Financing Systems Part 2
Social and Private Insurance
Unit 7
Outline
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•
•
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1) Multiple purposes of insurance
2) Private systems and “experience rating”
3) Methods to control over utilization
4) Varieties of public insurance
– Providers on payroll
– Contracting in
– Contracting out
Part 1: Multiple purposes of insurance
Multiple Purposes of Insurance?
• For Society
– Move money from the healthy to the sick
– Move money from the rich to the poor
• For Individual
– To be able to afford health care at all-thanks to the
cross subsidies engineered into the system
– Make smooth predictable payments with certainty
instead of chaotic unpredictable and possibly large
payments
• Called “consumption smoothing”
Why insurance is good
• Consider 2 income streams: A and B
A
Time
• People prefer B over A
49
45
41
37
33
29
25
21
17
13
9
B
5
100
80
60
40
20
0
-20
-40
-60
1
Income
Two Income Streams with Same Mean
Different Variances
Old forms of insurance persist
• All of the following insurance forms continue to co-exist
because they fill important niches in our lives
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–
–
–
–
–
Family
Kin
Village
Church
State
Formal
• Formal and state insurance systems can crowd out
family and kin in taking care of us during shocks
– Alienation of modern life
What Should be the Relative
Coverage of Different Services?
•
•
•
•
Prevention
Plastic surgery
Emergency care
Cancer treatment
• Depends on how you answer “What is the
purpose of insurance?”
Part 2: Experience or Community Rating
Advantages of Community Rating
• Controls adverse selection
• Enforces subsidies from the healthy to the
sick
• Lower loading costs because no need to
spend money cherry picking
Disadvantages of community rating
• The healthy people could get cheaper
insurance
– People who try to stay healthy pay the same
rates as people who don’t take care of
themselves
• Some insurance companies prefer the
high profits they can make if they cherry
pick
Experience Rating
• Advantages
– Savings for the healthy
– Incentives for people
to stay healthy to get
cheaper premiums
– Profits for some
companies
• Disadvantages
– Higher spending for
the sick
– Premiums can
become unaffordable
for the sick
– Adverse selection can
destroy the insurance
market
Part 3: Methods to Control Moral Hazard
Co-Payments
• If patients have to pay a portion of their
fees that can lower the amount of moral
hazard
• Co-payments can help control utilization
Disadvantages of Co-Pays
• Depends on which type of care people
give up as they have to pay more
– Patients may not know what type of care is
worthwhile and what type is not
– The co-payments may discourage them from
seeking important and vital services
• RAND Health Insurance Experiment
suggests that people forego both less and
more valuable care
Capitation to control moral hazard
• Definition of capitation: Under capitation
the provider is paid a flat amount for every
patient in their practice regardless of how
sick they become
• Capitated providers will try to restrain a
patient’s utilization to save money
Disadvantages of capitation
• With capitation the provider and the
patient are in conflict
– The patient wants “insured” services and
requests them
– The provider withholds services
• Anticipating these clashes can make
patients prefer non-capitated providers
Part 4: Varieties of Public Insurance
Options for Public Systems
• Staff Model
– Most common approach around the world
– Public sector hires doctors and pays them a flat
salary out of Ministry of Health funds
• Contracting in
– Performance incentives (bonuses) to salaried
government health workers
• Contracting out
– Public sector makes an offer to private providers for
services (with performance incentives)
Staff Models
• Administratively simplest
– Don’t need to measure performance
– Don’t need to administer bonuses
• Centralized collection of revenue and
payroll at center
• Easy to inject donor funds at center
Disadvantages of Staff Models
• Provider incentives similar to the capitated
systems
• Providers don’t get more pay for working
harder or providing quality
Contracting In
• Improves incentive structure for salaried
providers
• Requires financing for honest supervisors
to check performance
• Improved quality does not come free
Contracting Out
• Public sector collects tax revenue and
uses it to insure special groups for the
care they receive from private providers
– The insurance executives can be public
employees or private insurers too
Government
Tax Authority
Plan A) Private companies
Administer the insurance
payments
Plan B) Public Sector
administers the insurance
payments
Private
Providers
Contracting Out
• Appropriate when private sector is too big
to ignore
– Need to have the ability to monitor the
providers
– Tasks that are monitored need to be simple
enough to monitor
• Preserves heterogeneity of the providers
in the system
Disadvantages of Contracting Out
• Concerns about sustainability
– Contracts could alter how much they compete
– Contracts may be based on non-sustainable
outside funding
• Concerns about adequate monitoring
Summary
• Purposes of insurance
– Conflict between social goals and private
goals
• Experience rating vs. community rating
– Advantages and disadvantages
• Solutions for moral hazard
• Interface between public finance and
private medical care