define moral hazard, adverse selection, and cost-shifting

Question description

Week 7: Health Services Financing

UNIT OBJECTIVES

After completing this unit, you should be able to

• define moral hazard, adverse selection, and cost-shifting
• identify the major public programs for the financing of health care
• compare and contrast Medicare and Medicaid
• list and describe the four sub-programs of Medicare
• describe different reimbursement approaches for health services

UNIT LECTURE

When asked how health care services are paid for, many of us think immediately of health insurance. However, we typically don’t think about the dynamics behind health insurance or the various types of programs through which it is delivered. At its most basic level, health insurance is a tool for mitigating risk. An individual purchases health insurance to mitigate the risk of having to pay an enormous medical bill in the event of sickness or injury.

Those who provide health insurance—insurance companies—also work to mitigate risk, albeit from the other side. They attempt to create a risk pool containing a large number of healthy people to offset the expenses accrued by those who do get sick or injured. Premiums, the fees paid for ownership of health insurance, are used to subsidize the cost of the health care provided to those who use the insurance.

Factors that insurance companies need to be mindful of include moral hazard, whereby an insured individual is more prone to seek care than if he or she were paying the medical bill him- or herself; and adverse selection, whereby insurance is mainly purchased by those most in need of it. As with any financial enterprise, if the costs of providing the product or service exceed the revenue, the company goes out of business.

There are several types of insurance programs, both public and private. Together, these programs cover not only individual health services, but public health services, research, and the administration of the delivery and financing of health care in the United States. The majority of public and private expenditures—approximately 81 percent—are directed toward hospital care, provider and clinical services, long-term care, and prescription drug provision (Kovner & Knickman, 2011).

As mentioned in the week 4 lecture, health insurance is a relatively new mechanism for financing health services, and it has grown substantially since the mid-1900s, when only 9 percent of the US population had health insurance (Blumberg & Davidson, 2009). Health insurance can be broken down into private and public insurance.

Private health insurance is primarily employment-based, meaning that individuals receive coverage through commercial health insurance plans for which their employers either pay the premiums or subsidize them, with the employee paying the balance.

Some larger employers choose to self-insure, which means that they administer their own plans and accept the financial risk of doing so. In essence, they act as the insurer of their employees.

Some individuals, either through necessity or choice, opt to purchase their own private insurance coverage through a commercial insurance company or to remain uninsured and accept the risk.

Public health insurance is funded by the government and plays a significant role in the health care system. There are several public programs; two of the most prominent are the Medicare program, created through Title 18 of the Social Security Act of 1935 (SSA), and Medicaid, created through Title 19 of the SSA. Both programs are operated by the Centers for Medicare & Medicaid Services (CMS), a division of the U.S. Department of Health & Human Services (HHS).