Terms discussed in the lesson

Some important terms we discussed in the last lecture :

Cream Skimming - also called "Cherry Picking" - when an insurer knows more about consumers' expected costs than the consumers themselves and uses marketing or plan design to enroll a healthier-than-usual population. This, in the Israeli setting, was done by the smaller sick funds that only accepted young and healthy patients to their ranks. This created continuous deficit in the General Sick Fund, and, was one of the driving forces for the National Health Law of 1995. Cream Skimming is a general term from the world of insurance.

Adverse Selection - when unusually high-cost people select an insurance plan. When adverse selection occurs, the average expected cost of people in a plan is higher than the insurer planned. The insurer loses money. If the insurer then raises the premium, the higher premium causes relatively lower cost people to drop the policy, which pushes up the average cost of those remaining. The insurer loses money again and raises the premium again. Again, this forces lower cost people to drop out. This vicious cycle (sometimes called the "Premium Death Spiral") continues until only the highest cost people are left in the policy. Most people have then dropped out and are uninsured. Adverse Selection raises general premiums for health care insurance, so, many people cannot afford insurance, and they are left uninsured. One strategy to prevent adverse selection is waiting periods for eligibility (this strategy is used in Israel to prevent overt medical immigration).

Capitation - a payment method for health care services. The physician, hospital, or other health care provider is paid a contracted rate for each member assigned, referred to as "per-member-per-month" rate, regardless of the number or nature of services provided. The contractual rates are usually adjusted for age, gender, illness, and regional differences.

Capping - Sick Funds pay hospitals a specified amount of money in advance for services that will be provided in the future for a fixed amount of patients insured by the sick fund. Hospitals enjoy steady income, sick funds enjoy prices that are lower than the "Per Diem" rates set by the government.