Demand and Supply of Health Insurance by Mwimba Chewe - Department of health policy and management University of Zambia - Health Economics HSM

Demand and Supply of Health Insurance Mwimba Chewe HSM Department of health policy and management University of Zambia Outline • Definitions of insurance • Risk and Insurance • Demand for Health Insurance • Supply of Health Insurance • Moral Hazard • Conclusions What is Insurance • Definition of Insurance: Insurance is a risk management mechanism where a group of individuals collectively contribute funds to protect themselves from financial losses caused by uncertain events. • Illustrative Example: Imagine a club with 100 members of similar age, interests, and lifestyles. • Occasionally, one member falls ill and faces K10,000 in healthcare costs. • To mitigate this risk, each member contributes K1,000 upfront, creating a fund. If a member becomes ill, the fund covers their treatment costs. What is insurance - Features Desirable Characteristics of Insurance: • Large Number of Insured: Insurance works best when a large number of individuals are involved, ensuring risk is spread across a diverse group. • Definite Losses: Insured losses should be clear in terms of time, place, and amount, making them predictable. • Measurable Risk: The likelihood of loss should be quantifiable, allowing for accurate risk assessment. • Accidental Loss: The losses should be accidental from the perspective of the insured, not caused by their actions. What is insurance - Features • Reducing Variability: Insurance reduces income variability by pooling risks among many individuals. • Despite varying individual healthcare expenses, insurers can predict average costs for the group. • The law of large numbers demonstrates that as the group size increases, the average rate of illness will converge around the expected probability of illness, reducing financial uncertainty for individuals. What is insurance – Government Insurance • Insurance markets rely on statistical estimations of rare events to protect buyers. • Government insurance programs differ from private insurance by offering heavily subsidized premiums and limiting participation based on government-defined eligibility criteria. • They frequently involve income redistribution between societal segments. Key Insurance Terminology Term Description Example Premium / Coverage Insurance involves paying premiums to secure coverage against specific events. An insured individual may pay a K100 premium to receive K2000 worth of coverage. Coinsurance / Copayment Requires insured individuals to share the financial burden through copayments, expressed as a percentage known as the coinsurance rate. With a 20% coinsurance rate, the insured might pay a K60 copayment out of a K300 expense, with the insurance company covering the remaining K240 (80%). Deductible A payment made before insurance benefits apply, irrespective of coinsurance. This amount may apply to individual claims or be limited to a specific yearly threshold, as is common in health insurance. An insurance policy may require that an individual first pay the first K250 of her medical expenses out-of-pocket each year. Key Insurance Terminology • Deductibles and Coinsurance • While some view deductibles and coinsurance as money-makers for insurance companies, economists argue they have beneficial economic effects. • Copayments make consumers more cost-conscious about their treatment choices. • Deductibles discourage frivolous claims and enhance awareness of actions' consequences, ultimately helping control costs. Key Insurance Terminology Term Description Example Exclusions Specific services or conditions not covered by the insurance policy. Cosmetic or experimental treatments. Limitations Maximum coverage limits specified by insurance policies. A policy with a K1 million lifetime maximum. Pre-Existing Conditions Medical issues not covered if they existed before the policy issuance. An individual getting health insurance after they find out they have cancer Pure Premiums Actuarial losses associated with insured events. Represent the amount an insurer needs to cover claims without considering administrative expenses or profit margins Pure Premium=Exposure Uni ts/Total Losses Loading Fees General operational costs for the insurance company costs associated with sales, advertising, and profit margins. Types of Health Insurance • Public Health insurance Schemes • Social Health Insurance (SHI) • a financing and management system for healthcare that pools health risks and contributions from individuals, households, enterprises, and the government. • It provides protection against financial and health burdens, offering a fair way to finance healthcare. • Private Health insurance Schemes • which is provided through an employer or the marketplace Types of Health Insurance Examples of Health Insurance Schemes Zambia • NHIS (National Health Insurance Scheme managed by NHIMA) • Public …