Health Insurance Revisited
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Health Insurance Revisited
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Health Insurance Revisited
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Health Insurance Revisited
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Health Insurance Revisited
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Health Insurance Revisited
Expansion of population coverage      Mireia Jofre-Bonet
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Health Insurance Revisited

Insurance exchange                                                      Mireia Jofre-Bonet
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Health Insurance Revisited
Premiums, subsidies and other matters                                        Mireia Jofre-Bonet...
Health Insurance Revisited
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Health Insurance Revisited
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Taxes and subsidi...
Health Insurance Revisited
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Jofre Bonet, Alistair McGuire

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Jofre Bonet, Alistair McGuire

  1. 1. Health Insurance Revisited Mireia Jofre-Bonet Alistair McGuire Health Insurance Revisited: On the implications of the US Health Care Reform. Mireia Jofre-Boneta,c Alistair McGuireb aProfessor at the Department of Economics, City University bProfessor at LSE Health and Social Care cSenior Associate Research LSE Health AES Valencia June 2010
  2. 2. Health Insurance Revisited Mireia Jofre-Bonet Alistair McGuire Organisation of this talk First part (AJM): • Health Care Reform – Health insurance in practice – Insurance Exchange – Separating Equilibrium – Separating equalisation with subsidy – Competitive insurance with adverse selection AES Valencia June 2010 2
  3. 3. Health Insurance Revisited Mireia Jofre-Bonet Alistair McGuire Organisation of this talk - 2 Second part (MJB): Reflection of welfare and potential effects in the European setting • Health Insurance Exchange and search costs versus tax and subsidies • Health Insurance Exchange with supplementary health insurance setting AES Valencia June 2010 3
  4. 4. Health Insurance Revisited Mireia Jofre-Bonet Alistair McGuire Health insurance in practice • Pooling of wealth to mitigate financial loss of adverse events in risk adverse individuals • What do we know about insurance? – A lot • Arrow (1963) optimal insurance includes a deducible • Rothschild and Stiglitz (1979) pooling and separating equilibria • Raviv (1979) – maximum acceptable premium (actuarially fair premium + loading) for individual is lower the larger his wealth (if diminishing risk aversion) – If coverage of insurance can be chosen, then chosen to point where expected utility increment of additional unit of cover is zero, and this is generally less than full cover • Nyman (2002) income re-distribution is more important than compensating risk – Income effect fully dominates substitution effect – So optimal coverage tends not to be full coverage and income re- distribution is important
  5. 5. Health Insurance Revisited Mireia Jofre-Bonet Alistair McGuire USA Health Care Reform • Problems – High % population uninsured (c50m) – High catastrophic payments – High health care costs (the elephant in the room…) • Require most US citizens to have health insurance – Tax penalty for individuals without coverage • some exemptions – Require employers with >50 employees to offer cover • some exceptions – Create state-based American Health Benefit Exchanges • Provide information on plans and allow purchase through premiums and tax credits
  6. 6. Health Insurance Revisited Expansion of population coverage Mireia Jofre-Bonet Alistair McGuire
  7. 7. Health Insurance Revisited Insurance exchange Mireia Jofre-Bonet Alistair McGuire • Different (current) proposals • Objectives – Single point of entry to insurance market – Choice over benefit plans – Disseminate information specifically over coverage and price – Support price competition • Coverage must be appropriate – Only to uninsured? – All who have tax credit subsidies – Option for all in state/country • Offer of standardised options – Keene’s work on lack of contract knowledge • Act as a bargainer or informer • Protect against adverse selection – Premium and cost sharing subsidies = $350billion (2010-2019) – Underwriting expenses = $106billion (2010-2019)
  8. 8. Health Insurance Revisited Premiums, subsidies and other matters Mireia Jofre-Bonet Alistair McGuire • Non-group policies estimated to rise 10-13% (compared to existing) – 27-30% rise because of increased benefit coverage – 7-10% reduction due to bigger pools (exchanges), lower administration costs, increased competition – 57% of individuals would receive subsides • Subsidies to those with income 133-400% of FPL • Subsidies will help limit adverse selection • Employment based market – Small group (<50 employees) • Broadly neutral effect on premiums – 13% receive subsidy » Tax credits for small businesses – Large market • Broadly neutral in premium (3% savings) – No subsidies – Tax on high premium plans (c10% of plans after 2016)
  9. 9. Health Insurance Revisited …other matters Mireia Jofre-Bonet Alistair McGuire • Adverse selection in nongroup market/exchanges…may be low – Annual open enrollment – Enrollment of broad range of individuals – Subsidies extensive – Reinsurance system for high-cost enrollees limtie premium increases • Little on health care costs – Provider responses
  10. 10. Health Insurance Revisited …other matters Mireia Jofre-Bonet Alistair McGuire • Dutch system – Mandatory health insurance through private insurers – Open (annual) enrolment and community rating – Risk-equalisation subsidises – Insurers can contract selectively with providers • Problems – Consumer premiums rising – Insurers reporting losses – Patient satisfaction not high – Health care providers cream skimming • Subsidy issues in Mass. USA
  11. 11. Health Insurance Revisited Mireia Jofre-Bonet Alistair McGuire Rothschild-Stiglitz separating equilibrium • Each insurer observes all offers on market • Pure Nash strategies • Pooling not possible • Separating equilibrium – Depends on self-selection; high-risks prefer their contract to the low-risk contract – Break-even condition – No entry condition – Depends on the proportion of low risks in the market • Separating equilibrium may not exist – If costs of separating are high to the low cost risks • If it does it is not necessarily second-best
  12. 12. Health Insurance Revisited Mireia Jofre-Bonet Alistair McGuire Rothschild-Stiglitz separating equilibrium -2 AES Valencia June 2010 12
  13. 13. Health Insurance Revisited Mireia Jofre-Bonet Alistair McGuire Wilson-Miyazaki-Spence separating equalisation with subsidy • Does not depend on proportion of low risks in market – Low risks must signal their true risk and subsidise high- risks – Firms drop (potential) loss making policies • Wilson foresight firms drop policies which will become unprofitable with exit – Not possible to design new profitable contracts which change behaviour • Frontier all the zero aggregate transfer points • Bold sub-set are second-best (Pareto) optimal
  14. 14. Health Insurance Revisited Mireia Jofre-Bonet Alistair McGuire Wilson-Miyazaki-Spence separating equalisation with subsidy AES Valencia June 2010 14
  15. 15. Health Insurance Revisited Mireia Jofre-Bonet Alistair McGuire PART 2: Motivation Previous presentation explained the main features of the US Health Care Reform This part of the talk aims at: • calculating the potential welfare effects • reflect on the possible spill-over effects of the reform to the supplementary health insurance market in Europe AES Valencia June 2010 15
  16. 16. Health Insurance Revisited Mireia Jofre-Bonet Alistair McGuire Organisation of the talk • Pooling, taxes and subsidies versus increased competitiveness, standardization and reduced search costs • Expected Welfare Effects? – In the US – Europe, supplementary health insurance and the question AES Valencia June 2010 16
  17. 17. Health Insurance Revisited Mireia Jofre-Bonet Alistair McGuire Pooling, taxes and subsidies in the Health Insurance Market • Snow and Crocker (1985) construct a simple system of lump sum taxes and subsidies levied against firms to achieve Nash Equilibrium for any proportion of high risks. – insurance contracts : (α1,α2): • α1 premium, α2 reimbursement if ill – proportion of high risk population: λ – probabilities of being low risk and high risk: • pL & pH with 0<pL <pH <1 – average probability of loss: p = λ p H + (1 − λ ) p L AES Valencia June 2010 17
  18. 18. Health Insurance Revisited Mireia Jofre-Bonet Alistair McGuire Pooling, taxes and subsidies in the Health Insurance Market -2 • Then, there is a simple system of lump sum taxes and subsidies levied against firms: π H if ρ > p for High risk individuals   t = 0 if ρ=p  L π  if ρ < p for High risk individuals Low such that the regulator runs a balanced budget: H L λπ + (1 − λ ) π = 0 AES Valencia June 2010 18
  19. 19. Health Insurance Revisited Mireia Jofre-Bonet Alistair McGuire Pooling, taxes and subsidies in the Health Insurance Market -3 • Graphically: AES Valencia June 2010 19
  20. 20. Health Insurance Revisited Mireia Jofre-Bonet Alistair McGuire Pooling, taxes and subsidies in the Health Insurance Market -4 • Too many risk groups may mean taxes in the lowest risks’ end may become unbearably high – Thus, there is a need to make groups quite mixed, to spread the load of the high risk groups • the forced pooling of 3:1 imposed in the American Reform AES Valencia June 2010 20
  21. 21. Health Insurance Revisited Mireia Jofre-Bonet Alistair McGuire Health Insurance Exchange and search costs - 1 • Diamond (1985) and Stiglitz (1989) – Search costs in a homogeneous commodity market can result in monopolistic pricing by sellers – Resulting prices can be substantially higher than marginal costs even with • Modest search costs • Non collusive sellers AES Valencia June 2010 21
  22. 22. Health Insurance Revisited Mireia Jofre-Bonet Alistair McGuire HI Exchange and search costs in a differentiated market Bakos (1997) • The creation of electronic marketplaces – Lowers buyer’s costs to acquire information about seller prices and products – Reduces inefficiencies caused by buyer search costs – Reduces ability of sellers to extract monopolistic profits – Provides a more optimal allocation of resources as allows a better allocation of buyers to differentiated products matching their tastes • More literature reinforces these findings – Mortensen and Wright (2000) generalise Wolinsky, Rubinstein and Gale’s, model’s and reach similar conclusions AES Valencia June 2010 22
  23. 23. Health Insurance Revisited Mireia Jofre-Bonet Alistair McGuire HI Exchange and search costs in a differentiated market - 2 • The effects of standardisation – Standardisation of product • Easier to compare products – Reinforcement of increased competition between suppliers AES Valencia June 2010 23
  24. 24. Health Insurance Revisited Mireia Jofre-Bonet Alistair McGuire HI Exchange and search costs in this context • In our context, prior to HI Exchange, search costs for consumers, lack of standardisation, etc. we should observe: – A premium α1s higher than it will be with the exchange α1ex – Thus, an endowment E’ lower (to the left of) than the E • Thus, the indifference curves attainable by individuals prior to exchange had to be lower AES Valencia June 2010 24
  25. 25. Health Insurance Revisited Mireia Jofre-Bonet Alistair McGuire Taxes and subsidies and HI exchange in the Health Insurance Market • Graphically: F’ R’H E’ E’ AES Valencia June 2010 W- α1s W- α1ex 25
  26. 26. Health Insurance Revisited Mireia Jofre-Bonet Taxes and subsidies and exchange in the Alistair McGuire Health Insurance Market - 2 • The overall effect of introducing the HI exchange (removing search costs, etc.) AND taxing the low risks to subsidize the high risks will depend on: – the proportion of the high risks and low risks – whether the increase in efficiency by removal of search and other costs reduces premia SUFFICIENTLY for the low risks AES Valencia June 2010 26
  27. 27. Health Insurance Revisited Mireia Jofre-Bonet Alistair McGuire Welfare effects • Expected Welfare Effect of reducing search costs – Undeniably positive for high and low risks • Pooling and subidization – Previously uninsurable high risks gain – Insured high risks may gain? – Insured and uninsured low risks may gain or not • Depending on whether reduced premia offsets tax AES Valencia June 2010 27
  28. 28. Health Insurance Revisited Mireia Jofre-Bonet Alistair McGuire Welfare effects - 2 • Overall effect: – It will depend on how much HI exchange translates into increased competitiveness and reduction of search costs for all consumers – A proportion of population (low risk) would always have preferred no insurance or partial insurance to compulsory grossly pooled one • Net effect on welfare will depend on magnitude of premium reduction and the proportion of each risk type AES Valencia June 2010 28
  29. 29. Health Insurance Revisited Mireia Jofre-Bonet Alistair McGuire Spill-over effects for Europe • Europe: – Cross-subsidisation is done through taxes • Supplementary Health Insurance – Preference driven • Possibly more differentiated products – Potential lower impact of standardization through exchange – Similarly, welfare gains from exchange still hold AES Valencia June 2010 29
  30. 30. Health Insurance Revisited Mireia Jofre-Bonet Alistair McGuire AES Valencia June 2010 30
  31. 31. Health Insurance Revisited Summary Mireia Jofre-Bonet Alistair McGuire 1. Compulsory 2. Supplementary 3. Private Insurance Insurance Full participation Partial participation Partial participation Restriction of preferences Fuller coverage meeting Fuller coverage meeting - Not full insurance preferences preferences coverage - but co-pays - but co-pays Subsidy means: a. low risk individuals Adverse selection Adverse selection may be over-paying b. benefit coverage is Moral hazard Moral hazard “low” Adverse selection Welfare gain compared Welfare gain to 1&2 - Depends on provider to 1. unclear as it depends on arrangements risk preferences and Moral hazard distribution of risk types in population

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