ECON 440 Lecture Notes - Lecture 12: Moral Hazard, Risk Aversion, Standard Deviation
13 Jun 2018
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Department
Course
Professor
There exist overuse, underuse, and misuse of health care services
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Common way of measuring the quality now, and improved quality, is linked to the structure vs outcome
framework
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What is low/high quality health care?
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Usually the market creates incentives for suppliers to produce higher quality goods and services;
they're rewarded by greater demand
▪
e.g., why doesn't high quality care exist naturally?
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Demand doesn't shift in the same way
▪
Insurers, in some contexts, have been reluctant to push providers for higher quality; there's this
normative/historical resistance to public reporting on whether certain providers are good or bad
▪
This doesn't happen in the healthcare context in the same way
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The health industry doesn't want to defend why their facilities are low quality
▪
Why is this a sensitive topic?
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i.e., the patients are important inputs
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e.g., One center may have a higher mortality rate than another because they see specialty/high risk
patients
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Additionally, the quality providers produce doesn't depend solely on the provider, but on the patients as
well
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What are quality problems; why do they exist?
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Often we see policy interventions that target both the demand and the supply side of the market
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Demand side - quality improvement efforts that target patients
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Supply side - targeting of the quality of suppliers of healthcare services as well
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Strength and weaknesses?
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This may range across a structure vs. outcome framework
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Ongoing challenges?
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What efforts exist to improve quality?
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Last Class
Why?
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Expected value/utility, MU of wealth, risk aversion
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Expected Utility Model
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How is insurance priced?
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How do we calculate a premium, and why are people willing to buy insurance?
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Actuarially-fair premiums
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Gain from health insurance
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Demand for health insurance
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What is it?
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How much health insurance changes a person's behavior?
What's the problem?
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Moral Hazard
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This is the tradeoff we're always trying to navigate - protecting people from risk and avoiding moral hazard
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The First Fundamental Tradeoff in Health Economics
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Outline
People get HI to protect against the negative consequences of uncertain outcomes, i.e., things that
might happen that aren't certain, that would have negative consequences
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e.g., weighing the probability that you'll need medical care in the next year - do you buy insurance
(how much it would cost the HC system to provide you with care) or risk that you need medical care,
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Uncertain (random illness and injury - who and when)
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Medical care expenditures are:
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Why Insurance?
Lecture 12 - Demand for Health Insurance and Moral
Hazard
Monday, February 19, 2018
10:02 AM
ECON 440 Page 1
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This is uncertain - there's a random chance that it will happen, or even if you need it, how much
it will cost is uncertain
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(how much it would cost the HC system to provide you with care) or risk that you need medical care,
and whatever its expenditures might be?
The variance in costs is quite large; there's a high chance that it will be low, but a small chance costs
will be very high
▪
Variable (can be very expensive)
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Many people spend nothing in a given year while a small portion have very high expenditures
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Right-skewed (long right-tail)
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In the absence of having insurance, you could borrow money when you need it (if you end up in the
hospital you could ask for a loan)
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Borrow?
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You can save now, for the possibility that you might have those expenditures (limiting present
consumption), or insure yourself
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Save?
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You could spend money today to protect yourself in the future
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Insure?
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What to do?
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A small number of people drive the bulk of medical care expenditures
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Many people spend nothing or very little
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It's uncertain where you'll fall on this distribution
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Percent of Total Health Care Expenses Incurred by Different %tiles of US Population
Health Care Costs
ECON 440 Page 2
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Even among an older, sicker population, there's still a smaller % who are hospitalized
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Average expenditures can be quite low, because there are a lot of people with no use, but few
individuals with high use
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The minimums and maximums are drastic, though - and individual can spend up to 200K in a given
year, or 16K just seeing their GP
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Looking at the mean, only 1k is spent on average across everybody
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And, the standard deviation relative to the means is quite large
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This uncertainty motivates us to purchase insurance!!
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In this context, a person needing medical care
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"loss" - when the insurer has to pay out benefits
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Spreading risk!
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Insurance is an entity that pools risk in a population - insurance companies want to see that they have a
large number of people in the insurance pool
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e.g., disaster insurance - natural disasters can affect a lot of individuals at once; so, if insurers are
charging people based on any individual household experiencing a loss, they have to pay out a lot
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They also want to know that the risk of a health event across individuals in an insurance pool are
independent
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Number insured is large, with independent risks of loss
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The insurer also likes to know (with a fair degree of certainty), the probability that the individual will need
care
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Probability of a loss is known, at least for the population (law of large numbers)
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It's easy for the insurer to delineate clearly what a loss/health event/expenditures are, in terms of when and
where it happens and how much the cost is
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If the homeowner experiences a loss, they receive an estimate for repair, and they can submit this to
the insurer (and the insurer pays them money)
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The insurer is not involved in the reparations, simply the transfer of funds
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Indemnity insurance
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Losses are definite: in place, time, and amount
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e.g., if someone dies by suicide, life insurance benefits aren't paid out
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Finally, insurers prefer that the type of care provided isn't under the control of the individual (i.e. individuals
don't have control over whether they claim benefits to the insurer or not)
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Loss is accidental from the point of view of the insured individual
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Ideal Context for Insurance
Transfers money from the health to the sick (within and across people)
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As we collect and finance the HI system, we collect money and transfer it to the people who need medical
It spreads financial risk
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What Does Insurance Do?
ECON 440 Page 3
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Document Summary
Lecture 12 - demand for health insurance and moral. There exist overuse, underuse, and misuse of health care services. Common way of measuring the quality now, and improved quality, is linked to the structure vs outcome framework. Usually the market creates incentives for suppliers to produce higher quality goods and services; they"re rewarded by greater demand. This doesn"t happen in the healthcare context in the same way. Insurers, in some contexts, have been reluctant to push providers for higher quality; there"s this normative/historical resistance to public reporting on whether certain providers are good or bad. The health industry doesn"t want to defend why their facilities are low quality. Often we see policy interventions that target both the demand and the supply side of the market. Demand side - quality improvement efforts that target patients. Supply side - targeting of the quality of suppliers of healthcare services as well. This may range across a structure vs. outcome framework.
