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What Is Health Insurance (Good) For? pp 55–83Cite as

The Scope of Health Insurance

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Abstract

Chapter 2 described the economic motivation for health insurance and the financial mechanisms for providing health insurance. This chapter explores the scope of health insurance, and the amount of protection that individuals may seek to obtain for their health capital. The first section of the chapter examines the problem of quantifying and measuring the protection provided by health insurance. Many insurance models assume that the cost of insurance varies with the quantity of protection. The quality and the term of protection are less tangible features that also play a role in determining how much insurance costs and how much protection it provides. The multidimensional nature of health insurance and the trade-offs between the degree of protection and the price of insurance has motivated research investigating the optimal quantity of insurance. While full protection eliminates all exposure to health risks, such insurance may be too costly for individuals or unavailable in the market. Economics focuses on the choice of “optimal” health insurance, and generally finds that partial insurance is optimal for the protection of health capital in the presence of budget constraints. Optimal insurance is therefore the benchmark for determining the suitability of available insurance arrangements as well as the ability of health insurance policy to improve health insurance. The various markets for health insurance often result in individuals obtaining a suboptimal amount of insurance—certain populations are overinsured while others are underinsured or uninsured. This chapter concludes with an exploration of market failures that may explain these suboptimal health insurance arrangements, motivating a deeper investigation of health insurance markets in Sect. 3.2.

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Notes

  1. 1.

    The literature on physician and provider perception of health insurance quality is less developed than the literature on patient and consumer perception and choice of health insurance. Prior studies have found that physicians have a strong opinion that health insurers, among others, “… have a ‘major responsibility’ for reducing healthcare costs …”. The same study, when examining physician’s opinions about third-party payment, found that “Few expressed enthusiasm for ‘eliminating fee-for-service payment models’ (7 %)” (Tilburt et al. 2013). Future research into provider perceptions of health insurance may be a fruitful area for future research.

  2. 2.

    Money itself is not even required in these models. The basic mathematical technique involves what is called a “numeraire” good, or a good whose price and quantity is fixed in order to index the sets of prices and quantities of all other goods (Mas-Colell et al. 1995, p. 325). It is a convenience to consider money to be this good, since it is a unit of exchange with a fixed value, i.e., a dollar has a fixed value of one dollar. In an asset pricing model, it is convenient to think of the numeraire good as a risk-free asset, meaning one with a fixed return (Gollier 2001, p. 332).

  3. 3.

    Governments could also borrow the money, but such borrowing simply passes on the cost to future taxpayers in the form of taxes to repay those bonds.

  4. 4.

    Of course, insurers can ask consumers questions, and then rate the insurance on the basis of individual characteristics (underwriting). There is always a limit to the amount of information a company can obtain from a consumer and use, as well as the possibility that the consumer would misrepresent themselves, i.e., commit fraud. One of the major changes under the ACA is the end of such underwriting in the nongroup market. However, such underwriting has not been a feature of the group or government-provided markets for years (or ever).

  5. 5.

    Note that this assumes that all else is equal between the two claimants, which is clearly not the case. For example, an insurer could use its scale to negotiate a lower price for a given service, thereby paying less when adding together the lower negotiated rate and the cost of adjudicating the claim. That is why the economies of scale and scope are crucial to justifying the use of health insurance on an economic basis.

  6. 6.

    Misrepresenting oneself when the health insurer does ask about health status or other variables is a form of fraud as discussed above concerning underwriting (note iv).

  7. 7.

    It is also important to note that this is not a black and white distinction. “Ex ante moral hazard ” refers to a situation where a person does not undertake preventative behavior in anticipation of being able to address the need for care through insurance in the future (Ehrlich and Becker 1972).

  8. 8.

    There is also a more political question in terms of who derives the most benefit from the current system as it is structured. That question is important because it influences and constrains possible solutions to improve health insurance and health insurance markets. For an in-depth examination, Steven Brill’s “America’s Bitter Pill: Money, Politics, Backroom Deals, and the Fight to Fix Our Broken Healthcare System” serves as an account of how many of these forces shaped the ACA (Brill 2015).

  9. 9.

    Milton Friedman’s “Essays on Positive Economics” providers one extended treatment of positive versus normative economics, with an emphasis on the use of the positive economics method (Friedman 1953).

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  1. Department of Public Health, College of Education, Health, and Human Sciences, University of Tennessee, Knoxville, TN, USA

    Robert D. Lieberthal

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Lieberthal, R.D. (2016). The Scope of Health Insurance. In: What Is Health Insurance (Good) For?. Springer, Cham. https://doi.org/10.1007/978-3-319-43796-5_3

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