ECO 506

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ECO 506 Health Care Economics

• Lecture Notes

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Health Insurance

• I. The demand for Health Insurance
• Definitions
• Deductible when the patient pays all the price
  for a certain range
• Coinsurance the insurer pays only part of the
  price, the patient pays the rest
• Limits coverage up to a maximum amount
• Indemnity Insurance reimbursement to the patient
  for medical costs (often fixed price per day in
  hospital)
• Service insurance reimbursement to the provider
  for medical costs
• Impact of these on demand?

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• An economic theory of demand for health insurance
• Why do individuals choose to buy insurance and
  how much?
• Budget constraint and preferences
• Expected utility analysis
• Expected utility analysis
• Risk aversion
• Suppose we have the following situation
• 1. an individual has 50,000 in money
• 2. there is a 10 probability that the individual
  will become ill and have to pay 25,000 for
  treatment.

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• gt 1 good state 2 bad state
• Let Mg money income in good state
• Mb money income in bad state
• Suppose you can insure against the loss
• For example suppose you can buy 10 of insurance
  coverage for 1 and that you fully insure against
  the loss.
• 10 change of gt Mb 50,000 25,000 25,000
  2,500
• Mb 47,500
• Mg 50,000-2,500 47,500
• Regardless of which state of nature occurs

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• Let Y premium cost/dollar of coverage
• K dollars of coverage
• gt in general..
• 10 change of getting 25,000 K YK
• 90 chance of getting 50,000 YK
• Now, contingent consumption
• N states of nature and consumption is contingent
  upon which state of nature youre in.
• If states are just different consumption bundles
  gt consumer theory can handle it.

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A Endowment B Full
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• How do you attain points where Mb gt 50,000 yk
• By over-insuring
• In essence by selling insurance if such a choice
  is possible which it may not be
• Slope ?Mg /?Mb -yk/k-yk -y/1-y
• Now look at utility function and indifference
  curves to talk about how individuals make
  choices.
• But 1st, how do probabilities enter info utility?
  They should, shouldnt they?
• If Pg .9 Pb .1 (should get a different choice
  than if Pg 1 and Pb 0

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• Suppose m1, m2, m3 income in states 1 and 2
• ?1 ?2 ?3 probability in states 1, 2, 3
• 2 definitions
• Expected value ?1, M1, ?2, M2, ?3, M3. In
  our example EV (.9) (50,000) (.1) (25,000)
  47,500
• Explain
• Expected utility ?1, u(M1), ?2 u(M2) ?3
  u(M3) .
• Expected utility hypothesis you choose that
  option with the highest expected utility weight
  of ability in difference possible states of
  nature.

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• Now when does an individual choose to insure?
• Assume that the premium is actuarially fair (book
  calls pure premium)
• i.e. reflects the true probabilities so that in
  our example must pay ten cents the dollar gt
  premium 2,500 EV
• 1. Risk Aversion

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• Now look at two possibilities
• Dont buy insurance gt Euni .9 u(50K) .1
  u(25K)
• Buy insurance gt Eui u(97,500)
• An individual is risk averse for when EU (ins) gt
  EU (no ins.)
• Or u (EU (g))
• 3 possibilities
• 1. EUNI lt EUI gt risk averse
• 2. EU(NI) EUI gt risk neutral
• 3. EUNI gt EUI gt risk lover

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• So depends upon the individuals shape
  (preferences) of utility of money curve

Risk averse
Risk lover
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• Have shown two things that matter in deciding
  whether to buy insurance
• 1. Attitudes toward risk
• 2. The insurance premium

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• Risk averse individuals always buy insurance when
  the premium is actuarially fair as it was in our
  example.
• Now, just look at risk averse individuals
• And look at the price or premium
• Even with competition, insurance firms can ____
  charge an actuarially fair or pure premium
• Why?
• Suppose 10,000 individuals--- all the same with
  the same insurance
• Each pay 2,500 in premiums for a total of
  25,000,000
• 10 of these individuals will incur losses of
  25,000.
• The company must pay out (25,000)(1,000)
  25,000,000

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• But it costs more money to provide insurance
  (i.e. transaction costs of gathering premiums,
  paying for losses, etc.
• Even if profit 0 premium gt pure premium
• Q Will a risk averse individual still insure?
• A Perhaps

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• 1st look at EV of the gamble
• M3 gt EU U3 and willing to pay (M2-M4) at most
  to insure the distance M3 M4 the additional
  amount willing to pay above the pure premium if
  prem gtM2 M4 gt dont insure

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• Implications of this Analysis
• 1. as the probability of the loss gets larger gt
  M3-M4 gets smaller gt less likely to buy
  insurance
• i.e. if you are sure to pay for the expense gt
  not willing to buy insurance. Why?
• 2. As the probability of the loss gets smaller gt
  M3-M4 gets smaller gt less likely to buy
  insurance
• i.e. as you become more sure that loss will not
  occur less likely to buy insurance. Why?
• 3. As the magnitude of the loss decreases less
  likely to buy insurance because M4-M3 decreases.
• 4. As an individual becomes more risk aversegt
  more likely to buy insurance.

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• 5. As the price of insurance increases gt buy
  insurance for fewer events (less insurance) where
  price amount willing to pay above pure premium.
  
• 0 1 line amount person willing to pay above
  pure premium
• AA price of insurance (above fair premium
  (pure))

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• Rises assuming costs increases as the of claims
  increases due to rising transaction costs
• Individual only buys for P1 lt Prob. lt P2
• If price increases gt this interval gets smaller
• 6. The starting income of the individual
• At high income levels gt MU low so less willing
  to pay above fair premium
• At low income levels gt MU is high again because
  the distance between actual and EU is less
• This is wrong, at least the part about income
  levels affecting the distance. It still may be
  true that lower income people are less likely to
  buy insurance but this is because of budget
  constraints not the distances between the curves.
  

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• Now look at the evidence Tables 6.1 and 6.2
• We see
• 1. if prob. is low gt use is low
• 2. if prob. is high gt use is low
• 3. if magnitude is high gt use is high
• 4. if magnitude is low gt use is low
• gt model predicts relatively well
• The above assumed that D for M.C. perfectly
  inelastic once an illness occurs. Suppose its
  not.
• Moral Hazard the tendency for insurance to
  affect the individuals behavior. i.e. the
  individual can affect the size of the loss under
  insurance.

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• Examples
• 1. fire insurance gt less likely to install fire
  alarms, smoke detectors
• 2. Car insurance gt may drive faster
• 3. Health insurance gt individuals may invest in
  less preventative care. Why?
• Preventative care is not paid for but other care
  is.
• Other examples depends upon how the insurance is
  set up

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• Look at 2 impacts of the moral hazard using
  Demand Analysis
• Full Insurance Coverage P0 to consumer and buys
  Q Q2 gt Q
• This is inefficient since time cost is MC P at
  Q2
• MB 0 gt MC gtMB
• With no insurance, individuals consume Q Q
  with PP

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• Is this behavior rational? Yes, individual is
  equating MB with MC 0
• Given that Q increases, what happens to the
  premium? Clearly, it must rise as well. Both
  because Q increases and because P increase if S
  is upward sloping.
• Suppose
• P 1,000
• Q 10
• P2 2,000
• Q2 20
• Probability of illness .2
• Assume moral hazard does not cause this to change

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• With no moral hazard and no inefficient
• Pure Premium (.2) (1,000)(10) (.8) (0)
  2,000
• With moral hazard pure premium (.2)(2,000)(20)
  (.8)(0) 8,000
• Premium rises to pay additional costs
• Q Why dont individually obserce? Increase
  insurance premium and stop increase QD?
• A 1st, individuals make choices on the
  margin. The effect of insurance is to decrease
  the MC to the individual
• 2nd need to understand the concept that
  insurance groups people together gt by your
  decrease in QD you get very little benefit.

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• Implications of the Moral Hazard
• 1. QD increases with insurance ( P increases as
  well)
• 2. Premium rises gt fewer people insure
• Recall

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• 3 methods to decrease moral hazard problem
• 1. Deductibles
• Assume MC constant for simplicity
• Let Q1 deductible amount of services
• Actually, deductibles are usually in dollar
  amounts

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• Look at 2 situations
• 1st Q1 lt Q gt will always buy the insurance at
  the pure premium. Why?
• 2nd Q1 gt Q gt either dont buy insurance an
  consume at Q or do buy insurance and consume at
  Q2
• How do you decide? If you do buy
• Pay P x Q1 gt
• Extra cost (P)(Q1-Q) area a area c
• Extra benefit Area under from Q to Qz Area c
  Area b
• gtBut only if extra benefits gt Extra costs
• OR if a c lt c b or B gt A
• gt Deductibles do not reduce the amount of Q
  purchased if have insurancejust reduces the of
  people who buy insurance.

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• 2nd Coinsurance
• Pure premium (P -Pc)(Q1)(.2) lt (P)(Q2)(.2)
• Let Pc coinsurance price gt even with insurance
  must pay some of the price
• 1- Moral hazard problem is less
• 2-pure premium is lower with coinsurance gt more
  people buy insurance

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• 3rd Prepaid plans like HMOs and PPOs focus on
  Drs and patient incentives not just patient thru
  coinsurane or deductibles.
• Adverse Selection Consider 2 groups of people
• 1st group prob. of illness .8
• 2nd group prob. of illness .2
• Suppose that the insurance company cannot
  distinguish between individuals in the 2 groups.
• Results?
• Assume equal number of individuals in both
  groupsgt company observes a group who prob. of
  illness .5 and bases its premium upon that.

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• Let Mg 10,000 MB 2,000
• Pure premium for Group 1 (high risk)
  (.8)(8,000) 6,400
• M 10,000 -6,400 3,600
• Pure premium for Group 2 (low risk) (.2)(8,000)
  1,600
• M 10,000-1600 8,400

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• Both would be willing to buy at average premium
  of 4,000 (m 6,000)
• In our graph, Group 2 does not buy but Group 1
  will always buy. Why?
• Group 2 may buy dependent upon several factors
  but most important is how different the risk
  levels for the 2 groups.
• Conclusions
• Adverse selection
• 1. causes fewer low risk individuals to buy
  insurance and more high risk individuals to buy
• 2. Premium must rise if this is true, more low
  risk individuals drop out

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• Controls?
• 1. experience ratings but perfect experience
  rations no insurance.
• 2. exclusions for pre-existing conditions
• 3. decrease premium the longer insured
• 4. unwillingness to pay deductible and
  coinsurance may signal risk status

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• Conclusions for the Chapter
• 1. forced coverage for all expenses is
  inefficient. Both high and low prob. events
  should likely not be covered. Why? gt 100
  coverage not optimal
• 2. moral hazard and adverse selection problems
• 3. Public Policy
• National health insurance?
• Coerced coverage for all individuals
• discrimination

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• Other issues
• 1. Differential Health Insurances
• Suppose Health insurance reimburses hospital
  expenditures but not physician services
• If decrease P of H gt substitutes hospitals for
  Drs and inefficient since original iso-cost
  represented true costs.
• This is a service policy gt results in overuse of
  those services which are reimbursed.

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• An indemmity policy keeps the relative prices of
  the two goods the same since it reimburses for
  all medical expenditures
• This does cause D more MC to increase but does
  not change relative prices gt no technological
  inefficiency
• Note figure 6.9 indicates allocative efficiency
  but this is incorrect

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• Service benefit insurance creates more problems.
  i.e. inefficiency while indemmity insurance does
  not.
• 3 Problems
• Increased use of insured services
• Point where MP 0
• Increase demand for quality which is inefficient

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• Tax Advantages
• Health insurance as a fringe benefit is not taxed
• Look at the individual who has two choices
• 1. Get a 300/month raise (BL2)
• 2. Get health insurance benefits (BL3) worth
  300/month

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• Q Why ever choose (2)? Since it cuts off part of
  BL?
• A Tax benefits suppose 300 is taxed but health
  insurance is not gt for 1 actually face BL4
• gt Plan 2 Makes everyone better off but does
  cause inefficiencies since forces some
  individuals to use more health insurancethen
  optimal
• Note there is one type of ___ that may not be
  better offthe individual would choose no health
  care and depends on tax rate if ind. A would be
  better off

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The Market for Health Insurance

• Public Policy 2 Questions
• 1. is intervention justified?
• 2. what type of intervention?
• Efficiency in 2 senses
• Supply Side
• 1st- firm technological efficiency (use resources
  to min. cost of production)
• 2nd- Industry does each firm produce at min
  point on LRAC? suppose not any reason why this
  might be okay?

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• Demand Side
• Allocative efficiency MBMC?
• Note will basically take the same approach for
  all the other markets as well.
• A) Demand
• Market Recall that market demand is determined
  by
• 1. price of insurance
• 2. prob. of loss
• 3. magnitude of loss
• Income of the consumer
• Risk aversion
• Price elasticity -1 gt increase P of 10,
  decrease QD by 10

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• Firm Demand
• Look at 3 different types of insurance
• 1. Blue Cross/Blue Shield non profit
• 2. other commercial plans profit
• 3. Independent plans prepaid plans (HMOs) self
  insurance service contracts
• Look at the changes embodied in table 11-2, p.
  237
• Trends
• 1. increas in of Pop. covered but slight
  especially in later years
• 2. decrease in BC/BS and big increase in
  Independent
• gtmarket demand is relatively inelastic but firm
  demand is elastic due to substitutes and
  competition

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• Differences in
• 1. type of benefit
• 2. price
• 3. extent of coverage (Coinsurance, Deductibles)
• 4. reimbursement
• 5. reputation
• Predictions
• 1. price will vary as the product varies
• 2. the product will change over time as pref.
  change (or as costs change)

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• Now look at efficiency
• Is there an information argument that consumers
  find buying insurance inefficient since costly to
  gain information about competing cos?
• Probably not.
• 1. large benefit itemgt pays individuals to gain
  info
• 2. insurance often bought by groups and
  cost/person of gaining information is less.
• gt information probably not a problem (note table
  8-2 suggests it is for individual policies)

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• Now look at Benefit/Premium Ratio
• Benefit average benefit paid for by group
• Premium price of insurance for that group
• If B/P ratio 1 gt premium price
• Premium
• If B/P ratio lt 1 gt price gt pure premium as B/P
  ratio decreases, price increases
• If industry competitive expect to see B/P ratio
  close to 1
• If monopolygt B/P ratio would be low
• Look at table 8-2 to see how this has worked
• Note book concludes that a fair amount of
  competition exists in the health insurance
  market, especially in the later years.

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• Community Rating
• Why dont we just put everyone into the same
  basket, charge them the same premium and get the
  same benefit? community rating
• This is what Blue Cross did
• Problems
• Suppose we have 2 large goals
• 1. efficiency
• 2. redistribution so low income individuals can
  afford medical care
• Look at how community rating affects both of
  these goals

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• Assume 2 groups High risk and low risk
• What you are trying to do is cross subsidize the
  high risk group. But 3 problems
• 1) Inefficiency low risk will be paying too high
  a price gt may choose to self-insure even though
  for cost they should not.
• 2) Is the high risk group the one that we want to
  subsidize?
• Blue Cross subsidized the old but are they low
  income?
• Evidence suggests that Blue Cross actually
  subsidized the middle to high income.
• 3) Is community rating the efficient method of
  subsidizing?
• No, because it distorts choices by others gt just
  use direct subsidies to achieve the goal.
• Competition ensured the demise of community
  rating. Low risk groups would leave the Blue
  Cross system with more options and this is what
  happened.

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• The uninsured
• Look at table 11.3 / 11.4 (p. 241-42)
• Why do people choose no insurance? What does our
  theory tell us?
• P increase or decrease (prob.)
• Loading costs
• Lack of competition

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• Working uninsured
• Book discusses 3 major reasons
• 1. see figure 11.4 (p. 242)Basically firm has
  limited exp. Rating gt must pay i1 not i0 gt
  cant compete
• 2. Pre-existing conditions may keep out certain
  industries with high of such peopleBook
  discusses beauty shop workers (temporary, young,
  etc.)
• 3. Attitudes
• Solutionsmandated coverage?
• Separate insurance from work

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• Conclusion
• D relatively competitive especially in recent
  years gt allocatively efficient
• 2 points to support this price is close to pure
  premium and demise of community rating is
  probably a result of increased competition in the
  market.
• B) Supply look at 2 issues n determining the
  technological efficiency of production of health
  insurance
• 1. economies of scale right of firms in
  industry
• 2. each firm produces at min. cost
• Note in normal model, competition ensures these
  2 things but may have (1) information problems
  and (2) non-profit firms like BC BS.

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• (1) Economies of Scale book notes that there are
  many firms (gt 1,000) in the insurance industry
• Empirical evidence seems to suggest that
  costs/claim decreases as the insurance firm gets
  larger. This appears to be true for commercial
  firms and BC BS.
• Problems
• How do you measure costs?
• General problems with all these quality and type
  of service varies gt may get bias.
• The type of policy matters as well
• For example group v. individual policies. 2nd is
  likely to be more costly to administer gt may get
  additional bias.

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• (2) Internal efficiency
• Theoretical
• Small information problems gt Competition and
  profit-max will result in internal efficiency
• Currently doesnt exist in a large sector
  especially w.r.t. BC BS for 2 reasons
• 1. BC BS (BC est. by hospitals directly) have
  some monopoly power (competitive advantages) due
  to
• BC BS non-profit gt favorable tax treatment but
  premium increases are regulated. note lost
  federal tax exempt status in 1986
• Blues do not compete with each other gt legal
  collusive arrangement between them.
• BC (hospital portion) receives a discount on
  hospital charges that most commercial insures do
  not. Why?

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• One possibility is that hospitals are trying to
  increase utilization of their expense services.
  BC provides more comprehensive coverage than most
  hospital plans.
• gt monopoly power for BC BS
• Why dont they just drive other, less competitive
  firms out of the industry?
• Because they are not profit-max. They use their
  competitive advantage to benefit others (by
  increased costs of production gt inefficient)
• Possibilities
• Consumers - not much support for this
• Hospitals - some support for this
• Physicians - fair turnout of empirical support
  for this

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• Conclusion
• 1. Economies of scale exist
• 2. BS/BC may be internally tech. inefficient
• 3. However, increased competition in the past
  decade, especially by HMOs, etc. has decreased
  the ability of BC BS to be inefficient gt
  prospect for the future looks good.

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• Market Competition in Health Care
• Basically want to look at 2 issues
• Why did competition evolve now and not before?
• What is the nature of the new competition?
• I. Why did competition evolve?
• A. Impetus from several sectors of the market for
  increased competition
• () Federal initiatives fueled by concern with
  rising expenditures on Medicare gt implemented
  several plans
• Increased supply of physicians by
• Subsidizing construction of new medical schools
• Subsidizing medical education for physicians and
  all health professions
• gt Increase competition among physicians by
  increasing supply.

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• HMO acts decreased expenditures by stimulating
  HMOs
• 1973 HMO Act
• Employers with more than 25 employees had to
  offer HMO option in area
• Federally qualified HMOs exempt from restrictive
  state practices
• 1979 amendment to CON legislation
• Loosened restrictions on building hospitals gt
  HMOs found it easier to build their own hospitals
  if desired.
• gt increased comp. especially when hospitals
  began to have excess capacity

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• Medicaid Changes- basically eliminated the
  patients right of provider choice gt states could
  negotiate with efficient providers
• New hospital reimbursement DRGs talked about
  before. gt decrease occupancy rates in hospitals,
  etc.
• Note by this time, comp. already taking effect.
• (2) private sector
• Basically business wanted to decrease costs of
  health ins. Benefit programs for a number of
  reasons recession, foreign competition, etc.
• Solutions self-insurance, deductibles and
  coinsurance, pressure on insurers for efficiency,
  insurance coverage for low cost substitutes for
  hospital care.

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• Impact
• Business concerns translated into insurance
  concerns. Why?
• Hospital utilization decrease gt excess capacity
  in hospitals developed occupancy rate decreases
• gt hospitals became more willing to participate
  in alternate delivery systems
• Note the same kind of things had happened before
  but had not resulted in increased comp. Why?
  Anti-competitive practices by physicians.
• gt of even more importance

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• (3) Application of anti-trust laws to health
  sector
• Previously not applied to health sectorgt before
  when above conditions held competition by such
  things as
• Denying hospital privileges to participating
  physicians
• Denying licences
• Limit advertising
• Why? Service industry exemption gt decisions
  which changed this recently.
• Goldberg vs. Virginia State Bar price fixing not
  legal for service industries
• 1978 Supreme Court denied the use of
  anti-competitive behavior by engineers
• gt service industry exemptions lifted or at least
  decreased

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• Advertising has 2 impacts on the market
• 1st- decrease price of medical careWhy?
• 2nd- decrease variance of price of medical
  careWhy?
• 1st increase information available to the public
  gt increase elasticity of any individual
  suppliers D Curve

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• P is higher with no advertising and lower with
  advertising
• 2nd- recall our theory of how consumers search
  for best quality and best buy.
• Do it by spending resources. Get more variation
  in price for large budget vs. small budget
  goods when search costs are higher
• gt advertising (as long as it contains info
  decrease search costs gt get less variation in
  the price between difference producers)

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• 2 impacts of Advertising
• 1. consumers have info on different products
  price and qualitygt Decrease price in market
  because n increases/
• 2. decreased consumers search costs gt decreased
  variation in prices
• 3rd possible impact is to remove barriers to
  entry for competing firms includes new Drs and
  new HMOs/PPOs.

61

• Empirical Results appear to support the theory
• (1) P decreases (2) elasticity increases gt more
  substitutes. (3) variation decreases
• Also concern with negative effects of advertising
  i.e. not informative but induces individually to
  buy more low quality services
• But empirical work finds no reduction in quality
  of services with increased advertising (may even
  increase Quality)
• Spillover effects on non-advertisers gt P
  decrease in markets where some advertise even
  though all do not
• P decreases even though quality does not gt
  appears to be with reason for concern.

62

• B) Competition from alternate forms of health
  care providers. Like HMOS/PPOs
• Large increase in two market share.
• Serve app. 15 of the population in 1987. Average
  annual increases 19.6
• From 1980-87gt large impact on the market
• Want to look at advantages of HMOs, problems
  with HMOs, empirical evidence on HMO performance
• Advantages of HMOS
• Patients do not choose the provider at the time
  of illness- long term relation impact.
• Hospital efficiencyL for FFs (cost based)
  hospital reimbursement gt Drs had no incentive to
  be concerned about hospital costs.

63

• HMO Advantages (contd)
• Now dr. does have an incentive either as owner of
  HMO or given incentives by HMO. Explain
• Cost minimization HMO has an obvious incentive
  to min costs since fee does not depend on the
  amount of services provided
• Dr. productivity increases since HMOs use more
  complementary services like Dr. assistants and
  more of an incentive to lobby for damages in
  state practice acts
• Preventative care- since HMO as an insurer and
  has a long term relationship gt cost effective
  preventative care will be provided by HMO.
  Explain
• No incentives to duplicate facilities unless cost
  effective
• Incentive to use cost effective generic drugs
• Incentives to innovate in care technology,
  location, benefits,etc.

64

• HMO Problems
• Biggest problem is with quality of care. To
  illustrate assume patient has no info on qty of
  services provided gtno info on quality of
  treatment. (fee HMO flat monthly fee, no other
  impact)
• HMOs incentive? Max profit or minimize private
  costs?
• Private costs Wx X where X of services
  provided Wx C (cost of)
• gt HMO minimizes costs by decrease in Quality (x)
  to zero.
• Just as in analysis of medical malpractice. Are
  there any problems with the analysis?
• Yes consider the following reasons why this
  might be a problem.
• Assume that the HMO does not have the ability to
  set x0. Why not?
• Repeat dealings or reputation if HMO is in
  business for long term, then 2 effects patients
  may have repeat dealings and leave with
  inadequate care, or patients may be able to gain
  info easily from old patients.
• Impact of both?

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• Consumer Choice
• Assume 2 kinds of consumers well and ill
  informed.
• Well consumers cause competition and increase
  quality even for ill informed as long as the HMO
  can not distinguish between the 2 types.
• Medical Malpractice System if x lt x gt sue and
  obtain judgment gt gives incentive. Explain.
• Insurance Incentives Suppose decreased care now
  (say preventative) increase in needed services
  later and services with large info.
• gt HMO bears the cost of insuring against this gt
  will provide such cost effective care. Explain.

66

• Spillover effects in For-Profit HMOs
• The book claims that for profit HMO Drs owned by
  Drs
• gt each Dr has an incentive to monitor other Dr
  in organization since decrease in their profits
  due to lost reputation gt control own quality due
  to profit incentive
• Problem suppose large of Drs in HMO gt benefit
  to any Dr of monitoring is low (extra profit is
  split up as a large ) cost high gt not likely to
  do it.
• This is a typical moral hazard problem
• Solution HMO, who has better info, needs to
  control Drs actions since it has a large
  incentive. Explain.

67

• (3) Empirical Evidence
• Look at 3 issues quality, expenditures/utilizatio
  n, biased selection
• (a) quality little empirical research
• (b) Expenditures/utilization
• Utilization decreases length of stay, hospital
  admissions
• Expenditures per day decrease, per admission
  decrease
• Table 12. 3 (p. 270)
• HMO GHC
• Admission rates decrease, hospital days decrease,
  visits increase, preventative visits increase.
• Discuss
• But, per capital expenditures appear to increase.
  May be a short-term impact only.

68

• C) Bias due to Selection Problems
• 3 possible kinds of problems
• 1. Healthier patients with lower expenses may be
  more likely to join HMOs gt get lower
  utilization, lower exp and higher quality only
  because of self-selection.
• 2. Sicker patients may be more likely to choose
  HMO since coverage is more comprehensive.
• 3. HMOs may locate in areas with higher exp,
  higher utilization, and lower quality since they
  can be more competitive.
• Empirical evidence suggests that self-selective
  bias is not a large problem.
• Some get bias and other get bias
• Some get significant bias in correction
  procedures