Research Paper on "Management of Finances in Healthcare Organizations"

Research Paper 4 pages (1430 words) Sources: 4

[EXCERPT] . . . .

What is adverse selection? How does its existence affect the market for health insurance?

In definition, the more knowledgeable partner or entity in a contract acting in a premeditated and planned behavior against the interest of the other partner or entity that is less knowledgeable is adverse selection. This aspect is pertinent in the health insurance sector because every individual selects among the set of contracts provided by the insurance firms in accordance to his or her expected likelihood of making use of health services (Cutler et al., 1998).

In other words, the individuals who anticipate an extreme use of health services usually have a tendency of choosing more generous plans compared to those who anticipate a more restricted use of them. In the instance of extreme use, for every premium paid and extent of coverage, the individuals that make the decision to buy that specific health insurance contract are the ones who anticipate greater or at least equivalent health costs to the premium paid (Cutler et al., 1998).

Therefore, regardless of the premium, the insurance company might end up making a loss on every consumer. There are ways in which insurance companies can protect themselves from adverse selection. One of these ways is coming up with contract offers to screen individuals. This particular strategy is in fact all the more significant to the success and accomplishment in the market at any point when there is regulation or rules that do not permit health premiums to mirror individual risk. This is also applicable when there are rules that do not allow the attainment of information on prospective consumers' health conditions prior to making any contract offers. The screening approach enables the insurance company to avoid any risk pooling across individuals (Belli, 2001).

How will a change in price affect the demand for health insurance?

Price elasticity offers an estimation of how consumer demand changes as the prices change. For instance, the price elasticity of health insurance is defined as the percentage change in quantity of health insurance demanded divided by the percentage change in the price of the same economic commodity. As Buchmueller (2006) opines, the increase in the prices by the health coverage provider increases the amount of premiums to be paid by the consumers. As a result, due to the increase in premium prices, this causes the demand for health care to decrease.

What would be the effect of "risk-adjusted" premiums on insurers' engaging in preferred risk selection strategies?

Risk adjustment can be defined as an important aspect of the Affordable Care Act (ACA) that can ensure the success of the new reforms on health care in the long run. This is because risk adjustments offer compensation to the insurers and healthcare providers who offer plans on the individual market as also the small-group market which are found both inside and outside the exchanges for the risks linked to the enrolled individuals (Park, 2011). This is to ensure that these coverage providers have less incentive in engaging in activities that cause adverse selection; in as much it acts as a deterrent. Therefore, this implies that if the insurers engaged in preferred risk selection strategies, the effect of the premiums would increase and that the insurers would not be compensated.

References

Belli, P. (2001). How adverse selection affects the health insurance market. World Bank Policy Research Working Paper, (2574).

Buchmueller, T.C. (2006). Consumer demand for health insurance. NBER Reporter, 10.

Cutler, D.M., & Zeckhauser, R.J. (1998, January). Adverse selection in health insurance. In Forum for Health Economics & Policy (Vol. 1, No. 1).

Epstein, R.M., & Street, R.L. (2011). The values and value of patient-centered care. The Annals of Family Medicine, 9(2), 100-103.

Hacker, K., Mechanic, R., Santos, P. (2014). Accountable Care in the Safety Net: A Case Study of the Cambridge Health Alliance. The Commonwealth Fund.

Kaplan, R.S. (2002). Lead and manage using the Balanced Scorecard. Harvard Business Review.

Kaplan, R.S., Norton, D.P. (2007). Using the Balanced Scorecard as a Strategic Management System. Harvard Business Review.

Park, E. (2011). Ensuring Effective Risk Adjustment. Center on Budget and Policy Priorities. Retrieved 7 July 2015 from: http://www.cbpp.org/research/ensuring-effective-risk-adjustment

United States Securities and Exchange Communication. (2014). Wal-Mart Stores… READ MORE

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