c) The capitation-based reimbursement is defined as a method under which health care providers receive annual payments for each patient in their care, regardless of the services actually used by that patient. Hence, this care is paid for by an employer at a fixed price per patient and patients generally do not have any significant "out-of-pocket" expenses.
d) Note: during the whole paper, HMOs are considered to apply the capitation-based reimbursement method!.
2. Adverse selection:.
There are several selection effects that need to be observed in the health insurance market. Generally, selection effects are undesirable for society overall as they either lead to under-provision of insurances or to higher costs. .
During class, we discussed one very common kind of adverse selection in the health insurance market. This adverse selection phenomenon has been insuree-driven. .
In detail, insurees differ with regard to their risk for certain illnesses and diseases. Knowing about their risks, people with the highest risk are more likely to buy health insurances than people with low risks of getting ill. This so-called adverse selection problem causes the average buyer of insurance to have a higher risk than the average person in society. The consequence of the adverse selection problem is that the insurance company which is more likely to pay more due to their insurees, finds itself losing money and raise the premiums to break even. But: with higher premiums, relatively low-risk individuals leave the market. Thus, the market may underprovide health insurance!.
There are also insurance-carrier driven adverse selection effects:.
As already noted, enrollees differ in their degree of risk. If these differences are not picked up by a risk-adjusted premium, and enrollees are aware of the differences, plans offered by managed health care organizations have an incentive to structure their benefits to be unattractive to high-cost enrollees and attractive to low-cost enrollees.
