Chapter 9 Government and Health Care Copyright 2002 by Thomson Learning, Inc. Copyright 2002 Thomson Learning, Inc. Thomson Learning is a trademark used herein under license. ALL RIGHTS RESERVED. Instructors of classes adopting PUBLIC FINANCE: A CONTEMPORARY APPLICATION OF THEORY TO POLICY, Seventh Edition by David N. Hyman as an assigned textbook may reproduce material from this publication for classroom use or in a secure electronic network environment that prevents downloading or reproducing the copyrighted material. Otherwise, no part of this work covered by the copyright hereon may be reproduced or used in any form or by any means graphic, electronic, or mechanical, including, but not limited to, photocopying, recording, taping, Web distribution, information networks, or information storage and retrieval systems without the written permission of the publisher. Printed in the United States of America ISBN 0-03-033652-X
Government Health Care Spending Government represents 45.5% of the $1.1 trillion spent on Health Care. 19% of the Federal Budget is devoted to health care issues.
Percent Figure 9.1 U.S. Health Expenditures as a Percentage of GDP 1960-1998 25 20 15 10 5 Copyright 2002 by Thomson Learning, Inc. 0 1960 1965 19701975 19801985 1990 1995 2000 Year
Why Health Care is Different Uncertainty: People do not typically know what their health care expenses will be. Insurance: Because of uncertainty people typically buy health insurance. This means that people do not typically pay the full marginal cost of their health expenses.
Health Insurance Coverage 82% of Americans are covered. 44 million are uncovered.
Figure 9.2 Financing Health Care Expenditures in the United States, 1998 Individual Out-of-Pocket 17% Governments 45% Private Health Insurance 33% Private Charity and Other 5%
Price (Dollars per Unit Service) Copyright 2002 by Thomson Learning, Inc. Figure 9.3 Health Insurance and the Market for Health Care Supply = Marginal Social Cost P 2 A C Loss in Net Benefits P 2 P 2 B Demand = Marginal Social Benefit Q* Q 1
Problems with Health Insurance Asymmetric Information: Sellers know more about the health care needs than buyers. This can lead to over-consumption.
Problems with Health Insurance Adverse Selection (continued) People at greater risk for high health expenses will purchase health insurance even at very high premiums. At those higher premiums people who are healthy may opt to go without insurance leading to a situation where insurance companies must raise rates. This problem can create a vicious cycle that drives insurance companies out of business and leaves people without health insurance.
Problems with Health Insurance (continued) Third-Party Payments Neither the insured nor the physician has incentive to keep costs down. This leads to over-consumption. Patients evaluate the benefits of a procedure against only a fraction (their coinsurance rate) of the cost.
Government Health Spending (Billions of Dollars) Figure 9.4 Government Health Spending, 1965-1998 in billions (Selected Years) $500 $500.4 $456 $400 $300 $253.1 $330 $200 $174.6 $100 $105.1 Copyright 2002 by Thomson Learning, Inc. $45.3 $27.6 $8.3 $0 1965 1970 1975 1980 1985 1989 1991 Year 1995 1998
Problems with Health Insurance Moral Hazard (continued) People with insurance often behave in ways that cause them to need the insurance. People may fail to eat right and exercise knowing that they have health insurance to help defray the monetary costs of such a decision.
Other Features Contributing to Inefficiency and High Cost Malpractice Insurance: Doctors must pay high malpractice insurance premiums. These costs are passed on to health insurance companies and then on to patients in the form of higher insurance premiums. Uninsured Patients: Doctors and hospitals that accept Medicaid patients are not able to deny service to patients based on their ability to pay. Technological Advance: Third-party payments encourages over-consumption of health care services which leads to over-development of health care technology.
Governments and Health Care: Compensating for Market Failure Market Imperfection Asymmetric Information Adverse Selection with the retired population Income Inequality Public Health Government Reaction FDA drug approval Medicare Medicaid Vaccinations and Research
Why Worry About Growth in Health Care Costs An increasing share of income is devoted to health care which implies other priorities lose out. High health insurance costs for employers cause them to hire contract labor. Employees with a poor health history can be inefficiently locked into particular jobs.
Government Health Insurance Program Medicare 216.6 Medicaid 170.6 Other 113.2 Spending in Billions
Medicare 65 and older 38 million covered Part A: Hospitals Part B: Doctors Prescription Drugs and Long-Term care are not covered
Cost Containment in Medicare Prospective Payments and the DRG The Diagnosis Related Group is a broad type of illness. Payments to hospitals are made based on the DRG and are the same regardless of actual costs. This creates an incentive for hospitals to control costs because if they succeed they get to keep the savings.
Medicaid Medicaid is health insurance coverage for the poor. Eligibility is tied to the income of the household. Children of low income people can be eligible even when their parents are not.
Indirect Government Subsidies of Health Care Because employer-paid health insurance premiums are not subject to the income tax, this constitutes a substantial subsidy to health insurance.
Cost to Workers of Health Insurance (Dollars per Month) Figure 9.5 The Effect of Preferential Tax Treatment of Employer-Provided Health Insurance 225 Taxable Income Lost to Governments 150 Demand for Health Insurance Copyright 2002 by Thomson Learning, Inc. 0 Q 1 Q 2 Quantity of Health Insurance
The Impact of Coinsurance on the Price of Health Care Low coinsurance rates cause patients to ignore health care costs. This increases demand and encourages an inefficiently high level of consumption.
Price (Dollars per Unit if Service) Figure 9.6 How an Increase in Coinsurance Can Reduce Health Care Spending and Improve Efficiency in the Market for Health Care Services Supply P 4 A P 3 E A P 2 B P 1 B Demand Copyright 2002 by Thomson Learning, Inc. Q* Q 1 Health Care Services per Year
Controlling Costs Through Managed Care HMOs (Health Maintenance Organizations) are forms of insurance that pay a capitation or a fixed amount of money for every patient in their care. This puts pressure on HMOs to control costs. PPOs (Preferred Provider Organizations) are forms of insurance that negotiate a reduced fee structure for participating physicians.
Controlling Medicare and Medicaid Expenses Medicare: Prospective payments for DRGs. Problem: encourages early discharge and low levels of service. Medicaid: low reimbursement rates reduce doctor incentives to provide service. Problem: reduces access to quality care in many places.
Universal Coverage The U.S. has more than 40 million uninsured. It is one of only a few countries without universal health insurance guaranteed by government.
Universal Coverage Gaps in Coverage The U.S. has more than 40 million uninsured. It is one of only a few countries without universal health insurance guaranteed by government. No long-term coverage.
U.K. System National Health Service Capitation paid to general practice physician Universal coverage Specialists difficult to see Waiting lists for common operations; low cancer survival rates Capital expenses budgeted by a national board
Canadian System Provincial governments administer the system. Costs shared by national and provincial taxes. Waiting lists and shortages cause the wealthy to go to U.S. for service.