chapter 11: the private health insurance industry health economics

Chapter 11: The Private Health Insurance Industry

Health Economics

OutlineOutline

Industry structure. Industry conduct. Industry performance.

Health Insurance Industry Health Insurance Industry StructureStructure

The CompetitorsThe Competitors

Market exhibits perfect competition - large # of Market exhibits perfect competition - large # of health insurance companies of different types.health insurance companies of different types.Commercial (for-profit) Commercial (for-profit) BCBSBCBSHMO’sHMO’sSelf-insured companiesSelf-insured companies


Types of Private Health Insurers and Number of Types of Private Health Insurers and Number of Enrollees (million)Enrollees (million)

19941994 19951995Total private insuranceTotal private insurance 182.2182.2 185.3185.3Insurance companiesInsurance companies 75.8 75.8 76.6 76.6

Group policiesGroup policies 82.4 82.4 83.3 83.3Fully insuredFully insured 37.1 37.1ASOASO 39.9 39.9MPPMPP 6.3 6.3

Individual/family policiesIndividual/family policies 7.0 7.0 7.0 7.0Blue Cross/Blue ShieldBlue Cross/Blue Shield 65.2 65.2 65.6 65.6 Self-insuredSelf-insured 112.9 112.9 61.0 61.0HMOHMO 59.1 59.1

Blue Cross /Blue ShieldBlue Cross /Blue Shield 8.8 8.8Insurance CompaniesInsurance Companies 8.5 8.5IndependentIndependent 41.8 41.8


Persons with Private Health Insurance Coverage, Persons with Private Health Insurance Coverage, Selected Years, 1950-1995Selected Years, 1950-1995

Year Year Number (millions)Number (millions) % of Population% of Population

19501950 76.676.6 50.3%50.3%19601960 122.5 122.5 67.867.819701970 158.8158.8 77.477.419801980 187.4187.4 82.382.319901990 181.7181.7 72.772.719951995 185.3185.3 70.570.5

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


1.1. Commercial Health Insurers Commercial Health Insurers > 500 in operation, most national or regional in scope> 500 in operation, most national or regional in scope

19961996 Total accident & health Total accident & health premiumpremium

1. Prudential1. Prudential $9b$9b2. Metropolitan2. Metropolitan3. CIGNA3. CIGNA4. Aetna4. Aetna5. The Principal Fin. Group5. The Principal Fin. Group6. John Hancock6. John Hancock7. AFLAC, Inc.7. AFLAC, Inc.8 Guardian8 Guardian9. Mutual of Omaha9. Mutual of Omaha10. Anthem10. Anthem

• 1992 4-firm concentration ratio : 22% premium

• < 40%, which defines mild oligopoly


2. 2. Blue Cross Blue Shield Blue Cross Blue Shield 52 in 1998, organized regionally as not-for-profits. 52 in 1998, organized regionally as not-for-profits.

tend not to compete with each other.tend not to compete with each other.

Often exempt from state property taxes, have Often exempt from state property taxes, have lower premium taxes.lower premium taxes. Can pass on savings to consumers.Can pass on savings to consumers. Higher demand from lower prices alsoHigher demand from lower prices also

market share, so can negotiate discounts with market share, so can negotiate discounts with providers.providers.

Blue Cross - hospital insuranceBlue Cross - hospital insurance Blue Shield - Physician insuranceBlue Shield - Physician insurance


3. 3. “Other” Insurance Plans “Other” Insurance Plans

A. Self-insured plans (large employers)A. Self-insured plans (large employers) Exempt from premium taxes (as high as 2%)Exempt from premium taxes (as high as 2%) Under 1974 Employment Retirement Income Security Under 1974 Employment Retirement Income Security

Act, exempt from state mandate benefits.Act, exempt from state mandate benefits.Type of Self-insured PlanType of Self-insured Plan1) Administrative Services Only (ASO)1) Administrative Services Only (ASO)

Employer establishes self-funded health plan, pays an Employer establishes self-funded health plan, pays an insurance carrier to process claims.insurance carrier to process claims.

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

excessive claims.excessive claims.

1970 : 8.1 m members 1994 : 112.9 members1970 : 8.1 m members 1994 : 112.9 members


3. 3. “Other” Insurance Plans (cont.) “Other” Insurance Plans (cont.)

B. HMOs : 593 in the US, 48m enrollees (c.a. 20% B. HMOs : 593 in the US, 48m enrollees (c.a. 20% of population in 1995)of population in 1995) Penetration varies widely by region (lowest in South, Penetration varies widely by region (lowest in South,

highest in the coasts).highest in the coasts).

HMO providers, 1995HMO providers, 19951) 51% National managed care firms1) 51% National managed care firms2) 13% Blue Cross/Blue Shield2) 13% Blue Cross/Blue Shield3) 36% Independent ownership/sponsorship 3) 36% Independent ownership/sponsorship


Are there economies of scale to insurance provision?Are there economies of scale to insurance provision?

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

1) Evidence from 1) Evidence from cost regressionscost regressions (cross section) (cross section) (Blair et. al. 1975)(Blair et. al. 1975)

OPCOST = .464 - . 0000002P - .0003GI/T + other factors.OPCOST = .464 - . 0000002P - .0003GI/T + other factors. (34.32) (3.152) (19.693)(34.32) (3.152) (19.693)

RR2 2 = .589, N = 307 insurance companies = .589, N = 307 insurance companiesOPCOST = average administrative costsOPCOST = average administrative costs = = total operating costtotal operating cost//health premiums writtenhealth premiums written P = premiums writtenP = premiums written GI/T = GI/T = group insurance premiumsgroup insurance premiums//premium writtenpremium written


Who is the Consumer?Who is the Consumer?

Commercial group insurance premiums unregulated, unlike benefit/premium ratios of individuals.

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

Why?Why?

1) Monopsony buying power1) Monopsony buying power2) Group expert makes informed choices2) Group expert makes informed choices3) In large group, health status uncorrelated with 3) In large group, health status uncorrelated with

employment statusemployment status

Health Insurance Industry Health Insurance Industry ConductConduct

Price ComponentsPrice Components

Premium = E(Benefit) + Admin + Tax + Premium = E(Benefit) + Admin + Tax + ProfitProfit

Loading Fee Ex ante, insurance comp. does not know exact Ex ante, insurance comp. does not know exact

amount of benefits any individual will receive. amount of benefits any individual will receive. E(Benefit) = Ben + eE(Benefit) = Ben + e

Common measure of price : Premium-to-benefit Common measure of price : Premium-to-benefit ratio. ratio.

= 1 += 1 +Admin + tax + profit + eAdmin + tax + profit + ePremiumPremium

BenBen BenBen

Health Insurance Industry Health Insurance Industry Conduct (cont.)Conduct (cont.)

Price competition in 2 forms drives down loading Price competition in 2 forms drives down loading fee.fee.

1) Normal price comp. competes away profits.1) Normal price comp. competes away profits.2) Managed care contains health care costs 2) Managed care contains health care costs

benben

But managed care is costly; e.g. utilization reviewBut managed care is costly; e.g. utilization review admin. Costs loading fee.admin. Costs loading fee.

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


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

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

1993 average family monthly premium for 1993 average family monthly premium for

conventional insurance = $439, vs. $415 for HMO conventional insurance = $439, vs. $415 for HMO insurance.insurance.


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

Regression analyses that control for health status Regression analyses that control for health status differences find no significant difference in premiums differences find no significant difference in premiums between conventional and HMO premium. Why??between conventional and HMO premium. Why?? 1) Admin. costs may outweigh cost saving1) Admin. costs may outweigh cost saving 2) HMO’s may “shadow price”.2) HMO’s may “shadow price”. 3) Lack of consumer price consciousness.3) Lack of consumer price consciousness.

Pricing StrategiesPricing Strategies

Community rating - premium based on risk Community rating - premium based on risk characteristics of entire membership.characteristics of entire membership. Rates for each individual do not vary according to Rates for each individual do not vary according to

health history or health status.health history or health status. Low risk individuals subsidize high-risk individuals.Low risk individuals subsidize high-risk individuals. Disadvantages :Disadvantages : 1) low risk individuals discouraged from purchasing 1) low risk individuals discouraged from purchasing

insurance premium that are too high.insurance premium that are too high.

2) no incentive for individuals to adopt healthy lifestyle. 2) no incentive for individuals to adopt healthy lifestyle.

Pricing Strategies (cont.)Pricing Strategies (cont.)

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

expected medical costs.expected medical costs. Disadvantages :Disadvantages : 1) “unfair” to make sickest pay more 1) “unfair” to make sickest pay more - illness uncontrollable.- illness uncontrollable. 2) encourages “cherry picking”2) encourages “cherry picking”

Non-Price Business StrategiesNon-Price Business Strategies

Cherry-picking and benefit denial.Cherry-picking and benefit denial. Once an insur. comp. sets health insurance Once an insur. comp. sets health insurance

premiums, there is an incentive to keep low-risk premiums, there is an incentive to keep low-risk consumers and exclude high-risk consumers.consumers and exclude high-risk consumers.

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

or, exclude coverage for pre-existing conditions.or, exclude coverage for pre-existing conditions. More problem for individual vs. group policies. More problem for individual vs. group policies.

Non-Price Business Strategies Non-Price Business Strategies (cont.)(cont.)

Limited enrollment period to deal w/ Limited enrollment period to deal w/ adverse adverse selection.selection.

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

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

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

d) Instability -- high adjustment costs for insurers.d) Instability -- high adjustment costs for insurers.

Health Insurance Industry Health Insurance Industry PerformancePerformance

insured indirectly subsidize uninsured health care.insured indirectly subsidize uninsured health care. inefficient vs. planned financing mechanism.inefficient vs. planned financing mechanism.

42.6 m = 15.5% of the population remains 42.6 m = 15.5% of the population remains uninsured.uninsured. young adults, unmarried adults, minorities, part-young adults, unmarried adults, minorities, part-

time & self-employed, poor less likely to be time & self-employed, poor less likely to be insured.insured.

Resulting inefficiencies.Resulting inefficiencies.a) uninsured eventually receive emergency carea) uninsured eventually receive emergency care

Output (Quantity of Health Insurance)

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

Health Insurance Industry Health Insurance Industry Performance Performance (cont.)(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 Health Insurance Industry PerformancePerformance

Price of Private Insurance in the United States, Price of Private Insurance in the United States, Selected Years, 1950-1995Selected Years, 1950-1995

Insurance Companies . Insurance Companies .

Self Insured Blue Cross &Self Insured Blue Cross & Year Total Group Individual and HMOs Blue Shield Year Total Group Individual and HMOs Blue Shield 19501950 $1.62 $1.44 $2.01 --- $1.17 $1.62 $1.44 $2.01 --- $1.171960 1.57 1.23 2.47 ---1960 1.57 1.23 2.47 --- 1.08 1.0819701970 1.26 1.09 2.11 --- 1.26 1.09 2.11 --- 1.04 1.0419801980 1.18 1.12 1.18 1.12 1.73 1.73 $1.07 $1.07 1.03 1.0319901990 1.22 1.19 1.22 1.19 1.55 1.55 1.11 1.11 1.12 1.1219951995 1.22 1.19 1.22 1.19 1.46 1.08 1.13 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 Health Insurance Industry Performance (cont.)Performance (cont.)

Job lock - Health insurance often tied to worker’s Job lock - Health insurance often tied to worker’s job. job. New job may require long waiting period for New job may require long waiting period for

enrollment, no coverage for pre-existing enrollment, no coverage for pre-existing conditions, less generous coverage.conditions, less generous coverage.

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


analogyanalogy : restaurant bill splitting. : restaurant bill splitting.

Over-insurance/Moral Hazard. Over-insurance/Moral Hazard. Definition : Definition : Insured person no longer bears full cost of Insured person no longer bears full cost of

her actions may probability or magnitude of loss her actions may probability or magnitude of loss covered by insurance.covered by insurance.


Causes and Implications :Causes and Implications :

1) 1) Consumer pays coinsurance onlyConsumer pays coinsurance only2) Less incentive to practice healthy lifestyle/preventive 2) Less incentive to practice healthy lifestyle/preventive medicinemedicine3) Greater willingness to experiment w/ new, expensive3) Greater willingness to experiment w/ new, expensive technologiestechnologies4) Less incentive to monitor providers4) Less incentive to monitor providers5) Less incentive to comparison shop5) Less incentive to comparison shop

Practical SolutionPractical Solution : increase copayment, w/ stop-loss : increase copayment, w/ stop-loss

Over-insurance/Moral Hazard (cont.)Over-insurance/Moral Hazard (cont.)

Cost ContainmentCost Containment

Industry has been slow to adopt cost containment.Industry has been slow to adopt cost containment. Tax exemption on employer-sponsored health Tax exemption on employer-sponsored health

insurance reduced consumer’s demand for lower insurance reduced consumer’s demand for lower premiums.premiums.

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

Eliminating tax exemption may help to restrain cost Eliminating tax exemption may help to restrain cost growth.growth.

ConclusionsConclusions 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.

chapter 11: the private health insurance industry health economics

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