Lecture 6 - 9/21/99

Price of Insurance

R=(1+L d )(1-c) p_m M

The load is much smaller for large groups(pp. 346, Phelps). Groups

>1,000 5 to 8%, small groups, 30-40%, individual policies 60-80%

Magnitude of Loss has Correlates

• Price of medical services
• Person's health status (age, etc.)
• Other factors that affect person's health utilization when sick

Price and Income Elasticities of Demand for Private Health Insurance

• Difficulties in measuring effects of price on demand for private health insurance
• Price elasticities: Aggregate data using variation in marginal tax rates yields -1.5 to -2.0 elasticity; estimates based on size of employer groups yields elasticity of about ---1.0; estimates based on household data in a cross section yields elas. about -0.2.
• Income elasticities: +1.0 to +2.0 (aggregate data)

Determinants of Demand for Insurance

• Characteristics of service. More demand for service to be covered if (1) probability of loss in mid-range, (2) possible expenditure loss high, (3) price elasticity of demand for service is low
• Adverse selection (expected use of service)
• Loading
• Tax subsidy (varies with marginal tax rate)

Family income (wealth)

--effect on demand for service (Engel curve)

--effect on marginal tax rate

--effect on availability of Medicaid

--effect on degree of risk aversion

--association with having a job providing insurance coverage

Welfare Loss (or Gain) from Increasing Insurance Coverage

• Two offsetting sources of welfare gain: (1) utility gain from reduction in expenditure risk; and (2) welfare loss from excessive consumption (use) of services due to moral hazard
• See graphs
• Marttin Feldstein (1973) computed "welfare loss due to excess health insurance."  Found second component greatly outweighed first
• Note that welfare loss is higher, cet. par., for those services that are price elastic, e.g., dental, mental
• Explains why coverage for such services has been slower to emerge

Analysis of Tax Subsidy of Employer-Provided Health Insurance

• Defects: (1) inefficient; (2) regressive Why?
• Advantage: by stimulating coverages, tax subsidy provides risk reduction
• Alternative is to (1) fully tax employer-provided insurance or partially tax employer-provided insurance via a tax cap and (2) implement refundable tax credit
• Problem with tax credit: heterogeneity necessitating risk adjustment

Health Insurance Supply - Chapter 11

Role of Insurers

• Enrolling
• Claims Processing
• Risk-bearing
• Loss prevention

Loading Includes

• Administrative cost
• Hedge on adverse selection, moral hazard
• Return on capital (profit)
• Less earnings on investments
• (Concept of nondiversifiable risk)

Ownership Forms

• Not for profit: exempt from taxation, regulatory differences (underwriting practices, restricted to one state, not able to raise external equity capita).  Who owns?
• Stock companies
• Mutual companies
• Trends in ownership conversions and reasons (equity capital, scale economies, private inurement)

Alphabet Soup of Private Health Insurance (See Iglehart)

• Commercial insurers
• Blue Cross/Blue Shield
• Service benefits
• Indemnity coverage
• Community rating
• Experience rating
• State coverage mandates
• ERISA (Empl. Retirement Income Security Act) and growth of self-insured plans