrolling ii. What is a Formulary? 1. “A drug formulary is a list of prescription drugs, both generic and brand name, used by practitioners to identify drugs that offer the greatest overall value. A committee of physicians, nurse practitioners, and pharmacists maintain the formulary ii. What is Adverse Tiering? 1. Insurers traditionally used tiered formularies to encourage enrollees to select generic or preferred brand-name drugs instead of higher-cost alternatives 1. What if insurer places all HIV drugs in the tier with the highest cost sharing? 2. This results in enrollees with HIV paying high costs regardless of drugs that they take 1. This is the goal of adverse tiering, not to influence drug utilization, but to deter certain individuals from enrolling in the first place 3. Individuals with chronic conditions would enroll in adverse tiering plans that have a normal premium, and then be burdened by extremely high out of pocket costs due to cost sharing ii. The Problems with Adverse Tiering Plans (ATPs) 1. ATPs place substantial and unexpected financial strain on those with chronic conditions 1. Select ATP because of low premium but pay extremely high out-ofpocket drug costs 2. ATPs will likely lead to adverse selection over time 1. In the long run, sicker people will cluster in non-ATPs 2. Non-ATPs will experience influx of enrollees, reducing their profits 3. Leads to a race to the bottom in drug-plan design ii. Policy Suggestions 1. Price Transparency 1. Insurers to list on their formulary each drug’s estimated price to enrollee 2. Protected Condition in Drug Formularies 1. Medicare already has a similar clause, this would set an upper limit on cost sharing for certain important medications (Cancer, HIV, etc.) 3. Require Marketplace Plans to offer Drug benefits that meet a certain actuarial value 1. Percentage of drug costs paid by the plan would have to exceed a certain threshold ii. Conclusion: 1. Although stopping adverse tiering plans would help to resolve discrimination, it is merely a short term solution to a long-term problem 2. Insurers will inevitably find new ways to dissuade sick enrollees from joining their plans 3. Swartz presents a solution to deal with this adverse selection b. Government as Reinsurer for Very-High-Cost Persons in Nongroup Health Insurance Markets i. Adverse Selection

1. Fear of adverse selection drives competition between carriers, as they are competing in their use of selection mechanisms to screen out high cost applicants 1. Methods include medical underwriting, refusal to issue or renew a policy, exclusion of coverage for preexisting conditions, etc. 2. Also incentivizes finding new ways of selection, such as adverse tiering 2. This focus on adverse selection creates a market inefficiency, which Swartz argues is grounds for a government intervention 1. The primary goal will need to reduce these fears ii. How to Reduce Fear of Adverse Selection 1. Adverse selection practices are based on the assumption that high-cost individuals will continue to be high-cost 2. Longitudinal studies show that the top 5% of healthcare consumers do not stay in the top 5% very long 1. Mostly due to unforeseen events and accidents 3. If insurer’s risk to provide for this group’s care was removed, there would be less need to screen high risk consumers b. Government Reinsurance i. Swartz suggests the government reinsure the top 2-3% of healthcare consumers ii. Leaves risk for those outside of this 2-3% but inside the top 30% for insurers iii. This would shift this risk from insurers to the government 1. Making adverse risk-selection less necessary since they are not cost effective below the top 2-3% ii. Cost of having government do this depends on the design of the reinsurance 1. Also depends on the types of benefits that would be eligible b. Increased Efficiency and Equity i. Efficiency 1. If the government becomes the reinsurer in nongroup markets, they will operate more efficiently ii. Costs of producing health insurance will be lower → reduces premiums → induces more uninsured people to purchase coverage iii. Equity 1. If the government becomes the reinsurer, it will spread the burden of the cost of very high cost people from the relatively small number of people insured by any particular carrier to the broader population base of taxpayers 2. The burden of the high expenditures of a few people will be very small for any one person...