Chapter 11: The Private Health Insurance Industry Health Economics

Outline

 Industry structure.

 Industry conduct.

 Industry performance.

Health Insurance Industry Structure

The Competitors  Market exhibits perfect competition - large # of health insurance companies of different types.

 Commercial (for-profit)  BCBS  HMO’s  Self-insured companies

Health Insurance Industry Structure

Types of Private Health Insurers and Number of Enrollees (million) Total private insurance Insurance companies Group policies Fully insured ASO MPP Individual/family policies Blue Cross/Blue Shield Self-insured HMO 1994 182.2

75.8

82.4

7.0

65.2

112.9

1995 185.3

76.6

83.3

37.1

39.9

6.3

7.0

65.6 61.0

59.1

Blue Cross /Blue Shield Insurance Companies Independent 8.8

8.5

41.8

Health Insurance Industry Structure

Persons with Private Health Insurance Coverage, Selected Years, 1950-1995 Year Number (millions) % of Population 1950 1960 1970 1980 1990 1995 76.6

122.5

158.8

187.4

181.7

185.3

50.3% 67.8

77.4

82.3

72.7

70.5

Source : Source Book of Health Insurance Data 1997-1998 , Washington DC : Health Insurance Association of America, Table 2.5

Health Insurance Industry Structure

 1. Commercial Health Insurers > 500 in operation, most national or regional in scope 1996 1. Prudential 2. Metropolitan 3. CIGNA 4. Aetna 5. The Principal Fin. Group 6. John Hancock 7. AFLAC, Inc.

8 Guardian 9. Mutual of Omaha Total accident & health premium $9b • • 1992 4-firm concentration ratio : 22% premium < 40%, which defines mild oligopoly 10. Anthem

Health Insurance Industry Structure

2. Blue Cross Blue Shield  52 in 1998, organized regionally as not-for-profits.  tend not to compete with each other.

 Often exempt from state property taxes, have lower premium taxes.

 Can pass on savings to consumers.

 Higher demand from lower prices also  market share, so can negotiate discounts with providers.

  Blue Cross - hospital insurance Blue Shield - Physician insurance

Health Insurance Industry Structure

3. “Other” Insurance Plans  1970 : 8.1 m members 1994 : 112.9 members A. Self-insured plans (large employers)  Exempt from premium taxes (as high as 2%)  Under 1974 Employment Retirement Income Security Act, exempt from state mandate benefits.

Type of Self-insured Plan 1) Administrative Services Only (ASO)  Employer establishes self-funded health plan, pays an insurance carrier to process claims.

2) Minimum Premium Payment (MPP)  Employer self-funds, but purchases stop-loss insurance for excessive claims.

Health Insurance Industry Structure

3. “Other” Insurance Plans (cont.) B. HMOs : 593 in the US, 48m enrollees (c.a. 20% of population in 1995)  Penetration varies widely by region (lowest in South, highest in the coasts).

 HMO providers, 1995 1) 51% National managed care firms 2) 13% Blue Cross/Blue Shield 3) 36% Independent ownership/sponsorship

Health Insurance Industry Structure

Are there economies of scale to insurance provision?

1) Evidence from cost regressions (cross section) (Blair et. al. 1975) OPCOST = .464 - . 0000002P - .0003GI/T + other factors.

(34.32) (3.152) (19.693) R 2 = .589, N = 307 insurance companies OPCOST = average administrative costs =

total operating cost

/

health premiums written

P = premiums written GI/T =

group insurance premiums

/

premium written

•Coefficient on P : economies of scale •Coefficient on GI/T : lower admin. cost for group policies

Health Insurance Industry Structure

Who is the Consumer?

Majority of commercial insurance purchased by groups. (e.g. employers or union representatives).

Why?

1) Monopsony buying power 2) Group expert makes informed choices 3) In large group, health status uncorrelated with employment status  Commercial group insurance premiums unregulated, unlike benefit/premium ratios of individuals.

Health Insurance Industry Conduct

Price Components Premium = E(Benefit) + Admin + Tax + Profit

Loading Fee

 Ex ante, insurance comp. does not know exact amount of benefits any individual will receive.  E(Benefit) = Ben + e  Common measure of price : Premium-to-benefit ratio. Premium = 1 + Admin + tax + profit + e Ben Ben

Health Insurance Industry Conduct (cont.)

 Price competition in 2 forms drives down loading fee.

1) Normal price comp. competes away profits.

2) Managed care contains health care costs  ben  But managed care is costly; e.g. utilization review  admin. Costs loading fee.

 Price competition forces insurer to balance marginal cost saving vs. marginal admin. costs.

Health Insurance Industry Conduct (cont.)

 Do managed care organizations (MCOs) actually lower health insurance premiums?

 MCOs, especially HMOs, lower medical costs 15 20% through medical costs.

 1993 average family monthly premium for conventional insurance = $439, vs. $415 for HMO insurance.

Health Insurance Industry Conduct (cont.)

 However, the higher monthly premiums for conventional insurance may just reflect the decision of sicker individuals to buy more generous insurance policies.

 Regression analyses that control for health status differences find no significant difference in premiums between conventional and HMO premium. Why??

1) Admin. costs may outweigh cost saving 2) HMO’s may “shadow price”.

3) Lack of consumer price consciousness.

Pricing Strategies

 Community rating - premium based on risk characteristics of entire membership.

 Rates for each individual do not vary according to health history or health status.

 Low risk individuals subsidize high-risk individuals.

 Disadvantages : 1) low risk individuals discouraged from purchasing insurance premium that are too high.

2) no incentive for individuals to adopt healthy lifestyle.

Pricing Strategies (cont.)

 Experience rating - premiums for individuals (or groups of individuals) vary by risk status (e.g. age, gender, industrial occupation, prior illness).

 Individuals or groups of individuals pay price closer to expected medical costs.

 Disadvantages : 1) “unfair” to make sickest pay more - illness uncontrollable.

2) encourages “cherry picking”

Non-Price Business Strategies

 Cherry-picking and benefit denial.

 Once an insur. comp. sets health insurance premiums, there is an incentive to keep low-risk consumers and exclude high-risk consumers.

e.g. demand even higher premiums for patients w/ chronic health problems or high-risk conditions (e.g. hypertension, diabetes) or, exclude coverage for pre-existing conditions.

 More problem for individual vs. group policies.

Non-Price Business Strategies (cont.)

 Limited enrollment period to deal w/ adverse selection.

a) High risk consumers may know more about their own health than insurers.

b) High risk consumers may get into cheaper plans designed for lower risk persons.

c) High cost eventually drives up premiums, until high-risk consumers switch to next cheaper plan.

d) Instability -- high adjustment costs for insurers.

Health Insurance Industry Performance

Output (Quantity of Health Insurance)  42.6 m = 15.5% of the population remains uninsured.

young adults, unmarried adults, minorities, part time & self-employed, poor less likely to be insured.

 Resulting inefficiencies.

a) uninsured eventually receive emergency care   insured indirectly subsidize uninsured health care.

inefficient vs. planned financing mechanism.

b) uninsured may “wait too long” for care, when earlier treatment may have been cheaper.

Health Insurance Industry Performance

(cont.)

 One measure of the health insurance “price” is the amount of premiums the insurance company receives, divided by the amount of medical benefits paid out.

 Using this measure, the relative “price” of health insurance has declined over time.

 The overall price hasn’t fallen, because medical care expenditures are rising dramatically.

Health Insurance Industry Performance

Price of Private Insurance in the United States, Selected Years, 1950-1995 Insurance Companies . Self Insured Blue Cross & Year Total Group Individual and HMOs Blue Shield 1950 $1.62 $1.44 $2.01 -- $1.17

1960 1.57 1.23 2.47 -- 1970 1980 1.26 1.09 2.11 -- 1.18 1.12

1.73

$1.07

1990 1995 1.22 1.19

1.22 1.19

1.08

1.04

1.03

1.55

1.11

1.12

1.46 1.08 1.13

Source : Source Book of Health Insurance Data 1997-1998 , Washington DC : Health Insurance Association of America, Table 2.5

Health Insurance Industry Performance (cont.)

 Job lock Health insurance often tied to worker’s job.  New job may require long waiting period for enrollment, no coverage for pre-existing conditions, less generous coverage.

 Cooper & Monheit (1993) - Married men who expect to lose health insurance 23% less likely to change jobs.

Health Insurance Industry Performance (cont.)

 Over-insurance/Moral Hazard. Definition : Insured person no longer bears full cost of her actions may probability or magnitude of loss covered by insurance.

analogy : restaurant bill splitting.

Health Insurance Industry Performance (cont.)

 Over-insurance/Moral Hazard (cont.) Causes and Implications : 1) Consumer pays coinsurance only 2) Less incentive to practice healthy lifestyle/preventive medicine 3) Greater willingness to experiment w/ new, expensive technologies 4) Less incentive to monitor providers 5) Less incentive to comparison shop Practical Solution : increase copayment, w/ stop-loss

Cost Containment

 Industry has been slow to adopt cost containment.

 Tax exemption on employer-sponsored health insurance reduced consumer’s demand for lower premiums.

 Health insurance also used by employers as a symbol of their generosity.

 Eliminating tax exemption may help to restrain cost growth.

Conclusions

 The health insurance industry is structurally competitive.

 However, price and non-price strategies still lead to disparities in access to appropriately priced health insurance.

 The cost of health insurance continues to rise.

 In part due to rising costs of medical care.

 But also due to moral hazard problems.