The role of government in health care

Today: Reasons for having government-provided health care; Medicare; Medicaid; Reform efforts

Last lecture

We saw that health care costs (as a percentage of GDP) have rapidly increased over the last 50 years

Health care insurance Advantages and disadvantages

Today

Government-provided health care Why should government provide health care?

Programs Medicare Medicaid

The government’s role in health care reform

Why should gov’t provide health care? Adverse selection Moral hazard Paternalism Income too low for some people

Adverse selection

Recall adverse selection problem (see example to the right)

The government could force everyone into the same health care plan Pro: Adverse selection

problems go away Con: Low-risk people

subsidize high-risk people

Example: 6 people at a firm Spending if sick: $10,000 3 people have a high risk of

getting sick 10% each

3 people have a low risk of getting sick 5% each

With no employer contribution, some at low risk do not buy insurance

Moral hazard

Some activities are more likely to occur to an insured person Smoking Bad eating habits Bungee jumping Mountain climbing Skydiving

These activities lead to inefficient outcomes

The government can intervene to try to discourage these things from occurring Anti-smoking campaigns Commercials promoting

good eating habits Prohibiting certain very

dangerous activities Withholding care due to

dangerous activities

Paternalism

A paternalist would argue that some people “don’t get it right” when it comes to health insurance

These people would say that everyone should be forced to have a minimum level of health care

Much of the 2008 presidential debate involves paternalistic arguments

Income too low for some people Some people do not

make enough money to afford health care Problem made worse by

increasing health care cost (see “Downward spiral” at right)

Young adults and noncitizens make up a substantial fraction of the uninsured in the US

Downward spiral Health care costs go up More people are unable

to afford health insurance These people must use

the Emergency room, driving up premiums for those insured

When premiums go up due to increased numbers in the Emergency room, the cycle repeats

What does the government do? The government provides over 45%

of health care funds in the United States

Two main programs of government-provided health care Medicare

People 65 and older Disabled people

Medicaid Poor people

See also Figure 10.2, p. 207

Medicare

Enacted in 1965 Second largest domestic spending program

Funded by a 2.9 percent tax on earnings of current workers Tax split evenly between employers and employees

Provides health insurance to seniors and the disabled, primarily through the private sector Seniors must have worked and paid payroll taxes

for at least 10 years About 35 million seniors enrolled

See also Figure 10.3, p. 212

Different aspects of Medicare

Parts A and B of Medicare are the largest components Part A: Hospital insurance Part B: Supplementary medical insurance

New Medicare component: Part D Prescription drug benefit

Part A

Hospital insurance Structure for 2008

Monthly premium $423 per month Covered for people that have 10 years of contributions into

FICA taxes Must also enroll in Part B if enrolled in Part A (typically) States may be able to help low-income enrollees Various benefits covering

Blood Home health services Hospice care Hospital stays Skilled nursing facility care

(Source: http://www.medicare.gov/Publications/Pubs/pdf/10050.pdf)

Part B

Supplementary medical insurance Sometimes optional, depending on whether or not you

receive Social Security benefits Enrollment is automatic if you receive Social Security benefits

Structure for 2008 All but high income people pay $96.40 per month Benefits

Medically-necessary services Preventive services Coinsurance and deductibles may apply, depending on the

benefit

Part D

Prescription drug benefit Benefits began in 2006

Different plans offered Some numbers for the plan in 2006

Expected premium: $386 per year Low-income earners can qualify for lower premiums

Benefit structure $250 deductible Beneficiary pays 25% of cost for next $2,000 Beneficiary pays 100% of cost for next $2,850 (“donut hole”) Beneficiary pays at most $5 or 5% thereafter per prescription

Cost control measures for Medicare Before 1983, Medicare reimbursement was

retrospective for Part A Compensation is made after services are completed Little incentive to economize on costs

Since 1983, this changed to a prospective payment system (PPS) Compensation level is set before services start

500 diagnosis related groups exist for the prospective payment system

This gives incentives to economize on costs

Cost control measures for Medicare Recall DWL that occurs

when MB is low PPS appears to have

decreased DWL Average stay for

Medicare patients in short-stay hospitals decreased from 10.5 days in 1981 to 8.5 days in 1985

The decrease in stay appears to have no effect on health outcomes

Cost control measures for Medicare To keep costs down for Part B, a resource-

based relative value scale system is used Fees are set per service provided

Does not necessarily keep down number of services If fees are set too low, many medical practices will not

accept Medicare patients Medicare patients would then get low-quality care

Cost control measures for Medicare Managed-care options

Since 1985, Medicare beneficiaries could enroll in HMOs Originally, the HMO received 95% of the average

amount that the average patient would require Problem: Adverse selection… Healthier patients enrolled

in HMOs The government was overpaying the HMO

Cost control measures for Medicare Solution to adverse selection problem: Risk-

adjusted payments to HMOs Reduced HMO enrollment

New methods are being tested to try to increase HMO enrollment and decrease costs simultaneously

Medicaid eligibility

1965: Health insurance for recipients of cash welfare payments

1980s: Children of low-income two-parent families became eligible “Children” can include care to pregnant women

1997: State Children’s Health Insurance Program Allows states to get additional money from federal

government to reduce number of uninsured kids

See also Figure 10.4, p. 219, for an overview of Medicaid spending

Financing and benefits

Federal and state governments share the cost Poor states get higher matching rates than rich

states Federal government contribution comes from

general revenues States must offer major services with

Medicaid Hospital stays, physician visits, prenatal care,

vaccines for children

Financing and benefits

States have some flexibility in program administration Example: Capitation-based reimbursement is

allowed Recall that health care provider receives annual

payment per patient in their care, independent of services rendered

Some empirical evidence (Duggan 2004) shows that forcing people into managed care increased Medicaid costs Questionable if this is actually true

Medicaid stigma; crowding out Many people do not enroll in Medicaid

Guilty feelings Stigmas Uninformed about benefits

Public service announcements help to get more eligible children on Medicaid

See Figure 10.5, p. 221, to address the issue of crowding out

Are Medicaid expansions effective? Unclear for two reasons

How much is due to crowding out? Many eligible people do not enroll in Medicaid

Cutler and Gruber (1996) estimate that about half of new Medicaid enrollment previously had private insurance

Card and Shore-Sheppard (2004) estimate that crowding out occurs less than Cutler and Gruber estimate They also find that take-up rates due to expansion are low

Health care reform

Two factors are leading to more talk about health care reform Increased costs Significant portion of population without insurance

Increases cost to others

Health care reform

Some proposals to try to solve the health care problem Mandating everyone to have insurance

Hot topic in the 2008 Presidential race Catastrophic insurance

Only provides payment when expenses become large Health Savings Accounts can be used to pay for this

type of insurance Nationalized health care…

Nationalized health care

Pros Everybody is covered

Commodity egalitarianism

No adverse selection problems

Government can use cost-cutting measures to prevent care with low MB

Cons Predetermined budget

may lead to a suboptimal amount of health care provided

Long lines in some cases Government determines

what is “medically necessary”

New technology may not be adopted quickly

Moral hazard problems

Is there a solution?

Is there a solution to the health care problems presented over the last week? There will probably never be a complete solution

Security and efficiency will be “at odds” with each other Some people will always choose NOT to have

insurance unless forced to Current trend: More middle-class Americans are

deciding to have little or no insurance

Is there a solution?

What if we are willing to accept new ways for health care and insurance to be administered? We will likely be able to increase security without

giving up efficiency Catastrophic insurance may be most important at

reducing risk Higher deductibles, co-payments, and co-

insurance rates can decrease loss of efficiency

Is there a solution?

Is prevention the key? Should people be encouraged to eat healthy?

Should healthy food be subsidized? Should unhealthy food be taxed?

Are taxes on smoking and alcohol set at the optimal level?

Should drugs be legalized, taxed, and regulated? Tax money can be used for health care costs

Summary

The government provides health care insurance for millions of Americans through Medicare and Medicaid Some believe that every person should be able to

access needed health care Adverse selection and moral hazard are

significant problems Future health care reforms can try to balance

paternalistic views and efficiency