Session 2 Hour 2

Question 1

Risk Aversion

Answer 1

Which would you prefer?
- Your $2,000 paycheck
Or
- Flipping a coin and doubling your paycheck ($4,000) if you get a head ($0 if you get a tail)

• Most people prefer option A because we are risk averse: certain income is preferred over a risky alternative with the same expected income (a gamble)

Question 2

Risk Pooling

Answer 2

• 100 people in class. 1 out of the 100 will fall and break a leg in the next 12 months

Each of us faces a probability:

• Not falling (99% probability, $0 cost)
• Falling and breaking a leg (1% probability), incurring $10,000 for an ER visit/treatment

Uncertainty: Have no loss with 99% probability, but have a loss of $10,000 with a 1% probability

Risk Pooling:

• Each of us contributes $100 to a pool, the pool collects $10,000
• One person falls and incurs $10,000; the pool pays for it
• Collectively, we have transformed an uncertain situation into a certain one by risk pooling
• We have the certainty that we will lose $100
• If this was an insurance policy, the $100 would be the actuarial fair PREMIUM
• UCSD asks for $105 per person because of the costs associated with administration
• The extra $5 is called the LOADING FEE

Question 3

Risk Spreading

Answer 3

• Instead of risk pooling, we risk pooled across all UCSD, we would expect 1%*40,000= 400 students falling in a year
• It is much more likely that 2 out of our class 100 fall in a year than 800 out of 40,000 UCSD students fall
• The risk is spread across a larger population (risk spreading)
• Principle: The larger the number of people in a risk pool, the more accurate the estimates will be of what will actually take place
• Premiums are higher for insuring a small group (i.e. a small company) than a large one because health insurers need to compensate for the increased risk associated with insuring a small group

Question 4

Anatomy of a health insurance policy: Who it covers

Answer 4

• Beneficiary or member: all individuals enrolled in a health insurance plan
• Primary policy holder: individual who registered the insurance policy –“owns it”
• Dependents: other beneficiaries on the policy (spouse, children)

Question 5

Anatomy of a health insurance policy: Where the money comes from

Answer 5

• Insurers deal with adverse selection through underwriting and rate-making process to determine a premium based on risk

Current approach to premium calculation: Experience-rating

• Premiums based on prior or current utilization of a group
• For example, historically, higher premiums for individuals with pre-existing conditions

Question 6

Underwriting in the Individual Market

Answer 6

In the individual market, underwriting makes insurance very expensive for sick patients

• Affordable Care Act (ACA) limited the variables that insurers can use for underwriting in the individual market to location, age, family size, and smoking status
• The key change is that insurers are not allowed to underwrite based on pre-existing conditions
• This was supposed to ensure affordability of insurance to sicker individuals
• However, this requires of healthy individuals in the pool to spread the risk of sicker individuals -> Individual mandate

Question 7

Anatomy of a health insurance policy: What it covers, Benefit design

Answer 7

• Covered services
• Limits on covered services (# of visits or # of days)
• Factors influencing covered services:
• Covered providers
• Contracting relationship
• Administrative rules

Question 8

• HMO

Answer 8

• PCP required? YES
• Out of network coverage? NO (only emergency)
• Referral to see specialist? YES (exceptions)
• Cost? $

Question 9

• EPO (exclusive provider organization)

Answer 9

• PCP required? YES
• Out of network coverage? NO (only emergency)
• Referral to see specialist? YES (exceptions)
• Cost? $

Question 10

• POS (point of service)

Answer 10

• PCP required? YES
• Out of network coverage? YES (costs more)
• Referral to see specialist? NO
• Cost? $$

Question 11

• PPO

Answer 11

• PCP required? NO
• Out of network coverage? YES (costs more)
• Referral to see specialist? NO
• Cost? $$$

Question 12

• Basics of Benefit Design (deductible, copay, coins, etc)

Answer 12

Cost-sharing provisions

• Deductible: fixed amount the beneficiary (or the family) have to pay out-of-pocket before insurance coverage applies
• Co-payments: fixed amount the beneficiary has to pay for a certain service
• Coinsurance: percentage the beneficiary has to pay for a certain service
• Tiered cost-sharing, often employed for drugs
• Out of pocket maximum: total amount the beneficiary (or the family) can pay in a year for covered services