©2012 The McGraw-Hill Companies, All Rights Reserved Chapter 23 Health Care

1- 2 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Chapter Outline Where The Money Goes And Where It Comes From Insurance in the United States Economic Models Of Health Care Comparing The U.S. With The Rest Of The World

1- 3 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin The Money 16% of GDP spent on health care (2.5 trillion of 14.2 trillion) 52% spent by governments (Medicare, Medicaid etc.)

1- 4 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Government Health Programs Medicare public insurance in the U.S. which covers those over age 65 $502 billion Medicaid public insurance in the U.S. which covers the poor $374 billion

1- 5 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Where the Private Money Comes From Private Insurance $801 billion Out-of-Pocket Patient Expenses $299 billion

1- 6 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Where the Money Goes Hospitals $759 billion Doctors $505 billion Prescription Drugs $250 billion Research $45 billion

1- 7 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Insurance Coverage 80% covered all year 8% covered part of the year 12% without any insurance all year

1- 8 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Insurance Types Private Group Insurance 170 million Private Individual Insurance 25 million Medicare 54 million Medicaid 50 million

1- 9 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Why People Buy Insurance People who believe that their insurance premiums will be less than their expected health care expenditures will buy insurance. People who are risk averse (they would rather pay more than their predicted expenditures to limit their risk of large expenses) will buy insurance. A person who is risk neutral (they would not pay more than their predicted expenditure to eliminate uncertainty) would not buy insurance.

1- 10 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Vocabulary of Insurance Deductible the amount of health spending a year that you have to pay before the insurance company pays anything Co-payment either a set amount or the percentage of the bill after the deductible has been taken out that you have to pay Maximum out-of-pocket the most that a person or family will have to pay over a year for all covered health expenses Lifetime maximum the most that an insurance company will pay on your health expenses over your lifetime

1- 11 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Types of Insurance Plans Fee-for-service Health Maintenance Organization (HMO) Preferred Provider Organization (PPO)

1- 12 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Controlling Expenses HMO’s and PPO’s use Primary Care Physicians (PCP’s) or Gatekeepers who are physicians charged with making the initial diagnosis and making referrals

1- 13 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Advantages and Disadvantages of Insurance Types Insurance Type AdvantageDisadvantage Fee-for- Service 1)Maximum physician choice 2)Little insurance company meddling in doctors’ decisions Highest premiums, deductibles, and co-payment rates because of little control over expensive and unnecessary procedures HMOMaximum control over expensive and unnecessary procedures so premiums, deductibles and co- payment rates are low. 1)Minimal physician choice 2)Significant meddling in physician decisions, especially when differing procedures have significant cost differences PPO1)Some physician choice 2)moderate premiums, deductibles and co-payment rates 3)some control over expensive procedures 4)minor meddling in physician decisions

1- 14 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Public Insurance: Medicare Those over 65 are eligible Part A Covers expenses incurred in hospitals Compulsory Financed with premiums and 1.45% payroll tax on employers and employees Part B Covers doctor visits Voluntary Financed with premiums and general tax revenue

1- 15 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Public Insurance: Medicaid Covers the poor eligibility standards vary from state to state No premiums are required Some states have very small co- payments

1- 16 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin The Uninsured 21 million of 51 million go without insurance all year 18 million are between age 18 and million are under 18

1- 17 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Why Health Care is not “Just Another Good” Rapid increases in quality (which get confused as price increases) Treatments developed in the 1990s for AIDS are expensive but this is a quality increase, not a price increase Consumers have less knowledge about what they are buying than they typically do when buying goods.

1- 18 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Why Medicaid Raises All Health Care Prices P* Q poor Q nonpoor D poor+nonpoor P* Q poor Q nonpoor P Q/t S D poor D nonpoor Without Medicaid Q/t S P D poor D nonpoor With Medicaid

1- 19 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Why Co-Payments Increase Prices Third-Party Payer: an entity other than the consumer pays part of the costs If people only pay 20% of a price they will consume much more

1- 20 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Modeling Third-Party Payment 5P A P Q/t A PAPA D no insurance QAQA S D with 20% co-pay P’

1- 21 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Moral Hazard with Health Insurance Moral Hazard: the fact that having insurance increases the demand for the good If people choose to smoke, to drink to excess, to overeat and to not exercise, because they will pay fewer of the monetary consequences then this is moral hazard.

1- 22 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Adverse Selection Adverse Selection: Those in most need of insurance are the most willing to pay for insurance and drive up the price of insurance with their illnesses to such a degree that those people who are not as sick leave the market altogether.

1- 23 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Pre-Existing Conditions If the law requires insurance companies to accept every patient without regard to their health status, individuals may wait until they are ill to seek insurance.

1- 24 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Mandation Mandation: The requirement to purchase insurance. Mandation is one method to deal with the problem of adverse selection when there are laws against insurance companies denying unhealthy people coverage (or charging the unhealthy more than the healthy.)

1- 25 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin The HMO Debate To control costs, HMOs use rules to limit expenses. E.g. recuperating time in a hospital is limited for births. These rules sometimes conflict with doctors’ wishes for their patients. With patients having little interest in controlling costs, HMOs rely on rules to control costs.

1- 26 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Organ and Blood Donation There is always severe organ shortage. Economists argue that part of the problem is that laws prevent people from buying and selling organs. There is often a shortage of blood. Economists argue that part of the problem is that laws prevent people from buying and selling their blood for medical use even though they can sell their blood plasma for cosmetic use.

1- 27 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin The Rest of the World Most of the industrialized world uses a single-payer system where the government collects (usually very high) taxes to pay for everyone’s health care

1- 28 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin International Health Care Finance Arrangements Country Public $ as a % of TotalHospitalsPhysiciansPriv. Ins Australia 67.4mostly publicAa Canada 70.4mostly privateA, Ba France 80.1mostly publicAb Germany 76.7 mix of public and privateAa Japan 82.5mostly privateA, Bnone United Kingdom 86.7 mostly public trustsCa United States 45.1mostly privateAc A) Mostly private Fee-for-Service B) Government imposed fee schedule C) Public employees a) option to purchase private insurance for all expenses b) option to purchase private insurance for non-covered expenses c) all non-Medicare, non Medicaid

1- 29 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Country Comparisons Health Expenditures/ GDP (2004) Infant Morality per 1000 births (2006) Life Expectancy (2008) U.S.15.3% U.K.8.3% France10.5% Germany10.9% Japan8.0%

1- 30 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Country Comparisons (cont.) Five Year Survival Rates Prostate Cancer Breast Cancer U.S.98.6%88.7% U.K.71.0%81.0% France61.7%80.3% Germany67.6%71.7%

1- 31 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin Advantages and Disadvantages of Single-Payer Systems Advantages Universal coverage Low-to-no cost coverage to patients Disadvantages Long waiting lines for heart bypass and other surgeries Lower Survival Rates on many ailments High taxes