Unbiased Analysis of Today's Healthcare Issues

The Four-Party System

Written By: Jason Shafrin - Nov• 25•09

Who does health care reform affect?  Charles Kroncke and Ronald White organize individuals into the following four major stakeholder groups:

  • First-party patients.  The patients who seek care.
  • Second-party providers.  These include hospitals,  physicians, nurses, physical therapists, dentists, and pharmaceutical companies.
  • Third-party payers.  The payers are generally either private insurance companies or government programs such as  Medicaid and Medicare.
  • Fourth-party employers.  Employers purchase health insurance for their employees and thereby obtain a deductible expense in calculating their federal income-tax liability. 
  • Other parties.  These include health care researchers, scientists, financial institutions that provide funding for medical school, malpractice insurers, and of course bloggers.

Third party payers must decide on either community or experience rating.  Kroncke and White use examples from both health care and other forms of insurance.

  • Community Rating.  Community rating charges all members of a specific group the sam premium.  However, adverse selection can destabilize community rating schemes when healthy individuals opt out.  This drives up insurance premiums for the sicker patients remaining in the insurance pool.  “Although community-rated insurance systems proved to be unsustainable in free markets, egalitarian-minded legislators were especially fond of them. The most obvious way for legislators to increase these systems’ viability was to prevent low-risk buyers from exiting the risk pools. Compulsory (or mandatory) insurance laws now dominate homeowner, automotive, unemployment, and disability insurance markets….Over the long run, however, without third-party control over second-party reimbursement rates, compulsory insurance produced windfall profits for providers and fueled spiraling costs.”  
  • Experience Rating.  Experience rating may seem to be a solution to the problems of community rating.  Experience rating, however suffers from the problem of information asymmetry and insurance fraud.  Patients may have hidden information concerning the probability they get sick (e.g., family history) or may hide pre-existing conditions from insurers.  Seller’s side information asymmetry involves  deliberately withholding or disguising information insurance buyers need in order to  decide rationally between competing policies or companies.  The language of health insurance contract is extremely opaque and makes comparison shopping between health plans nearly impossible.  Further, there may be fraud in experience-rated systems.  The GAO has long identified large-scale public programs, such as  Medicare and Medicaid, as notoriously rife with provider-based fraud.  In an example outside the health care realm, homeowner’s insurance suffered from a lack of transparency after Hurricane Katrina, when insurers relied on an indiscernible distinction between wind and water damage to deny claims.

Key Pieces of Legislation:

  • Flexner Report (1910): Lead to a reform of medical education; reduced the number of medical school graduates by one half and the number of medical schools from 160 to 85.
  • Stabilization Act (1942): allowed large corporations to offer fringe benefits without violating the freeze on wages. This act stimulated the rise of employer-provided health benefits.
  • Hill Burton Act (1946): Provides federal subsides for the construction of nonprofit community hospitals.
  • IRS tax code (1954): Makes employer contributions to employee health insurance tax deductible for employees.
  • Employee Retirement Income Security Act (1974): exempted health care benefits from many state taxes and regulations. Since then, this act has become a magnet for health care-related enabling legislation.


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