HEALTH CARE CHAPTER 22. Tuesday, September 27, 11

HEALTH CARE CHAPTER 22

YOU ARE HERE 2

WHY HEALTH CARE IS NOT JUST ANOTHER GOOD 3

WHY HEALTH CARE IS NOT JUST ANOTHER GOOD Rapid increases in quality (which get confused as price increases) Treatments developed in the 1990s for AIDS are expensive but this is a quality increase, not a price increase Consumers have less knowledge about what they are buying than they typically do when buying goods. We value it as a society: we hate the idea that people may die when a treatment is available. View health care like a right. 3

THE MONEY 16% of GDP spent on health care (2.2 trillion of 13.8 trillion) 46% spent by governments (Medicare, Medicaid etc.) 4

WHERE THE PRIVATE MONEY COMES FROM Private Insurance $775 billion Out-of-Pocket Patient Expenses $264 billion 5

WHERE THE MONEY GOES Hospitals $697 billion Doctors $479 billion Prescription Drugs $228 billion Research $40 billion 16% 33% HOSPITALS PRESCRIPTION DRUGS 3% 48% DOCTORS RESEARCH 6

INSURANCE COVERAGE 82% covered all year 8% covered part of the year 10% without any insurance all year Full Year Part Year No Coverage 10% 8% 82% 7

THE UNINSURED 21 million of 40-45 million go without insurance all year 18-20 million are between age 18 and 34 8.5 million are under 18 8

INSURANCE TYPES Private Group Insurance 171 million Private Individual Insurance 25 million Medicare 43 million Medicaid 52 million Private Group Private Individual Medicare Medicaid 18% 15% 59% 9% 9

INSURANCE 10

INSURANCE Lets forget about health care for a little while and think about insurance more generally 10

INSURANCE Lets forget about health care for a little while and think about insurance more generally What is insurance? 10

INSURANCE Lets forget about health care for a little while and think about insurance more generally What is insurance? I am worried about something bad happening (health shock, house burns down, wife dies, car accident) Basically insurance works the following way: - I pay something to the insurance company every month - If something bad happens the insurance company gives me money Why do people do this? - We think they are Risk Averse-that is we like our income to be smooth 10

MORAL HAZARD 11

MORAL HAZARD There are two major problems with insurance, the first is moral hazard 11

MORAL HAZARD There are two major problems with insurance, the first is moral hazard Moral Hazard: the fact that having insurance increases 11

MORAL HAZARD There are two major problems with insurance, the first is moral hazard Moral Hazard: the fact that having insurance increases the demand for the good 11

MORAL HAZARD There are two major problems with insurance, the first is moral hazard Moral Hazard: the fact that having insurance increases the demand for the good Think about car insurance: 11

MORAL HAZARD There are two major problems with insurance, the first is moral hazard Moral Hazard: the fact that having insurance increases the demand for the good Think about car insurance: I will not drive as carefully because I don t need to worry about buying a new car 11

MORAL HAZARD IN HEALTH INSURANCE Health insurance has some of these issues I will not do as much to take care of myself because I don t need to worry about cost I may go to the doctor with a small problem At hospital I may want expensive tests that I wouldn t pay for myself However, probably wouldn t actually make myself sick to get insurance We need to put things into health insurance contracts to help reduce this problem Lets see it in a picture 12

Price Amount of Health Care 13

Price Suppose this were the supply and demand if people paid for health insurance themselves once they were sick Amount of Health Care 13

However, once they are perfectly insured what will they choose? Price Suppose this were the supply and demand if people paid for health insurance themselves once they were sick Amount of Health Care 13

However, once they are perfectly insured what will they choose? Price Amount of Health Care 13

However, once they are perfectly insured what will they choose? Consumers actually don t really like this, it is nice once they get sick but it makes insurance too expensive Price Amount of Health Care 13

However, once they are perfectly insured what will they choose? Consumers actually don t really like this, it is nice once they get sick but it makes insurance too expensive Price Note that once again if demand were inelastic this wouldn t be a problem Amount of Health Care 13

VOCABULARY OF INSURANCE 14

VOCABULARY OF INSURANCE Deductible the amount of health spending a year that you have to pay before the insurance company pays anything 14

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 14

WHY CO-PAYMENTS INCREASE PRICES Third-Party Payer: an entity other than the consumer pays part of the costs If people only pay 50% of a price they will consume much more Lets see this in a picture 15

Copayment: lets think about what happens with copayments Price Suppose copayment is 50%, now when price is $100 I act like it is $50 16

Copayment: lets think about what happens with copayments Price Suppose copayment is 50%, now when price is $100 I act like it is $50 Better but not perfect, are there other things we can do to keep costs down? 16

TYPES OF INSURANCE PLANS Fee-for-service Health Maintenance Organization (HMO) Preferred Provider Organization (PPO) 17

CONTROLLING EXPENSES HMO s and PPO s use Primary Care Physicians (PCP s) or Gatekeepers who are physicians charged with making the initial diagnosis and making referrals 18

ADVANTAGES AND DISADVANTAGES OF INSURANCE TYPES Insurance Type Fee-for- Service HMO Advantage 1) Maximum physician choice 2) Little insurance company meddling in doctors decisions Maximum control over expensive and unnecessary procedures so premiums, deductibles and co-payment rates are low. Disadvantage Highest premiums, deductibles, and co-payment rates because of little control over expensive and unnecessary procedures 1) Minimal physician choice 2) Significant meddling in physician decisions, especially when differing procedures have significant cost differences PPO 1) Some physician choice 2) moderate premiums, deductibles and co-payment rates 3) some control over expensive procedures 4) minor meddling in physician decisions 19

THE HMO DEBATE To control costs, HMOs use rules to limit expenses. E.g. recuperating time in a hospital is limited for births. These rules sometimes conflict with doctors wishes for their patients. With patients having little interest in controlling costs, HMOs rely on rules to control costs. 20

ADVERSE SELECTION The other major problem in insurance is adverse selection This occurs when the people who choose to insure themselves are particularly risky-this is a problem for everyone else To see this lets suppose we are insuring ourselves against some event (say wisdom tooth replacement) There are two types of people 21

Type Probability of Operation Willingness to Pay Population Probability A 100% $1000 10% B 10% $150 90% So what happens if insurance company doesn t know who is A and who is B? If everyone buys insurance for each person the average payoff the insurance pays out is:.10x$1000+0.9x0.1x$1000=$100+$90=$190 The insurance company would be willing to offer insurance for $190 However type B people are not willing to pay this, thus none of them buy it But if only type A buy it the average payoff is $1000 This isn t really insurance, the market breaks down 22

ADVERSE SELECTION AND HEALTH INSURANCE This is potentially a big problem with health insurance if we just bought it on the market like bacon People who are likely to be sick sign up making it prohibitively expensive for those who are generally healthy This makes it more expensive for insurance company, leading them to raise premiums, leading to an even more selected group This would be particularly problematic if we allowed for pre-existing conditions In some ways this isn t insurance-it is just buying the good 23

SOLUTIONS TO ADVERSE SELECTION IN HEALTH INSURANCE In practice tax code is such that employers make health insurance available to all of their employees: this is a way of making sure everyone is in the pool Kind of works for people at the firm Big problem for people who don t have a job Real complication when somebody loses their job-particularly if they are sick Maybe adverse selection isn t a problem at all Public Insurance-have government worry about it and everyone is insured Individual Mandate: it might be unconstitutional but there is some economics behind it 24

THE REST OF THE WORLD Most of the industrialized world uses a single-payer system where the government collects (usually very high) taxes to pay for everyone s health care 25

INTERNATIONAL HEALTH CARE FINANCE ARRANGEMENTS Country Public $ as a % of Total Hospitals Physicians Priv. Ins Australia 67.4 mostly public A a Canada 70.4 mostly private A, B a France 80.1 mostly public A b mix of public and Germany 76.7 private A a Japan 82.5 mostly private A, B none United Kingdom 86.7 mostly public trusts C a United States 45.1 mostly private A c A) Mostly private Fee-for-Service B) Government imposed fee schedule C) Public employees a) option to purchase private insurance for all expenses b) option to purchase private insurance for non-covered expenses c) all non-medicare, non Medicaid 26

COUNTRY COMPARISONS Health Expenditures/ GDP (2004) Infant Morality per 1000 births (2006) Life Expectancy (2008) U.S. 15.3% 6.4 78.1 U.K. 8.3% 5.1 78.9 France 10.5% 3.4 80.9 Germany 10.9% 4.1 79.1 Japan 8.0% 2.8 82.0 27

COUNTRY COMPARISONS (CONT.) Five Year Survival Rates Prostate Cancer Breast Cancer U.S. 98.6% 88.7% U.K. 71.0% 81.0% France 61.7% 80.3% Germany 67.6% 71.7% 28

ADVANTAGES AND DISADVANTAGES OF SINGLE-PAYER SYSTEMS Advantages Universal coverage Low-to-no cost coverage to patients Disadvantages Long waiting lines for heart bypass and other surgeries Lower Survival Rates on many ailments High taxes 29