Final Study Guide

Concept of insurance

Purpose is to manage certain types of unanticipated risk.

Unanticipated: unpredictable (such as car accident) and inevitable (such as death)

What are the 3 principles of insurance?

1. Risk exchange

2. Risk transfer

3. Risk pooling

Risk exchange

Small, certain loss for the possibility of large, unpredictable loss.

E.g., monthly premium

Risk transfer

Individuals give/ transfer risk to the insurance company (for a fee).

E.g., purchasing insurance

Risk pooling

Large number of insured, more accurate predictions regarding loss (spread out risk more evenly)

Examples of risk management problems

1. Adverse selections

2. Moral hazard

What is adverse selections?

Only those that are expecting higher losses will get insurance, so the insurer pays out more than expected.

I.e., healthy people won’t get insurance, so there are less people who help pay for sick individuals.

Strategy for dealing with adverse selections

1. Underwriting (Denial of Coverage or Higher Fees); evaluation of risk of certain people and how much they should pay / if they should be covered.

2. Pre-Existing Conditions pay more or are not insured; this changed with ACA.

3. Penalties

What is moral hazard?

If someone’s insurance is covered and costs decreased, over utilization of services. Insurer has to increase cost sharing

What are the categories of health insurance in the US?

1. Private

2. Public

3. Social Health Insurance (SHI)

4. Welfare Medicine

5. Voluntary Health Insurance (VHI)

Private health insurance examples

• Employer (including worker’s comp)

• Individual (including COBRA)

Public health insurance examples

• Medicare / Medicaid

• VA or Tricare

SHI examples

• Medicare

• Government entitlement program linked to current / prior employment

Welfare medicine health insurance examples

• Unemployed, underemployed, disabled

• Medicaid

VHI example

• Private insurance, usually connected with current employment

What are the 3 health insurance designs?

1. Indemnity (fee-for-service)

2. Managed care

3. High deductible health plan (HDHP)

Defining characteristics of indemnity (fee-for-service) health insurance

Can see any provider - you do not pay based on who you see; provider choice.

Compensation

• Assignment of Benefits: Insured assigns benefits to provider

• Fee-For-Service: services are unbundled and paid for separately

Potential issues

• Biggest issue: moral hazard and overutilization of services, difficult for insurance to cover costs

• Treatment vs. Prevention: l eads to treatment of illness, not prevention

  • Cost Sharing: lower premiums, but higher deductibles & co-insurance

  • Unnecessary Services: more services delivered than needed