The workings of health insurance in the United States

2. Explain the theory of insurance, by specifically addressing the degree of risk aversion, the size of the potential loss, and the "wealth effect".

The theory of insurance is fundamentally based on the concept of risk aversion. Individuals, generally being risk-averse, prefer certainty to uncertainty. Insurance allows individuals to transfer a small, certain cost (the premium) to avoid a large, uncertain financial loss (the cost of a potential adverse event). This transfer is economically rational for risk-averse individuals because the disutility of a large loss outweighs the utility of a small, certain payment. The degree of risk aversion plays a crucial role. Highly risk-averse individuals are more likely to purchase insurance, even at a relatively high premium, as they are more willing to pay for the peace of mind and financial security it provides.

The size of the potential loss is another critical factor. Insurance is most effective for events with a low probability but a high potential cost. For instance, insuring against a catastrophic illness is more appealing than insuring against a minor cold. The larger the potential loss, the greater the benefit of insurance. The "wealth effect" also influences insurance decisions. Individuals with greater wealth may be less risk-averse, as they can absorb larger losses. Conversely, those with limited resources are more likely to seek insurance, as a significant healthcare expense could be financially devastating. Essentially, the relative impact of a potential loss on an individual's overall wealth influences their willingness to pay for insurance.

3. What is meant by the "HMO Effect" versus "Favorable Selection" in managed care? Describe the evidence of an HMO Effect, and the evidence of Favorable Selection.

In managed care, the "HMO Effect" refers to the idea that Health Maintenance Organizations (HMOs) may achieve lower healthcare costs not just through favorable selection (choosing healthier patients), but also through more efficient care delivery and utilization management. This could involve emphasizing preventive care, coordinating care across providers, and reducing unnecessary hospitalizations. Evidence for the HMO Effect includes studies showing that even after adjusting for health status, HMOs often have lower costs compared to traditional fee-for-service plans. Furthermore, some studies have found improvements in quality of care within HMOs, suggesting that cost savings aren't solely achieved by limiting necessary services.  

"Favorable Selection," on the other hand, refers to the tendency of healthier individuals to enroll in HMOs, leaving less healthy individuals in traditional plans. This can make it appear as though HMOs are more efficient when, in reality, they are simply dealing with a healthier population. Evidence of favorable selection can be seen in studies comparing the health status of HMO enrollees to those in other plans. If HMO enrollees are systematically healthier, it suggests favorable selection is at play. Researchers often use techniques like risk adjustment to account for health status differences when comparing HMOs to other plans. However, completely eliminating the influence of favorable selection can be challenging.

4. What are deductibles? Why are they so important in US health insurance models? How do changes in deductibles impact utilization and clinical decision-making.

Deductibles are the portion of healthcare expenses that the insured must pay out-of-pocket before the insurance coverage begins. They act as a form of cost-sharing, requiring individuals to bear some of the financial burden of their healthcare. Deductibles are important in US health insurance models for several reasons. They help control healthcare utilization by discouraging unnecessary use of services. By requiring individuals to pay a portion of the cost, deductibles create a financial incentive to be more judicious in seeking care. They also help lower premiums, as the insurer's financial risk is reduced. Essentially, deductibles shift some of the financial risk from the insurer to the insured.  

Changes in deductibles can significantly impact both healthcare utilization and clinical decision-making. Increasing deductibles tends to decrease utilization, as individuals are more likely to postpone or forgo care when faced with higher out-of-pocket costs. This can be particularly true for discretionary or preventive care. Conversely, decreasing deductibles can lead to increased utilization. From a clinical perspective, high deductibles might influence a patient's decision to seek treatment. They might delay or avoid necessary care due to cost concerns, potentially leading to worse health outcomes in the long run. Clinicians, aware of these financial constraints, may also be influenced in their treatment recommendations, sometimes considering less expensive alternatives even if they are not the optimal choice from a purely clinical standpoint.

5. Discuss the Utilization Management function in managed care, including Preadmission Certification and Concurrent Review of services.

Utilization Management (UM) is a key function in managed care aimed at ensuring that healthcare services are medically necessary, appropriate, and delivered in the most cost-effective setting. It involves a range of strategies to manage the utilization of healthcare resources. UM seeks to prevent overuse, underuse, and misuse of services, while maintaining quality of care. It often involves reviewing the appropriateness of hospital admissions, lengths of stay, and the use of specific procedures or treatments.  

Preadmission Certification is a type of UM that requires providers to obtain approval from the MCO before admitting a patient to the hospital for certain procedures or treatments. This process helps ensure that the admission is medically necessary and that alternative, less costly settings of care are considered. Concurrent Review is another UM strategy that involves ongoing review of a patient's care while they are hospitalized. This review helps ensure that the patient is receiving appropriate care and that the length of stay is justified. It also allows for early identification of potential issues and facilitates discharge planning.  

6. Discuss the emerging role of Disease Management (DM) and Intensive Case Management in American managed care. How does DM actually work?

Disease Management (DM) and Intensive Case Management are increasingly important strategies in American managed care, focusing on improving the quality of care and outcomes for individuals with chronic conditions. These approaches aim to coordinate care, educate patients, and promote adherence to treatment plans, ultimately reducing healthcare costs and improving patient well-being. DM programs typically target specific chronic conditions like diabetes, asthma, or heart failure.  

DM programs work by employing a variety of strategies. They often involve educating patients about their condition, providing self-management support, and monitoring their progress. Nurses or other healthcare professionals may work directly with patients, providing counseling, answering questions, and helping them develop individualized care plans. DM programs also emphasize care coordination, ensuring that patients receive timely and appropriate care from multiple providers. Intensive Case Management is similar to DM but focuses on individuals with complex needs, often involving multiple chronic conditions or psychosocial issues. Case managers work closely with these individuals to coordinate their care, address their needs, and connect them with appropriate resources.  

7. A key concept of health insurance is premium sensitivity. Describe the general process for premium computations in US healthcare insurance. Briefly explain employee premium sensitivity and how do employees typically respond to changes in health insurance premiums?

Premium computations in US healthcare insurance involve several factors. Insurers estimate the expected healthcare costs of their enrollees based on factors like age, gender, health status, and geographic location. They also consider administrative costs, marketing expenses, and desired profit margins. The estimated costs are then spread across the enrolled population to determine the premium. Actuaries play a crucial role in this process, using statistical models to project future healthcare costs. The process also factors in the type of plan (e.g., HMO, PPO) and the level of coverage offered.  

Employee premium sensitivity refers to how employees react to changes in their health insurance premiums. Generally, employees are sensitive to premium increases, especially if they are shouldering a significant portion of the cost. When premiums rise, employees may choose to enroll in less expensive plans with higher deductibles or lower coverage levels. They might also opt out of employer-sponsored insurance altogether if they find it too costly. Conversely, when premiums decrease or remain stable, employees are more likely to maintain their current coverage or even upgrade to a more comprehensive plan. Employers often play a role in managing premium sensitivity by offering a range of plan options and contributing a portion of the premium cost.  

**8. Describe the commonly used approaches to "underwriting" for healthcare services