Financing of Health Care
Teonna Smalls
HCS/440
Donna Lupinacci
05/12/2012

Introduction
HMO’s and enrollees are two important players in the world of health care. Due to uncertainty on the supply and demand, moral hazard, and adverse selection, decision making for HMO’s more complex. The simulation provided me the decision making tools necessary, when making an economic decision for an HMO. Health care can be seen as a good that consumers demand and managed care firms are considered to be suppliers of both health insurance and health care. Economics tells us that rational firms make choices to maximize profits. Managed care firms incur cost when providing health care services to their enrollees and maximize their revenue by providing health insurance.
Castor Collins Health Plans
Castor Collins Health Plans was founded as a regional HMO in 1999. The HMO provides health insurance and health services to enrollees through its statewide network of physicians and hospitals using a capitation model to pay health care providers within the network. Currently the plan has 100,000 enrollees through the state. My responsibility as Vice President of Castor of financial planning and strategy requires me to interact with new clients and formulate health plan that will best suit their needs. In addition, I am responsible for pricing plans and setting insurance premiums. Collins has three plans to choose from, Castor Standard, which does not cover preexisting medical conditions, Castor Enhanced, which covers preexisting medical conditions, and Castor Enhanced Minor, which is a customized plan. The first group Constructit consists of 1,000 people, while the second group, E-Editors consists of 1,600 people. Neither of the groups have health insurance, which means both groups will pay for their insurance. Constructit is willing to pay a maximum annual premium of $4,000.00 per person, while E-Editors are willing to pay a maximum annual premium of $4,500.00 per person.
Constructit Health Profile Constructit consist of 550 men and 450 women, in the age group of 26 through 42. About 60 percent of the group is married. 32 percent of the people at Constructit have a work profile that involves physical activity. The remaining 43 percent of the work force is involved in sedentary activities. 38 percent of the work force has been diagnosed as having no major health risk, 10 percent of the men and eight percent of the women are smokers. There are multiple major health issues that contribute to absenteeism at Constructit, which include injuries, respiratory system diseases, digestive disorders, migraines, and allergic conditions. Obesity affects 39 percent of the group. Therefore, the risk of obesity-related diseases, such as hyperlipidemia, high blood pressure, diabetes, and cardiovascular diseases are high for this group. The expected utilization includes inpatient hospital services, surgical benefits, emergencies, inpatient mental health, inpatient detoxification, substance abuse treatment, obesity treatment, and skilled nursing care. Other expected utilizations are vision screening, hearing screening, allergy testing and treatment, immunizations, outpatient surgery, x-rays, laboratory, and diagnostic testing.
E-Editors Health Profile The members of E-Editors consist of 760 men and 840 women, all between the ages of 35 through 54 and most are married. Their work involves sitting in front of computers for long hours and is sedentary. The risk of stress related injuries and a vision problem is more for the 95 percent of people who have done the job for an extended period of time. Twenty two percent of the group has been diagnosed as having no major health risk. Twenty-six percent of the men and 32 percent of the women are heavy smokers; however none suffer from respiratory disorder. Forty five percent of this group is obese. This indicates increased risk for diabetes, hypertension, high cholesterol, and cardiovascular disease. Expected utilization for E-Editors includes obesity treatment, skilled nursing care, maternity care, emergencies, surgical benefits, inpatient mental health care, and inpatient hospital services. Outpatient services included are physician office visits, periodic physical examinations, annual well women examinations, occupational therapy, speech therapy, physical therapy, ambulance services, prescription services, durable medical equipment, diabetes management and treatment, and prenatal and postnatal care.
Risk, Cost and Profitability Castor Collins calculates the premium and profitability based on the risk Castor Collins will incur when providing insurance to a particular group. The risk estimates are based on the cost of services and expected utilization by the group. Based upon the ages and health profiles of the employees at Constructit and E-Editors, Castor Collins can estimate the expected utilization per year. Comparing the average utilization to healthy adults in the same age group, we can estimate the risk involved when providing insurance to each group under various plans. The annual premium to be charged is based upon the cost and expected utilization of each service under either plan. The cost of service is exclusive of any co-payments that enrollees may bear.
Plans Selected Based upon the health and utilization of services I choose the Castor Standard plan for Constructit and I decided not to ensure E-Editors. Castor Standard does not cover preexisting conditions, which means the risk of providing this plan is lower. In turn, the returns will be lower. The premium charged to Constructit is $3, 428, and the earnings from Constructit are $3.43 million. Although the plan I selected was a good recovery, another plan could have maximized the potential earnings for Castor Collins. My decision to not ensure E-Editors was based upon the health profile and the expected utilization of services from this group. The risk of insuring this group was very high, and the earnings from this group were inadequate to cover the risks. I could have negotiated the cost of the premium and if the group was willing to pay a higher premium, I could have reconsidered my decision. The decision I made was a good recovery for Castor Collins.

Risk-averse consumers buy health insurance to avoid losing income or wealth when they are unwell. Consumers transfer the risk of medical risk to the insurance company and the insurance company bears the risk in return for the premium and takes care of the enrollee’s medical expenses either in full or by part. The premium is considered a source of revenue and is compensation for bearing risk such as payment to health care providers. Therefore, while selecting a plan and the services to provide under that plan, Castor Collins has to weigh the premium enrollees are willing to pay, risk of providing a particular plan or service, expected utilization, and the cost. The goal is to maintain profitability.

References
https://ecampus.phoenix.edu/secure/aapd/vendors/tata/UBAMSims/financing_health_care/economic_issues_hmo/financing_health_care_economic_issues_hmo_frame.html