Management Decision to Offer Insurance
Executive Summary.
Adverse selection results when health insurance policies are offered to a group of individuals who are neither fully homogeneous by certain characteristics nor randomly distributed (Finkelstein et al., 2002). Generally, sustainable health insurance should be equitable and pool risks among a random group of individuals. Health insurers face uncertainty in offering insurance policies considering that individuals with higher risks of ill health are more likely to enroll in health insurance plans. Citizens ought to take advantage of insurance policies that are suited to their needs both in terms of catering for their unique health care needs and in terms of financial implications.
Insurers with an optimum pool of enrollees who fit the correct specifications of each insurance policy stand a better chance of providing better quality insurance to the population. In the grand scheme of things, sustainable health insurance plans are important in creating equitable social societies. In the United States, the health insurance sector is highly privatized with most citizens enrolled in private insurance policies (Sydnor, J., 2010). The Disease oriented model of solving adverse selection is a suitable approach in a large population composed of individuals with distinct health needs.
The U.S has a large population of people writ in a spectrum of health conditions in different geographical settings. In the modern society, disease trends are changing from acute child-hood communicable to chronic adult-hood non communicable conditions. A disease oriented model takes into account this aspect of change in disease distribution. Moreover, it accounts for the number of individuals with different health problems who are qualified for health insurance policies as well as the sustainability of each plan. Considering the heavy cost implications of treatment for chronic conditions across all age groups, a customized insurance plan suited for specific health problems can enable patients to make worthwhile decisions for their health insurance.
Introduction.
Statement of the Problem.
Health insurers are constantly faced with the problem of selecting the most appropriate plan for different situations. Insurance is about pooling of resources and covering the risk of uncertain loss. Every year, insurers experience high expenses for reimbursing health providers. A large number of reimbursements are made with negative implications on profit margins for insurance companies. The process of offering health insurance plans is subject to adverse selection; individuals with higher risks for health problems are naturally more likely to enroll in insurance policies. Insurance companies may be in the position to know in advance that consumers likely to take insurance cover vary in the level of risk. However, in the end they are not logically able to discern the individuals who have high risks and the ones with low risks within a group of potential customers.
While determining the level of risk is crucial to the benefits of the plan, identifying the associated risks accurately and in time is a difficult task and often requires that insurers incur some costs. Providing insurance cover to a group of individuals that is not homogeneous by characteristic is not only expensive but it is not sustainable in the long run. Individuals with high health risks are generally poised not to reveal crucial information about their health statuses. As a result, insurers end up with inaccurate information regarding their individual health. Under these circumstances, insurance cover and the premium are set at the average point between low and high risk profile individuals.
This may lead to drop out of patients with low risks who feel they are paying more or an increase in the number of high risk patients paying relatively lower premiums. Insurers therefore must determine the most appropriate model for coming up with the best decision for developing insurance plans.
Scope.
I was able to observe a group of 160 employees from different companies in Atkinson town, Henry County in Illinois to assess the role of adverse selection in health insurance plans. Each of the employees was an enrollee in an insurance policy. Through a dialogue with the employees I was able to obtain reasonable feedback from most of them on this topic. I must however state from the outset of this paper that the research was based on my personal observations and the feedback from the employees through the dialogue sessions. Essentially, I based my research on how the employees felt about their enrollment in insurance plans. I collected responses in which positive and negative responses were compared against the total sample of employees as a common denominator. This served as the baseline for determining whether age and income have any effect on the selection of insurance plans available.
Objectives
- .Creation of a Reliable Health Information Pool.
The most important element of insurance is provision of correct, timely and reliable information for the purpose of evaluating the health of individuals and developing suitable insurance plans. Health information is crucial in the process of analyzing health risks. While potential insurance customers provide substantial information to the insurer in the process of developing plans, an acute shortage of certain heath information on certain aspects is the greatest challenge in most cases. Health care providers are not necessarily authorized to disclose pertinent information regarding patients’ health for third party usage. Patients and their health care providers need to harmonize the required information to be availed to the insurer to aid in developing suitable insurance plans.
- Improving Homogeneity of Potential Groups.
The homogeneity of insured groups in health insurance is important as it has far-reaching implications on reimbursements to be made. Randomization is a critical factor that determines the homogeneity of the selected group in terms of the general characteristics of the group. Groups can be selected basing on any criterion that ensures random selection. Geographical location is one of the most suitable criteria considering that individuals living in the same geographic setting have the same health risks. Insurers can arrive at a suitable homogeneous group by further analyzing patient information based on diseases and conditions.
- Creating Equitable Distribution of Resources.
The ultimate goal is to develop a model of equitable distribution of risks in which patents pay reasonable and logical premiums for insurance cover. In addition, health insurers will benefit from the incentive to provide insurance that is sustainable because the risks of ill health are certain and random. Different groups of patients with distinct health needs will find suitable plans that cover their unique health needs. In the end, insurance will be affordable to all individuals and feasible for different health circumstances.
Summary of Key Objectives:
| Fundamental Objectives | Means Objectives
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| Objective 1
Creation of a Reliable Health Information Pool |
Development of health provider panels
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| Development of minimum set of information
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| Creation of a dissemination framework
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| Objective 2
Improving Homogeneity of Potential Groups
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Development of a selection criteria
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| Selection of a general group
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| Selection of a disease-specific group
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| Objective 3
Creating Equitable Distribution of Resources
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Determination of suitable premium
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Development of a suitable disease specific plan
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| Provision of diseases specific insurance plan
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Alternatives.
Age-Specific Model.
In order to address the problem of adverse selection, some insurers may opt to consider age as criteria for tailoring insurance plans. Indeed, disease patterns differ by age. The most notable pattern of disease distribution by age is the nature of disease development or causation. In children, most diseases are acute and communicable while in adults and the elderly most diseases are chronic and non-communicable.
The approach of tailoring insurance plans based on the criteria of age can control adverse selection by placing members of specific age groups suffering from a group of diseases into one insurance plan (Kowalski, A., 2012). For instance, the elderly people with chronic conditions may be provided with a plan that covers various health care needs that are similar in nature. This approach has the disadvantage of failing to take into consideration the bias by disease and failing to control for other risk factors associated with risk factors.
Cost-oriented model.
This alternative offers an approach to solving adverse selection by providing cost-tailored plans to individuals. Different health insurance plans are available in the market offering various health-related insurance cover at particular costs. This model is based on the premise that different individuals have varied health financial capacity and therefore can afford certain amounts of health care costs. Logically, it is relevant to enroll in a plan that is financially suitable for an individual since each individual is directly concerned with their health care expenses. However, this approach is limited to costs only and does not take into consideration risk factors and sustainability of the plans.
Disease-oriented model.
This approach is based on the distribution of diseases across the population and geographically. Essentially, it takes into account the fact that different diseases have distinct cost implications irrespective of age and other factors. Each group of individuals is assessed and analyzed base on their health status before a plan is offered. This model offers the advantage of certainty in that the costs can be estimated easily in on the occurrence of a risky event (Kowalski, A., 2012).
Summary of alternatives
| Alternative |
Description of Alternatives
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| Alternative 1
Age-specific approach |
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| Alternative 2
Cost-oriented approach |
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| Alternative 3
Disease-oriented approach |
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Selection.
Disease-oriented model for controlling adverse selection is the most suitable approach and which is proposed for insurers in this paper. It is established that in the United States, when the population is divided into insured and the uninsured individuals only, an average of about 10% of the population is estimated to be uninsured (Rothschild et al., 2007). On further analysis, it is established that the uninsured are younger, and poorer in comparison to the insured individuals. Moreover, health care expenditure is found to be an important aspect to individuals relative to total income with about 11% expenditures for the insured and about 13% for the uninsured. On health status, 89% of the insured individuals are observed to have good health against a proportion of 82% of the uninsured (Rothschild et al., 2007). This means that the individuals who are insured behave in healthier ways. Disease-oriented approach therefore is more suitable in that it would encourage individuals to be insured for specific diseases and pay proportionate premiums.
Age specific model for correcting adverse selection is less likely to work because younger people are more likely not to be attracted to the insurance plan because they consider themselves healthier and at lower risks of ill health (Samuelson et al., 2009). Cost oriented approach on the other hand would fail to work because poorer people may end up shunning away from insurance or enrolling for cheaper plans which may include high risk individuals.
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Alternatives | |||
| Alternative A
Age-specific approach
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Alternative B
Cost-oriented approach
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Alternative C
Disease-oriented Approach
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| Objective 1
Creation of a Reliable Health Information Pool
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Easy | Difficult | Easy | |
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Objective 2 Improving Homogeneity of Potential Groups
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Difficult | Difficult | Easy | |
| Objective 3
Creating Equitable Distribution of Resources
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Difficult | Easy | Easy | |
Ranking Alternatives
Analysis and Consequences
Ideally, I found out that a significant proportion of the employees (over 60%) are enrolled in health insurance policies based on their age as a core factor. At 95 % confidence interval, a positive correlation exists between age and insurance cover. Older people tend to enroll for insurance plans more than younger people (Cinzia, D.N., 2008). The implication of using an age-specific model of tailoring insurance plans is that more alder people will enroll in health insurance policies while a large number of young people will shun away from the plans. A large proportion of the United States population is middle-aged demanding for health insurance plans favorable to middle aged adults (Stefania et al, 2007).
Another 60% of the employees are enrolled in health insurance policies based on their incomes. A positive correlation can also be shown between income and health insurance cover. A large majority of individuals without insurance cover has been shown to be among the group of people in the lower income cadres (Cinzia, D.N., 2008). Using a cost-oriented approach for tailoring health insurance plans would have an implication of attracting people with more income into policies while people with lesser incomes would either adopt unsuitably cheaper plans or remain uninsured.
Using a disease-oriented model removes the bias by age and costs. Individuals with certain diseases can be catered for irrespective of their age and incomes. Disease-oriented approach accounts for the costs likely to be incurred in the event of ill health for the insured thereby reducing the uncertainty of the plan and therefore improving efficiency. Individuals with similar diseases can be categorized in one insurance plan in which a customized premium is devised for the benefit of both the insurer and the insured. Generally, the approach would reduce adverse selection and improve homogeneity and equitable distribution of resources.
Risk Profile
| Uncertainty1: Reduction of adverse effect by age | ||
| Outcome: | Chance | Consequences: |
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Enrollment of young people |
33% |
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| Enrollment of elderly people
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67% |
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| Uncertainty2: Reduction of adverse effect by income
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| Outcome: | Chance | Consequences: |
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Enrollment of people in lower in come classes |
40% |
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| Enrollment of people in middle and upper income classes | 60% |
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Implementation, Monitoring and Control
The approach will be implemented in a step-wise manner in which groups of individuals will be identified within the town of Atkinson. These groups will initially be generalized groups that will be analyzed to produce disease-specific categories of individuals. Each category will be analyzed separately in terms of health care resources required for treatment to arrive at the average premium. Health care providers in the town will be used to provide information on patients and potential clients. Qualified insurance personnel will be required for interviewing potential clients.
Mapping of individuals will be randomized within the entire town. Successful clients will be offered insurance plans that are customized for their health conditions. Data on the individuals will be collected continuously throughout the process to assess the effects of selection. Adverse selection will be evaluated by measuring the randomization of clients with respect to the occurrence of claims over a period of six months. Sustainability will be assessed with time to determine whether the plan is effective in the long run. Claims that are random, expected and within the cost limitations will be an indication of a successful implementation. In the event that the expected results are not obtained, the plan will be altered to include other elements of selection including age and income within a period of ne year.
Timeline
| Timeframe | Implementation Plan
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| Week 1 to 6 | Collection of information
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| Week 7 to 10 |
Analysis of information
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| Week 11 to 14 |
Preliminary mapping of clients
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| Week 15 to 16 |
Final mapping of clients
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| Week 17 to 20 |
Analysis of information on client needs |
| Week 21 to 23 |
Determination of premiums
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| Week 24 |
Provision of a disease-specific insurance plan
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Conclusion and summary.
Adverse selection is a critical problem in most insurance plans. Sustainable health insurance depends on equitable pooling of resources. Without a sound approach to providing insurance policies, it is difficult to arrive at a suitable group of clients who deserve the insurance plan. Making the right decision on the appropriate plan is not easy. Coming up with a working plan is not a coincidence but a consequence of good planning. Diseases-specific approaches to insurance can be used to solve the problem of adverse selection in health insurance policies. This approach is recommended especially in large populations in which a spectrum of health conditions exists.
It ensures randomization and accounts for resources advanced in treatment of patients. Reimbursements made therefore are likely to be within the cost limitations of insurance companies. The plan can be implemented in a step-wise manner beginning with a general analysis of information regarding a larger group and narrowing down to specific groups within the population with certain health conditions. With effective monitoring and evaluation, the plan can be incorporated in the larger context of the insurance system.
References
Cinzia Di Novi (2008). Adverse selection in the U.S. health insurance markets: evidence from the MEPS.
Finkelstein, Amy and James Poterba. (2002).Testing for Adverse Selection with Unused Observables. NBER Working Paper.
Holt, Charles and Susan Laury. (2002). Risk Aversion and Incentive Effects. American Economic Review.
Kowalski, Amanda. (2012). Estimating the Trade between Risk Protection and Moral Hazard with a Nonlinear Budget Set Model of Health Insurance. NBER working paper.
Rothschild, Michael and Joseph Stiglitz. (2007). Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information. Quarterly Journal of Economics.
Samuelson, William and Richard Zeckhauser. (2009). Status Quo Bias in Decision Making. Journal of Risk and Uncertainty.
Stefania Ottone and Ferruccio Ponzano. (2007). Non-self-centered inequity aversion matters. A model.
Sydnor, Justin. (2010). Over insuring Modest Risks. American Economic Journal: Applied Economics.
