• Previous section – outlined the benefits of insurance – smooth
consumption and improve welfare
Moral Hazard, Part 1
• Model: given loss L, receive q in return from insurance
– Useful model for homeowners or car insurance
– Not so for medical care
Health Economics
Fall 2016
• Medical insurance tends NOT to be structured this way
– Policy holder decides when to enter market
– Insurance changes prices for the product
1
2
• 1st part – use demand curves to isolate how insurance
alters demand for health care
• Therefore, insurance generates a wedge – what doctors
receive and what they pay are sometimes very
difference
• Insurance has reduced the cost of care to the consumer,
and hence, consumer should increase use
• 2nd part – examine some estimates of the price elasticity
of demand
• Along the way, we will point out how difficult it is to
get this estimate and how we have had to rely on the
rare experiment in this context
• “Moral hazard”
3
4
1
Some tools of the trade
Market 1
Market 2
P
P
• Price elasticity of demand
D2
– ξd = %ΔQ/%ΔP
D1
• Examples:
– ξd = -0.3, 10% ↑ price, 3% ↓ in demand
– ξd = -1.75, 10% ↑ price, 17.5% ↓ in demand
P1
P2
• When looking at demand curves on the same scale, the
steeper demand curve, the lower elasticity of demand
(absolute value)
Q1
Q2
Q
Q3
Q4
Q
6
5
Factors that determine elasticity of demand for
medical care
• Services for more acute conditions should have lower
elasticity of demand
• Notice that for the same change in price, Market 1 has
a more pronounced change in demand
– You need care at that moment, cannot wait for treatment
– Likewise – anything where you can substitute over time,
produces a higher elasticity of demand
– Emergency room visits low elast. of demand
– What about preventive services? Dental care? X-rays?
• | ξ1 | > | ξ2 |
• Availability of substitutes
7
– When they are plentiful, greater elasticity of demand
– what about psychoanalysis?
– Generic drugs? AIDS drugs?
8
2
Demand for medical services
• Larger fraction of income, greater elast of demand
• Like any other good, medical services are consumed on
a per unit basis
– Have to think twice about cost
– Long term care/assisted living is expensive, high elast of
demand (and many substitutes, like informal care)
– Doctor visits, Prescriptions, X-rays, etc.
– Some ‘units’ are easier to measure
• Each has a price attached to it
• What is different for medical care is that often, the
price paid by the patient is not the price of the good
(insurance)
9
• The demand for medical services slopes down just like
any other product
10
• Some factors that may shift the demand curve
• The position of the demand curve can however change
radically based on external conditions
– Medical state
– Socioeconomic status (income and education)
– Price of other medical services
• Example: Compliments
– As price falls for good 1, people are willing to demand more
of good 2 at any price
• Example: demand for a particular drug is highly
dependent on your current state of health
11
12
3
P
Income elasticity of demand
• ζ = % ΔQ/%ΔIncome
• ζ = 0.25
– 10% increase in income, 2.5% increase in quantity demanded
P1
• ζ = 1.5
– 10% increase in income, 15% increase in quantity demanded
• Normal goods ζ >0
• Inferior goods ζ <0
D2
D1
Q1
Q2
Q
13
14
Shifts in demand due to health state
Poor health could
Shift the demand out
P
P
• Demand for medical services is state-dependent
Poor health could make
demand less responsive to
price
D2
D2
• When health is poor, demand may be greater
D1
– At any price, you demand more
D2
P1
• Change in health status could have two effects
– Shift demand
– Make less/more price responsive
Q1
15
Q2
Q
Q3
Q4
Q
16
4
Shifts due to price of other medical goods
•
•
•
•
• Strong inter-relationship between different medical
services. Some are substitutes, some are compliments
Suppose you are diagnosed w/ high cholesterol
Predictor of heart disease
Increased risk of death
Standard treatment after diagnosis
• Price of one procedure can therefore impact the
demand for another
– Change diet
– Increase exercise
• As cholesterol level rises, ability to control with behavior
modification declines
• Therefore, demand for pharmaceutical solution should rise
• Compliments: Doctors visits and medical tests
• Substitutes: Psychotropic drugs and psychiatric visits
17
MD visits
18
Psychotropic
Drugs
Medical tests
P
P
Psychiatric Visits
P
P
D1
D2
D2
D
D1
D
P3
P1
P3
P1
P2
P2
Q1
Q2
Q
Q3
Q4
Q1
Q
19
Q2
Q
Q4
Q3
Q
20
5
Cigarettes
Example: The Heroin Epidemic
Nicotine replacement
P
P
D1
•
•
•
•
•
D2
D
P3
P2
P1
OxyContin – opioid pan killer introduced in 1996
Properties similar to opium, heroin
“Extended release” (ER)
$35 billion in worldwide sales through 2015
High abuse rates
– Was originally pushed as “non habit forming”
– Crushed and snorted to circumvent ER properties
Q1
Q
Q3
Q4
• August 10, 2010, abuse-resistant version released
• People could no longer crush and snort/inject
Q
21
22
Figure 1: Opioid and Heroin Deaths
30,000
Heroin or
Opioids
25,000
Opioids
20,000
Deaths
Q2
15,000
Heroin
10,000
5,000
0
1999
23
2001
2003
2005
2007
Year
2009
2011
2013
24
6
Monthly RXs for Oxycodone/1000 Subscribers, Marketscan Data
9
KGs of Oxycodone Shippments/1000, ARCOS Data
60
8/2010
2010:Q3
8
50
7
40
KGs /1000
RXs/1000
6
5
4
3
30
20
2
10
1
0
2006.01
0
2007.01
2008.01
2009.01
2010.01
2011.01
Year.Month
Actual
Predicted
2012.01
2013.01
2004.1
2006.1
2008.1
2010.1
2012.1
Year.Month
Actual
Predicted
2014.1
25
26
0.35
% Use Pain Meds Recreationally in past 30 Days, NDUHS
3.0%
Monthly Heroin Deaths/100,000
2010:Q2
0.30
9/2010
2.5%
0.25
Deaths/100,000
% 30-day Use
2.0%
1.5%
0.20
0.15
1.0%
0.10
0.5%
0.05
0.00
2004.01 2005.01 2006.01 2007.01 2008.01 2009.01 2010.01 2011.01 2012.01 2013.01 2014.01
Year.Month
Actual
Predicted
0.0%
2004.1
2006.1
2008.1
2010.1
Year.Month
Actual
Predicted
2012.1
2014.1
27
28
7
A: Ages 25-34
A: Ages 25-34
40
Hisp. or non-white
all-cause mortality (left)
125
120
35
115
30
110
25
105
20
Hisp. or non-white
all-cause mortality (left)
82% of the
increase
15
White, non-Hispanic
all-cause mortality (left)
95
10
90
5
85
0
All cause mortality rate
100
Opioid/Heroin mortality rate
All cause mortality rate
120
30
110
25
105
20
100
15
White, non-Hispanic
all-cause mortality (left)
White, non-Hisp.
O/H mortality
(right)
90
2001
2003
2005
2007
Year
2009
2011
2013
Hisp. or non-white 10
O/H mortality
(right)
5
0
85
1999
2001
29
Cost sharing in insurance
• Insurance is designed to reduce the welfare loss due to
uncertainty
• Insurance can however generate ‘moral hazard’
35
115
95
1999
40
Opioid/Heroin mortality rate
125
2003
2005
2007
Year
2009
2011
2013
30
Cost sharing in insurance
• Copayment
– Usually fixed dollar amount per service
• Deductibles
– Dollar amount you have to pay out of pocket (OOP) before insurance
will start paying
• Coinsurance
– Fixed percent paid by the policy holder for every dollar spent
• Can reduce moral hazard by cost-sharing
• In most cost sharing plans, the costs of using medical
care by policy holders is however reduced, encouraging
use
31
• Stop loss
– A point where if OOP expenditures exceed a particular value, coinsurance
rates go to 0
32
8
• Type of cost sharing varies a lot by type of insurance
system
– Copayments
• Popular in managed care
• Prescription drugs
– Co-insurance
• Fee for service type of arrangements
• Hospital care and diagnostic tests
• In this class – will most frequently model the impact of
33
copays – just easier
34
Notre Dame Insurance
•
•
•
•
•
•
Copayments
$400 individual deductible
85% coinsurance rate
Max out of pocket of $1950
First $400 in medical spending, price=1
After $400, price is $0.15
After $10,733.33 price falls to $0
• How do copayments impact demand?
• Example: suppose you pay a $10 copay for each
prescription (Rx)
– If the Rx is $50, you pay $10, insurance pays $40
• Note that
– Let x be total spending
– You pay 0.15 on every dollar over $400 plus the original $400
– (x-400)*0.15+400=1950 and x=$10,733.33
35
– If P<$10, you pay the price
– if P≥$10, you only pay $10
• What does this do to your demand
36
9
P
d
Suppose there is a copayment rate of $C
Without insurance, demand is line (ab)
At a price of $C, people will demand Q1
With a copay of $C, any price in excess of $C generates
out of pocket price of only $C, so demand is vertical at
Q1
• Demand with a copay is therefore line (acd)
D w/out insurance = line ab
•
•
•
•
D w/insurance = line acd
b
c
$C
a
Q1
Q
38
37
Coinsurance
P
• Pm be price of medical care
• c is the coinsurance rate
S
Pp
• For next unit consumed by patient
– consumer pays Pmc
– Insurance pays Pm(1-c)
– Provider receives Pm
Pa
$C
D
Qa
Q1
Q
39
40
10
How coinsurance changes demand
• Qd = f(P) where P is price paid by the consumer
• Coinsurance changes this. Now there is a wedge
between what the provider gets and the patient pays
• Let
• In our supply and demand graph world, the price axis
represents the transacted in the market
• Without coinsurance, let Pt be the transacted price
– P t = Pd = Ps
• With coinsurance, suppliers receive Ps but consumers
only have to pay a fraction of that
– Ps the price received by suppliers (providers)
– Pd the price paid by the demanders (patient)
– Pd = cPt
• so
– Pt = Pd /c = Ps
41
42
• Consider graph on the next slide
• Without coinsurance
• Because consumers only pay a fraction of the
transacted price, they are willing to purchase more of
the good at the posted transacted price
• Suppose c=25%
• Without insurance, they would purchase 5 visits a year
at $100/visit
• Now, the transacted price can rise to $400/visit and
they would still demand 5.
• Doctor is paid $400, consumer pays $100, same as
before
– When Ps =0, Qd =Qm
– When Ps =Pm, Qd =0
• With coinsurance
– Pt = Pd/c=Ps
– When Ps =0, Pd still =0, Qd =Qm
• (demand curve rotates at point a)
– Ps would have to rise to Pm/c to eliminate demand
• since if Ps=Pm/c, Pd=Psc = (Pmc)/c = Pm
43
44
11
P
Demand for medical care
With and without coinsurance
Pm/c
• Without insurance, at price P1, patients would be willing
to consume Q1
• With insurance, in order for consumers to demand Q1,
the price received by sellers would have to rise to P1/c
P1/c
Pm
– Doctor charges P1/c
– Consumer pays (P1/c)c = P1
– Consumer is only concerned with the price after coinsurance
P1
a
Q1
Qm
Q
45
46
Example
• Demand curve without coinsurance
• P = 100 – 10Q
– Pd = 100 – 10Q
– when Ps =0, Q=10 and
– when Ps = 100, Q=0
• Coinsurance rate of c
• Let c=50%
• Pt = 100/c – 10Q/c = 200 – 20Q
– With coinsurance, Pt = Pd/c
• Demand curve with coinsurance
– Pt= Pd/c = (100 – 10Q)/c
– Pt = 100/c – 10Q/c
– when P = 0, Q=10 and
– when P = 200, consumers pay 100 and Q=0
47
48
12
P
200
With coinsurance
• Note that if c=0, when P=$50, Q=5
• With c = 0.5, P=$50, Q=7.5
100
Without
50
5
7.5
10
Q
50
49
With
P
Without
S
P2
P1
With
P
Without
S
P2
b
P1
a
b
Increase in consumer
Welfare due to expansion
Of output
a
c
Q1
Q2
abc = deadweight loss of
insurance
c
Q1
Q
51
Q2
Increase in cost due to
Expansion in output
Q
52
13
Deadweight loss of insurance
• With coinsurance
• Because of this wedge, there is use beyond a socially
optimal level
• Consumers value the increased consumption at area
Q1acQ2
• What it cost society to produce this extra output? Area
Q1abQ2
• Clearly Q1acQ2 < Q1abQ2
• Area (abc) deadweight loss of insurance
– Output ↑ from Q1 to Q2
– Price received by sellers ↑ from P1 to P2
• Recall what height of the demand curve represents
– At Q2 consumers value the last unit at P3
– Doctors get P2
– Patients only pay P2c
• Now there is a wedge between what people value the last unit
and what they pay
53
54
Example
• Demand curve with insurance
• Pd = 40 – 2Q
• Ps = 4 + 4Q
• c =0.25
– Pt=Pd/c = (40 – 2Q)/c
– Pt = 40/c – 2Q/c = 40/.25 = 2Q/.25
– Pt = 160 – 8Q
– Patients pick up 25%
– Insurance picks up 75%
•
Market solution with insurance
–
–
–
–
–
• Market solution without insurance
– Pd=Ps
– 40-2Q=4+4Q; 36=6Q
– Q=6, P=28
55
Supply = Demand
4 + 4Q = 160 – 8Q
156 =12Q
Q = 13
P = 56
56
14
P
160
DWL=(.5)(13-6)(56-14)
Demand with Insurance
• What do consumers value the last unit consumed?
– Q = 13
– Pd= 40 - 2Q = 40 – 2(13) = 14
S
• DWL= triangle abc
• Area = (1/2)height x base
56
40
– = (1/2)(56-14)(13 – 6)
– = 147
Demand without
28
14
6
13
20
Q
58
57
The tradeoffs?
(Why people hate economists)
• Recall from expected utility section
• Feldman and Dowd
– Insurance increases welfare because it reduces uncertainty
– Consumers are willing to pay a premium to reduce
uncertainty
–
–
–
–
• But -- the structure of insurance is such that consumers
do not pay the full dollar price of service, encouraging
them to over use, which generates a deadweight loss
Use 1980s data
$33 billion to $109 billion loss
9 to 29% of health care spending (mid 80s levels)
9 to 29% of health care spending in 2007 is $198 - $638
billion
• Optimal coinsurance rate?
– Estimate puts it at about 33-45%
– Far above current values (among those that have insurance)
59
60
15