chapter 9- government and health care

8/14/2019 CHAPTER 9- GOVERNMENT AND HEALTH CARE

1/32

1

Chapter 9

Government andHealth Care


2/32

2

Government Health Care Spending

Government spending represents 45% of the$1.3 trillion spent on Health Care.

20% of the Federal Budget is devoted tohealth care issues.


3/32

3

Figure 9.1 U.S. Health Expenditures as a

Percentage of GDP 1960-2001


4/32

4

Why Health Care is Different Uncertainty:

People do not typically know what their

health care expenses will be. Insurance:

Because of uncertainty (risk), people

typically buy health insurance. This means that people do not typicallypay the full marginal cost of their healthexpenses.


5/32

5

Health Insurance Coverage

86% of Americans are covered.

40 million are uncovered.


6/32

6

Figure 9.2 Financing Health Care Expenditures

in the United States, 2001


7/327

Problems with the Health Care Market

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 mayopt to go without insurance. This lack of healthy insuredsin the pool forces insurance companies to raise rates,because companies must assume that only those withhigher risk will apply for insurance.

This problem can create a vicious cycle that drivesinsurance companies out of business and leaves peoplewithout health insurance.


8/328

Problems with the Health Care Market Asymmetric Information:

Sellers (providers) know more about the costand benefits of medical services than buyersknow.

This can lead to over-consumption, becausedoctors may prescribe unnecessaryprocedures.


9/329

Problems with the Health Care Market

Third-Party Payments Neither the insured nor the physician has

incentives to keep costs down.

This leads to over-consumption.

Patients evaluate the benefits of aprocedure against only a fraction of theprocedures cost (i.e, (their coinsurancerate).

Fi 9 3 H l h I


10/3210

Figure 9.3 Health Insurance

and the Market for Health Care

Price

(Dollarsp

er

Un

itServic

e)

P2

P1

Q1

B

A

P*

Q*

C Loss in Net Benefits

Supply =Marginal

Social Cost

Demand = MarginalSocial BenefitO


11/3211

Problems with Health Insurance (cont.)

Moral Hazard

People with insurance often behave in ways

that cause them to need the insurance.

People may fail to eat right or exercise,knowing that they have health insurance to

help defray the monetary costs of suchunhealthy decisions.


12/3212

Other Features Contributing to

Inefficiency and High Cost Malpractice Insurance: Doctors must pay high malpractice insurance

premiums. These costs are passed on to health insurancecompanies and then on to patients in the form of higher insurancepremiums.

Uninsured Patients: Doctors and hospitals that accept Medicaidpatients are not able to deny service to patients based on patientsability to pay.

Technological Advance: Third-party payments encourages over-consumption of health care services, which leads to over-

development of health care technology.


13/3213

Governments and Health Care:

Compensating for Market FailureMarket Imperfection Government Reaction

Asymmetric Information FDA drug approval

Adverse Selection withthe retired population

Medicare

Income Inequality Medicaid

Public Health Vaccinations and

Research


14/3214

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 causethem to contract labor rather than hiring peopleoutright.

Employees with a poor health history can be

inefficiently locked into particular jobs.

Fi 9 4 G t H lth S di


15/3215

Figure 9.4 Government Health Spending,

1965-1998 in billions (Selected Years)


16/3216

Program Spending

in Billions

Medicare 238.0

Medicaid 224.3

Other

Total

99.6

561.9

Government Health Insurance


17/3217

Medicare

65 and older

40 million covered

Part A: Hospitals

Part B: Doctors

Prescription Drugs and Long-Term care notcovered


18/3218

Cost Containment in Medicare

Prospective Payments and the DRG A Diagnosis Related Group is a broad

type of illness.

Medicare pays hospitals based on DRG andpayments are the same nationwide,regardless of actual costs.

This creates an incentive for hospitals tocontrol costs, because if they succeed theyget to keep the savings.


19/3219

Medicaid

Medicaid is health insurance coverage for

the poor.

Eligibility is tied to household income.

Children of low income parents can be

eligible, even if their parents are not.


20/3220

Controlling Medicaid Costs

State government spending under the Medicaidprogram has been increasing at an average annualrate of between 10% and 13% since 2001.

In some states (AZ, MS, NM, NC, WA) costs have

risen between 30% and 50%. To compensate, states have:

reduced reimbursement rates to Medicaid providers;

restricted reimbursement rates to providers of

prescription drugs; required special authorization for use of the drugs, and

required recipients to pay some of the costs.


21/32

21

Indirect Government Subsidies of Health

Care

Because employer-paid healthinsurance premiums are not subject toincome taxes, such uncharged taxesconstitute a substantial subsidy to

health insurance.


22/32

22

Health Care Reform Issues

Controversy over health care reform andthe role of government in that process hascentered around two issues: Controlling the growth of health care

spending to prevent health care fromabsorbing ever-increasing shares of our GDP

Moving toward universal coverage forAmericans by making health insurance agovernment-guaranteed right for all citizens


23/32

23

Impact of Coinsurance on Health Care Price

Low coinsurance rates cause patients

to ignore health care costs.

This increases demand and

encourages an inefficiently high level ofconsumption.

Figure 9 6 How an Increase in Coinsurance Can


24/32

24

Figure 9.6 How an Increase in Coinsurance Can

Reduce Health Care Spending and Improve

Efficiency in the Market for Health Care Services

P4

Q1

P1

A

B

Q*

P3

P2

A

B

Demand

Supply

E

Price

(D

ollarsp

erU

nitifServic

e)

Health Care Services per Year


25/32

25

Controlling Costs Through Managed Care

HMOs (Health Maintenance Organizations)are forms of insurance that pay a capitationor fixed amount of money for every patient

in their care. This puts pressure on HMOsand doctors to control costs.

PPOs (Preferred Provider Organizations) areforms of insurance that negotiate a reducedfee structure for participating physicians.


26/32

26

Controlling Medicare and Medicaid Expenses Medicare: Prospective payments for

DRGs Problem: encourages early discharge

and low levels of service

Medicaid: Low reimbursement ratesreduce doctor incentives to provide

service. Problem: reduces access to quality care

in many places


27/32

27

Gaps in Coverage

The U.S. has more than 40 million uninsured.

It is one of only a few developed countrieswithout universal health insurance guaranteedby government.

No long-term coverage.

Universal Coverage


28/32

28

Tax Credits for Health Insurance

One method to extend health insurance to theuninsured is through government subsidies thatlower the cost per policy.

A $2,000 per year subsidy could pay 84% ofinsurance policy costs for some families in some

parts of the United States.

The subsidy could be added to the eligiblerecipients paycheck (like the EITC).


29/32

29

Universal Entitlement Systems with

Managed Competition One way to provide universal coverage is to mandate that

all employers provide insurance.

The government would then fill in the gaps for those who: are unemployed, choose not to participate in the labor force, or otherwise do not have health insurance.

President Clintons (1993) plan was to couple mandateswith proposals for managed competition to limit thegrowth of health care costs.


30/32

30

National Health Insurance National health insurance in the United States would

ensure at least a minimal amount of health care.

National health insurance financed through taxationwould benefit some Americans at the expense of others. Benefits:

Universal coverage Some would get better coverage than they have

now.

Costs: Higher taxes and tax-related distortions Rationing of care


31/32

31

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 national

board.


32/32

32

Canadian System Provincial governments administer the

system.

Costs shared by national and provincialtaxes.

Waiting lists and shortages cause thewealthy to go to U.S. for service.

chapter 9- government and health care

Documents