Solutions to counter adverse selection in Managed Health Care.
During the class sessions of ECON 253, we have discussed the basics of social insurance and hence, took a broad view on the US health care market. The US health care industry is massive as it employs about 10 million people and accounts for about 13.5 percent of GDP. .
Interestingly, only 17 percent of total health expenses are paid out of pocket through consumers - private insurance pays 35 percent, government 45 percent.
After 2nd World War, health insurance had been crucially provided by government. Until today, there are three key programs: Medicaid, Medicare and the implicit subsidy for private insurance embodied in the federal income tax system. .
The reasons for public provision are especially.
• Information asymmetry.
• Adverse selection .
• Moral hazard.
• Paternalism .
Private insurance in the USA is mainly provided by employers as a part of compensation. Consequently, there is a trade-off between the amount of health insurance and the level of wages. In the last two decades, employers started to vary how health care is provided under the policies they offer: instead of using a system called cost-based reimbursement ( or fee-for-service ), a capitation-based reimbursement was applied. This had been the starting point for the development and rise of Health Maintenance Organizations ( HMOs ). .
Considered as a virtual revolution, managed care options as HMOs are even now of growing importance in the publicly provided Medicaid program. Further, enrollment in HMOs by Medicare beneficiaries has been induced by legislation passed in 1997. Doing so, government tries to hold down the growth rate of health care costs.
Noting that a change to a capitating-based reimbursement system may establish incentives for health care providers to skimp on the quality of care, this development has not been further discussed in class with regard to possible selection effects.