“Insurance tends to increase demand and make patients less price sensitive, which increases prices overall.”
The basic concept of insurance is the transfer of risk from one entity to another through certain conditions. Health insurance is no different, only the entities mentioned are consumer or the patient and the insurance company. In the health insurance concept, a premium is paid by the individual to the company for a year and the insurance company has to pay for the cost of healthcare for that individual. Hence the risk for the consumer is transferred to the insurance company.
A consumer point of view - Why people opt for insurance
Healthcare is expensive, even for the wealthy. Having insurance protects you from being poorer. Most incidences are not meant to happen but most times, people cant help it. Consumers think of health insurance that way. The unpredictability, the large impact and the infrequency encourages consumers to purchase health insurance. Moreover, medical bills is the prime cause of bankruptcies.
Health insurance use the concept of risk pooling where a group of people from different health backgrounds are put in a single pool. While there is less predictability in who is more likely to get the disease, the basic concept is that the group of people in the pool, whether or not they have health episodes, pay for the people who do. The major problem arises when there is a large disparity in the health conditions of people of different ages. While older people are more prone to diseases, this forces the younger generation to opt out of insurance. This spurs an increase in the premiums, since everyone in the pool would be likely to be affected by health problems.
The risk sharing
“The price elasticity of demand for healthcare brings about economic incentives which are known as Moral Hazard”(Sherman Folland, 2013). Since the affordable care act aims at universal care by offering insurance to all, the premiums will be under check offering more incentives to insurance companies. While lack of insurance gives way to consumers opting out of necessary healthcare, the availability of insurance may induce consumers to pay for treatment which would have otherwise been avoided. Another type of moral hazard is lack of taking preventive measures.
Risk for Insurance companies
While risk pooling gives insurance companies a cushion in managing the risk of healthcare, the fact that there is no involvement in the healthcare of the consumer provides enormous risks for the insurance company. The major contributor to the risk is the supply induced demand of healthcare. Since most private insurance companies follow fee for service(ffs) the hospital and physician gets reimbursed for the services. The poor quality of healthcare affects the insurers with private insurance having to pay for readmissions and other hospital acquired infections. A moral hazard that is relevant to the risk of the insurance...