Share
Explore BrainMass

Private health insurers

Subject: Insurance
Details: Private health insurers tend to be quite passive in the face of health care cost escalation ? simply passing increased costs forward as increased premiums or back as reduced coverage and larger requirements for patient payment. (Think of Canadian drug insurers.) How would one interpret cost escalation in the framework of part a. above? Is there any reason for insurers to worry about cost escalation, or might it in fact be good for their business? Over twenty years ago, however, large employers in the U.S. became sufficiently troubled by cost escalation that some began to ?self-insure,? bearing the risks of their employees? health expenditures themselves and contracting with insurers only to administer the premium collection and claims payment process (for a fee). They began t look for firms that could offer various forms of cost control services (?managed care?). Traditional insurers also moved into this market, initially with apparent success as suggested by American cost trends between 1992 and 2000. (These activites, however, generated significant additional administrative costs, both for cost controllers and for providers revisiting their control.) Since 2000 these private market initiatives seem totally to have lost their grip (in market contrast to the experience of other industrialized countries.) Employers are beginning to roll back coverage, passing more of the costs onto employees. What does this experience suggest about the determinates of health care costs, and the long-run scope for private health insurance even with subsidy and compulsion?

Solution Preview

Subject: Insurance
Details: Private health insurers tend to be quite passive in the face of health care cost escalation ? simply passing increased costs forward as increased premiums or back as reduced coverage and larger requirements for patient payment. (Think of Canadian drug insurers.) How would one interpret cost escalation in the framework of part a. above?
The above question needs to be interpreted in the context of the risk averse individual, who goes in for full insurance and the premium is actuarially fair. Since the private health insurers are actuarially fair, they do not want to bear any extra cost that escalation of drug price would cost them. So they either charge higher premiums or they reduce coverage. As we are taking the assumptions in a, we assume that the risk averse individual will not tolerate less than full insurance and this in turn will lead to his paying higher premium for his coverage. So, a price escalation in Canadian drug industry translates into premium escalation for the risk-averse individuals. For example if the price of five lifesaving antibiotics goes up and this affects the cost of health care, the premium will correspondingly increase.

Is there any reason for insurers to worry about cost escalation, or might it in fact be good for their ...

Solution Summary

Please explore facets surrounding private health insurers.

$2.19