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Cost of health insurance essay



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The cost of healthcare has become an increasingly salient issue in recent years. In the United States as well as in many European countries, health related costs have risen significantly and have increasingly constituted a larger proportion of GDP. [1 ] The rapid increase in healthcare costs has threatened to push healthcare systems in certain countries to the financial brink. Citizens in countries with privatized systems like the United States' have seen their premiums rise at rates higher than inflation with many people becoming unable to afford even basic health insurance. In countries with universal health care, costs have also risen with much of the burden being passed on to residents in the form of higher taxes. [2 ] The recent healthcare debate in the United States underscores the importance of this issue. Although there was disagreement as to how the problem of unaffordable healthcare should be solved, there was a general consensus that something had to be done to lower health care costs.

The need to drastically reduce healthcare costs and increase efficiency has led to much research and debate. Many inefficiencies exist within the system but for the purposes of this paper, the main focus will be on over utilization of health care services and more specifically ambulatory care. Regardless of the type of insurance, the presence of the third party payer has the potential to induce over utilization of health care services. If patients are not directly exposed to the costs of their consumption, there is considerable incentive for them to take advantage of the system and to consume at a higher rate than they would have otherwise. This excess consumption is the result of a general phenomenon called moral hazard. Moral hazard exists when one party's insulation from risk causes it to behave in manner that is inconsistent with how it would have behaved had it been exposed to that risk. [3 ] In order to combat excess consumption and marginal utilization of ambulatory services, the mechanism of cost sharing through copayments is often used. Copayments are either a flat fee or percentage of total price which the user must pay upon consumption of services. The rationale behind copayments is as follows: insurance users are generally desensitized to the cost of their services because they incur no expenses at the point of consumption. This desensitization leads to an excess consumption of services. By making the user pay a portion of the cost at the point of consumption, one forces the user to become sensitive to the costs of his/her consumption thus reducing his/her propensity to demand and consume unnecessary services. [4 ] The use of copayments is quite significant because by reducing the over utilization of ambulatory care, one effectively reduces the burden born by taxpayers and premium payers.

Cost sharing through copayments has proven effective at reducing over utilization in many instances but is its effectiveness the same in all systems? Furthermore, do the economic demographics of the user population have any effect on the efficacy of user payments in reducing the utilization of ambulatory care? A look at the effects of copayments in the Medicaid system in the U.S. versus in the German Universal Healthcare system will provide great insight into this issue.

Both healthcare and health insurance in the United States are provided primarily by the private sector. The cost of healthcare constitutes a significant portion of national and individual income with the United States leading the world in money spent per person on healthcare. Although the United States spends a considerable proportion of its income on healthcare, about 11 percent of its citizens remain uninsured with an estimated 21 percent having less than adequate coverage. The reasoning of those who remain uninsured varies from circumstance to circumstance. Some people choose not to enroll in an insurance plan because they do not feel like they have considerable health risks and feel that their income could be put to better use. Others, who have fallen victim to financial strain, simply do not have the resources to afford adequate insurance or any insurance at all. The people in the latter category often have incomes that are just above the threshold that would qualify them for governmental aid, but for those who live below what has been established as the poverty line, various programs exist to assist with health insurance. [5 ]

One of the primary programs which the U.S. uses to provide health insurance to the poor is the Medicaid system. Medicaid was founded in 1965 under the Social Security Act. The Medicaid program is jointly funded by the federal and state governments. Each state names its own Medicaid program and has the responsibility of setting its eligibility guidelines while the Center for Medicare and Medicaid services sets general parameters with regards to funding and service delivery. Poverty is seen as the main prerequisite for Medicaid eligibility, but low income alone does not qualify an individual for Medicaid coverage. In fact, a considerable portion of poor individual in the United States do not qualify for Medicaid. In order to qualify for Medicaid, an individual must fall into either one of the Mandatory Medicaid eligibility groups or into what is defined as a categorically needy group. The people who fall into these categories range from Supplementary Security Income recipients to medically needy persons with excessive medical costs. For the purposes of this paper the most important thing to keep in mind is that the majority of Medicaid users fall below the poverty line. [6 ]

The universalized German healthcare system contrasts greatly with the privatized American system. 88 percent of Germans are covered under their Statutory Health Insurance Plan with the other 12 percent opting for the private sector. The national healthcare plan is mandatory for all salaried employees, and only a few select groups have the option of purchasing premium private insurance. Premiums are set by Germany's Public Ministry of Health to levels that are determined to be economically viable. Premiums do not take into account the health status of individuals but instead are based on a percentage of salary. Because the universal system covers the majority of German citizens, the demographics of its users differ greatly from those of the Medicaid system. More specifically, the average income of the typical German user is significantly higher than that of the average Medicaid user. [7 ]

In order to compare the relative effectiveness of copayments in the two systems, this paper will consider data from two natural experiments. One study by Helms, Newhouse, and Phelps entitled "Copayments and the Demand for Healthcare: The California Medicaid Experience," examines the effect of the introduction of copayments on Medicaid users in California. The other study entitled "Copayments in the German Healthcare System: Does it Work?," examines the effects of the introduction of a 10 Euro copayment for the first physician visit of each quarter in Germany.

Because of rising health care expenditures, in 2004, the German government introduced a copayment for all those covered by Statutory Health Insurance. Those covered by private insurance plans where exempted from the copayment and thus within the framework of this experiment serve as a natural control. The copayment was 10 Euros and was to be paid upon the first doctors visit of each quarter. Certain groups were to be exempted including those with chronic conditions and patients with considerably low incomes. The data collected in the study covers 2000-2003 and 2005-2006 - the periods before and after the intervention. According to the Data collected in the Study, the number of physicians visits for non exempt SHI members dropped from 2.75 in 2003 to 2.5 in 2004. That number increased to 2.6 in 2005 before falling back to 2.5 in 2006. Interestingly PHI members followed a similar trend during this period with average visits falling from 2.25 in 2003 to 2 in 2004 then rising back up to 2.5 in 2005 before falling back to 2 in 2006. [8 ] The fluctuation in these numbers suggests that while the copayment may have had an initial effect, it did little to reduce utilization of ambulatory services in the long term.

A similar natural experiment took place in California in 1972. In order to reduce utilization of ambulatory services, Medicaid patients were asked to pay a small out of pocket fee for certain out of hospital services. A group of patients was exempted to serve as a control. Data was collected for six quarters from July 1971 to December 1972. The sample includes 400,662 individuals from the San Francisco, Tulare, and Ventura Counties. The demographics of the sample differed greatly from the general population with 100 percent the participants being low income individuals. From January 1, 1972 to the end of the experiment, the Californian government imposed a copayment of 26 percent on the sample population. The copayment was $1 for the first 2 visits of each month with subsequent services being offered for free. In the copayment group, the average number of physicians visits per quarter decreased from .6772 before the imposed copayments to .6494 representing a 4.1 percent decrease in utilization. For the control group the number of visits dropped from .7316 to .7274. Using complex methodology, the numbers where adjusted to account for demographical and behavioral differences between the experimental and control group. After this adjustment, it was found that the actual effect of the 1 dollar copayment was a significant 8 percent reduction in doctors visits. [9 ]

The findings of these two experiments are significant. While the introduction of the copayment in the German system seemed to have the initial effect of reducing utilization, in the long run it proved futile. On the other hand cost sharing seemed to have quite a significant effect in the Medicaid system in California. There are various reasons for this statistical disparity. One may be the differences in marginal utility that exist between the two populations. The Californian experiment monitored a welfare population. Because all of the subjects were of low income the marginal utility of one dollar was quite high. Given this fact, it is quite likely that even a small amount of money played a significant role in altering their behavior. In contrast, the average member of the German population was relatively well off. The majority had the means to take care of life's basic necessities. The marginal utility of their money was considerably less than those of the Medicaid users. This is likely why the imposition of copayments had very little lasting effect on the utilization of ambulatory services. It is also likely that other factors including various regional, social, and cultural differences, may have contributed to the disparity, but more research is required to asses the effects of these variables.

Given the results of the two experiments, it appears that the socioeconomic demographics of an insured population play a significant role in the effectiveness of user payments at reducing over utilization of ambulatory services. Cost sharing mechanisms are quite effective at reducing over utilization in poorer populations, but loose their effectiveness with more affluent insured populations. While it is quite clear that a significant relationship exists between the efficacy of cost sharing mechanisms and the income level of insured populations more research is needed to determine the full extent of this relationship.

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