Chapter 15

Reform of the Health Care Market

15.1INTRODUCTION

Health reform is a term that has been applied to insurance and health care markets as well as to total constellation of health services.

15.2INSURANCE MARKET REFORM

15.2.1 The need for reform

15.2.2 The basic model

Health insurance market in which there are 7 individuals, each with a degree of risk of being ill. Expected loss for each individual is shown in Table 15-1.

Specify 2 age groups: older than 50 and younger than 50.

Assume cost $1 to supply insurance coverage to large group and $3 to small group. 1 supplier of insurance who knows the risks of each person (information symmetry)

Price for each person = E(loss) + Admin. Cost

15.2.3 Information Asymmetry and Adverse Selection

Assume insurer cannot distinguish between insured in terms of their health status, and therefore charges each insured person same premium. E(cost) = $45 + Admin. Cost (= $11) for all → Insurer must collect $56, or $8/person.

At this premium only 4 will insure. But with 5-7 dropping out of market, Price will ↑ to $9.75 to cover cost of insuring 1-4 → entire market eventually disappears.

15.2.4 Subsidies

Introduce a subsidy of 25% of premium paid by individual. (See Table 15-1). All individuals will purchase insurance.

15.3MANAGED CARE

15.3.1 Introduction

15.3.2 Types of managed care organization

All managed care organizations employ some form of prepayment and some degree of integration of financial risk bearing with health care delivery. Members of an HMO receive care at one of the HMO’s medical office locations, which typically have a number of primary care providers and often some specialty care providers under one roof.

In an independent practice association (IPA), the physicians practice in their own offices as solo practitioners or small groups. Compared with an HMO, an IPA usually offers members a larger number of providers and a larger number of office locations among which to choose from.

A preferred provider organization (PPO) is an arrangement whereby the insurer designates a selected list of providers, including physicians and hospitals. If a patient chooses to seek treatment from providers not on the list, there will still be some insurance coverage but the patient will bear a larger share of the cost.

As the industry evolves, there have grown up various mixed models. The term network model is often applied to these. For example, an HMO might offer care through its own health centers but also from a list of physicians in the community.

15.3.3 Control of Resource Use

Proponents of managed care point to the elimination of unnecessary or low marginal benefit care, the selection of more cost-effective treatment approaches, the encouragement of wellness, and increased access to care through elimination of financial barriers. Critics note the lack of choice of provider and fear that the cost incentives can lead to lower quality care through the elimination or restriction of necessary treatments.

15.3.4 Empirical Evidence: Resource Use, Quality of Care, and Satisfaction

Much early research involved statistical comparisons of hospital admission rates, hospital lengths of stay, or the use of particular expensive procedures between members of an HMO and those of a comparison group with traditional insurance. It was clear that HMO members seemed to use fewer resources than the comparison group. If people joining HMOs were healthier than the population of people with traditional insurance, it would not be possible to conclude that the observed differences in resource utilization represented greater efficiency.

One way to deal with selection bias in research is to eliminate it through random selection (i.e., to use an experimental study design where people are assigned at random to different types of insurance coverage). In the comparison that would best show the HMO effect (i.e., between the HMO group and the traditional insurance with no copayment), there was a clear difference in resource use. Annual hospital admissions (per 100 people) were 8.4 in the HMO group, compared with 13.8 in the traditional insurance group. Annual hospital stays (per 100 people) totaled 49 in the HMO group and 83 in the traditional insurance group (Manning et al. 1984).

Quality of care is another dimension along which managed care and nonmanaged care may differ. Economic incentives to limit resource use could lead HMOs to cut corners, which would lead to a deterioration of quality. On the other hand, lack of financial barriers to early treatment and emphasis on wellness could lead to higher quality in the managed care setting. The results varied widely: may studies found no significant difference, and about as many found higher quality in HMOs as found lower quality.

Enrollee satisfaction as measured by survey responses has also been a subject of research. Most of the evidence on this issue showed a somewhat lower level of overall satisfaction among HMO members than those in fee-for-service plans.