HCM 320 Module 6 Insurance Short Paper Example

Who Pays When No One Is Insured? Risk Pooling and Uncompensated Care

[Student Name]

Southern New Hampshire University

HCM 320: Healthcare Economics

Module Six Short Paper

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Who Pays When No One Is Insured? Risk Pooling and Uncompensated Care

Last month a 44-year-old landscaper without insurance came to Valley Community Health Center for a follow-up after an emergency appendectomy. His hospital bill was $38,000, more than his annual income. His story shows why insurance exists and what happens when people do not have it. This paper explains the economics of insurance and traces who ends up paying for care the uninsured cannot afford.

Why People Buy Insurance

Most people are risk averse: they prefer a certain, modest cost to a small chance of a very large one, even if the expected cost is the same. Health spending is highly uncertain and concentrated; in any year, a small share of people account for most spending. Insurance lets a risk-averse person trade an unpredictable, possibly ruinous expense for a predictable premium.

How Pooling Works

Suppose 1,000 people each face a 1% chance of a $38,000 surgery in a year. Individually, each faces either $0 or $38,000. Together, the group can expect about ten surgeries, costing $380,000. If each member pays $380 plus a small amount for administration, the pool can cover everyone's surgery. The law of large numbers makes the group's total cost far more predictable than any individual's, which is what makes insurance possible.

Table 1. A Simple Risk Pool

Note. Illustrative figures.

The Premium Math Behind Real Plans

Real insurance premiums follow the same logic as the simple pool but include more costs. A premium must cover expected claims for everyone in the pool, administrative costs such as claims processing and customer service and, for private insurers, a margin. The Affordable Care Act requires insurers in the individual and small group markets to spend at least 80% of premiums on medical care and quality improvement, returning rebates if they fall short. For a patient deciding whether to buy coverage, the relevant comparison is the premium, after subsidies, against the expected cost and the financial risk of going without.

Two Problems Insurers Face

Insurance markets face two well-known problems. Adverse selection occurs when people who expect higher costs are more likely to buy insurance, raising average costs and premiums and driving healthier people out. Moral hazard occurs when insurance lowers the price of care at the point of use, leading people to use more. Rules such as open enrollment periods, subsidies and cost-sharing are designed to manage these problems.

Why People Remain Uninsured

Valley's uninsured patients fall into several groups: adults with incomes too high for Medicaid in their state but who find marketplace premiums hard to afford, workers whose employers do not offer coverage, immigrants ineligible for public programs and people unaware of their eligibility. For many, insurance is valuable but unaffordable relative to other needs such as rent and food.

Hospitals as Insurers of Last Resort

The landscaper's appendectomy was performed because federal law requires hospitals to stabilize emergency patients regardless of ability to pay. Garthwaite et al. (2018) studied hospital finances and found that when the number of uninsured people rises, hospitals' uncompensated care rises substantially, with each additional uninsured person adding roughly $800 to $900 a year in uncompensated care. They concluded that hospitals act as insurers of last resort, providing a form of coverage the uninsured do not pay for directly.

Who Really Pays

Uncompensated care does not disappear. It is financed partly by government payments to hospitals that serve many low-income patients, partly by charitable funds and partly by the prices hospitals negotiate with private insurers. Patients also pay: the landscaper faces collection efforts unless he qualifies for charity care, and medical debt can harm credit and well-being. In economic terms, the uninsured receive care, but its cost is spread in less transparent and less efficient ways than insurance premiums would spread it.

What Coverage Changes

Dranove et al. (2016) tracked unpaid hospital care before and after 2014 and saw it drop sharply where Medicaid eligibility widened, with no similar drop elsewhere. Sommers et al. (2017) reviewed evidence on coverage and health and concluded that insurance improves access to care, reduces financial strain and is associated with better health and lower mortality. Coverage converts hidden, inefficient cost-shifting into organized risk pooling.

Financial Risk for Families

For low-income families, a single hospitalization can mean years of debt. Medical bills can lead to skipped rent, damaged credit and, for some, bankruptcy. Insurance protects against these consequences as much as it pays for care. When Valley's counselors talk with uninsured patients about coverage, the conversation is often less about access to doctors and more about protecting a family's finances from the next emergency.

Back to the Landscaper

Valley's financial counselor helped the landscaper apply for the hospital's charity care program, which covered most of his bill, and screened him for marketplace coverage, where a subsidy would bring his premium to about $60 a month. Had he been enrolled before his surgery, the pool, rather than the hospital and his own savings, would have absorbed the cost.

Implications for the Health Center

For Valley, every uninsured patient who gains coverage brings in more revenue per visit, gains access to specialists and hospital care on better terms and faces less financial risk. Enrollment assistance is therefore both a mission activity and an economically sensible one. The center enrolled about 900 patients in coverage last year and could reach more with a second certified counselor.

Limits of Insurance

Insurance is not free of trade-offs. Premiums must cover administrative costs, and cost-sharing can deter needed care, as earlier modules showed. Coverage also does not guarantee access if clinicians are scarce. Insurance is necessary for financial protection but not sufficient for good care.

Conclusion

Insurance works by pooling unpredictable individual risks into predictable group costs. When people are uninsured, the costs of their care are still paid, but through hospitals, taxpayers, private premiums and patients' own finances in ways that are less fair and less efficient. Expanding coverage replaces that hidden system with organized pooling.

References

Dranove, D., Garthwaite, C., & Ody, C. (2016). Uncompensated care decreased at hospitals in Medicaid expansion states but not at hospitals in nonexpansion states. Health Affairs, 35(8), 1471-1479. https://doi.org/10.1377/hlthaff.2015.1344

Garthwaite, C., Gross, T., & Notowidigdo, M. J. (2018). Hospitals as insurers of last resort. American Economic Journal: Applied Economics, 10(1), 1-39. https://doi.org/10.1257/app.20150581

Sommers, B. D., Gawande, A. A., & Baicker, K. (2017). Health insurance coverage and health: What the recent evidence tells us. New England Journal of Medicine, 377(6), 586-593. https://doi.org/10.1056/NEJMsb1706645