01. Provision of Health Insurance

General Taxation

In this type of insurance contributions are income related in case of income tax and dependent on taxation goods and services. Since the poor often consume more of their income than the rich, this implies that there could be an inverse relationship. The poor pay a high proportion of their income in taxes. Contributions are not earmarked for health. Whether taxes are paid or not, does not determine entitlement e.g. UK, Sweden, Portugal system.

Earmarked tax

This is between general taxation and social insurance. It provides earmarked money from the pay roll tax for the health sector without guaranteeing any specific entitlement. It is envisaged that the advantages of provision of health insurance bureaucracy.

Social Insurance

This is referred to as public, compulsory or statutory insurance. Contributions are related to income and all the money collected is for the health sector. Premiums determine whether one is entitled to a free service. Sometimes entitled services are specified but not normally to the same level of detail as in a private scheme. Membership is on compulsory basis for a specified segment of the population. The German system is the best known example.

Community Insurance

This has similar characteristics to social insurance except that premiums are usually that rated rather than to income. Premiums are seldom based on individual risk assessments. These community based schemes are often recognized as a means of providing insurance coverage for rural communities which are unlikely to benefit immediately from either social or private health insurance. e.g. African, Asian insurance system.

Private Insurance

This type of insurance shifts the risk of a possible financial loss from individual members to the insurer who is paid a premium. The premiums include administrative, acquisition cost and profit for the insurance company. Decisions about the size of a premium employ a range of risk rating methods like age, claims experience and lifestyle to work out the premium. This makes them financially inequitable since risk is frequently inversely related to income. In both private and community insurance systems, individuals are expected to pay voluntarily. e.g. US, Switzerland system.

02. Key Theoretical Issues of Insurance

Adverse Selection

Adverse selection is a consequence of asymmetric information which happens when the parties on opposite sides of  a transaction have differing amounts of information. Under these condition there is a market failure or inefficiency. This result in a tendency for high risk people to be more likely to buy insurance or buy large amount than low risk. Adverse selection can be corrected by groups of people who join a plan, being selected on the basis of other characteristics other than their health status. This ensures that the health risks are random. When the insurer does not know the high and low risk individuals he may charge a uniform premium commonly called the community based premium. There still a probability of adverse selection; the community premium is low for high risk and high for low risk and therefore attracting the high risk people. Risk rating is one of the ways of addressing adverse selection. People at a very high risk or in a dangerous occupation like coal miners pay a higher premium compared with the teenagers in their first year of university. Risk rating schemes increase efficiency of insurance but are quite often regarded as immoral or inequitable. Others methods employed are developing plans with different combinations of premiums, deductibles and co-payment. If there is only high risk in the scheme, no possibility to spread risk. There must have a mixture of high of high and low risk in the scheme. Different methods or strategies should be taken to attract the people with low risk. In the scheme some people not claiming in order to cross-subsidies claimant. Even if people do not claim they benefit through purchasing certainty. But different people gain different amounts of utility depending on how risk-averse they are.

Moral Hazard

Moral hazard refers to situations where people with insurance coverage have a tendency to consume more health care or the doctor over provide services. They take advantage of their membership in a health insurance plan by using services more frequently than they would had they not been members. Co-insurance and deductible are used to contain moral hazard and quite often they are used together. Co-insurance  scheme and the clients. Co- insurer refers to the percentage while co-payment is the amount paid by the insurer. A deductible refers to the amount paid by the insured before insurance comes in. Insurance does apply until the client has paid a deductible. Co-payments make the client more and deductibles discourage frivolous claims or visits and make the client more aware of the result of one’s action. Both have a net effect of reducing claims

Risk Pool

The risk pool is a situation where the people with insurance coverage may demand a very high medical care for any certain accident. An insurer must maintain a reserve to deal with such type of unexpectedly high demand for medical care. In case of risk pool the probability of incurring cost that are significantly higher than the average declines as the number of people enrolled in the scheme increases. In addition some administrative cost decline with larger pool.

Risk and Risk- averse

Risk is usually used to describe the form of uncertainty. Some times economists distinguish between risk and uncertainty. Risk refers to situation in which we can list all the outcomes and assign the probabilities to them. Uncertainty refers to situations in which we may neither be able to list the possible outcomes of the action nor assign the probabilities.

 

General Taxation

Earmarked Tax

Social Insurance

Community Insurance

Private Insurance

Are contributions risks, community or income rated?

 Income

 Income

 Income

 Community

 Risk

Are contributions earmarked for the health sector?

 No

 Yes

 Yes

 Yes

 Yes

Do contributions determine entitlement?

 No

 No

 Yes

 Yes

 Yes


The variance of the possible outcomes is frequently used as a measure of risk but this should not be taken for granted. For some distributions of possible outcomes and some utility function variance is exactly right as a measure of risk. This applies if the utility function is quadratic or if the outcomes are normally distributed. For other type of utility functions and distributions, variance is only and approximates measure of risk and indeed is not always defined. Risk-neutrality means that utility is a linear function of outcomes. Risk-aversion means that the marginal utility is decreasing in outcomes. An individual with decreasing marginal utility of total wealth will get less utility from a prospect with uncertain returns than from safe project with the same mean expected returns. Such an individual will refuse actuarially fair gambles and is risk-averse. So that of any two projects with equal means outcomes that with the lower dispersion will be preferred. A risk free asset is one with zero dispersion of outcomes; such assets are hard to find. With zero inflation, money is risk free asset.

Methods Used to Assess Risk Attitudes

Attempts to assess risk aversion and risk loving in economic behavior are usually based on choices between lotteries. There are several ways of eliciting the risk attitudes which are (a) a choice between a certain alternative and a probable alternative (b) choice of between to probable alternatives with same or unequal expected value (c) request for a certain value equivalent to a probable value (d) request for a probability statement which makes the subjects indifferent between two alternatives one of which is certain (e) request for a probability that makes the subject indifferent between two alternatives one of which has a known probability.

The risk attitudes elicited through the different techniques are seldom exactly the same. This demonstrated by the so called preference reversal phenomenon. Many investigations of businessmen’s risk attitudes have employed verbal description of situations in which the options have been couched. The descriptions make the situation more  interesting to the respondents but they may give rise to association that obscure the risk propensity measure and rather reveal attempts. The respondents may feel a strong need for making qualifying statement rather than choices.