What is ‘Managed Care’?

• A ‘type’ of health insurance– combines both the financing of care (insurance)

with the provision of care– variations in MC plans stem from the multiple

choices of financing and provision

• Best understood by comparing to indemnity or ‘FFS’ insurance

Fee-for-Service v. MC Insurance• Traditional Insurance

in U.S. (1930s)• “One ill, one pill, one

bill”• Historically focussed

on financing of medical care, NOT care delivery and management

• Provider choice NOT restricted

• Has existed for a long time but growth has been recent (since 1985)

• Restricts provider choice (hospitals and physicians)

• ‘Manages Care’• Expanded benefit

coverage (e.g. preventive care)

Why Buy Health Insurance?

• Provides no direct ‘utility’ to consumer– unlike a car, stereo, vacation or restaurant meal

• Utility of Health Insurance is ‘indirect’– consumers prefer to spend money on

goods/services

– medical care provides ‘utility when used’• preventive and wellness care (desired)

• medical or surgical care (undesired)

– insurance pays for medical care

Difference Between Health Insurance and Other Types of

InsuranceType Coverage Benefits

Auto Accidents $

Home Fire $

Life Death $

Disability Serious Injury $

Health WellnessSickness

$Health Care

Why Buy Insurance Instead of ‘Self Insuring’ (Pay Direct)?

• Expenditures can be significant – rebuilding a home– making up for lost income– having knee surgery to repair a torn ACL

• Uncertainty– can’t predict the future– insurance is only possible when uncertainty exists– numerous events are possible in the world

Uncertainty

• Uncertainty means there is some positive probability of experiencing an event– torn ACL– pregnancy– cancer– auto accident– home fire– airline crash

Buying Insurance v. Self Insuring

Taking the Gamble• Taking the Risk

– Income = $30,000

– Injury costs $10,000

– Income if injury occurs = $20,000

– Income if injury does not occur = $30,000

Buying Insurance• Give up $ (premium)

to reduce or avoid uncertainty– Income = $30,000

– Injury costs $10,000

– Insurance costs $2,000

– Income after buying insurance = $28,000

Risk Aversion

• Risk averse individuals prefer to forego a bit of $ in order to reduce risk and financial exposure and to increase uncertainty– if this were not the case the insurance industry

would not be so large

• The amount of $ one is willing to pay for insurance depends on how risk averse one is – more risk averse persons will pay more– less risk averse people will pay less

Statistical Concepts Used Throughout Course

• Probability - the relative frequency with which an event occur; the likelihood that an event will occur– probability of a ‘head’ on a coin flip is 0.5

• Gamble - an uncertain situation– the probability of an event is <1

Statistical Concepts Used Throughout Course

• Expected Value - The average outcome of a ‘gamble’.– equal to the sum of the probabilities of events

multiplied by the value of the outcomes of events

• Example– buy church lottery ticket for $1– 1/1000 will win $500– 999/1000 will lose $1

Statistical Concepts Used Throughout Course

• Expected Value Calculation– EV = 0.001($499) + 0.999($-1) = -$0.50

• Actuarially Unfair Gamble– lose money on average (EV < 0)

• Actuarially Fair Gamble– break even on average (EV=0)

Actuarially Fair Insurance• Cost of insurance policy is equal to the expected

value

• Insurance companies could not exist if they sold actuarially fair insurance policies– would not cover administrative costs– would not earn a profit

• Consumers WILL buy actuarially unfair policies– consumers will pay a bit above the actuarially fair

premium bc they are risk averse

Health Insurance in the USSource: 1997 MEPS

• Sources of Health Insurance– Private Insurance

• Employment based insurance

• Individually purchased insurance policies

– Public Insurance• Medicaid [poor (AFDC), poor elderly]

• Medicare [seniors ages 65+, disabled <65]

• Children (CHIP programs)

– Uninsured• about 45 million or 16% of US population

Insurance Characteristics of the US Population

Source: 1997 MEPS

Population Private Public Only

Uninsured

US Total 68.1% 15.1% 16.8%

<65 69.2% 11.9% 18.9%

>65 60.5% 38.4% 1.0%

Insurance Characteristics of the US Population

Source: 1997 MEPS

Population Private Public Only

Uninsured

Employed 78.3% 4.2% 17.5%

NotEmployed

53.9% 30.0% 16.1%

Insurance Characteristics of the US Population

Source: 1997 MEPS

Race/Ethnicity % Uninsured

Hispanic 32.9%

Black 21.4%

White 13.2%

Other 20.5%

Insurance Characteristics of the US Population

Source: 1997 MEPS

Marital Status % Uninsured

Married 12.2%

Widowed 6.5%

Divorced 21.2%

Separated 31.9%

Never Married 27.4%

Insurance Characteristics of the US Population

Source: 1997 MEPS

Perceived Health Status

% Uninsured

Excellent 32.4%

Very Good 30.3%

Good 26.8%

Fair 8%

Poor 2.5%

Prevalence of MC: Employment Based Insurance

Source: KPMG 1998

Type 1988 1998

FFS 71% 14%*

POS 0% 22%

PPO 11% 34%

HMO 18% 30%

Asymmetry of Information and Health Insurance Markets

• Asymmetry of Information– when one party to an insurance contract (e.g. the

insurer or the insured) has information that the other party does not.

• Moral Hazard– one has private information about the actions they

take that might mitigate insurance risks (e.g. smoking in bed)

• Adverse (or Favorable) Selection– enrollees are better informed about their health risk

than insurers