What Is Health Insurance (Good) For? by Robert D. Lieberthal

Author:Robert D. Lieberthal
Language: eng
Format: epub
Publisher: Springer International Publishing, Cham

5.3.3 Features and Drawbacks of Provider-Supplied Insurance

The main feature of provider-supplied health insurance is the potential to address asymmetry of information whereby providers know more about a patient’s condition than the patient or the health insurer. Returning to the case of the heart attack, a provider has superior knowledge of the severity of the case, meaning the degree of the health shock, in terms of how much healthcare is really useful to restore a patient to good health. The crucial assumption underlying a PPS or other form of provider-supplied insurance is that the facility can incentivize providers to use their knowledge of the complexity of cases and the medical needs of patients to provide care in an efficient way (Phelps 2003). Then, the health insurer that is the third-party payer for care can continue to “tweak” the system to maximize the benefit to beneficiaries by adjusting payment rates and other ongoing changes to the system.

The main downside to having providers supply health insurance in this way is that the entire purpose of health insurance is to protect individuals from the financial consequences of sickness or injury rather than minimizing the cost of care that is provided. Providers, however, have a major conflict of interest in providing healthcare services when they are also providing risk management . In the example of the heart attack, a PPS may give doctors incentives to undersupply care that is loss making for them, even if such care has a high benefit for the cost it incurs. This is the flip side of the moral hazard problem underlying fee-for-service payment for healthcare, which may give providers incentives to oversupply care that is relatively ineffective relative to its cost if such services are profitable.

Ideally, provider-supplied insurance induces provider to internalize the conflicting incentives they face. Providers generally generate more revenue through a greater intensity of treatment. Insurers generally generate more revenue through a lower intensity of treatment. Providers who also act as insurers could internalize the trade-off between the marginal benefits of treatment and the marginal cost . On the other hand, such combinations clearly have an anticompetitive effect for consumers, who are in some sense “locked in” to a particular set of providers by any form of health insurance that restricts provider networks. Here, a classic economic result will obtain—“bundling” insurance and the provision of services to ameliorate the loss will cause some harm in terms of reduced consumer choice, and some gain in terms of reduced use of unnecessary services and fraud (Adams and Yellen 1976). Whether these trade-offs redound to consumer benefit is an empirical question; careful design and management of provider-supplied health insurance systems based on these types of studies is required to ensure that consumers are made better off by bundling.

Pilot programs in provider-based health insurance include Accountable Care Organizations (ACOs), bundled payments, and other experiments in provider risk-bearing. ACOs are an attempt by the Medicare program and other insurers to put providers and provider organizations in charge of risk management by making them “accountable” for the total cost of care for their patients.

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