nyman 412010 presentation

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1 April 2010 Nyman University of Minnesota 1

Review of

Health Reformwithout Side Effects

by Mark V. PaulyJohn A. Nyman

University of Minnesota

American Enterprise InstituteWashington, DC

April 1, 2010


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Many Areas of Agreement

Improvements to current system Importance ofguaranteed renewability (GR)

Not requiring community rating, but subsidizing high-risk

Subsidies for the low-income

A mandate (with penalties) for the high income

Some provision for dealing with those who becomesick and uninsured

A few areas of disagreement


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Value of Insurance

Pauly Consumers purchase insurance because they prefer a

sure loss (paying the premium) to an uncertain loss(the medical expenditure if ill) of the same expected

magnitude Insurance distorts the price of healthcare causing

consumers to purchase care that costs more than it isvaluedmoral hazard

The additional care is welfare decreasing and requirescost-sharing to increase prices of medical care andreduce welfare loss

Thus, the value of insurance is financial only, and theadditional care is not worth its costs


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Value of Insurance

Nyman

Health insurance is contract where the consumerpays a premium in exchange for an (actuarially

equivalent) amount of additional income if ill This additional income allows the consumer to

purchase more healthcare than without insurance

Contracts that actually pay off with a lump-sum

income transfer when ill are impractical, so insurancepays off by paying for the ill persons healthcare

The access that insurance provides to additionalhealthcare when ill is the main value of insurance


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Liver Transplant Example

Liver transplants cost about $300,000

They occur in about 1 of every 75,000 peopleannually in the US

Actuarially fair insurance premium for coverageof this procedure alone is $300,000/75,000 = $4

The payoff if ill is $300,000 in income

The amount of income that would be transferredto person who is insured and whose liver failedis $300,000 - $4 = $299,996


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Efficient and Inefficient MoralHazard

An insured person purchases a $300,000 liver transplantthat he would not have purchased if uninsured, so thetransplant is moral hazard

To determine whether the moral hazard (liver

transplant) is efficient, it would be necessary to give theill person $300,000 in cash and observe what he does

If he uses this income to purchase the liver transplant,then the transplant is efficient moral hazard

If not, then it is inefficient moral hazard Nyman, The Theory of Demand for Health Insurance, Stanford UPress, 2003


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Median Financial Assets and Net Worth, By Income and InsuranceStatus, Among Nonelderly Families, Pooled Sample for 2002 and 2003,

For Those In the Individual Insurance Market*

Income Quartile Financial assets Net worth

Privatelyinsured

Uninsured Privatelyinsured

Uninsured

Quartile 1

Inc$36,330

$23,700($4,469)

$1,808($315)

$175,684($19,896)

$50,963($5,921)

*Bernard DM, Banthin JS, Encinosa WE. Wealth, Income, and the Affordabilityof Health Insurance,Health Affairs28(5), May/June 2009, pp. 887-96.


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Why Insurance is Not Purchased

Pauly High loading fees, primarily high selling and

administrative costs

Nothigh profits

Nyman High prices of medical care in the US causing

premiums to be high

Reliance on other government programs likeMedicaid, and charity (bad debts)

Pauly and Nyman Myopia and not understanding the need for insurance


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Spending, Doctor Visits and HospitalDays for G7 Countries, 2006*

Canada France Germany Italy Japan UK Avg US

Spendingper capita $3,696 $3,423 $3,464 $2,673 $2,581 $2,885 $3,120 $6,933

Physicianvisits per

capita

5.8 6.4 7.4 7.0** 13.6 5.17.6

visits3.8

visits

Hospitaldischargesper 100population

8.4 28.4 22.0 13.9 10.6** 12.616.0stays

12.6stays

Averagehospital

LOS (days)

7.3 5.4 7.9 6.7 19.2 7.59.0

days

5.6

days

Hospitaldays per100population

61.32 153.36 173.80 93.13 203.52 94.50144.00days

70.56days

*Organization for Economic Cooperation and Development website, OECD Health Data2009Selected Data, http://stats.oecd.org/index.aspx, accessed March 30, 2009

**2005 data
http://stats.oecd.org/index.aspxhttp://stats.oecd.org/index.aspx


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Some Anecdotal Evidence

Reimbursement price of an MRI (2004) US: $1,057

Germany: $216

Japan: $122

Reimbursement price of a CT scan (2004) US: $616

Germany: $146

Japan: $62

Farrell D, Jensen E, Kocher B, Lovegrove N, Melhem F,Mendonca L, Parish B. Accounting for the Cost of USHealth Care: A New Look at Why Americans Spend More.McKinsey Global Institute, December 2008, p. 50.


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High Provider Prices in the US

Many sources of market power for healthcare providers Asymmetry of information

Lack of competition by other specialists, hospitals, etc.

Monopolies on certain tasks

surgery prescribing drugs

admitting to hospital

Price discrimination

Limits on admissions to medical schools

Certificate-of-need laws Gaming the patent system

Lack of enforcement of anti-trust laws

Etc., etc., etc.


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Final Issues

Do exchanges actually work to increase thenumber of insured and also lower premiums?

How do you evaluate whether profits of health

insurers are high or low? Percentage of premiums?

Percentage of value of equity?

Percentage of the loading?

Is the RAND Health Insurance Experiment reallythe best information we have about the impactof cost sharing on health?


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Attrition Bias in the RAND HIEPoints

The data from the Health Insurance Experimentindicate that individuals who dropped outbehaved differentlythan those who stayed to

the end of the study. Thus, past inferencesbased largely on stayers are biased. Foroutpatient care, the bias was quite small. Butfor inpatient care, there was a moderate bias

Manning WG, Duan N, Keeler EB. Attrition Bias in aRandomized Trial of Health Insurance. Unpublishedmanuscript. Minneapolis: University of Minnesota,1993, pp. 15-16.

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