The People Factor - Research Paper Example

 The people factor Corey Sutton Dr. Am Health care Economics Date Table of Contents Introduction 3 Relationship between risk and insurance 3 Ethical concerns in healthcare management 4 Effect of income on health insurance 6 Factors driving consumer demand for health insurance 7 Recommendations 8 Conclusion: Problem of lemons 9 References 10 Introduction The financial crisis that engulfed the US economy along with the entire global economy has cast significant impact on the state of the US healthcare system. According to some researchers, the US healthcare system had started experiencing a downfall almost a decade ago and is still considered to be running in a “broken” state (Garson, 2013). As risks associated with the health of people increased, more people have become inclined to insure their health against any diseases or in need of medical support. Therefore, the insurance providing companies are raising the general level of premium for insurance (Garson, 2013). The US economy runs on a huge budget deficit. After the US economy faced the economic downturn due to the financial crunch of 2008-2009, the amount of deficit has increased magnanimously and hence the US government has taken steps to reduce public expenditure. Therefore, medical benefits offered by the Federal Reserve to the population of the country have been revised. This makes the people to avail private insurance schemes sold by different private insurance companies. Relationship between risk and insurance Security is an important factor in the lives of all human beings. Some people like to adopt risks while others are risk averse. Hence the perception of security varies among individuals depending upon different factors that affect their necessity to get security. Security is considered a basic necessity, apart from food, clothing and shelter, for maintaining a healthy and good standard of living. Therefore, rational individuals are inclined towards achieving certain level of security for themselves. People might need security in order to cover their medical emergencies, threat of loss of property, risk associated with agricultural activities or for various other aspects (Vidal, Parra & López, 2009). In this context it has to be understood that risk and insurance are closely associated. If there is some form of risk, there is some form of insurance that can act as a cover for the risk. In other words, risk can be converted into an equivalent form of insurance. In most cases, higher the risk, higher is the amount of return and the premium for insuring the risk. Risk arises as a result of uncertainty in various investment activities. Cost of investment and its benefits vary according to the varying levels of risk (Anderson & Brown, 2005). Ethical concerns in healthcare management The healthcare management sector is rising in importance in the economy of United States. A large range of ethical dimensions are currently arising in the US healthcare sector. The private healthcare sector is operating like any other organization in the private sector with their profit maximization objective (Zhou-Richter, 2009). However, healthcare is one of the basic rights of any individual. According to ethical principles, an individual is entitled to receive support and care for his or her healthcare issues. In this regard, the most daunting task is to make the rightful decision with respect to some ethical problem arising in healthcare sector. Insurance providers have to recognize the challenges and assess the seriousness of a given situation with confidence. Only when the challenges in dealing with healthcare problems are identified and understood fully, professional and management in this sector can cater sufficiently to the insurance needs of people (Labspace, 2013). The ethical implications refer to the issue of beneficence, justice and respect for the basic need of an individual irrespective of the class or income group that the person belongs to. These ethical values refer to the culture and values embedded in a society and its people and their outlook towards their fellow community members. The personnel responsible for the management of the institutions operating in the healthcare sector face such ethical concerns. In this regard, administrators and other professionals have to provide specific attention to the level of demand for healthcare support services and the level of supply available to the buyers in the market. Management personnel and administrators are required to assess the intensity of the demand on the basis of their personal ethical values, organizational visions and company values. Healthcare is an industry in which the consumers pose a demand for the goods or services out of a basic necessity. From the ethical point of view, sellers are not only responsible for making profitable business, but also provide the goods and services in the market to the optimal level, such that the demand can be satisfied to the most socially desirable manner. Professional codes of ethics intertwine with the professional business objectives (Hughes, 2012). The five arenas of ethical concern are conflicts of mutual interest between consumers and sellers, balance between company profit and need to provide charity care, inequality in treatment of common man and influential people or donors, poor management of patients that might lack decision-making capacity and lack of moral encouragement of volunteers who provide healthcare support in return for minimal or zero benefit (Kreimer, 2010). All these factors cannot be addressed or judges from within a corporate decision making framework. It entails a two way risk. On one hand, the society requires the healthcare benefits in order to develop a healthy community and sustain its good health conditions, while, on the other hand, the players in the private healthcare industry in the country can justify their ground to offer services only to that extent that would allow them to maximize their business objectives and profit targets. Therefore, the administrators have to carefully consider the health conditions of people that demand health insurance products (Kreimer, 2010). Depending on the condition of the health, the amount of premium chargeable is decided. The more the status of one’s health is inclined towards bad condition the level of premium is increased. This is done in order to protect the company from loses that it would incur by insuring an individual with extremely bad health condition. Effect of income on health insurance The rate at which consumers are purchasing health insurance plans in the US is rising rapidly. An increase in the demand for healthcare services and health insurance plans can be recognized particularly in the baby-boomer generation. Healthcare benefits is one such most sought after product. This generation is receiving lesser healthcare support from the government while the population of this generation is increasing rapidly. Therefore, the rate of demand for health insurance is increasing at a remarkably high rate. In this context, researchers have made investigated whether there is any relation between the income of the consumer and the health premium paid by the person. Several studies have revealed that with the rise in average age of the population, the average rate of premium charged also rises. Other studies show that the level of income of an individual in the US rises as the person’s age increases. According to Jessie (2011, p. 14) “older and wealthier people are likely to pay more for health insurance than younger and poorer people.” The author has provided two possible explanations for this situation. The first explanation highlights a relationship between income of an individual and the premium paid. In general, wealthier people and the elderly are risk averse and therefore, opt for plans that offer better coverage. They pay higher premiums for these plans than the plans with lower coverage. The second explanation emphasizes on the phenomenon of adverse selection under which higher premium is charged from the elderly people since they are expected to have greater physical weakness than others. Since elderly people are towards the end of their earning period, they generally have higher income than the younger generation. It can be seen that there exists a relationship between the income of an individual and premium charged for health insurance. Both these aspects do not look at the problem of income inequality within the country. Although elderly people might be more risk prone than younger individuals, there is a class of people that are poor and do not have an income high enough to pay high premium. However, from ethical view point, they should also get equally good coverage as the wealthier counterparts. Hence, this section of population should be charged less premium for similar services, while those that have the ability to pay are charged higher. Also, premium rate for other age groups should be set according to the income level of the consumer (Jessie, 2011). Factors driving consumer demand for health insurance There are a large range of factors that affect the demand for health insurance. These factors are nearly common between the US and the other countries. The most common factors are price elasticity and income elasticity of demand. Price elasticity of demand is difficult to measure accurately. This is because, the price of some drugs and services are quite high and the insurance company has to bear higher risk in order to insure them due to which these plans attract lesser number of customers. They charge higher premium in these cases. However, some of the drugs are indispensible and demand level does not fluctuate despite price rise. Income elasticity shows positive relation with demand for insurance plans in the US. This is because, consumers in the US are more aware of their health conditions than citizens of many other developing countries. Therefore, people with higher income demand higher value insurance plans by paying higher premiums. However, administration of the insurance companies needs to assess the health status of the people that purchase insurance plans. In the US, people that are more prone to sickness would want to get maximum coverage by paying minimum money as premium. Therefore, before selling the plan, company management has to distinguish the consumers who are actually prone to suffering from bad health from the ones that purchase high value plans merely because they are supported by high income. Management has to conduct tests in order to leverage information necessary for assessing the actual health status of the people that they are insuring. Recommendations Measurement of the healthcare demand is a critical factor that affects demand and supply situation in the US insurance market. The functioning of the dual forces of demand and supply depends on the appropriate measurement of the extent to which the customer is prone to demand insurance owing to sickness. In the US, the broadest recommendation that has been made by President Barrack Obama is that insurance companies should bring maximum possible number of customers under their policy. There is no substitute to this process since there is lack of sufficient amount of money to cover the actually sick people in the country. Therefore, more number of insured people would imply that companies would be able to earn higher amounts of money in the form of premium. This would allow the companies to run profitably even after paying out large sums of money for claims (Cheney & Haberkorn, 2013). Apart from this method, it is highly recommended that the companies develop a stringent medical screening process to judge the actual health condition of the customers before allowing them to purchase a particular plan. It is recommended that premium should be charged on a dual basis of income of the consumer as well as the level of sickness. An elaborate premium slab should be developed that would take into account the income of customers. Customers with higher annual income would be charged higher premium than those with lower or marginal income. Conclusion: Problem of lemons The problem of lemon arises in the market when there is information asymmetry between the consumers and the sellers. In this problem, both parties involved in transaction posses dissimilar levels of information regarding the same level of product or service regarding which the transaction is being made. Therefore, they cannot make informed decision about buying or selling the product. In the healthcare industry in the US, this problem arises because insurance companies often lack appropriate information regarding the health status of the customer whom they are offering insurance. As the premium level rises, people that are comparatively healthier reduce their demand for insurance plans and the market becomes crowded with more sick patients. These customers are compared to bad lemons in the market. If insurance companies are unable to distinguish the sick customers from the healthier ones, they would lose more money in the form of payment for claims. Therefore, it would be difficult for the companies to remain in business. Thus, the lemon principle is highly relevant in the healthcare sector in the US. The recommendations made above have been developed with view of helping the companies to retain profitability and remain in business. References Anderson, J. F. & Brown, R. L. (2005). Risk and insurance. Retrieved from http://www.soa.org/files/pdf/P-21-05.pdf . Cheney, K. & Haberkorn, J. (2013). President Obama to insurers: No bailout. Retrieved from http://www.politico.com/story/2013/11/health-care-insurers-meeting-barack-obama-100028.html . Garson, A. (2013). The US Healthcare System 2010. Retrieved from http://circ.ahajournals.org/content/101/16/2015.full . Hughes, J. E. (2012). 3 common ethical dilemmas health administrators face. Retrieved from http://www.phoenix.edu/forward/perspectives/2012/03/3-common-ethical-dilemmas-health-administrators-face.html . Jessie, L. (2011). Effects of Age and Income on Individual Health Insurance Premiums. Undergraduate Economic Review, 7 (1), 1-18. Kreimer, S. (2010). Five ethical challenges in healthcare. Retrieved from http://www.amnhealthcare.com/latest-healthcare-news/five-ethical-challenges-healthcare/ . Labspace. (2013). Health management, ethics and research heat module (sign in) help with this. Retrieved from http://labspace.open.ac.uk/mod/oucontent/view.php?id=454408§ion=1.3.1 . Vidal, F., Parra, G. & López, D. B. (2009). Is there a relation between risk rate and the insurance premium in agricultural insurances? An application to the citrus sector. Spanish Journal of Agricultural Research, 7 (4), 1-778. Zhou-Richter, T. (2009). Lemon principle or cherry picking? Retrieved from http://www.cb.wsu.edu/aria2009/ARIA2009Papers/Full%20Papers/session3D_Zhou-Richter.pdf . Read More