ECNS 594 Current Issues in Economics

June 20, 2013Bozeman, Montana

3 Intrinsic Goals1. Improve health (value for $ spent): Positive

2. Improve responsiveness: Positive

3. Ensure financial burdens are distributed fairly: Normative

Affordability

AccessQuality

But levels of health not solely determined by health “systems”

Education Income Housing Food quality

Health Care: Merit Good?

Evolution of Health Systems post WWII

Europe and Japan rebuilt from scratch Developed national health systems

U.S. chose subsidies for its health care system Hospitals: Hill Burton Act Physicians: NHSC Employers: tax preference treatment for

benefits Elderly and low income disabled: Medicare Financially indigent: Medicaid, Community

Health Centers

How does the U.S. health system rank?

http://www.oecd.org

Australia Canada Germany New Zealand

UK US

Rank 3.5 5 2 3.5 1 6

Quality 4 6 2.5 2.5 1 5

Access 3 5 1 2 4 6

Efficiency

4 5 3 2 1 6

Equity 2 5 4 3 1 6

Healthy Lives

1 3 2 4.5 4.5 6

Per Cap Spending

$2,876 $3,165 $3,005 $2,083 $2,546 $6,102

Commonwealth Fund Comparative Ranking

International Comparison of Spending on Healthtotal expenditures per capita, U.S. $ PPP

Source: OECD Health Data 2009 (June 2009).

Total expenditures on health as a percent of GDP

U.S. Health Care We are the biggest

spender Per capita As a share of GDP

High expenditures may have 3 meanings: High average level of

use? (large income elasticity)

High resource costs? (supplier induced demand)

Inefficient provision of services (fee for service)

General observations about health care spending…

Income group Spending on health/GDP

Gov. health spending/total

health spending

Gov. health spending/tot

al Gov. Spending

Low income 4.3 36.2 5.9

Lower middle income

4.5 43.2 8.2

Upper middle income

6.3 55.1 9.8

High income 11.2 60.7 17.1

Global 8.7 57.6 14.3

Choice is important… “Our founders

thought politicians should be accountable when it comes to citizens’ right to life, liberty and the pursuit of heart surgery” Gottlieb, American

Enterprise Institute

Any System Must Ration Any and all systems, for all kinds of goods

and services, must ration resources someway, somehow, according to… price time in queue budgets geography (access) specialty, type of service

Each has unintended consequences

Unintended consequences are seldom good….

…If a federal program was established to give financial assistance to Boy Scouts to enable them to help old ladies cross busy intersections, we could be sure that:

not all the money would go to Boy Scouts, that some of those they helped would be neither old nor

ladies, that part of the program would be devoted to preventing

old ladies from crossing busy intersections, and that many of them would be killed because they

would now cross at places where, unsupervised, they were at least permitted to cross.” (Ronald Coase)

We often compare our system to others

Canada France Germany United Kingdom

So Who Has the Best System?

Source: Schoen November 2005()= Pew Research Center, June 2009

Overall System View (%)

Minor change needed

Fundamental change needed

Completely rebuild system

Australia 23 48 26

Canada 21 61 17

New Zealand 27 52 20

U. K. 30 52 14

U.S. 23 (24) 44 (30) 30 (41)

Germany 16 54 31

How Valid are Comparisons? No standard taxonomy

Purchasing power parities errors Income/prices/taxes

Quality comparisons

What Are Some of the Safer Conclusions?

Availability of medical resources does not explain high health care costs in the U.S. (or does it?) Japan and Italy have more MRI and CT Scanners per

million population

Spend more on medical care in absolute terms ($5,635 per capita) and in relative terms (15% GDP)

High income elasticity of demand (income is U.S. 20% higher than average, hence, supports more spending on medical care)

Some of the Safer Conclusions, continued…

Lifestyle choices of U.S. citizens (obesity)

Shorter waiting times (we pay for convenience)

18% of U.S. population has no insurance

Would more government and universal access improve the U.S. situation?

Questions to Ask with Each Reform?

Does the plan achieve universal coverage?

How is the plan financed, will it add to the federal deficit and national debt?

Will it contain costs without sacrificing quality?

Will it slow cost growth? How will it affect overall

employment? Freedom of choice?

Elasticity has to do with the ability to stretch your demand or supply when price changes…

Recall in ELM 9 and 11 the concept of a “change in the quantity

demanded…?” A 10% increase in the price of _______

results in a decrease in the quantity demanded of _______% physician price

Good health 3.5% Poor health 1.6%

hospital price 1.4% nursing home price 6.9% to 7.6%

Demand, Elasticity and Opportunity Cost

0 2 4 6 8 10 12 14 16 18$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

Remember in your ELM’s the concept of a “change in demand?” a 10% increase in income results in a _____

% increase in the demand for ______. 0.2% to 0.4% hospital services 24% to 32% dental services 2.0% to 5.7% physician services 6.0% to 9.0% nursing homes

And the supply response is important too

4 5 6 7 8 9 10 11 12 13 14 15$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

Inelastic

Supply

0 10 20 30 40 50 60 70 80 90 100$0

$2

$4

$6

$8

$10

$12

$14

$16

Does the law of demand apply to health care?

Coinsurance %

# visits/year Total spending on outpatient care

Probability of use

Free 4.6 $340 87%

25% 3.3 $260 79%

50% 3.0 $224 77%

What happens to resource use when its virtually “free?”

Percent Waiting

Australia Canada New Zealand

UK US

% waiting >week to

see specialist

46 57 40 60 23

So is “price” the perfect way to ration use?

Percent Australia Canada New Zealand

UK US

Did not fill Rx

22 20 19 8 40

Did not visit MD

when sick

18 7 29 4 34

Did not get rec. test

20 12 21 5 33

> $1,000 out of pocket

14 14 8 4 34

The dilemma worldwide then is providing…

Accessibility Geographically Wait time (time is not free)

Affordability Quality

Personnel Equipment (technology)

Health Care System Typology

Sickness Insurance (Germany) Private insurance market with state subsidy

National Health Insurance (Canada) National level health insurance system

National Health Services (United Kingdom) State provides health care

Mixed System (U.S.) Sickness insurance and national health

coverage)

Overview of Health System Types

National Health Service Great Britain, Sweden, Norway, Finland,

Spain, Italy, Greece National Health Insurance

Japan, France, Russia, Canada, Australia Mixed

U.S., China (post reform efforts)

National Health Service Universal coverage-Single Payer Financing via general revenues,

income taxes District budgets control spending Patients seen in public hospitals and

clinics Physicians work for NHS

Private practices often allowed

National Health Insurance Universal coverage via employer and

employee mandates May be both single and multiple

payers Financing via employment taxes,

Social Security Public and private hospitals exist France: 87% have supplemental

insurance

Mixed No universal coverage Multiple payers No individual or employer mandates Financing via individual, government,

private insurance Hodge-podge of providers and payers

The UK Experience All British citizens have access to universal health care Financing: payroll taxes, general fund, fees 10% Britons buy private health insurance

Chief benefit is reduced wait time for elective surgery Not all services are free (dental, Rx) GP is gatekeeper Good access to emergency and primary care For specialty care: rationed via wait lists and limits to

technology

Canadian Experience 13 different provincial healthcare systems

Quebec is unique: administers its own system for physician licensing

Hospitals: owned by provincial governments, private not for profits, and some by federal government

Financing for Medicare: provincial and federal taxes

Hospitals on global budgets regardless of ownership

Wait times are big although only 20% Canadians consider it a problem

The German Experience World’s oldest social health insurance

Universal coverage: 88% have social insurance, 10% private insurance

Financing: almost entirely via labor market (employer-employee)

Hospitals are private, not for profit and state/federal/local owned

Privately insured: shorter wait times, more elective surgery, more likely to see specialists

All Non US Systems have… Individual and/or employer mandates Universal coverage Less expensive Better outcomes?

Can health care be “too” universal?

Recent case of Spain as point of “health tourism” Northern Europeans relocate to

Mediterranean area in Spain for medical care

Spain recovers only fraction of cost from EU health fund ($10 million of $67 million)

U.S. System No central governing

Little coordination and integration Hodge-podge of public and private financing

Technology Driven Lack of central control credited with innovation, diffusion,

utilization Technology as bellwether indicator of quality Dartmouth Studies

Uninsured use safety nets: CHC, ER, Outpatient Dept. Delivery in imperfect market: consumer knows little of cost

Asymmetry of info between principals-agents

So Who Has It Right? France & Japan & Netherlands

Rapidly increasing costs Benefit reductions

Germany Increased payroll tax to meet spiraling costs

England 2006 report “the present system is

incomprehensible and its outcomes unjust”

The “health” of health systems

Ultimately depends on… Public values which are culturally

dependent UK: right to free care as citizens Canada: “just, fair, and equitable principal” Germany: solidarity and subsidiarity U.S.: self reliance, aversion to taxation,

limited role for government

Human organs are scarce

http://www.organdonor.gov/index.html

“Commercialize” human organs?

Assisted-suicide pioneer Jack Kevorkian temporarily commercialize organ harvesting and auctioning off body parts online to pay donors and provide an expense fund for poor recipients.

Is the same thing as saying scarce resources have alternative uses

Saying economic choices have an opportunity cost…

TANSTAAFL

Can’t have it all…

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

-$1,500

-$1,000

-$500

$0

$500

$1,000

$1,500

$2,000

Annual Change in Per Capita Spending Available AFTER Health Care, Montana(2009 $)

Salient Features Requiring Special Attention

#1 Uncertainty

Irregular demand Inelastic demand Provider responses

Salient Feature # 2 Third Party Payers

Deductibles, co-pays-co-insurance Fee for service reimbursement Dartmouth Studies Moral hazard of insurance

Even with red light cameras!

Salient Feature #3 Information Asymmetry

Adverse selection in health insurance (individual mandate)

Quality chasm: providers provide both info and service

Salient Feature #4 Role of not-for-profits

Usually assume firms maximize profits

Salient Feature #5 Monopoly, Oligopoly, Monopsonistic

Competition Licensure Direct to consumer advertising Regulation Patent protection Anti-trust

Salient Feature #6 Concerns for Equity, Need for Health

Care Is health care a merit good? All health care?

Salient Feature #7 Government

As direct provider (VA, CHC, IHS, State and County hospitals, nursing homes, etc.)

As financier of health care Who really pays, really?

Salient Feature # 8 Taxing ESI Health Coverage likely…

Increases demand for elaborate and many perk health plans (Cadillac tax of ACA)

Big loss of tax revenue for government Think “budget deficits and the national

debt” federal revenue lost = $268 B in 2011 federal deficit = $642 B (4% of GDP)

ESI and the demand for health care

Gross Pay/Week

Marginal Tax Rate

Take Home Pay

Insurance Cost $60/Week

Net Take Home Pay

Difference

$1,000 28% $720 Employee Pays

$660 $17

$940 28% $677 Employer Pays

$677

Assume Marginal Tax Rate Increases to 35 Percent  

$1,000 35% $650 Employee Pays

$590 $21

$940 35% $611 Employer Pays

$611

Know Your Facts: Some Examples

The uninsured go without coverage because they believe they do not need it or simply don’t want it.

Know Your Facts: Some Examples

The uninsured don’t have ESI because they are not working

5 factors will shape the trajectory of future spending on health care.. 1. state of economy 2. impact of ACA, and future of 3. industry consolidation 4. shift toward value 5. empowerment of health care

consumer

New trends? Share of population with private

insurance dropped Share with public insurance and the

uninsured increased Sustained in reductions in utilization Growth in hospital admissions and

physician visits down

354,000 May Change Health Insurance

Previously Eligible Med-icaid1%

Crowd-Out Medicaid4%

Newly Eligible Med-icaid11%

Young Adults5%

FFE Popu-lation with Subsidies

53%

FFE Population without Subsidies

26%

Stretch Time