risk and the economics of information. agenda current events risk aversion adverse selection...
TRANSCRIPT
Risk and the Economics of Information
Agenda
• Current Events
• Risk Aversion
• Adverse Selection
• Principal Agent Problem
Exam!!
• Tuesday April 7th
• Midterm question sheet:– 7 total questions
• 70-80% of the test will be from these questions
• The rest will be from short answer questions
• Closed book/notes/internet/text/email/chat/text – just you
and the test
• Can either hand write, or type on your laptop
Bonus Learning
• Mike McBride – April 6th, 4:00pm
• John Haupert – April 9th afternoon
Tenet USPI Baylor Scott & White?
• Tenet – USPI– Tenet and USPI will combine their short-stay
surgery and imaging center assets into a new joint venture.
– more than 200 ambulatory surgery centers, 16 short-stay surgery hospitals, and 20 imaging centers across 29 states—making it the largest ambulatory surgery provider in the country.
– Estimated value of $2.6 billion
Tenet USPI Baylor Scott & White?
• Tenet – Baylor Scott & White– At the same time Tenet and BSW announced a
deal to jointly own 5 Tenet hospitals in North Texas.
– BSW majority owner and will operate under the BSW brand
– Tenet’s ACO also entered into an affiliation agreement with BSW’s Quality Alliance
What is the Sustainable Growth Rate?
• How does Medicare Pay Physicians?– In 1992 Resource-based relative value scale
(RBRVS)– A point value for each service (RVU)• Physician work – time, effort, skill required to furnish
the service (55%)• Practice expense – separated out for “Facility” and
“non-Facility” (42%)• Malpractice insurance – varies by specialty (3%)
Paying physicians
• Typical physician service set a value of 1, then
everything else is relative to that: – a service with 1.6 RVUs is 60% more costly than the
typical service, etc.
• Now all they have to do is set the dollar value for one
unit of service. Conversion Factor– In 2015 it is $35.7547
• CMS Common Procedural Coding System (CPT-4)
SGR
• In 1997 Medicaid switched to a “Sustainable Growth
Rate” when updating the conversion factor– Target global spending level• If this year spending is greater, next year the conversion
factor gets reduced to make up the difference
– Over the past 15 years as medical spending growth greatly exceeded GDP growth…• Kicked can down the road
• Repeals the SGR and provides stability and 5 years of
payment updates
• Improves the existing fee-for-service system by rewarding
value over volume and ensuring payment accuracy
• Incentivizes movement to alternative payment models
• Expands the use of Medicare data for transparency and
quality improvement
Risk and The Economics of Information
Moral Hazard in the Market
Quantity of Medical Care
Price of Care
$100
$150
3 5
Without Insurance: $100*3=$300 expenditure
With insurance: $150*5=$750 expenditure
Supply
Why do we demand insurance?
• Suppose I give you the choice:1. Get $900 for sure2. A 90% chance at $1,001 and a 10% chance at
nothing
• Now lets say you face the following1. Lose $900 for sure2. A 90% of losing $1,001 and a 10% chance of
nothing
Risk and PreferencesGains Losses
High Probability Event
Low Probability Event
Desperate gamble
Lottery TicketsInsurance Markets
95% to win $10,000Fear of disappointment RISK AVERSEAccept unfavorable settlement
95% chance to lose 10,000Hope to avoid lossRISK SEEKINGReject favorable settlement
5% chance to win $10,000Hope of Large GainRISK SEEKINGReject Favorable Settlement
5% chance to lose $10,000Fear of large lossRISK AVERSEAccept unfavorable settlement
Risk Aversion
• Suppose you have a 5% chance of incurring a 10,000
loss in a given year.
• You are offered insurance against this loss. For a
$500 annual premium.
• Would you pay more than $500?
• On average I will lose $10,000*.05=$500 per year
Risk Aversion
• $500 is what is known as the actuarially fair premium
• A risk averse individual would be willing to pay more than this
• The insurance company needs a price of at least $500 to
cover the cost of payouts
• Health insurance markets exist because individuals are risk
averse enough to be willing to pay more in premiums than
the cost of their coverage
Risk and Insurance
• These are relatively rare but expensive events.
• Consumers are willing to pay a premium to avoid the risk
• Insurance companies pool large groups of individuals
together which eliminates (or greatly reduces) the risk
• You can think of insurance companies taking your risk in
exchange for a fee.
An Alternative View
• Instead of a mechanism to reduce risk an alternative view of insurance
can be as a financing mechanism
• Health care is expensive. Even if I knew that in the next few years I
was going to need heart surgery I could not pay for it no matter how
well I planned.
• But since it is a relative unlikely event, it will only occur to a small
fraction of the population.
• So insurance transfers money from healthy people to the sick and
enables them to pay for highly valuable services
Experience vs. Community Rating
• Unlike life or auto insurance, health insurance tends to use community rating
over experience rating.
• Why?
• Experience rating tends to reduce moral hazard and focuses on individual risk
• Community rating creates an externality and encourages over-use, but lowers
costs for the sick
• Employer wellness programs and other tools are now being implemented to
move away from pure community rating
• But it is a slippery slope
Too Much Insurance?
• Is insurance too generous?
• Car insurance does not pay for routine maintenance
• It does not pay if you blow your engine because it ran out of oil
• It covers the risk of an accident
• Yet health insurance tends to pay for the routine things, why?– Tax treatment encourages generous insurance– Easier to distinguish accidents from routine for autos than for
health– Fairness/ethical issues
Economics of Information
• Uncertainty creates the market for insurance, which
can cause a market distortion.
• Another issue arises when there is asymmetric
information
• If the individual knows more about their health needs
than the insurance company then problems can arise.
• This is known as Adverse Selection
Adverse Selection
Probability
Spending
$0 $100 $200 $300 $400
1/n
Adverse Selection
Probability
Spending$0 $200 $300 $400
1/.5n
Adverse Selection
Probability
Spending
$0 $200 $300 $400
1/.25n
Adverse Selection
Probability
Spending$0 $200 $300 $400
1
Adverse Selection
• The bad tends to push the good out of the market
• Solution requires a way to compel the healthy to participate– Employer-provided insurance– Insurance mandate– Medicare– Medicare Part D
• Or move to experience rating– Individual prices
Adverse Selection
• It doesn’t always have to result in full market failure
• Let’s look at it in a little more detail
Adverse Selection in Insurance
$
Qmax
Demand
MC
AC
Qeq
P
Minimum Price needed to insure everyone
Welfare loss
Adverse Selection in Insurance
$
Qmax
Demand
MC
AC
Qeq
P
Special Case – if people are very risk averse
$
Qmax
Demand
MC
AC
P
Special Case 2: now what happens?
$
Qmax
Demand
MC
AC
P
Minimum Price needed to insure everyone
The market fails completely – Death Spiral
Adverse Selection
• Even with adverse selection, the market could still function – though
not necessarily efficiently
• But a “death spiral” is possible
• The more risk averse the population is, the less adverse selection will
occur
• Young invincibles – tend to be both below average users and less risk
averse
• Lowering admin costs improves efficiency of market – Shifts costs
curves downward
King vs Burwell
• “through an exchange established by the state”
• What happens if people in these states lose their subsidy?
Under a “normal” market:
SupplyDemand
Q1
p1
Price and quantity both fall, depending on elasticity of supply
But insurance is not normal!
$
Qmax
Demand
Qeq
P
Now Q falls but Price RISES
The Principal-Agent Problem
• There is a principal who has some objective and they hire an agent
• The agents is supposed to represent the principal’s interest
• But a problem arises if the agents do not have the same incentive as
the principal
• The Principal-Agent problem occurs when agents pursue some of their
own objectives in conflict with achieving the goals of the principal.
• Generally this requires asymmetric information – or high monitoring
costs
Where do we see the principal-agent problem?
• Babysitters– parents are the principal, babysitters are the
agents
• Employer-employee relationships– Piece rate pay– stock options– tiered compensation• Why do earnings rise with tenure?
Where do we see it in healthcare?
• Patients are the principal– They don’t understand healthcare, medicine, the
healthcare system– They need help
• They hire the physician to be their agent– Relationship of trust
• Why has the hospital and physician historically been separate?
• Does the agent act in the best interest of the principal?
The Shopping Problem
• The consumer needs a “shopper”• Health care is an “experience” good
• Marcus Welby Medicine– The perfect agent physician chooses as the
patients themselves would choose if the patients had the same information the physician does.
The shopping problem and physician-induced demand
1. Insurance tends to shield the consumer from price sensitivity. The
consumer inefficiently produces health. “I want it all”
2. Patients tend to rely on the providers when deciding how much to
“shop"
3. Payers worrying about moral hazard tend to pay more for “doing
things” rather than talking. – Acute care vs. chronic care– behavioral health vs. physical
4. Suppliers have incentive to do more based on 1 and 2 above as well
as legal concerns.
Solutions to the shopping problem?
• In the managed care era – the payer became shopper
• HD/HSA – the consumer becomes the shopper
• Who is the shopper in an ACO?
• Direct Primary Care
Jigsaw Exercise – Round 1
• Aashini Anna Beatrice• Brin Caroline ThomasGroup1• Christian Christina Dolapo• Elle Emily ShawntaeGroup2• Gopal Hugh Jessica• Justin Katherine Sarah• Mr. Hornbeak
Group 3• Livia Mariah Patrick• Rebecca Ryan Mr. HupfeldGroup 4
Jigsaw Exercise – Round 2
•Aashini Christian Gopal•Livia ThomasGroup 1•Anna Christina Hugh•Mariah Mr. HornbeakGroup 2•Beatrice Dolapo Jessica•Patrick ShawntaeGroup 3•Brin Elle Justin•Rebecca SarahGroup 4•Caroline Emily Katherine•Ryan Mr. HupfeldGroup 5