Chapter 8

Health Care

Economics of Health Care

• Health care is too important to leave to the market, vs. health care is too important not to be exposed to the market
• Reform is difficult
• Powerful vested interests
• Every dollar saved by using more cost-effective procedures is someone’s dollar of income

Economics of Health Care

• During WWII, with wage and price controls in place, employers offered insurance as an additional benefit
• Has since continued as an employee benefit
• 80 percent of health care costs are paid by insurance
• Led to overuse & higher prices
• Tendency to regulate (rather than replace) the insurance industry

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LO1

21-3

Economics of Health Care

• National Issue:
• People without Health Insurance
• Increasing Share of Federal and State Budgets
• Labor Disputes over Health Insurance
• Insurance Companies Dictating Medical Care
• Ethical Questions
• Affordable Care Act (Obamacare)

Economics of Health Care

• Health Care Industry
• Hospitals, Nursing Homes, Labs, Doctors’ Offices, Drugs, Artificial Limbs, Eyeglasses
• 17 million employed, 850,000 physicians, over 5,800 hospitals, over one billion office visits each year
• Accounts for 17.9% of GDP (5% in 1960), and 10% of total employment

Economics of Health Care

• Twin Problems: Costs and Access
• Controlling costs and increasing accessibility
• High & Rising Health Care Costs
• Price and Quantity; Demand and Supply
• Absolute terms, % of GDP and per capita
• Total Spending on Health Care
• Insurance (80%)
• Deductibles , Co-payments & cash (20%)
• Medicare & Medicaid (triple as % of GDP by 2050); monthly premiums cover 25% of benefits provided

U.S. Health Care Expenditures and Outcomes

• Total health care expenditures in the United States
• Not adjusted for inflation
• 1960: $28 billion
• 2011: $2.7 trillion (almost 100 times the 1960 number)
• Quality increases are part of rise in costs, i.e., it’s not just inflation

Figure 8-1: National health care expenditures as a percent of GDP of the Western industrialized countries and Japan, 2013

U.S. Health Care Expenditures and Outcomes

Are We Healthier?

• Good news:
• Average life expectancy increased by 6 years since 1970.
• U.S. physicians and hospitals use the most advanced medical equipment and technology
• More than one-half of world’s medical research is done in the U.S.
• Bad News:
• Many nations rank higher in life expectancy, maternal mortality and infant mortality

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U.S. Health Care Expenditures and Outcomes

• Infant mortality rate
• The number of infants who die before their first birthday per every 1,000 live births
• Life expectancy
• The age to which a baby born in a particular year can be expected to live on average

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Table 8-3: Life expectancies and infant mortality rates^a for the western industrialized countries and Japan, 2012

Table 8-3 (cont.): Life expectancies and infant mortality rates^a for the western industrialized countries and Japan, 2012

U.S. Health Care Expenditures and Outcomes

• United States: (17.9% of GDP)
• Lowest life expectancy, highest infant mortality rate
• Japan: (10.1% of GDP)
• Highest life expectancy, lowest infant mortality rate

U.S. Health Care Expenditures and Outcomes

• Quality of US health care varies
• Infant mortality rate
• Whites: 5.6
• African-Americans: 13.2
• Life expectancy
• Whites: 78.4
• African Americans: 74.3
• Important factors
• Income and discrimination

U.S. Health Care Expenditures and Outcomes

• Director of the World Health Organization
• “There are 3 Americas. There is high quality health care for the rich and mediocre health care for the middle income class. However... ‘it‘s the bottom 5 percent or 10 percent, made up of Native Americans... the inner-city poor, rural blacks and Appalachia that is the third America. They have health conditions as bad as those in sub-Saharan Africa.’”

U.S. Health Care Expenditures and Outcomes

U.S. Health Care Expenditures and Outcomes

Summary

• High and increasing health care costs in the U.S.
• Our health indicators are below those of other developed nations
• Health indicators vary by race and ethnicity
• Why do we spend so much on health care, yet we have relatively poor outcomes?
• Answer: rising costs and lack of access

U.S. Health Care Problems

• Escalating health care costs
• A growing demand for health care
• Waste and inefficiency
• Physician sovereignty
• A medical doctor’s control over the demand for medical procedures (e.g., MRIs)
• Fee-for-service
• The charging of a specific fee for provision of a specific health care service (e.g., X-rays; 4X)

U.S. Health Care Problems

2. Defensive medicine
• The ordering of unnecessary tests and services by health care professionals solely to protect themselves from charges of malpractice
• If a test is not ordered and the insurance company finds out, the insurance company may drop that person from its coverage
• Malpractice insurance
• Insurance carried by health care professionals to protect themselves from large malpractice damage awards

U.S. Health Care Problems

3. Third-party payment
• Insurance pays 80 percent of all payments
4. Rapid technological change
• More expensive (What’s cold and clammy and out of date?)
• When hospitals invest in highly specialized equipment, hospital costs must then increase
• Medical experts and their patients judge hospitals by quality of physicians who are on staffs
• Reputable medical doctors choose to practice at hospitals that have all the latest technology available
• New pharmaceutical products

U.S. Health Care Problems

5. Cost shifting
• The practice of recovering the unpaid costs of some patients by charging higher prices to other patients
6. Attitudes of patients
• Any treatment should be available to us, more tests are better than less, aggressive medical treatment can cure virtually anything
• Because they have insurance, they demand excessive care without much regard for cost
7. Rising incomes
• Elasticities: price (-.2); income (1 to 1.5)

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U.S. Health Care Problems

8. An aging population
• Over 65: 3.5 times the care of others
• Over 65: 12.4% of 2000 pop.; 20% in 2030
• Last year of life
9. Unhealthy life styles
• Smoking, alcohol, weight
• Moral hazard problem
1. Consequences
• Medical costs have been skyrocketing

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U.S. Health Care Problems

10. Waste and inefficiencies
• Unnecessary tests and medical procedures
• Unnecessary surgeries and drugs
• Extremely expensive equipment
• Paperwork costs
• Patients forgo cost-effective preventative health care interventions
• Prenatal care; blood pressure checks
• Child immunizations

Consequences of These Characteristics

• Have caused medical costs to skyrocket over time
• Physician sovereignty, third-party payment, and increase in tests and treatments caused by rapid technological change and defensive medicine all imply increases in demand for health care
• Installation of new technology and continual replacement of “old” technology, as well as expansion of number of hospital beds and doctors, represent increase in supply of health care
• Consumer advocates maintain that much of our health care expenditures are wasted on unnecessary tests and medical procedures
• Paperwork costs are tremendous
• End up at a point inside the PPC

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Figure 8-3: Increased demand for medical care

Because demand has increased since 1960, medical care prices have

risen as we have consumed a greater quantity of health care.

Figure 8-2: Production possibilities curve for health care

As we have moved from point A to point B, we have obtained more health care, but we have

given up other goods and services. At point C, we are using our resources inefficiently.

U.S. Health Care Problems

• US hospitals, clinics, etc.
• Non-profit and for-profit
• Consolidation
• Insurance companies, pharmaceutical firms
• For-profit
• Question:
• Should healthcare be a for-profit industry?
• Single-payer system
• Save an estimated 15-20% of costs

U.S. Health Care Problems

• Lack of access to health care
• Health insurance or program
• Private insurance
• Purchased from a private insurance company
• Through place of employment
• Public health coverage
• By the government: Medicare, Medicaid
• Many people have no health coverage

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Table 8-4: Percent of people without health insurance�coverage, by race and ethnicity, 2011-12

Vocabulary of Insurance

• Deductible: the amount of health spending a year that you have to pay before the insurance company pays anything
• Co-payment: either a set amount or the percentage of the bill after the deductible has been taken out that you have to pay
• Maximum out-of-pocket: the most that a person or family will have to pay over a year for all covered health expenses

Public Insurance: Medicare

• All those over 65 are eligible
• Part A
• Covers expenses incurred in hospitals
• Compulsory
• Financed with premiums and 1.45% payroll tax on employers and employees
• Part B
• Covers doctor visits
• Voluntary
• Financed with premiums and general tax revenue
• Part D
• Prescription coverage
• Financed with premiums

Public Insurance: Medicaid

• Covers the poor
• Means tested
• eligibility standards vary from state to state
• No premiums are required
• Some states have very small co-payments
• State Children’s Health Insurance Program (SCHIP)
• Health care to children in families whose income is too high to qualify for medicaid

The Affordable Health Care Act

• Passed in 2010 by President Obama and Congress
• Goals
• Achieve universal health coverage
• Contain costs and apply mandates
• Means
• Extend heath care to the uninsured
• To make health care more affordable
• New policies and regulations

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The Affordable Health Care Act

• Prior to PPACA health insurers could
• cut off dependent children from coverage under their parents’ health insurance the first year after their children reached 23,
• consider, charge more for, and deny coverage for any medical condition a prospective client had prior to purchasing insurance through the company.
• set annual and lifetime limits on how much they would cover.
• set prior conditions by which they could rescind coverage and they were free to raise the rates of those who became ill (and therefore expensive to the company).
• charge rates that were different for men and women.
• Be free from most government intervention when it came to premiums, profit and the proportion of premiums taken up with administrative costs.

The Affordable Health Care Act

• PPACA requires that health insurers
• allow dependent children to stay on their parents health insurance through age 25,
• to accept everyone without regard to health status,
• charge the same to healthy and the unhealthy alike
• charge the same for men and women.
• no longer set lifetime limits
• no longer set annual limits.
• no longer rescind coverage or raise rates on the sick
• How does each of these impact health care costs?

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What Insurance Companies Can Still Do

• They will be allowed to
• charge older customers no more than three times what they charge younger ones (though younger ones typically cost one fifth or less than what older ones cost),
• charge 50 percent more to tobacco users.
• set up broad geographic price differences
• charge more for larger families than smaller ones.

Are These All Good For Everyone?

• Preventing one person from facing an adverse consequence spreads the adverse consequence to others.
• Some provisions will cost employers (who may choose to employ fewer people)
• Some will simply shift costs from one group to another.
• What about the promise made that Americans could keep their present health care coverage if they were happy with it?

The Affordable Health Care Act

• New taxes
• Higher income Medicare tax
• Higher income capital gains tax
• Cadillac insurance tax (40%)
• Excise tax on sales of medical devices
• 10% tax on indoor tanning

LO5

21-39

The Affordable Health Care Act

• Objections and alternatives
• Greater inefficiencies in health care (additional layers of bureaucracy)
• First step to national health insurance (and nonprice rationing)
• Lack of sufficient revenue sources in the future
• Increased inefficient consumption as a result of increased coverage
• Need to force consumers to weigh marginal benefits and costs (e.g., Singapore plan)

LO5

21-40

Other Options for Health Care in the U.S.: From the Economic Right

• Privatization & increased competition, supply side of health care
• Privatization
• Of government-owned and government-run hospitals
• Increase competition among hospitals
• Pay more attention to the bottom line
• Eliminating a great deal of inefficiency
• Advertising within the health care industry
• Improve competition among suppliers

Alternatives for Health Care in the U.S.:�From the Economic Right

• Increased competition, demand side
• Well-informed consumer
• But, people’s choices are constrained by
• Insurance coverage, the availability of providers accepting Medicare and Medicaid
• Curtailment/elimination of Medicare, Medicaid
• Rising health care costs: demand that is not regulated by the usual norms of frugality

Alternatives for Health Care in the U.S.:�From the Economic Right

• Medical Savings Accounts
• Insurance
• The purchaser makes payments into an account that can be drawn against in times of illness
• Monies not spent for medical care are returned to the insured person

Alternatives for Health Care in the U.S.:�From the Economic Left

• Competition
• Among health insurance companies—“keeps them honest”
• National health insurance
• Universal, single-payer, non-profit
• Canadian model
• Doctors, etc., paid directly by the government
• Fees negotiated by industry and gov’t
• Criticism: rationing and waiting periods

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Alternatives for Health Care in the U.S.:�From the Economic Left

• Socialized medicine
• Similar to national health insurance
• Extensive gov’t intervention in health care
• British model
• Doctors, etc., salaried government employees
• Hospitals and clinics government-owned
• Relatively little bureaucracy
• Criticism: rationing and waiting periods

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Alternatives for Health Care in the U.S.

• Managed care
• Health maintenance organization (HMO)
• Group practice
• Contracts with insurance companies
• Preferred provider organization (PPO)
• Similar—contracts with insurance
• A group of medical providers contract to provide the insured patient’s medical care at discounted rates

Alternatives for Health Care in the U.S.

Vouchers a Better Solution than insurance?

• A voucher is a token that can be used to buy only the item that the voucher specifies.
• So a healthcare voucher could be used to buy only health insurance.

Alternatives for Health Care in the U.S.

Vouchers have four advantages over public and private insurance:

• Vouchers can be used with public and private insurance and result in competition between them.
• Governments can set the total value of vouchers to overcome bureaucratic overproduction.
• Vouchers spread the public contribution across millions of consumers.

4. By giving the buying power to patients, producers compete and provide quality service at the lowest attainable cost.

Alternatives for Health Care in the U.S.

Self-insurance

• Some large employers are bypassing the insurance companies and negotiating directly with hospitals and doctors
• Acting as their own insurance companies
• Intel, Walmart, Boeing, Lowe’s, and Oracle
• Governments of San Francisco and Wisconsin
• Can be expanded with smaller businesses collectively purchasing healthcare

Singapore’s Health Care System

• Rated by WHO as one of the best
• Spent just 3.8% of GDP on health care
• Competition between hospitals
• Must post prices, and government tracks performance
• Increased out-of-pocket expenses (92%)
• Required to save 6% of income in MediSave
• Private property
• Government subsidizes the poor and those whose MediSave accounts have been exhausted.

21-51

Other Plans

• Whole Foods
• Each full-time employee has $1,800 per year deposited into a “wellness” account
• Company pays for a high-deductible HIP that covers 100% of all medical expenses exceeding $2,500 in a given year
• At most, employees are on the hook for $700 per year
• The $1,800 and $700 are personal property, so employee must consider opportunity costs resulting in less spending

21-52

Other Plans

• State of Indiana
• Each employee has $2,750 per year deposited into a health savings account
• Company provides an insurance policy that covers 80% of medical expenses between $2,750 and $8,000 and 100% of all medical expenses exceeding $8,000 in a given year
• Results showed a 35% reduction in medical expenses for those choosing this plan compared to employees choosing traditional PPO plan
• Voluntary participation went from 2% in first year to 70% in second year

21-53

Conservative versus Liberal

Liberals

• Market has done a poor job of allocating medical care
• Special characteristics of health care make it unlikely that the market will ever reach a fair and equitable solution
• Favor policy ranging from bolstering Medicaid and Medicare to developing national health programs on the order of those in other industrialized countries

Conservatives

• Strongly oppose national health programs
• Expansion of the government’s role
• Privatization and increased competition
• Trimming of Medicare and Medicaid,
• Development of medical savings accounts
• Stronger role for the unregulated market

Recent House Republican Plan (voted down)

• ACA calculated the credits based on the cost of insurance in a given area and how much the purchaser could afford to pay.
• Republican plan would have handed out tax credits on a flat basis, according to age.
• Both plans cut off subsidies at a certain income level

Recent House Republican Plan (voted down)

• The biggest losers under the Republican plan would have been older Americans with low incomes who live in high-cost areas.
• Those are the people who benefited most from Obamacare.
• The winners were likely to be younger, earn higher incomes and live in areas where the cost of health insurance is low.

Recent House Republican Plan (voted down)

• ACA's subsidies were structured to limit how much low- and middle-income Americans could be asked to pay for health insurance.
• Under the Republican proposal, many of the people whose tax credits would fall sharply would likely have ended up uninsured.
• For people with few resources, a gap of several thousands of dollars between their tax credit and the cost of coverage would have been impossible to make up.

Recent House Republican Plan (voted down)

• GOP program still represented a very large outlay of federal money to help Americans buy health insurance.
• Before Obamacare passed, those buying their own insurance did not receive government subsidies.
• The tax credits in the Republican bill would have gone to people regardless of whether they even paid taxes
• Another reason some conservatives oppose it.

Recent Developments

• President Trump cuts off health subsidies
• Democrats and republicans agree on plan to temporarily stabilize healthcare insurance market
• . . . . . .