Chapter 22 This chapter addresses the rising cost of health care in the United States. We will discuss both the economic and noneconomic costs associated with providing health care to the American public. We will end by summarizing the goals of the legislation passed in 2010, the Patient and Affordable Care Act (PPACA). Health Care

U.S. Emphasis on Private Health Insurance Patient Protection & Affordable Care Act (2009) During WWII employers offered insurance Continued as an employee benefit Led to overuse & higher prices Tendency to regulate industry Canada has nationalized healthcare where the government uses taxes to pay for health care for every resident. Private health insurance is uniquely American. Health insurance was used during WWII for expanding businesses to attract workers under the constraints of government-imposed wartime wage and price restrictions. After WWII, companies continued to offer health insurance to attract employees. LO1

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Costs and Access Costs increased rapidly Higher prices Increased quantity of services Projected to grow at 5.8% annually over next 10 years Access 49 million uninsured On March 23, 2010, President Barack Obama signed the Patient Protection and Affordable Care Act (PPACA) into law. New controversial power was given to the government for universal health insurance coverage. Health care spending is about 17.9% of GDP which is nearly one-fifth of the U.S. economy. LO1

Health Care Spending These two figures break down the sources of health care funds as well as where the money is spent. LO1

Health Care Spending In this figure, you can see that health care expenditures as a percentage of GDP have been growing. LO1

Health Care Spending Is the U.S. healthier? Longer life expectancies Most advanced medical equipment and technologies Half of medical research funding is in U.S. Increase in breast cancer mortality TB has reappeared AIDS epidemic US life expectancy has increased by 7 years since 1970. Increases in research funding has led to a decrease in many diseases. Production of health care uses scarce resources; total output of health care, at the margin, may be worth less than alternative goods. The U.S. may be consuming health care where MC>MB, therefore, there is an overallocation and efficiency loss to society. LO1

Economic Implications of Rising Costs Reduced access to care Labor market effects Slower wage growth Part-time and temporary workers Outsourcing and offshoring Personal bankruptcies Impact on government budgets Rising health care costs cause employers to reduce, or eliminate, offering health insurance. The wages grow at a slower pace because health care costs make up a larger percentage of pay. Employers save money on health care if workers are part-time or temporary. Spending through Medicare and Medicaid is the fastest growing segment of the federal budget, and states can’t cover their share. LO2

Limited Access The poor are likely to be uninsured Make “too much” to qualify for Medicaid Waiting for treatment increases costs As one’s income rises, one is more likely to be insured. Low wage earners may make too much money to qualify for Medicaid but not enough to buy healthcare in the open market. Emergency rooms treat all people, insured or not, and this must be paid for by shifting the costs onto others. When people wait before seeking medical care, their illness has often progressed and is significantly worse, requiring more treatment. LO3

Why the Rapid Rise in Costs? Peculiarities of the health care market Ethical and equity considerations Asymmetric information Positive externalities Third-party payments: insurance Healthcare is looked upon as entitlement due to ethical considerations. Is it not like considering which car you can afford or buy? Healthcare buyers have a lack of knowledge about procedures and tests which leads to asymmetric information. There are positive spillover costs to society due to improved healthcare, immunizations, etc. Consumers pay lower “out of pocket” or true prices of health care because four-fifths of insurance is paid through public or private insurance. Therefore, people don’t make choices based on the true cost of resources and tend to over use it. LO4

Why the Rapid Rise in Costs? Increasing demand for health care Rising income Role of elasticity Aging population Unhealthy lifestyles Role of doctors Supplier induced demand Defensive medicine Medical ethics Healthcare is a normal good with an income elasticity coefficient that is about 1 and a price elasticity of demand coefficient that is as low as .2. Aging populations and unhealthy lifestyles will likely cause the demand for healthcare to increase. Physicians may increase the demand for healthcare in several ways, also. LO4

Why the Rapid Rise in Costs? Role of health insurance The moral hazard problem Less prevention Overconsumption Government tax subsidy Rationing to control costs Health insurance, like most insurance, is a way to pay a known cost in exchange for protection of an uncertain, but potentially much larger cost. This could lead to two behavior changes by the insured. First, they might adopt a less healthy life style, encouraging behavior that requires more health care. Second, insured people may seek visits to the doctor more often since the cost beyond a fixed premium is only a modest deductible. LO4

Supply Factors in Rising Health Costs Supply of physicians Slow productivity growth Changes in medical technology Relative importance of supply and demand factors The supply of physicians in the US has increased over the years; however, this supply has not kept up with the increase in the demand for physicians’ services. Health care is a service, and it is generally more difficult to increase productivity for a service than for goods. Some technological advances in the way we deliver healthcare have lowered costs; however, more often those medical technologies have been more expensive. LO4

Cost Containment: Altering Incentives Deductibles and copayments Health Savings Accounts (HSA) Managed care Preferred Provider Organizations (PPO) Health Maintenance Organizations (HMO) Medicare and DRG Limits on malpractice awards Controlling the growth of health care cost, prices, and spending has long been the major objective. This list details some of many efforts focused towards that goal. LO5

Patient Protection & Affordable Care Preexisting conditions, caps, and drops Employer mandate Personal mandate Covering the poor Insurance exchanges Other provisions Taxes We finish this chapter by highlighting some of the major provisions of the PPACA. Other provisions can be found in the 2400-page document or at www.heathcare.gov, a federal government website managed by the U.S. Department of Health & Human Services. LO6

Patient Protection & Affordable Care Objections and alternatives Greater inefficiencies in health care First step to national health insurance Lack of revenue sources Increased consumption Need to force consumers to weigh marginal benefits and costs The passing of the PPACA was not without strong opposition. Some of the major objections are listed here. One thing is clear, in evaluating the pros and cons of the PPACA, this will not be the last word on health care reform in America. LO6