Transcript Document

Making good use of the
economic theory of health insurance:
Catching the wind
Michael Thiede
HEPNet & PG Diploma Workshop
on Health Insurance in Developing Countries
Cape Town, 28 May 2007
Let me introduce you to …
Wise words IV
“...[T]he special economic problems of medical care
can be explained as adaptations to the existence of
uncertainty in the incidence of disease and
in the efficacy of treatment.”
K.J. Arrow 1963
Wise words V
“...It should be noted that the subject is the medical-care
industry, not health.
The causal factors in health are many, and the provision
of medical care is only one. Particularly at low levels of
income, other commodities such as nutrition, shelter,
clothing, and sanitation may be much more significant.”
K.J. Arrow 1963
Uncertainty
• Ignorance is knowing nothing.
• Risk is where there are uncertain states of the world but these are
known and the probabilities of their occurrence.
• Uncertainty is the same as risk but the probabilities are not known.
Theory of Ideal Insurance
• Each individual acts so as to maximise the expected value of a
utility function, e.g. utility attached to income (& medical care
as random deduction from this income)
• Risk-averse individuals
(If an individual is given a choice between a probability
distribution of income with given mean m, and the certainty of
the income m, she would prefer the latter.)
• Actuarially fair basis of insurance:
costs of medical care are random variable with mean m 
premium m  welfare gain for the individual
• but: risk pooling, risk aversion by insurers, administrative
costs/loading, third party control over payments
First Optimality Theorem of Welfare Economics
If a competitive equilibrium exists at all, and if all commodities
relevant to costs or utilities were in fact priced in the market,
then the equilibrium is necessarily optimal in the following
precise sense: There is no other allocation of resources to
services which will make all participants in the market better
off.
Second Optimality Theorem
of Welfare Economics
If there are no increasing returns in production, and if certain
other minor conditions are satisfied, then every optimal state is
a competitive equilibrium corresponding to some initial
distribution of purchasing power.
Wise words VI
“... If the … allocation mechanism in the real
world satisfies the conditions for a competitive model,
then social policy can confine itself to steps taken to alter
the distribution of purchasing power.”
K.J. Arrow 1963
Wise words VII
“If ... the actual market differs significantly from the
competitive model … the separation
of allocative and distributional procedures becomes,
in most cases, impossible.”
K.J. Arrow 1963
Issues I
Dual loss in the event of illness
- Income
- Health
Issues II
Dual moral hazard
(exploiting “information asymmetry” to take
advantage of the other party to the contract)
- ex ante
- ex post
Issues III
Adverse selection
(occurs when individuals use their inside
information to accept or reject a contract, so that
those who accept are not an average sample of the
population)
The Rand Health Insurance Experiment (HIE)
1974-1977*
• Basis: Rapid increase in medical care costs as result of the spread
of health insurance, which has “generated demand for both a
higher quality and an increased quantity of medical services”.
• Objectives:
1. Demand response of insuring the poor through public
programmes
2. Price elasticities, e.g. more generous insurance for less price
elastic services
3. Health care as merit good: effects of marginal changes in
consumption of medical services on health
4. Reasons for lower costs in HMOs: cream skimming? lower
“depth”?
*Manning W et al. (1987), Health insurance and the demand
for medical care: evidence from a randomised experiment,
AER 77:251-277.
The Rand Health Insurance Experiment (HIE)
contd.
Design:
6 sites
14 fee-for service insurance plans + pre-paid group practice
2 variables: coinsurance rate (percentage paid out-of-pocket):
0, 25, 50, 95 percent (variations in inpatient and
outpatient services)
upperlimit to annual out-of-pocket expenses:
5, 10, 15 percent of family income, up to max of $ 1.000
5.809 people, 20.190 person years
HIE - Results
• Use of medical services responds to changes in the amount paid
out-of-pocket (no. of contacts stronger affected than intensity of
contacts)
• No significant differences in the use of inpatient services
• Expenditure correlates as predicted
• Two conflicting effects of income: positive on outpatient use,
negative on inpatient use
• Children are less “plan responsive” for inpatient care
• No differential response to health insurance coverage between the
healthy and the sickly
• HMO experiment: less hospital admissions; hardly any significant
differences from fee-for-service system (just one HMO!)
Health Insurance Contracts
& Incentive Effects
• Degree of coverage (services)
• Differentiation according to health goods included
• Differentiation according to type of provider
• Differentiation according to the extent of compensation –
bears on:
(a) quantity of the service consumed
(b) price of the service
(c) product of quantity and price = expenditure
Equity
Equity (fairness/justice) in financing: Those with different
ability to pay should make appropriately dissimilar payments
(  progressivity of contributions
 financing incidence)
Equity in delivery of health services: Those with different needs
should get dissimilar benefits
( benefit incidence [usually takes into account only SES])
• Financing, benefit and overall incidence
• Vertical equity, horizontal equity
• Process equity
Some more health insurance terms
• Risk-pooling
• Risk factors
- Age
- Gender
- Births and deaths
- Ethnicity
- Family size
- CDL
• Income and X-subsidies
• Benefits
• Voluntary or compulsory membership
Types of insurance
based on source of funds
Providers
Risk Pooling Entity
General Taxation
Social Insurance
Public
Tax Collector
Taxes
Social Insurance
Revenue
Collector
Private Insurance
private for profit,
private not for profit,
community, some
mandatory, group,
individual
primary,
Premiums
secondary
Individuals and Employers
Source: WHO
Definitions I
• Private health insurance and voluntary health insurance
• Private health insurance is a National Health Accounts
category. Definition based on ‘source of financing’
• Most insurance in this category is voluntary but this is not
criterion for inclusion
Key dimensions of health insurance
Enrolment
Voluntary
Contributions
Risk rated
Management
Private For Profit
Mandatory
Community Rated
Non-Profit
Income Related
Public
Spectrum of Insurance Arrangements
(WHO)
Privately funded
(Private Insurance)
Type of Enrollment
Publicly funded through taxation
(Public insurance)
Voluntary
Voluntary
Voluntary
Voluntary
Type of Contributions Risk rated
Risk rated
Community
rated
Non-profit
BUPA in U.K.
Mandatory
Voluntary
Mandatory
Voluntary Mandatory
Mandatory
Community Community
rated
rated
Income
based
Community Income
rated
based
Income
based
Income
based
Non-profit
community
Public
Non Profit
For profit
Non-profit
Public
SEWA in
India
Medibank CHCIs in
in Australia Uruguay
(Voluntary-Mandatory)
(Risk rated-Community
rated-income based)
Type of Management For profit
Non-profit
Public
(Private for profit-nonprofit-public)
Examples
Tata/AIG in
India
Seguro
ISAPRES in Various in
Various
Popular in
Slovakia
Chile
Switzerland
Netherlands
Mexico
GIC in
India
Source: Sekhri & Savedoff (2005)
So what’s new?
• Moves away from ideology
• Moves towards integration of health financing strategies
rather than compartmentalization
• Focuses on design of insurance coverage to provide
financial protection, promote equity, efficiency…
Potential Model Towards Universal Coverage
(WHO)
Public Spending
Limited
Public
Funding (for
vulnerable)
Increasing public
share of health
financing through
targeted coverage
for vulnerable
populations
Financing Fairness
LOW
Majority of
population
covered through
publicly funded
schemes (e.g.
general taxation,
social insurance)
Capacity Building/ Institutional Strengthening
Out-of-pocket
payments
predominate
Private Insurance
pools cover other
segments of the
population
Private Spending
Private
insurance for
secondary
coverage
HIGH
Definitions II
Social Health Insurance
• Compulsory / mandated, regular income-related contributions
(employers and employees)
• Covers those who contribute [versus National Health Insurance
(universal)]
• Social solidarity / cross-subsidisation:
- high to low income (income-related cross-subsidies)
- young and healthy to elderly and ill (risk-related crosssubsidies)
• Standardised minimum benefit package
Definitions III
Community(-Based) Health Insurance (Fund)
• Criteria?
• Voluntary (except e.g. Ghana NHIS)
• Targeted at those outside formal sector (rural areas, some in
peri-urban areas)
• Strong community involvement
• May be linked to a specific facility
International Experience SHI
• Coverage: formal sector – gradually extend
• Benefit package:
- Hospital cover a priority, comprehensive where affordable
- Primary care gatekeepers
• Tends to be less progressive than general tax revenue
(can be regressive)
• Administration costs
• Bargaining with providers
Theoretical Shortcomings
of Comprehensive SHI/NHI
• Administrative expenditure increases with benefits
(solution: benefits in kind [?])
• There may be too little incentive to invest in prevention, when
sick funds do not make any efforts at observing preventive
effort.
• The price elasticity of demand for health care services,
although not very high, is different from zero, giving rise to
“ex post moral hazard”.
• …
Mandatory vs. voluntary membership
• Protection against “free rider” problem
• “Adverse selection” (occurs when individuals use their inside
information to accept or reject a contract, so that those who
accept are not an average sample of the population; therefore:)
Introduction of compulsory insurance may result in a Pareto
improvement.
• Cream-skimming
Vertical restraints and integration
high
Insurance and health care delivery by the same organisation
Hospitals owned by insurer, remaining services through contracting
Ambulatory care provided by the insurer,
remaining through contracting
Some health plans managed by the insurer, other plans devoid
of vertical restraints
Selective/exclusive contracting of insurer with service providers
Contracting between insurer and providers at association level
Any provider can deliver any service to the insurer’s customers
low
Determinants of system choice
• Historical context of choice
• Cultural preferences (mutuality vs. solidarity)
• Capacity
• Feasibility
• Socio-economic environment
Caveats
• Dynamic planning context
• No high income country uses private coverage as the primary
method for insuring populations who are poor or at high risk
(not even the US which has the largest private insurance market
in the world)
• Government stewardship of health insurance markets is critical
to their effective functioning (policies, incentives and
regulations)