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1、Chapter 10 Social Insurance II: Health Care1Whats Special About Health Care?Health care costs are large and growing fastNumber of reasons why First Welfare Theorem may be violatedPoor information (physician induced demand)Adverse selection and moral hazardDisease externalities2Whats Special About He
2、alth Care?In the context of health care, moral hazard can be analyzed in a conventional supply-and-demand framework.Health insurance changes the price of health care, and creates deadweight loss.3Figure 10.14Whats Special About Health Care?Without insurance, consume M0 of health care services.Insura
3、nce in this example lowers the price of services to 20% of actual price. With insurance, consume M1 of health care services.Deadweight loss equals abh.5Whats Special About Health Care?Assumed that demand for health care downward sloping (e.g., health care use is elastic with respect to the price).As
4、sumed coinsurance rate of 20% - the amount the insured person pays out of pocket.Social experiments find that the elasticity of demand for health care is -0.20.6The U.S. Health Care MarketPatchwork of public and private insurance.13.2% of GDPSpending on hospitals is 32% of costsSpending on physician
5、 services is 22%7The U.S. Health Care Market: Private InsuranceVirtually all (93%) of private insurance for the non-elderly is provided through the employer.By-product of wage & price controls during World War IITax provisions subsidize employer contributionsGroup market is less expensive than indiv
6、idual market8The U.S. Health Care Market: Private InsuranceLink to employment potentially leads to “job lock”When you leave your job, you also lose your health insuranceMay be difficult to get new insurance if you have a “pre-existing” conditionKennedy-Kassenbaum Act mandated that employers must inc
7、lude a new employee who previously had health insurance, even if they have pre-existing condition.9The U.S. Health Care Market: Private InsuranceGroup marketPossible that workers within a firm are fairly heterogeneous, so adverse selection is less of a concernOn the other hand, employees not randoml
8、y assignedAn employer may shift-compensation toward wages, or shift employees onto spouses plan by offering a less generous package of benefits.More problematic at smaller firms.10The U.S. Health Care Market: Private InsuranceCost-based reimbursement / Fee-for-serviceInsurance policies that provide
9、payments to health care providers based on actual costs of treating patientLittle incentive to economize on methods for delivering health care since fully reimbursed11The U.S. Health Care Market: Private InsuranceManaged CareFocus on supply-side (health care provider-side) of market rather than on t
10、he demand size.Often patients face very little cost sharing (prices close to zero)Quantity constraints (such as seeing a “gatekeeper” primary care physician before seeing a specialist).Capitation based reimbursement providers received fixed, lump sum per patient, regardless of actual utilization.12T
11、he U.S. Health Care Market: Private InsuranceManaged Care, continuedHealth Maintenance Organizations (HMOs) a group of physicians work only for a particular plan and patients can only see doctors within that planPreferred Provider Organizations (PPOs) a group of physicians accept lower fees for acce
12、ss to patient network; patients can go out of the network at greater cost.13The Role of GovernmentMedicareImplicit subsidy for employer health insuranceMedicaid14The Role of Government: MedicareEnacted in 1965, provides health insurance coverage to virtually all elderly individuals and some disabled
13、.$254 billion in 2002Adverse selection problems likely to be largest for the elderly15The Role of Government: MedicareApproximately 40 million enrolleesNot means-testedProgram divided into three parts:Part A: Hospital insurance (HI)Part B: Supplementary medical insurance (SMI) optional, but 99% of e
14、lderly take it upPart C: Medicare+Choice optional, a managed care arrangement where elderly get certain additional benefits like prescription drug coverage and have restricted choice of providers16The Role of Government: MedicareMedicare does not cover:Long-term institutional services like nursing h
15、omesPrescription drugs, though new legislation was passed in 2003 that will phase-in coverageMedicare beneficiaries spent $87 billion on outpatient prescription drugs in 200217The Role of Government: MedicareMedicare financing paid for by payroll tax on current workersUncapped, totals 2.9% split eve
16、nly between employer and employee18The Role of Government: MedicareMedicare financing paid for by payroll tax on current workersUncapped, totals 2.9% split evenly between employer and employeeMedicare outlays have grown dramatically over time raises concerns about its solvency19Table 10.120The Role
17、of Government: Controlling the costs of MedicareIncreasing burden on current beneficiariesPrice controlsComplicated to administerMay lead to access problemsAfter Medicare reduced reimbursement by 5.4% in 2002, a substantial number of medical practices stopped taking Medicare patients21The Role of Go
18、vernment: Controlling the costs of MedicareManaged careOnly 15% of Medicare elderly choose managed care arrangementsA number of HMOs have backed out of providing serviceHospice and home health careEnd-of-life expenditures are 27% of Medicare costs. May be less expensive to provide home health care r
19、ather than expensive in-patient proceduresHas not slowed the growth in Medicare costs22The Role of Government: Controlling the costs of MedicareMedical Savings Accounts (MSAs)Consumers have very weak incentives to control costs, the moral hazard issueMSAs are in effect a catastrophic insurance polic
20、y provides payments for very expensive illnesses, but not the day-to-day health care needsMoney in MSAs that is not used can be used for non-medical purposesLeads to adverse selection, where the low-risks opt into MSAs.23The Role of Government:Implicit Subsidy for Health InsuranceEmployer contributi
21、ons for health care plans are not subject to taxationIf employer increases wages by $2000, employee only keeps (1-t)x$2000, where t=marginal tax rateIf employer provides health insurance worth $2000, tax bill does not increaseProvides incentive to substitute away from wages and towards fringe benefi
22、ts like health insurance.24The Role of Government:Implicit Subsidy for Health InsuranceBecause of subsidy:More firms provide employer-provided health insuranceFirms provide more generous health insurance25The Twin Issues: Access and CostAccess to health care83% of non-elderly have some form of healt
23、h care17% of non-elderly (41 million people) are uninsuredUninsured are diverse groupMost are employedLess than half are poorAbsence of health insurance different from absence of health care26The Twin Issues: Access and CostCostsTable 10.2 shows the rapid growth in health care over timeTable 10.3 an
24、d Figure 10.2 show that the U.S. has much higher levels of health care expenditure than other developed countries, but the rate of growth is not out of line27Table 10.228Table 10.329Figure 10.230The Twin Issues: Access and CostWhy are costs growing?The “Graying” of America older populations require
25、more health careIncome growth health care is a normal goodThird party payments insurance coverage may have changedImprovements in quality treatments are very different (better & more expensive) than in previous decade31New Directions for Governments Role in Health CareIndividual mandatesStates force
26、 their residents to purchase automobile insurance, so why not health insurance?Heritage Foundations plan would have an individual mandate, replace the implicit tax subsidy to employer-provided health insurance with vouchers, and keep Medicare and Medicaid intact.32New Directions for Governments Role
27、 in Health CareIndividual mandatesAnalogy with automobile insurance is tenuous.Automobile accidents clearly cause fiscal externalities damages to other vehicles, passengers, and property. The consequences of getting sick are largely internalized.States remove the highest risks (e.g. those who have d
28、runk driving convictions and those under age 16, etc.) from the insurance pool by restricting their ability to drive. The high health risks are not removed in any way.33New Directions for Governments Role in Health CareIndividual mandatesEnforcement of mandate is unclearWhat happens if someone did n
29、ot purchase insurance?If someone chooses not to drive or own an automobile, there is no mandate that they buy insurance.34New Directions for Governments Role in Health CareSingle PayerOne provider of health insurance, funded by tax collections.Eliminates adverse selection problem, and is used in man
30、y developed countries.Analog in U.S. would be to extend Medicare.Prices are not used in this case to ration health care, and often rationing is done by impose constraints on the supply side (e.g., waiting lists for health care).35New Directions for Governments Role in Health CareSingle PayerAlso, de
31、nial of treatments for some patientsIn United Kingdom, patients over age 65 are generally not permitted kidney dialysisHealth care costs are growing at about the same rate in these countries as in the U.S.36New Directions for Governments Role in Health CareIncremental changes to current systemMedica
32、re prescription drug benefitHow generous should the program be?Should the program be means-tested?How important is adverse selection?How expensive will it be?Would greater use of prescription drugs lead to substitution away from physicians and hospitals, and lower overall costs?37Recap of Social Insurance II: Health CareWhats special about health care?U.S. Health care marketRole of governmentAccess and costsPolicy proposals38
