WHY HEALTH ECONOMICS?

What makes health care different from other goods?

• Health is a major source of uncertainty and risk.

• Governments around the world are deeply involved in financing health systems.

• The U.S. health care economy is massive and expensive.

• The fact that other people’s health decisions affect you creates externalities– Examples:

• Vaccinations and other preventative measures create positive externalities

• Going out in public with Ebola virus creates negative externalities

• Externalities undermine the efficient function of markets and often require government intervention.

What makes health care different from other goods?

National Health Expenditures

Table 1. Expenditures, GDP, and US Population, 1960-20101960 1970 1980 1990 2000 2010

Nat'l. health exp. $28 $75 $256 $724 $1,377 $2,594 Private 21 47 147 488 889 1,429 Public 7 28 106 236 489 1,164

Amounts in Billions

Nat'l. health exp. $147 $356 $1,100 $2,854 $4,878 $8,402 Private 111 223 638 1,684 2,678 Public 36 134 462 1,130 2,111

Per Capita Amounts

GDP $526 $1,038 $2,788 $5,801 $9,952 $14,527Amounts in Billions

U.S. Population 186 210 230 254 282 309Amounts in Millions

Average AnnualPercent Increase 7.1 10.4 7.6 5.6 4.8%

Average AnnualPercent Increase 10.6 13.1 11.0 6.6 7.1%

National Health Exp. Share of GDP 5.2 7.2 9.1 12.3 13.6 16.2

National Health Expenditures per Capita, 1960-2010

Notes: According to CMS, population is the U.S. Bureau of the Census resident-based population, less armed forces overseas.

Source: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group, at http://www.cms.hhs.gov/NationalHealthExpendData/ (see Historical; NHE summary including share of GDP, CY 1960-2010; file nhegdp10.zip).

5.2% 7.2% 9.2% 12.5% 13.8% 14.5% 15.4% 15.9% 16.0% 16.1% 16.2% 16.4% 16.8% 17.9% 17.9%

NHE as a Share of GDP

National Health Expenditures as a % of GDP

Average Annual Growth Rates for NHE and GDP, Per Capita, for Selected Time Periods

Source: Historical data from Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group, January 2012, at http://www.cms.hhs.gov/NationalHealthExpendData/ (see Historical; NHE summary including share of GDP, CY 1960-2010; file nhegdp10.zip). Projections from Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group, July 2011, “National Health Expenditures 2010-2020,” Table 1, https://www.cms.gov/NationalHealthExpendData/downloads/proj2010.pdf.

Projected

P ersonal C onsum ption E xpenditures, percent of total

0.0

5.0

10.0

15.0

20.0

25.0

30.0

1950 1960 1970 1980 1990 2000 2010

T im e

Per

cen

t of T

ota

l

Food

C lothing

Gas and Oil

Housing

Medica l C are

International Comparisons

Year = 2006Total expenditure on

health, % GDPTotal expenditure on

health, Per capita US$ PPP

Australia 8.7 3141

Austria 10.1 3606

Belgium 10.3 3462

Canada 10 3678

Czech Republic 6.8 1509

Denmark 9.5 3362

Finland 8.2 2668

France 11 3449

Germany 10.6 3371

Greece 9.1 2483

Hungary 8.3 1504

Iceland 9.1 3340

Ireland 7.5 3082

Italy 9 2614

Japan 8.1 2578

Korea 6.4 1464

Mexico 6.6 794

Norway 8.7 4520

Poland 6.2 910

Portugal 10.2 2120

Slovak Republic 7.4 1308

Spain 8.4 2458

Sweden 9.2 3202

Switzerland 11.3 4311

United Kingdom 8.4 2760

United States 15.3 6714

Public expenditure on health, % total

expenditure on health

67.7

76.2

..

70.4

88

84.1

76

79.7

76.9

61.6

70.9

82

78.3

77.2

81.3

55.7

44.2

83.6

69.9

70.6

68.3

71.2

81.7

60.3

87.3

45.8

Per Capita Total Current Health Care Expenditures, U.S. and Selected Countries, 2009

^OECD estimate.

*Break in series.

Notes: Amounts in U.S.$ Purchasing Power Parity, see http://www.oecd.org/std/ppp; includes only countries over $2,500. OECD defines Total Current Expenditures on Health as the sum of expenditures on personal health care, preventive and public health services, and health administration and health insurance; it excludes investment.

Source: Organisation for Economic Co-operation and Development. “OECD Health Data: Health Expenditures and Financing”, OECD Health Statistics Data from internet subscription database. http://www.oecd-ilibrary.org, data accessed on 01/10/12.

Table 25. Infant mortality rates and international rankings: Selected countries and territories

Country2 1960 1970 1980 1990 2000 2004 2004

Infant3 deaths per 1,000 live births International rankAustralia 20.2 17.9 10.7 8.2 5.2 4.7 20Austria 37.5 25.9 14.3 7.8 4.8 4.5 18Belgium 23.9 21.1 12.1 6.5 4.8 4.3 16Canada 27.3 18.8 10.4 6.8 5.3 5.3 24Cuba 37.3 38.7 19.6 10.7 7.2 5.8 27Czech Republic 20.0 20.2 16.9 10.8 4.1 3.7 8Denmark 21.5 14.2 8.4 7.5 5.3 4.4 17England and Wales 22.4 18.5 12.0 7.9 5.6 5.0 23Finland 21.0 13.2 7.6 5.6 3.8 3.3 6France 27.5 18.2 10.0 7.3 4.4 3.9 9Germany 35.0 22.5 12.4 7.0 4.4 4.1 11Greece 40.1 29.6 17.9 9.7 5.9 4.1 11Hong Kong 41.5 19.2 11.2 5.9 2.9 2.5 2Hungary 47.6 35.9 23.2 14.8 9.2 6.6 28Ireland 29.3 19.5 11.1 8.2 6.2 4.9 21Israel 31.0 18.9 15.6 9.9 5.4 4.5 18Italy 43.9 29.6 14.6 8.2 4.5 4.1 11Japan 30.7 13.1 7.5 4.6 3.2 2.8 3Netherlands 17.9 12.7 8.6 7.1 5.1 4.1 11New Zealand 22.6 16.7 13.0 8.4 6.3 5.7 26Northern Ireland 27.2 22.9 13.4 7.5 5.1 5.5 25Norway 18.9 12.7 8.1 6.9 3.8 3.2 5Poland 54.8 36.7 25.5 19.3 8.1 6.8 29Portugal 77.5 55.5 24.3 11.0 5.5 4.0 10Scotland 26.4 19.6 12.1 7.7 5.7 4.9 21Singapore 34.8 21.4 11.7 6.7 2.5 2.0 1Spain 43.7 28.1 12.3 7.6 3.9 3.5 7Sweden 16.6 11.0 6.9 6.0 3.4 3.1 4Switzerland 21.1 15.1 9.1 6.8 4.9 4.2 15United States 26.0 20.0 12.6 9.2 6.9 6.8 29

Table 26. Life expectancy at birth, by sex:

Country 1980 1990 2000 2003 2003 1980 1990 2000 2003 2003At birth Life expectancy in years Rank Life expectancy in years Rank

Australia 71.0 73.9 76.6 77.8 5 78.1 80.1 82.0 82.8 6Austria 69.0 72.2 75.1 75.9 18 76.1 78.8 81.1 81.6 15Belgium 70.0 72.7 75.1 75.9 18 76.8 79.4 81.4 81.7 13Canada 71.7 74.4 76.7 77.4 7 78.9 80.8 81.9 82.4 9Costa Rica 71.9 74.7 75.4 76.2 16 77.0 79.1 80.2 81.0 19Cuba 72.2 74.6 74.7 75.4 24 --- 76.9 79.0 79.8 28Denmark 71.2 72.0 74.5 76.5 13 77.3 77.7 79.3 79.9 27England and Wales 70.8 73.1 75.6 76.5 13 76.8 78.6 80.3 80.9 20Finland 69.2 70.9 74.2 75.1 25 77.6 78.9 81.0 81.8 11France 70.2 72.8 75.3 75.9 18 78.4 80.9 82.7 82.9 5Germany 69.6 72.0 75.0 75.7 23 76.1 78.4 81.0 81.4 16Greece 72.2 74.6 75.6 76.5 13 76.8 79.5 80.6 81.3 17Hong Kong 71.6 74.6 78.0 78.5 1 77.9 80.3 83.9 84.3 2Ireland 70.1 72.1 73.4 75.8 21 75.6 77.6 79.1 80.7 22Israel 72.2 75.1 76.7 77.5 6 75.8 78.5 81.1 81.7 13Italy 70.6 73.6 76.6 76.8 12 77.4 80.1 82.5 82.5 7Japan 73.4 75.9 77.7 78.4 2 78.8 81.9 84.6 85.3 1Netherlands 72.5 73.8 75.5 76.2 16 79.2 80.9 80.5 80.9 20New Zealand 70.0 72.4 76.3 77.0 10 76.3 78.3 81.1 81.3 17Northern Ireland 68.3 72.1 74.8 75.8 21 75.0 78.0 79.8 80.6 23Norway 72.3 73.4 76.0 77.1 9 79.2 79.8 81.4 82.0 10Portugal. 67.7 70.4 73.2 74.2 27 75.2 77.4 80.0 80.5 25Puerto Rico 70.8 69.1 71.1 71.8 31 76.9 77.2 80.1 80.6 23Singapore 69.8 73.1 76.1 77.4 7 74.7 77.6 80.1 81.8 11Spain 72.5 73.3 75.7 76.9 11 78.6 80.3 82.5 83.6 3Sweden 72.8 74.8 77.4 77.9 4 78.8 80.4 82.0 82.5 7Switzerland 72.8 74.0 76.9 78.0 3 79.6 80.7 82.6 83.1 4United States 70.0 71.8 74.1 74.8 26 77.4 78.8 79.5 80.1 26

Female Male

Year = 2004 Doctor consultations

per capitaHospital discharge

rates, all causes, per 100 000 population

Average length of stay for acute care, all conditions, days

Australia 6 15786 6.1

Austria 6.7 27852 6

Belgium 7.6 17410 7.4

Canada 6 8747 7.3

Czech Republic 13.1 .. 8.1

Denmark 7.5 17031 3.4

Finland 4.2 20484 4.7

France 6.6 27102 5.5

Germany 7 20149 8.7

Greece .. 18406 5.7

Hungary 12.6 23272 6.5

Iceland 6.3 16977 5.3

Ireland .. 13889 6.5

Italy .. 14471 6.7

Japan 13.8 .. 20.2

Mexico 2.5 5188 4

Norway .. 17345 5.2

Poland 6.2 17777 6.6

Portugal 3.8 9035 6.9

Slovak Republic 11.9 18893 7.4

Spain .. 10838 6.7

Sweden 2.8 16002 4.7

Switzerland .. 15722 8.8

Turkey 3.1 8451 ..

United Kingdom 5.3 12778 8

United States 3.8 12090 5.6

Austra lia Be lgium C anada Denm ark F inland France Germ anyGreece H ungary I ce land I re land J apan Korea Lux em bourg Netherlands New Zea land Norw ay Poland Slov ak RepublicSw eden Sw itzerland Turkey United Kingdom United States

16.5 18.9 17.719.7 28 23.7

.. .. .. 23 29 26

19.5 27.1 2319 28 23.. .. ..

31.3 46 38.6.. .. ..

18.9 21.5 20.2.. .. ..

13.2 46.9 29.4.. .. ..

23 30 2727 35 3121 23 2225 27 26

19.3 33.9 26.3.. .. ..

17.5 15 16.2.. .. .. .. .. ..

23 26 2515.1 19 17

9.8..

7.812.8

9.913

10.1..

13.26.7

13.68.28.3

..

.. 9.26.2

.. 9.46.5

10.71.4

11.58.4

.. .. .. 13.4 11.9 12.7

.. .. ..

.. .. .. 14 14 14

9.4 9.5 9.4.. .. .. .. .. .. .. .. .. .. .. .. .. .. ..

3.1 2.8 3.. .. ..

17.1 19 18.212.1 9.6 10.9

.. .. ..

.. .. .. 12.5 12.6 12.516.2 17.1 16.5

9.9 9.8 9.8.. .. .. .. .. ..

23.2 22.7 2333.2 31.1 32.2

Country Females % Daily

Smokers

Males % Daily

Smokers

Population % Daily

Smokers

AlcoholLitres per

capita

Females % with

BMI>30

Males - % with

BMI > 30

Population - % with

BMI > 30

Why are Health Care Expenditures Increasing Rapidly in the United

States?

1. An Aging Population

Aging U.S. population

% 65 years+ 1950 8.1 1970 9.8 2008 12.8

The Coming Surge in the Population of Age 65 Years and Older

Source: IFTF; U.S. Census Bureau

Table 2a. Projections of the Population by Selected Age Groups for the United States: 2010 to 2050

Age(Resident population as of July 1. Numbers in thousands)

2010 2015 2020 2025 2030 2035 2040 2045 2050

BOTH SEXES 310,233 325,540 341,387 357,452 373,504 389,531 405,655 422,059 439,010

.Under 18 years 75,217 78,106 81,685 84,866 87,815 90,722 93,986 97,669 101,574

.Under 5 years 21,100 22,076 22,846 23,484 24,161 25,056 26,117 27,171 28,148

.5 to 13 years 37,123 39,011 40,792 42,490 43,858 45,170 46,743 48,664 50,697

.14 to 17 years 16,994 17,019 18,048 18,892 19,796 20,496 21,126 21,834 22,728

.18 to 64 years 194,787 200,597 204,897 208,678 213,597 221,266 230,431 239,933 248,890

.18 to 24 years 30,713 30,885 30,817 32,555 34,059 35,695 37,038 38,234 39,538

.25 to 44 years 83,095 85,801 89,724 92,612 95,242 97,962 101,392 106,366 110,862

.45 to 64 years 80,980 83,911 84,356 83,510 84,296 87,608 92,000 95,333 98,490

.65 years and over 40,229 46,837 54,804 63,907 72,092 77,543 81,238 84,456 88,547

.85 years and over 5,751 6,292 6,597 7,239 8,745 11,450 14,198 16,985 19,041

.100 years and over 79 105 135 175 208 239 298 409 601

Source: Population Division, U.S. Census Bureau

Median Incomes in the U.S. 1975-2008

0

10,000

20,000

30,000

40,000

50,000

60,000

Year

Do

llars

Current Dollars

Constant Dollars

2. Increasing Incomes

3. Technology: The Health Care Industry is Rapidly Evolving

• Advances in medical technology and drugs are dramatically improving patient care– But, these improvements are costly

Annual Percent Change in Medical Care and All Goods Price Indices

4. Growth of Third Party Insurance

Percent Distribution of National Health Expenditures, by Source of Funds, 1960-2010

4. Growth of Third Party Insurance

• There have been increased cost containment efforts– Changes in government reimbursement of health care

providers– Private insurers are exercising more control over

patient care

Two False Reasons for growth in National Health care Expenditures…

Active PhysiciansNumber of per 10,000

Year Active Physicians civilian Population1975 340,280 15.31985 497,140 20.71995 625,443 24.22000 692,368 25.42003 736,211 26.6

Facts don’s support…

Summary: Health care is only getting bigger and more expensive for governments and taxpayers

• Increasing life expectancies and graying populations throughout the developed world will place stress on public health insurance systems.

• Governments will have to cope with ongoing questions about whether to pay for expensive new medical technologies.

Given these trends we can confidently expect health care to be an ever-growing line item on government balance sheets.

Where are the Dollars$ Coming From and Where are They Going$?

Total Health Care Expenditures in 2010: $2,593,600,000,000

Table 127. National health expenditures, average annual percent change, and percent distribution, by type ofexpenditure: United States, selected years 1960-2007

Type of National Health Expenditure 1960 1970 1980 1990 2000 2005 2010

National health expenditures $27.4 $74.9 $255.8 $724.3 $1,377.2 $2,029.1 $2,593.6

Hospital care 9.0 27.2 100.5 250.4 415.5 609.4 814.0Physician and clinical services 5.6 14.3 47.7 158.9 290.9 416.9 515.5Dental services 2.0 4.7 13.4 31.7 62.3 87.0 104.8Nursing home and home health.0.9 4.2 17.7 57.5 117.5 161.2 213.3Prescription drugs 2.7 5.5 12.0 40.3 120.9 204.8 259.1

Amount in Billions

Hospital care 32.8 36.3 39.3 34.6 30.2 30.0 31.4Physician and clinical services 20.6 19.1 18.7 21.9 21.1 20.5 19.9Dental services 7.3 6.3 5.2 4.4 4.5 4.3 4.0Nursing home and home health.3.2 5.7 6.9 7.9 8.6 7.9 8.2Prescription drugs 9.8 7.3 4.7 5.6 8.8 10.1 10.0

Percent Distribution

Note: Dollar amounts in parentheses are the annual expenses per person in each percentile. Population is the civilian noninstitutionalized population, including those without any health care spending. Health care spending is total payments from all sources (including direct payments from individuals and families, private insurance, Medicare, Medicaid, and miscellaneous other sources) to hospitals, physicians, other providers (including dental care), and pharmacies; health insurance premiums are not included.

Source: Kaiser Family Foundation calculations using data from U.S. Department of Health and Human Services, Agency for Healthcare Research and Quality, Medical Expenditure Panel Survey (MEPS), Household Component, 2009.

Concentration of Health Care Spending in the U.S. Population, 2009

(≥$51,951) (≥$17,402) (≥$9,570) (≥$6,343) (≥$4,586) (≥$851) (<$851)

Per

cen

t of

Tot

al H

ealt

h C

are

Sp

end

ing

Distribution of Average Spending Per Person, 2009

Average Spending Per Person

Age (in years)

<5 $2,468

5-17 1,695

18-24 1,834

25-44 2,739

45-64 5,511

65 or Older 9,744

Sex

Male $3,559

Female 4,635

Note: Population is the civilian noninstitutionalized population, including those without any health care spending. Health care spending is total payments from all sources (including direct payments from individuals and families, private insurance, Medicare, Medicaid, and miscellaneous other sources) to hospitals, physicians, other providers (including dental care), and pharmacies; health insurance premiums are not included.

Source: Kaiser Family Foundation calculations using data from U.S. Department of Health and Human Services, Agency for Healthcare Research and Quality, Medical Expenditure Panel Survey (MEPS), 2009.

Total Health Care Expenditures in 2010: $2,593,600,000,000

Table 4. Expenditures for health services and supplies, and percent distribution, by type of payer: U.S., 2009Type of payer

Total.......................(amounts in billions) $2,486.30 100

Private................................... 1,403.10 56.4 Private business........................ 518.3 20.8 Employer contribution to private health insurance premiums………………. 397.5 16.0 Private employer contribution to Medicare hospital insurance trust fund…………. 77.7 3.1 Workers compensation and temporary disability insurance and worksite healthcare... 43.1 1.7

2009

Household............................... 708.4 28.5 Employee contribution to private health insurance premiums and individual policy premiums… 247.6 10.0 Employee and self-employment contributions and voluntary premiums paid to Medicare hospital insurance trust fund............... 108.5 4.4 Premiums paid by individuals to Medicare supplementary medical insurance trust fund…….. 53 2.1 Out-of-pocket health spending......... 299.3 12.0 Other private revenues.................. 176.4 7.1

Governments............................... $1,083.2 43.6 Federal Government 678.4 27.3 Employer contribution to Private HI Premiums…. 26.8 1.1 Employer contribution to Medicare HI Trust Fund… 3.9 0.2 Adjusted Medicare 233.1 9.4 Health Program Expenditures (Excluding Medicare) 414.6 16.7 Medicaid 254.3 10.2 Other Programs 160.3 6.4

State and local government 404.8 16.3 Employer contribution to Private HI Premiums…. 123.4 5.0 Employer contribution to Medicare HI Trust Fund… 11.6 0.5 Health Program Expenditures (Excluding Medicare) 269.8 10.9 Medicaid 130.5 5.2 Other Programs 139.3 5.6

Table 4. Expenditures for health services and supplies, and percent distribution, by type of payer: U.S., 2009continued…Type of payer

Total.......................(amounts in billions) $2,486.30 100

Private................................... 1,403.10 56.4 Private business........................ 518.3 20.8 Household........................ 708.4 28.5

2009

Percent Distribution of National Health Expenditures, by Type of Sponsor, 1987, 2000, 2010

Notes:  Starting with the 2009 NHE data, CMS expanded their focus on spending by Type of Sponsor, which provides estimates of the individual, business, or tax source that is behind each Source of Funds category and is responsible for financing or sponsoring the payments. “Federal” and “State & Local” includes government contributions to private health insurance premiums and to the Medicare Hospital Insurance Trust Fund through payroll taxes, Medicaid program expenditures including buy-in premiums for Medicare, and other state & local government programs. “Private Business” includes employer contributions to private health insurance, the Medicare Hospital Insurance Trust Fund through payroll taxes, workers’ compensation insurance, temporary disability insurance, worksite health care. “Household” includes contributions to health insurance premiums for private health insurance, Medicare Part A or Part B, out-of-pocket costs. “Other Private Revenues” includes philanthropy, structure & equipment, non-patient revenues.

Source: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group at https://www.cms.gov/NationalHealthExpendData/ (see Historical; NHE Web tables, Table 5).

Government Private1987 (Total = $519.1 billion)

Government Private

Government Private2000 (Total = $1,377.2 billion)

31.8%

68.2%

35.5%

64.5%

44.9%

55.1%

Federal Private Business State & Local Household Other Private Revenues

2011 (Total = $2,700.7 billion)

Percent Distribution of Source of Funds for Selected Personal Health Care Services, 1970 and 2010

Notes: Medicare and Medicaid were enacted in 1965; by January 1970, all states but two were participating in Medicaid. “Out-of-Pocket” includes direct spending by consumers for all health care goods and services not covered by insurance, except for health care premiums. “Priv. Health Ins.” includes premiums paid to health insurance plans and the net cost of private health insurance (administrative costs, reserves, taxes, and profits or losses). “Other” includes Other Public Health Insurance Programs (CHIP, Depts. of Defense and of Veterans Affairs) and Other Third Party Payers (e.g., worksite health care, other private revenues, workers’ compensation, maternal/child health, other state and local programs, etc.). 

Source: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group at https://www.cms.gov/NationalHealthExpendData/ (see Historical; NHE Web tables, Tables 7, 8, 11, 12).

1970 2010

1970 2010

1970 2010 1970 2010

Hospital Care

Physician & Clinical Services

Retail Prescription Drugs

Nursing Care Facilities & Continuing Care

Retirement Communities