Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 1 of 35 Health Care in US Private and Government roles

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 2 of 35 SOURCE: Centers for Medicare and Medicaid Services [2005a].

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 3 of 35 SOURCE: Centers for Medicare and Medicaid Services [2005a].

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 4 of 35 An Overview of Health Care in the United States 15. 1

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 5 of 35 Private Health Insurance The Implicit Subsidy for Employer-Provided Insurance World War II era price controls Federal tax subsidy Health insurance expenditures by employers are tax subsidized: payments to employees in the form of wages are taxed, while payments in the form of health insurance are not. This is a major reason health insurance is offered through firms.

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 6 of 35 The Advantages of Employer-Provided Health Insurance Increase the risk pool Reduce adverse selection Lower administrative costs

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 7 of 35 Employer-Provided Health Insurance and Job Lock Job lock Health Insurance Policy Portability and Accountability Act of 1996 (Kennedy-Kassenbaum Act)

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 8 of 35 Health Care Reform Issues Controlling costs The uninsured

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 9 of 35 Cost Control and Private Insurance Cost-based reimbursement (fee-for-service) Managed care -- An approach to controlling medical costs using supply-side restrictions such as limited choice of medical provider. Capitation-based reimbursement Providers receive payments based on number of enrollees Health Maintenance Organizations (HMOs) A health care organization that integrates insurance and delivery of care by, for example, paying its own doctors and hospitals a salary independent of the amount of care they deliver. Preferred Provider Organizations (PPOs) A health care organization that lowers care costs by shopping for health care providers on behalf of the insured. Point-of-service (POS)– a provider serves as gate keeper to network

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 10 of 35 An Overview of Health Care in the United States The Uninsured Who are they?  The uninsured have lower-than-average incomes.  In 2004, almost 70% of the uninsured came from families where one or more members were full-term workers.  Over one-fifth of the uninsured are children.

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 11 of 35 An Overview of Health Care in the United States The Uninsured Why Care About the Uninsured? First, there are physical externalities associated with communicable diseases. Second, there is a significant financial externality imposed by the uninsured on the insured. The third reason we might care whether individuals are uninsured is that care is not delivered appropriately to the uninsured.

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 12 of 35 An Overview of Health Care in the United States The Uninsured Why Care About the Uninsured? Fourth, there are paternalism and equity motivations for caring about the uninsured. The final reason for caring about the uninsured is that becoming uninsured is a concern for millions of individuals who currently have insurance. Health insurance availability may inhibit productivity increasing job switches.

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 13 of 35

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 14 of 35 Health Insurance II: Medicare, Medicaid, and Health Care Reform

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 15 of 35 Medicare Federal program, funded by a payroll tax, that provides health insurance to all elderly over age 65 and disabled persons under age 65. Medicaid Federal and state program, funded by general tax revenues, that provides health care for poor families, elderly, and disabled. Health Insurance II: Medicare, Medicaid, and Health Care Reform

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 16 of 35 Even Bigger Mess: Medicare Efforts for Social Security reform ended with 2006 election CBO shifted focus to Medicare Much bigger financial problem Part of health care “crisis” in America Same concerns about aging with little control on benefit costs Last action expanded the program!

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 17 of 35 Medicare defined Medicare is publicly-provided health insurance for the elderly Medicaid is publicly-provided health insurance for low income uninsured Four parts Part A: Hospital Insurance (HI) Part B: Supplemental Medical Insurance (SMI) Part C: Medicare Advantage is alternative to A&B Part D: Prescription Drugs

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 18 of 35 Who is covered? Elderly, 65+ (85% of beneficiaries) Everyone automatically covered by HI, must sign up for SMI (95% do) Disabled eligible after two years receiving DI benefits End stage renal disease (kidney dialysis)

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 19 of 35 What is covered? HI covers inpatient hospital care, skilled nursing facilities, home health services, and hospice care SMI covers doctor visits, lab tests, and outpatient hospital care Part D covers prescription drugs (w limits) Does NOT cover nursing homes

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 20 of 35 How is Medicare financed? HI financed through payroll taxes 1.45% (3.9%) on all earnings (HI Trust Fund) SMI and Part D financed through monthly premiums (25%) and general revenues SMI $ (2007) each month, Part D varies by plan - deducted from Social Security checks Also co-pays and deductibles

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 21 of 35 Medicare in financial trouble Dramatic growth in the program 1980: $37 Billion 2006: $380 Billion Similar to Social Security, Medicare has a bleak financial future Baby boomers start to retire in next 5 years People living longer Health costs rising faster than economy as a whole

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 22 of 35 Excess Cost Growth Growth in spending per beneficiary that exceeds growth in per capita GDP 3.0 percent over percent over Captures both policy changes and “residual” growth Assumption going forward dramatically alters projections of program growth

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 23 of 35 Medicare Spending as Share of GDP: Excess Cost Growth??

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 24 of 35 …so Federal budget in trouble HI Trust Fund, currently in surplus, is projected to be exhausted in 2019 as costs rise (between $980 billion and $1.4 trillion) SMI will squeeze other federal spending as the Part B costs rise – 75% from current taxpayers Part D cheaper so far, but tries to expand coverage may raise costs Estimated to cost $400 B over 10 years

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 25 of 35

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 26 of 35 The Medicaid Program for Low-income Mothers and Children How Medicaid Works Medicaid, like unemployment insurance (UI), is a program that is federally mandated but administered by the states. Who Is Eligible for Medicaid? All individuals age 18 or younger are eligible for Medicaid or CHIP up to 100% of the poverty line. Children under age 6 and pregnant women are covered up to 133% of the poverty line. In most states, eligibility extends further for both children and pregnant women: a typical state covers both groups up to 200% of the poverty line. Children’s Health Insurance Program (CHIP) Program introduced in 1997 to expand eligibility of children for public health insurance beyond the existing limits of the Medicaid program, generally up to 200% of the poverty line.

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 27 of 35 The Medicaid Program for Low-income Mothers and Children What Health Services Does Medicaid Cover? While federal Medicaid rules require states to cover major services, such as physician and hospital care, they do not require states to pay for optional services, such as prescription drugs or dental care. How Do Providers Get Paid? States can also regulate the rate at which health service providers are reimbursed. In most states, Medicaid reimburses physicians at a much lower level than does the private sector, which often leads physicians to be unwilling to serve Medicaid patients.

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 28 of 35 What Are the Effects of the Medicaid Program? How Does Medicaid Affect Health? Evidence Take-Up In 1982, 12% of individuals nationwide aged 18 or under were eligible for public insurance under Medicaid. By 2000, 46% of individuals in that age group were eligible. There was a parallel rise for pregnant women, with some small increase for parents of eligible children in selected states that chose to expand to that population. Crowd-Out Unlike people who prefer to hold on to their private health insurance, some individuals might find it attractive to leave private insurance for public insurance because the Medicaid insurance package is much more generous. This is another example of the ways government intervention can crowd out private provision, as we saw with fireworks, education, and social insurance.

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 29 of 35 What Are the Effects of the Medicaid Program? How Does Medicaid Affect Health? Evidence Health Care Utilization and Health Even at the largest estimates of crowd-out, expanding Medicaid still substantially reduces the number of uninsured, so expansions may affect the utilization of health care services. Cost-Effectiveness Findings suggest that investing in low-income health care may be a cost- effective means of improving health in the United States.

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 30 of 35 USING STATE MEDICAID EXPANSIONS TO ESTIMATE PROGRAM EFFECTS An important feature of the Medicaid expansions is that they occurred at a very different pace across the states and at a different pace for different age groups of children within states. E M P I R I C A L E V I D E N C E Studies can compare outcomes (such as degree of illness) in the treatment states, those that expand eligibility more, to outcomes in the controls, those that expand it less.

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 31 of 35 The Medicare Program The largest public health insurance program in the United States is Medicare.

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 32 of 35 Long-term Care This care is delivered primarily in two forms: 1. Institutional care provided in nursing homes. 2. Home health care, where nurses and other aides provide care in the patient’s home. long-term care Health care delivered to the disabled and elderly for their long-term rather than acute needs either in an institutional setting (a nursing home) or in their homes. Financing Long-term Care When savings are drawn below a threshold level, individuals qualify for state programs that pick up the cost of nursing homes under Medicaid.

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 33 of 35 Lessons for Health Care Reform in the United States Rising Health Care Costs Since 1950, the Consumer Price Index for medical care has risen by 1.8 percentage points more per year than the Consumer Price Index for all items in the U.S. economy. Controlling medical care costs is a tremendously difficult proposition for two reasons. First, it is not clear that costs should be controlled. Second, even if costs should be controlled, it is not clear how this can be done.

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 34 of 35 Health Care Reform Individual mandates Health savings accounts Catastrophic insurance policy Single payer

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 35 of 35 Lessons for Health Care Reform in the United States The Uninsured Pooling Efficient provision of insurance requires large pools of participants that are created independently of health status. Solving the problem of the uninsured requires developing some new pooling mechanism, either through government insurance or through private insurance pools. Affordability Health insurance is expensive. For example, the average cost of employer-provided insurance in 2006 is $4,024 per year for individuals and $10,880 for families. Mandates mandate A legal requirement for employers to offer insurance or for individuals to obtain some type of insurance coverage.

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 36 of 35 Lessons for Health Care Reform in the United States Incremental Reforms Incremental Cost Controls One approach that has been used extensively in recent years by the Medicare program is to restrict provider reimbursement, either by lowering prices or moving to more prospective reimbursement. Incremental Reforms to Cover the Uninsured One option is to try to make the small employer and nongroup markets more hospitable to the uninsured, in the hopes of inducing the uninsured to buy insurance. Another possibility for increasing insurance coverage for the uninsured is to continue to expand the public insurance safety net. A third possibility (which is currently very popular) is to offer individuals new tax subsidies with which to purchase health insurance.

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 37 of 35 Lessons for Health Care Reform in the United States Fundamental Reform: Public National Health Insurance national health insurance A system whereby the government provides insurance to all its citizens, as in Canada, without the involvement of a private insurance industry. While public expenditures would rise dramatically, there would be a large reduction in private insurance expenditures. Thus, the rise in total social costs of health care would be small compared to the actual costs to the government. First, there may be a deadweight loss arising from the need to increase government revenues. Second, moving from private financing of health insurance through employer expenditures to public financing is like moving from a hidden tax to an explicit tax.

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 38 of 35 Lessons for Health Care Reform in the United States Fundamental Reform: Private-Sector Solutions An alternative approach to fundamental reform would be to build on the existing hybrid of private and public insurance in the United States. State governments could each set up new pools of insurance plans, akin to the pools offered by employers, from which individuals could choose insurance.

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 39 of 35 Your future retirement? Health care diminishing as private retirement benefit Reliance on Medicare also uncertain Economics informs us – solution is political

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 40 of Candidate Health Care Plans Hillary Mandates health insurance for all Individuals can choose provider Low income HH would receive subsidy Small businesses receives tax breaks for offering insurance Businesses assisted with insurance for retirees Policies portable to other jobs Costs: $100 billion

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 41 of Candidate Health Care Plans Edwards Health insurance required for all by 2012 Buy private plan or a medicare type policy from government Tax credits given to low income HH Financial support to small businesses Regional health pools for businesses and individuals Cap insurance company profits at 15% Costs: $ billion

Chapter 15 Health Insurance I: Health Economics and Private Health Insurance © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 42 of Candidate Health Care Plans Mitt Romney (based largely on Massachusetts model) Mandates insurance coverage Emphasizes employer-based health plans Wants states to design programs using federal monies for incentives and subsidies State insurance pool to hedge risks De-regulate state insurance companies to encourage competition and lower costs