Copyright © 2002 by Thomson Learning, Inc. Chapter 9 Government and Health Care Copyright © 2002 Thomson Learning, Inc. Thomson Learning™ is a trademark

Copyright © 2002 by Thomson Learning, Inc.

Chapter 9

Government and Health Care

Copyright © 2002 Thomson Learning, Inc. Thomson Learning™ is a trademark used herein under license.

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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.


Figure 9.1 U.S. Health Expenditures as a Percentage of GDP 1960-1998

Per

cen

t

Year

25

20

15

10

5

0 1965 1960 1970 1975 1980 1985 1990 1995 2000


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%

Private Health Insurance 33%

Private Charity and Other 5%

Governments 45%


Figure 9.3 Health Insurance and the Market for Health Care

Pri

ce (

Do

llar

s p

er U

nit

Ser

vice

)

P2

P2

P2

Q* Q1

B

A

C Loss in Net Benefits

Supply =Marginal

Social Cost

Demand = Marginal Social Benefit


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 (continued)

Adverse Selection 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.



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.


Figure 9.4 Government Health Spending, 1965-1998 in billions (Selected Years)

Year

$400

$300

$200

$100

$0

$500

1965 1970 1975 1980 1985 1989 1991

$8.3 $27.6

$45.3

$105.1

$174.6

$253.1

$330

1995 1998

$456

$500.4

Go

ve

rnm

en

t H

ealt

h S

pe

nd

ing

(B

illio

ns

of

Do

llars

)



Moral Hazard 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

FailureMarket Imperfection Government Reaction

Asymmetric Information FDA drug approval

Adverse Selection with the retired population

Medicare

Income Inequality Medicaid

Public Health 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.


Program Spending in Billions

Medicare 216.6

Medicaid 170.6

Other 113.2

Government Health Insurance


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.


Figure 9.5 The Effect of Preferential Tax Treatment of Employer-Provided Health Insurance

Cos

t to

Wor

kers

of

Hea

lth I

nsur

ance

(Dol

lars

per

Mon

th)

Taxable Income Lost to Governments

225

150

0 Q1 Q2

Demand forHealth Insurance

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.


Figure 9.6 How an Increase in Coinsurance Can Reduce Health Care Spending and Improve

Efficiency in the Market for Health Care ServicesP

rice

(D

oll

ars

per

Un

it i

f S

ervi

ce)

P4

Q1Q*

P3

P2

P1

Demand

Supply

A

B

A’

B’

E

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.


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.

Universal 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.

Documents

Copyright © 2002 by Thomson Learning, Inc. Chapter 9 Government and Health Care Copyright © 2002 Thomson Learning, Inc. Thomson Learning™ is a trademark