Medical Care Costs: How Much Welfare Loss

Joseph P. Newhouse

Increase of Medical Expenditure

Growth in health care > Growth in GNP The share of health care in GNP increases over

time.

Now the health industry in U. S. is about two trillion…

$2,000,000,000,000

Increase of Medical Expenditure

Growth in health care > Growth in GNP The share of health care in GNP increases over

time.

The public is concerned about the growth of health care expenditure

Interview with Jonathan Gruber

http://thebrowser.com/interviews/jonathan-gruber-on-public-finance

What are the two or three most important questions that public finance economists have not answered but need to?

I like to say there are only two problems we have to worry about in America – healthcare spending and global warming because either one puts us underwater.

How we control healthcare costs is probably the number one problem for public finance economists and everyone in the world has to grapple with, because if we don’t control healthcare costs we’ll be bankrupt.

Factors accounting for Medical Exp Increase

Aging Increased insurance Increased income Supplied induced demand Factor productivity in a service industry

Aging

Population mix changes over time Aged over 65: 8% (1950) to 12% (1987) Aged below 19: 33% (1950) to 28% (1987)

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人口急速老化，財務壓力遽增

　 ≧65歲 ＜ 65歲以下 合計

每年增加人數 (90~97年平均 ) 6萬人 12萬人 18萬人人數成長率 (90~97年平均 ) 2.84% 0.60% 0.81%

97年平均每人費用 (點 ) 71,810 15,643 21,412

老人 71,810　

年輕人 15,643 =4.6 倍

10 年內人口將急遽老化， 解決健保財務刻不容緩

年度 ≧65歲人口98 10.60%

103 12.09%

108 15.44%

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人口老化65歲以上人數及費用占率

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醫療費用成長原因 -重大傷病醫療費用占率領證數占率

Aging

Increase on Med Expenditure 15% increase the actual increase is 500%

Increased Insurance

The spread of insurance reduces the price and increases the demand

Issue of moral hazard

Increased Insurance

Rand experiment Average coinsurance moves from 33% to 0%

increases the spending by 40-50% price elasticity is -0.1 to -0.2

Increase on Med expenditure Average coinsurance rate: 67% (1950) to 27%

(1980) the increase in Med Exp is around 50% No change on hospital co-payment but the increase

in hospital expenditure is 50% in 1980s

Increased Income

Income elasticity Income elasticity in U. S. is 0.2-0.4 Income elasticity in the world is around 1.0

Increase on Med Exp in the world Between 1940-1990, real GNP increases by 180% Increase in health is 35-70% if elasticity is 0.2-0.4 Increase in health is 180% if elasticity is 1

Supplier Induced Demand

Physicians want more demand, even at the cost of patients Number of physicians increases, increase the

demand to protect their incomes Number of physicians over time do not increase

very much

Factor productivity in a service industry

Medical care is a service which is difficult to import or export

If the productivity gains for services are lower like the medical care than the rest of the economy, then relative medical prices would rise over time.

Demand is inelastic, so the expenditures would also rise.

Factor productivity in a service industry

The medical price inflation exceeds the CPI by 3.4% in 1980s, but 0.4% in 1970s, 2.0% in 1960s, and 1.9% in 1950s. No clear evidence indicating that medical price inflation is very different from CPI.

More importantly, price index for medical care is measured with strong bias, most notably is the problem of failing to make adjustments of quality change over time.

項目 變化 對醫療支出的影響

同期醫療支出的上升程度 解釋程度

人口老化 (65 以上）

8%(1950)12%(1980)

+15% 5 倍 3.75%

部分負擔率下降 (保險普及 )

67%(1950)27%(1980)

+50% 5 倍 12.5%

所得成長1940-90

成長 180%+180% 780% 23%

醫師誘發需求 minor -

相對價格 minor -

About 50% is still unexplained…

Conclusions

About 50% is still unexplained… Technology innovation is considered the

important factor that attributes to the growth of medical expenditure

Benefit of Medical Care