chapter 9- government and health care
TRANSCRIPT
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Chapter 9
Government andHealth Care
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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.
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Figure 9.1 U.S. Health Expenditures as a
Percentage of GDP 1960-2001
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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.
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Health Insurance Coverage
86% of Americans are covered.
40 million are uncovered.
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Figure 9.2 Financing Health Care Expenditures
in the United States, 2001
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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.
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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.
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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
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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
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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.
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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.
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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
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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
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Figure 9.4 Government Health Spending,
1965-1998 in billions (Selected Years)
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Program Spending
in Billions
Medicare 238.0
Medicaid 224.3
Other
Total
99.6
561.9
Government Health Insurance
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Medicare
65 and older
40 million covered
Part A: Hospitals
Part B: Doctors
Prescription Drugs and Long-Term care notcovered
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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.
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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.
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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.
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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.
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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
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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
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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
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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.
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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
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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
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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).
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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.
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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
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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.
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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.