Transcript Document

Risk and the Economics of
Information
Agenda
• Current Events
• Risk Aversion
• Adverse Selection
• Principal Agent Problem
Exam!!
• Tuesday April 7th
• Midterm question sheet:
– 7 total questions
• 70-80% of the test will be from these questions
• The rest will be from short answer questions
• Closed book/notes/internet/text/email/chat/text – just
you and the test
• Can either hand write, or type on your laptop
Bonus Learning
• Mike McBride – April 6th, 4:00pm
• John Haupert – April 9th afternoon
Tenet USPI Baylor Scott & White?
• Tenet – USPI
– Tenet and USPI will combine their short-stay
surgery and imaging center assets into a new joint
venture.
– more than 200 ambulatory surgery centers, 16
short-stay surgery hospitals, and 20 imaging
centers across 29 states—making it the largest
ambulatory surgery provider in the country.
– Estimated value of $2.6 billion
Tenet USPI Baylor Scott & White?
• Tenet – Baylor Scott & White
– At the same time Tenet and BSW announced a
deal to jointly own 5 Tenet hospitals in North
Texas.
– BSW majority owner and will operate under the
BSW brand
– Tenet’s ACO also entered into an affiliation
agreement with BSW’s Quality Alliance
What is the Sustainable Growth Rate?
• How does Medicare Pay Physicians?
– In 1992 Resource-based relative value scale
(RBRVS)
– A point value for each service (RVU)
• Physician work – time, effort, skill required to furnish
the service (55%)
• Practice expense – separated out for “Facility” and
“non-Facility” (42%)
• Malpractice insurance – varies by specialty (3%)
Paying physicians
• Typical physician service set a value of 1, then everything
else is relative to that:
– a service with 1.6 RVUs is 60% more costly than the
typical service, etc.
• Now all they have to do is set the dollar value for one unit
of service. Conversion Factor
– In 2015 it is $35.7547
• CMS Common Procedural Coding System (CPT-4)
SGR
• In 1997 Medicaid switched to a “Sustainable Growth
Rate” when updating the conversion factor
– Target global spending level
• If this year spending is greater, next year the conversion
factor gets reduced to make up the difference
– Over the past 15 years as medical spending
growth greatly exceeded GDP growth…
• Kicked can down the road
• Repeals the SGR and provides stability and 5 years of
payment updates
• Improves the existing fee-for-service system by
rewarding value over volume and ensuring payment
accuracy
• Incentivizes movement to alternative payment models
• Expands the use of Medicare data for transparency and
quality improvement
Risk and The Economics of Information
Moral Hazard in the Market
Price of Care
Supply
Without Insurance:
$100*3=$300 expenditure
$150
$100
With insurance: $150*5=$750
expenditure
3
5
Quantity of Medical Care
Why do we demand insurance?
• Suppose I give you the choice:
1. Get $900 for sure
2. A 90% chance at $1,001 and a 10% chance at
nothing
•
Now lets say you face the following
1. Lose $900 for sure
2. A 90% of losing $1,001 and a 10% chance of
nothing
Risk and Preferences
High
Probability
Event
Gains
Losses
95% to win $10,000
Fear of disappointment
RISK AVERSE
Accept unfavorable settlement
95% chance to lose 10,000
Hope to avoid loss
RISK SEEKING
Reject favorable settlement
Desperate gamble
Low Probability
Event
5% chance to win $10,000
Hope of Large Gain
RISK SEEKING
Reject Favorable Settlement
Lottery Tickets
5% chance to lose $10,000
Fear of large loss
RISK AVERSE
Accept unfavorable settlement
Insurance Markets
Risk Aversion
• Suppose you have a 5% chance of incurring a 10,000
loss in a given year.
• You are offered insurance against this loss. For a
$500 annual premium.
• Would you pay more than $500?
• On average I will lose $10,000*.05=$500 per year
Risk Aversion
• $500 is what is known as the actuarially fair premium
• A risk averse individual would be willing to pay more than
this
• The insurance company needs a price of at least $500 to
cover the cost of payouts
• Health insurance markets exist because individuals are
risk averse enough to be willing to pay more in premiums
than the cost of their coverage
Risk and Insurance
• These are relatively rare but expensive events.
• Consumers are willing to pay a premium to avoid the risk
• Insurance companies pool large groups of individuals
together which eliminates (or greatly reduces) the risk
• You can think of insurance companies taking your risk in
exchange for a fee.
An Alternative View
• Instead of a mechanism to reduce risk an alternative view of
insurance can be as a financing mechanism
• Health care is expensive. Even if I knew that in the next few years I
was going to need heart surgery I could not pay for it no matter how
well I planned.
• But since it is a relative unlikely event, it will only occur to a small
fraction of the population.
• So insurance transfers money from healthy people to the sick and
enables them to pay for highly valuable services
Experience vs. Community Rating
• Unlike life or auto insurance, health insurance tends to use community
rating over experience rating.
• Why?
• Experience rating tends to reduce moral hazard and focuses on individual
risk
• Community rating creates an externality and encourages over-use, but
lowers costs for the sick
• Employer wellness programs and other tools are now being implemented
to move away from pure community rating
• But it is a slippery slope
Too Much Insurance?
• Is insurance too generous?
• Car insurance does not pay for routine maintenance
• It does not pay if you blow your engine because it ran out of oil
• It covers the risk of an accident
• Yet health insurance tends to pay for the routine things, why?
– Tax treatment encourages generous insurance
– Easier to distinguish accidents from routine for autos than for
health
– Fairness/ethical issues
Economics of Information
• Uncertainty creates the market for insurance, which can
cause a market distortion.
• Another issue arises when there is asymmetric
information
• If the individual knows more about their health needs
than the insurance company then problems can arise.
• This is known as Adverse Selection
Adverse Selection
Probability
1/n
Spending
$0
$100
$200
$300
$400
Adverse Selection
Probability
1/.5n
Spending
$0
$200
$300
$400
Adverse Selection
Probability
1/.25n
Spending
$0
$200
$300
$400
Adverse Selection
Probability
1
Spending
$0
$200
$300
$400
Adverse Selection
• The bad tends to push the good out of the market
• Solution requires a way to compel the healthy to
participate
– Employer-provided insurance
– Insurance mandate
– Medicare
– Medicare Part D
• Or move to experience rating
– Individual prices
Adverse Selection
• It doesn’t always have to result in full market failure
• Let’s look at it in a little more detail
Adverse Selection in Insurance
$
Demand
MC
P
AC
Minimum Price
needed to insure
everyone
Qeq
Qmax
Adverse Selection in Insurance
$
Demand
MC
P
AC
Qeq
Qmax
Special Case – if people are very risk
averse
$
Demand
MC
AC
P
Qmax
Special Case 2: now what happens?
$
Demand
AC
MC
Minimum Price
needed to insure
everyone
P
The market fails completely – Death Spiral
Qmax
Adverse Selection
• Even with adverse selection, the market could still function – though
not necessarily efficiently
• But a “death spiral” is possible
• The more risk averse the population is, the less adverse selection
will occur
• Young invincibles – tend to be both below average users and less
risk averse
• Lowering admin costs improves efficiency of market – Shifts costs
curves downward
King vs Burwell
• “through an exchange established by the state”
• What happens if people in these states lose their subsidy?
Under a “normal” market:
Demand
Supply
Price and quantity both
fall, depending on
elasticity of supply
p1
Q1
But insurance is not normal!
$
Now Q falls but Price
RISES
Demand
P
Qeq
Qmax
The Principal-Agent Problem
• There is a principal who has some objective and they hire an agent
• The agents is supposed to represent the principal’s interest
• But a problem arises if the agents do not have the same incentive as
the principal
• The Principal-Agent problem occurs when agents pursue some of
their own objectives in conflict with achieving the goals of the
principal.
• Generally this requires asymmetric information – or high monitoring
costs
Where do we see the principal-agent
problem?
• Babysitters
– parents are the principal, babysitters are the
agents
• Employer-employee relationships
– Piece rate pay
– stock options
– tiered compensation
• Why do earnings rise with tenure?
Where do we see it in healthcare?
• Patients are the principal
– They don’t understand healthcare, medicine, the
healthcare system
– They need help
• They hire the physician to be their agent
– Relationship of trust
• Why has the hospital and physician historically been
separate?
• Does the agent act in the best interest of the principal?
The Shopping Problem
• The consumer needs a “shopper”
• Health care is an “experience” good
• Marcus Welby Medicine
– The perfect agent physician chooses as the
patients themselves would choose if the patients
had the same information the physician does.
The shopping problem and physicianinduced demand
1.
Insurance tends to shield the consumer from price sensitivity. The
consumer inefficiently produces health. “I want it all”
2.
Patients tend to rely on the providers when deciding how much to
“shop"
3.
Payers worrying about moral hazard tend to pay more for “doing
things” rather than talking.
–
–
4.
Acute care vs. chronic care
behavioral health vs. physical
Suppliers have incentive to do more based on 1 and 2 above as
well as legal concerns.
Solutions to the shopping problem?
• In the managed care era – the payer became shopper
• HD/HSA – the consumer becomes the shopper
• Who is the shopper in an ACO?
• Direct Primary Care
Jigsaw Exercise – Round 1
Group1
• Aashini Anna Beatrice
• Brin Caroline Thomas
Group2
• Christian Christina Dolapo
• Elle Emily Shawntae
Group 3
• Gopal Hugh Jessica
• Justin Katherine Sarah
• Mr. Hornbeak
Group 4
• Livia Mariah Patrick
• Rebecca Ryan Mr. Hupfeld
Jigsaw Exercise – Round 2
Group 1
• Aashini Christian Gopal
• Livia Thomas
Group 2
• Anna Christina Hugh
• Mariah Mr. Hornbeak
Group 3
• Beatrice Dolapo Jessica
• Patrick Shawntae
Group 4
• Brin Elle Justin
• Rebecca Sarah
Group 5
• Caroline Emily Katherine
• Ryan Mr. Hupfeld