HEALTH INSURANCE

Uncertainty in the market for health

care :
Timing of health care expenditure
Amount of expenditure on health care is
required

Key Concept in Insurance :

Uncertainty state in which more than one event

may occur, but there is no knowledge which one
States of the world set of different outcomes
which may result from the condition of creating the
uncertainty
Probability describe the uncertainty. P =0 ; state
of the world will not occur; p = 1 state of the world
will occur
Pay offs - - outcome which will be obtained if
particular state of the world is realized

Contingency matrices : summary table of the

possible pay offs arising from each state of the
world
Table 1. Contingency matrix for 50 year old male
with hypertension and who smokes
State of the world

CHD

Not CHD

Pay off (life

expectancy)

60

70

Probability

1/20

19/20

Expected value : average of the weight in the

payoff in each state of the world by the probability
of that state of the world occurring. Ev : [60 x1/20
] + [ 70 x 19/20 ] = 69 years (Average life
expectancy)
Risk : one which more than one outcome may occur

ATTITUDES TOWARDS RISK

Risk Aversion A risk averse individual dislikes risk

and uncertainty, and will often pay sums of money
in order to avoid risky situations.
Risk neutrality A risk neutral individual neither like
or dislikes risk and uncertainty, but is indifferent to it
Risk loving. A risk loving individual likes risk and
uncertainty, and may even pay sums of money in
order to enter into risky situations

HEALTH INSURANCE

Nature of Health Insurance

Risk Pooling
Demand for Health Insurance
Supply for Health Insurance

Table 2. CONTINGENCY MATRIX WITH AND WITHOUT

INSURANCE
State of the World (disease Not Ill
state)

Ill

Payoff if not Insured

W-C

Payoff if insured

W-R

W-R

Probability

(1-p)

EV (W) = [px(W-C)] + [(1-p) xW]

EV (W) = [W] [pxC]

20,000 (W)
15,000(W-C); 20,000-5,000=

Insurance
R= .05x 5000= 250
W-R= if not sick ; 20,000-250= 19750
If sick : w-r= ; 20,000-250= 19750; 5000;
4750+250= 5000

Rf= .05x 5,000= 250

5,000;
1,000,000 iph x 250= 250,000,000
250,000,000- 5,000= 249,995,000
50,000 iph x 5,000 = 250,000, 000
250 M, invest on real estate ; revenues , eraning
10 years after
5,000 15,000, more than 50 % iph ; nursing tf
= 20,000 30,0000; 40k

Fair Premium insurance premium charge by an

insurance company for health insurance which is
equal to the amount of wealth that individual will
lose, on average, if they are not insured.
RF = p X C
Risk Premium sum of money which individuals
are prepared to pay over and above the fair
premium so that risk might be reduced.
Total Insurance Premium = RF + RR

Table 3. Contingency Matrix with and Without Insurance for 50

year old male with hypertension and who smokes

State of the World

(Disease State)

Does not develop CHD

Develops CHD

Payoff if not insured

20,000

15,000

Probability

19/20

1/20

P x C = Fair Premium

Problems of Health Insurance :

Adverse Selection
Moral Hazard
Non Price Competition
Affordability of Health Insurance

FINANCING HEALTH CARE

Direct Out of Pocket Payment

Private Health Insurance
Preferred Provider Organizations
Health Maintenance Organization
Public Health Insurance
Direct Taxation

Related Concepts

Third Party Payment

Reimbursing Health Care Providers
The effectiveness of methods of financing health
care
Paying insurance premium

FINANCING HEALTH CARE

Direct out of Pocket charge

made to the individual who
receives health care for
treatment received
Private Health Insurance
involves an insurance contract
between private insurance
companies and individuals
who consider themselves to be
at risk of ill health

Public Health Insurance an

individual has the opportunity
to purchase health insurance
from only one insurance
company, the government
Direct Taxation System
derivative of public health
insurance where the role of
the insurance company is
again played solely by the
government

HEALTH MAINTENANCE ORGANIZATION : HMO

Health Maintenance Organization. A

form of health insurance combining a
range of coverages in a group basis.
A group of doctors and other
medical professionals offer care
through the HMO for a flat monthly
rate with no deductibles. However,
only visits to professionals within the
HMO network are covered by the
policy. All visits, prescriptions and
other care must be cleared by the
HMO in order to be covered. A
primary physician within the HMO
handles referrals.

International
Organizations :
Aetna
CIGNA
Kaiser Permanente
Humana
Health Net
Universal American
Wellpoint

Types of HMOs
HMOs operate in a variety of forms. Most HMOs today do not fit neatly into one
form; they can have multiple divisions, each operating under a different model, or
blend two or more models together.
Staff Model, physicians are salaried and have offices in HMO buildings. In
this case, physicians are direct employees of the HMOs. This model is an
example of a closed-panel HMO, meaning that contracted physicians may
only see HMO patients.
Group Model, the HMO does not employ the physicians directly, but
contracts with a multi-specialty physician group practice. Individual
physicians are employed by the group practice, rather than by the HMO.
The group practice may be established by the HMO and only serve HMO
members ("captive group model"). Example : Kaiser Permanente
Network Model, an HMO will contract with any combination of groups,
IPAs, and individual physicians. Since 1990, most HMOs run by managed
care organizations with other lines of business (such as PPO, POS and
indemnity) use the network model.

MEMBERSHIP BENEFITS AND PRIVILEGES

The following no charge hospitalization (In-Patient) services will apply when MEDICARD physicians prescribe the hospitalization of
members in any MEDICARD Hospitals or MEDICARD centers:

No deposit upon admission

Room & Board according to type of enrollment

Use of operating theater and Recovery Room

Services of MEDICard specialist like anaesthesiologists, internists, surgeons, etc.

Services and medications for general/spinal anaesthesia or other forms of anaesthesia deemed necessary for a surgical
procedure.

Fresh whole blood transfusions and intravenous fluids

X-ray and Laboratory examinations

Administered medicines

Dressings, plaster casts, sutures and other items directly related to the medical management of the patient

ICU confinements, Chemotherapy, Radiotherapy, and Dialysis are covered subject to maximum limits and pre-existing conditions
coverage

Modern therapeutic modalities and interventional surgical procedures such as, but not limited to laparoscopic surgery and
lithotripsy, are covered up to P20,000 each per years subject to the pre-existing conditions coverage

CT Scan, MRI and ultrasound are covered up to P50,000 each per member per year subject to the pre-existing conditions
coverage (inclusive of room and board, operating room charges, professional fees and other incidental expenses relative to the
procedure):

ADVANTAGES

Less Paperwork
Fewer Expenses
Broader Coverage

DISADVANTAGES

Limited Choice
Affiliation Period

Essentials in Choosing HMO

The HMO Itself :

Contact the Department of Insurance to find out if the HMO is licensed .

Contact the Department of Insurance or check the consumer complaint ratios on-line to check the HMO's consumer
complaint record.
Ask your friends or family if they belong to the HMO, and whether they are happy with the services and care
provided to them.

The HMO Plan

Is it affordable? How do the premiums and copayments compare to other HMOs offering similar benefits?
Do the benefits match your needs? Are any services you need not covered?
How does the plan treat preexisting medical conditions? (For example, even though an HMO can't exclude a
preexisting condition, it can require a higher copayment.)

The HMO Health Providers

Are the HMO providers familiar to you? Are they conveniently located? Is there a wide choice of physicians,
specialists and hospitals?
Are the HMO providers accepting new patients?
Is your current doctor or specialist with the HMO? If so, is he or she satisfied with the HMO and planning to
continue with the HMO?
Is it easy to change Primary Care Physicians?

PPO : Preferred Provider Organization

preferred provider organization (or "PPO",

sometimes referred to as a participating provider
organization or preferred provider option) is a
managed care organization of medical doctors,
hospitals, and other health care providers who have
covenanted with an insurer or a third-party
administrator to provide health care at reduced
rates to the insurer's or administrator's clients.

PPO : Preferred Provider Organization.

These organizations also have contractual relationships

with insurance companies. However, PPOs are more
loosely organized and are not as restrictive as HMOs.
If you have a PPO, you can see whatever doctor you
like, but if you choose an out-of-network physician, you
will have to pay more out-of-pocket. You will not need
a referral to see a specialist.
PPOs cost more than HMOs, but many people choose
them because they are less restrictive. You will have
more control over your own healthcare decisions than
you would have under an HMO.