22 CHAPTER PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Health Care

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 22-2 Health Care  Government is involved in health care in multiple ways  Regulator  Financier  Provider  Government greatly influences health care  Should government influence it more?

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 22-3 Rationales for Government Involvement  Public Health  Contagious disease  Negative Externality  Dissemination of health care information  Equity  Inability for all persons to afford health insurance

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 22-4 Public Health  Spread of contagious diseases  Example: typhoid fever, cholera  Opportunity for disease to spread rapidly  Government established public health boards  Controlled epidemics  Highly successful

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 22-5 Public Versus Private Health  Many common health problems today are private in nature  Noncontagious  Examples: heart disease, cancer  Problems are serious but private

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 22-6 Public Health Policy  Medicare and Medicaid created  Government paid for health care of elderly and needy regardless of problem’s nature  Distinction between public and private health concerns has been obscured

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 22-7 Health Insurance  Major policy issues – universal health insurance  Recent problem  1940 – 10% population covered  Factors making health insurance commonplace  Rising medical costs  Tax deductibility of employer-paid health plans

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 22-8 Moral Hazard and Adverse Selection  Insurance industry must deal with two factors  Moral hazard  Adverse selection

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 22-9 Moral Hazard  Moral hazard – when an individual has some control over events that trigger insurance payment  Example: driving a car  Increases health care costs

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Adverse Selection  Adverse selection – occurs when those most likely to make insurance claims buy insurance, those not likely to make claims do not  Adverse selection created because:  Individuals have better information  Strong public sentiment about charging higher-risk individuals more

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Moral Hazard and Adverse Selection  Employer-provided insurance avoids most of the adverse selection problem  All employees get insurance  Single-provider insurance would eliminate adverse selection

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Health Insurance Incentives  No one has an incentive to control health care costs under standard health insurance  Marginal cost to patient = zero  Marginal benefit to doctor is high  Incentive to overconsume health care services  Cost of overproduction passed onto all health insurance

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Health Insurance Incentives

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Health Insurance Incentives  Two possible ways to mitigate health insurance incentive problems  Deductibles  Individual pays first several dollars of service, insurance pays remainder  MC still equals zero  Copayments  Patient pays a certain percentage of total bill  Bulk still paid by insurer

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Health Insurance Incentives  HMOs – Health Maintenance Organization  Accept payments in advance  Provide required medical care  Advantages  Incentive to conserve costs  Disadvantages  Incentive to conserve costs

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Health Insurance Incentives  Hospital Reimbursement for Insured Expenses  Fixed payment for certain procedures  Creates incentive to reduce costs  Historically reimbursed using “cost-plus” system  Incentive to increase costs  Purchase expensive equipment  Lengthen hospital stays

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe The Evolution of 20th Century Health Care  Role of the AMA in transforming health care in the United States  Controlled physician’s entry  Promoted fees for service  Created current physician-patient relationship

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Government Health Care Programs  Medicare  Federal program  Provides health care to the elderly  Medicaid  Run by states, jointly financed by states and federal government  Provides health care to needy

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Health Care Reform  Universal coverage  Example: the Canadian system  Advantages:  Eliminate adverse selection  Reduces tendency to avoid preventative care  Disadvantages:  Specialist rationed  Costs are hidden  U.S provides safety valve

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Health Care Reform  Medical Savings Accounts (MSAs)  Provides catastrophic coverage  Direct control of routine expenditures  Has advantage of creating incentive to save on routine expenditures  Does not address expensive treatments

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Health Care Reform  Mandated Employer Coverage  Problems include:  Increases cost of hiring workers  Negative impact on labor market for low- income workers  Does not fulfill the goal of universal coverage  Pay or Play  Similar problems as employer mandates

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Interest Groups and Health Care Reform  Health care reform will ultimately be determined through political process  Future of health care will be partly determined by special interests  Doctors  Insurance companies  Elderly