1 Health Care Reform: An Economic Perspective Bill Evans Department of Economics and Econometrics

2 Motivation for talk No Federal reform effort since 1994 Re-emergence as a political issue Reform packages from nearly all presidential candidates States are forcing the issue

3 Kaiser Family Foundation Tracking Survey – June 2007 What two issues you would most like to hear the presidential candidates talk about? Iraq43% Health care 21% Immigration18% Economy13% Gas price/Energy12% Terrorism/Nat. Sec. 7%

4 Outline of talk What problems must reforms address? What have we learned from reform? Outline some current alternatives Examine some likely economic consequences

5 Talk may be premature Uncertain who the Democratic nominee will be –one plan will become irrelevant Plan of the presumptive Republican nominee somewhat ill-formed at this point

6 What we will not talk about? Single payer

7 Many countries have single-payer system Generates low administrative costs but (arguably) poorer quality care US companies process $700 billion in HC claims each year The US is not about to get rid of a $700 billion industry

8 What are the issues? Cost/Expenditures Fiscal (taxes and expenditures) Equity Coverage

9 Expenditures on Medical Care $2 trillion annually 16% GDP $6000/person Twice as much as the median OECD country

10 90% more than Canada 145% more than the UK

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12 Average Annual Premiums Covered Workers, 2006 (KFF) Individual plan –$4,242 total Family plan –$11,480

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14 Are high expenditures a bad thing? A key driver of health care costs is technology MRIs/CT scans, angioplasty, anti-psychotropic drugs, hip/knee replacements, neo-natal intensive care, treatments for AIDS, statin drugs (Lipitor) All not available 20 years ago. Now, commonplace

15 HIV/AIDS Drugs Early 1990s, 8% quarterly mortality rates for patients w/ AIDS 1995:4, 1996:1, three new drug introduced to fight virus –Work by preventing the virus from replicating in the host Usage rates increase immediately and aggregate mortality falls 70% in 18 months

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17 AIDS drugs are expensive, $12K/year in some cases AIDS patients are expensive, $20K/year This medical advance by construction increases lifetime spending by a considerably amount

18 ARVs increase lifespan after diagnosis with AIDS by almost 8 years Lifetime cost of treating an AIDS patient increases by about $250K This is expensive, but compared to many other programs, it is relatively cheap on a cost-per-life-year saved amount

19 NICU Specialty wards of hospitals that provide “constant nursing and continuous cardiopulmonary and other support for severely ill infants” Developed in late 1950 early 1970s Growth has been rapid –NICU beds increased by 150%

20 Costs, 2001 CA NICU discharge $50,000 Non-NICU, $4,500 In CA, 10% of births are for a NICU Therefore, more than half the hospital cost of childbirth are attributable to NICUs

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22 But…. not getting the bang per buck Overhead costs are high (NEJM, 2003) –31% in US –< 2% in Canada Unnecessary care (Dartmouth Atlas) –30% of care has little medical benefit US performs poorly in comparison –Higher infant mortality –Lower life expectancy

years less than Japan 2.4 years Less than Canada

24 If you want to cut costs, where do you look? Administrative/overhead Unnecessary procedures Chronic conditions –20% of people responsible for 80% spending

25 What are the issues? Cost/Expenditures Fiscal (taxes and expenditures) Equity Coverage

26 Government Insurance Federal government – largest health insurance provider Medicaid and Medicare –95 million covered in 2006 –$540 billion –21 percent of the federal budget

27 Medicare 42.4 million recipients in 2006 Costs in 2006 –$342 billion –14% of Federal expenditures Financing –Part A financed by payroll tax (2.9%) –Part B/D financed by premiums (25%) and general revenues (75%)

28 Future problems Costs of program are expected to escalate between now and 2030 At the same time, fewer workers to tax Medicare Trustees predict –Costs > revenues by 2011 –Trust fund exhausted by 2019

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32 What are the issues? Cost/Expenditures Fiscal (taxes and expenditures) Equity Coverage

33 Tax System Equity EPHI health insurance is a tax-free fringe benefit Greatly reduces the cost to consumers of purchasing insurance Has encouraged the growth of EPHI Now, most people w/ private insurance get is through their employers

34 Tax Benefit of EPHI A family w/ $70,000 in income 36.4% marginal tax rate –25% federal –3.4% state (Indiana) –~8% Social Security and Medicare Want to purchase $12,000 policy in AFTER TAX DOLLARS

35 Without tax advantage: Receive $18,897 in income Pay 36.4% or $6,897 in taxes $12,000 left over for health insurance Net benefit of tax deduction is $6,897

36 Inequalities Tax break only available to people who receive insurance from their firm Higher income families have higher tax rates so the tax benefit to them is greater Costs over $210 billion/year

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38 What are the issues? Cost/Expenditures Fiscal (taxes and expenditures) Equity Coverage

39 Coverage Uninsurance is a persistent problem in US Dimensions of the problem –47 million people –16% of population –9 million children Uninsurance rates have increased steadily over time

40 Who are the uninsured? Race –White 10.8% –Black20.5% –Hispanic34.1% Age –<1811.7% – % – % – % – % Family Income –<$25K24.9% –$25-$50K21.1% –$50-$75K14.4% –>$75K 8.5%

41 Time Series Number uninsured –31 million in 1987 –47 million in 2006 Percent uninsured –12.6 in 1987 –15.8 in 2006

42 What have we been doing the past 13 years? Two major efforts aimed at coverage –Medicare Part D –SCHIP program Movement to managed care BUT….Most of the ‘action’ has been with states –unsuccessful but informative

43 Small Group Reform People without EPHI or small firms must purchase insurance in the ‘Small Group’ Market Small groups tend to have –Higher prices –Higher administrative fees –Prices that are volatile

44 Prices are a function of the demographics Concern: prices for some groups too high Lower prices for some by “community rating” Nearly all states have adopted some version of small group reform in 1990s

45 What happened? Increased the price for low risk customers –Healthy 30 year old pays $180/month in PA –$420/month in NJ with community ratings Low risks promptly left the market Which raised prices Policy did everything wrong

46 Lesson Idea was correct: –Use low risk to subsidize the high risk But you cannot allow the low risk to exit the market

47 Massachusetts Reform

48 MA Reform: Romney Most ambitious state reform to date Many features but….. Most striking component: Individual mandate –Required by law to carry insurance

49 MA Reform If you require insurance, you need to make it affordable State subsidizes purchases for poor Firms must establish Section 125 plans Established the “Connector”

50 Connector Merge of individual and small group market Market maker in insurance Community rating Requirements on what plans must have

51 Connector Cheapest individual plans cost about $200/month 40-60% lower than average plan Was achieved primarily by higher cost sharing

52 Results from MA It was estimated that 500K were uninsured and 300K have been added to insurance rolls State underestimated –Number uninsured –Uninsured eligible for subsidized care Cost of the program are exceeding expectations

53 Exporting MA Plan? Plan is being studied extensively by –Other states –Presidential candidates MA is very unique so it might not travel –Lower uninsurance rate (9%) –Unique fiscal situation that was used to finance the law

54 Other reform plans Obama and Clinton have offered detailed plans Both loosely based on the MA reform Clinton’s is nearly identical to Edward’s Maintain EPHI as basis of system Try to lower costs to those without EPHI so they can afford insurance Plans vary in detail but contain many similarities

55 Democratic plans EdwardsObamaClinton Pay or PlayYes ‘Connector’ Type plan Yes Subsidize/ Tax credits Yes Individual mandates YesNoYes

56 Clinton Those without insurance can purchase through same insurance members of Congress have Insurance subsidies for low income Reliance on preventive care/disease management to reduce costs to make affordable Individual mandates

57 Obama Mandates for children Employer mandates Expansion of SCHIP/Medicaid

58 Cost savings proposals in Obama’s Plan Health IT systems –$10 billion/year for 5 years Heavy emphasis on disease management –Effort to standardize care for chronically ill Performance based rewards (MD’s) Rx reform (generics, importation, negot.)

59 Pay or Play Firms must pay 5% wage bill to health insurance or pay that as a fine Proposed in 26 states in 2006 Language -- firms must pay ‘their fair share’ Problem: ignores the realities of the labor market

60 Insurance is one component of a compensation package Increased costs in one area will be paid for by reducing on costs in another (wages) In long run, costs will be borne by workers

61 Will firms pay or play? In March 2007, Private industry –Average hourly comp.$27.61 –Wages/salaries$18.34 (71%) –Health insurance$ 1.83 (7.1%) Wal-Mart pays 5-7% –Only 40% Wal-Mart workers receive their care through the firm

62 Cost reduction Variety of ways to reduce costs –Computer investments (medical records) –Preventive services –Disease management –‘Best practices’ Way to ‘self finance’ plans Problem –Returns are years away –Preventive/DM not really cost saving

63 Example: Cervical Cancer Screening 11,500 cases in 2007, approx deaths 4 th leading cause of cancer death in women Cheap test available – Pap smear $40 Expensive to treat ($30,000/case) Consider universal testing every three years for women 45-64

64 37 million in this group Cancer incidence rate of 16/100,000 Approx 6000 new cases per year Suppose test every three years prevents ALL cervical cancers for 3 years Costs $1.1 billion Save: $540 million Net – program cost $560 million

65 Result Universal testing is a good idea –saves lives –it is a COST EFFECTIVE However, in most cases, mass screening is not COST SAVING

66 “It’s a nice thing to think, and it seems like it should be true, but I don’t know of any evidence that preventive care actually saves money,” Jon Gruber, MIT Economics professor and architect of the Massachusetts Connector plan

67 What is different now? Leaves current system intact, builds out Individual mandates Pay or play Belief we can generate more uniformity in practice patterns to save costs

68 What is missing? Little discussion of Medicare Attacks costs by spending more money Little discussion about the need for more cost sharing

69 McCain Uninsurance is a problem of cost Attack costs, reduce premiums, increase coverage, Offers variety of proposals designed to drive down costs –Increase competition in insurance –Malpractice reform –Increase accountability

70 Highlights Purchase insurance from nationwide pools Obtain insurance through any group, not just employers Encourage retail medical outlets Base pay on performance Establish national standards for treatment

71 Tax Credits Eliminate tax deductibility of EPHI Replace with tax credit for people with health insurance –$2500 for individuals –$5000 for families Tax benefit the same for everyone, regardless of income

72 Concerns The subsidy rate is not high enough for low income people What will happen to employer-provided health insurance?

73 Summary Clinton –Primarily attacks uninsurance problem Individual mandates Pay or play –Imposes lots of (potentially costly) programs like preventive medicine –Individual mandates make the plan politically challenging

74 Obama –Attacks costs first –Most aggressive cost-saving but, benefits are years away from being realized –Some impact on uninsurance through expansions of SCHIP/Medicaid, pay-or-play –Benefits to working uninsured will be long in the future when/if costs have been reduced

75 McCain –Riskiest program because it blows up EPHI Replaces with a tax credit –Estimates suggest it will have minimal impact on uninsurance –Questionable impact on costs -- any benefits are long in the future