Health Insurance in the U.S. An Overview October 23, 2006

By the end of this lecture, you should be able to: Explain level of health care costs in US relative to other developed countries Discuss whether HC expenditures are “worth it” Explain sources of health care cost growth Discuss sources of payment for HC in US, and the “problem of the uninsured”

Health Care in Global Perspective Health insurance is common to all developed countries Mechanism differs England and Italy finance health care through general taxation and provide services publicly (at least historically) Canada and Germany finance insurance publicly but contract for services through private providers

US Health Care System United States distinctive in several ways: We spend much larger fraction of GDP on health care than other nations Most global health care innovation is due to R&D done in the United States Formal insurance coverage is not universal in the US The elderly and the poor rely on government Others depend on employers

How much do we spend? The United States in 2002 spent $5,267 per capita Switzerland, the second highest per capita spending in the OECD, spent $3,446 Median OECD country spent $2,193 This was 14.6% of U.S. GDP in 2002 Only two other countries – Switzerland and Germany – exceeded 10% of GDP Source: Anderson, et al, Health Affairs, Jul/Aug 2005, Vol. 24, Issue 4, pg. 903

Is this a Problem? Individual perspective Employer perspective Federal budget perspective Economy wide perspective

Do we get what we pay for? Inputs Numbers of beds, physicians, etc. per capita Outcomes Infant mortality Life expectancy

Inputs For number of hospital beds per capita, U.S. is in bottom quartile of OECD Number of physicians per capita is below OECD median Number of nurses per capita is below OECD median But … we might be using our resources more efficiently

Outputs: Life expectancy at Birth CountryFemaleMale Japan Canada Germany U.K U.S These are 1996 numbers

Outputs: Infant Mortality Rates CountryRate Japan0.4 Canada0.6 Germany0.5 U.K.0.6 U.S.0.8 These are 1996 numbers

Limits of International Comparisons? Not necessarily “fair” to compare US costs to other countries Not necessarily due to waste or inefficiency Financial incentives for innovation exist here We spend on R&D, and other countries benefit  does not necessarily mean we spend too much – if we value the output

So the level is high, but what about growth rates? Health care is growing faster than GDP in most countries In U.S., health spending rose from 13% of GDP in 1992 to 14.6% of GDP in 2002 This 1.6% increase relative to GDP is twice the 0.8% increase of the OECD median This was even during a time when managed care and increased cost sharing were credited for holding down spending in U.S.!

Escalating Costs of Health Care Year% GDP

Discussion: What is the Cause? Why do you think HC costs are rising?

What causes health care cost growth? Many potential candidates Technological progress  new procedures Rising income  greater demand Increased 3 rd party payments Aging population More doctors  physician induced demand More expensive conditions (HIV, drug treatment) Increasing malpractice awards “Easy access” – no waiting lists, etc. Other? What does the evidence say?

It’s the Prices … The United States pays much higher prices than other countries for pharmaceuticals, hospital stays, and physician visits. Ex: Average cost of a hospital day in the U.S. in 2002 was $2,434, compared with $870 in Canada. But it just shifts the puzzle – why are prices so high?

A Leading Cause - Technology Over half of the rise in U.S. health care spending is due to new technology MRIs, CAT scans, organ transplants, new prescription drugs Most of these did not exist 40 years ago! As our national income rises, we use more of these products Costs may rise quickly, but so might the benefits?

A Leading Cause - The Role of Third Party Payers … Finkelstein (BusinessWeek article) Consumers opt for more care if someone else pays for it Insurance provides guaranteed source of revenue for hospitals and other health providers (e.g., to build new facility) Evidence Introduction of Medicare – in areas where there was little pre-existing insurance (e.g., South), health spending soared, while it had little effect in areas where insurance as already common (e.g. New England)

Other Reasons - Aging Population The elderly consume much more health care per capita than younger cohorts Leading edge of baby boom generation is turning 60 …

Access to Care Many OECD countries imposed “supply constraints” over the past 3 decades. Limiting the number of hospital beds Controls on diffusion of technology Limits on numbers of physicians U.S. has fewer of these, but presumably use them more intensively

Lack of “Waiting Lists” Unlikely to help reduce costs by much Procedures for which there are wait lists constitute a small fraction of overall spending While countries with wait lists have lower costs than U.S., so do countries without waiting lists

Malpractice Litigation Dept of Health and Human Services reports that “Americans spend far more per person on the costs of litigation than any other country in the world.” U.S. had 50 percent more malpractice claims filed per capita than U.S. or Australia and 350 percent more than Canada Malpractice payments per ruled or settled case about $265k in U.S. in 2001, slightly lower than in Canada and the UK While it raises average cost, it is not clear it can really explain the trend

Costs of Medical Malpractice Legal costs Direct cost of awards Legal costs of defending malpractice claims Underwriting insurance against claims All these only account for 0.5% of HC spending Defensive medicine Test or procedures ordered to protect physician against risk of lawsuit Cost estimates vary widely – perhaps as high as 5-9 percent of total HC spending Indirect Costs Specialist shortages in some areas due to high malpractice insurance premiums

Who Pays for Care? SourceGroups CoveredShare of population Share of payments MedicareElderly, disabled 13%22% MedicaidElderly, blind, disabled, poor women/children 1015 OtherMilitary 18 EmployerWorkers & dependents NongroupFamilies 6 Uninsured 162

The Uninsured Approximately 15% of individuals in US are not covered by insurance – 44 million people Implications are controversial Some choose to go without Some Medicaid eligible but have not taken up (though likely will if need care) Many uninsured receive free care from emergency rooms, etc. One could argue that we have universal (if inefficient) catastrophic coverage delivered through complex patchwork of vehicles

Characteristics of Uninsured Most have jobs More like to be in service sector Majority are low income But some have high income Young adults more likely to be uninsured Minorities more likely to be uninsured Unmarried more likely to be uninsured Less educated more likely to be uninsured

Insurance as a Policy Issue 44 million uninsured But ¼ are short spells (< 4 months) Many more underinsured Still more at risk of being uninsured Children at risk Federal deficit (Social Security HI fund) Cost of health insurance to business

Our HC Journey U.S. Medicare System Part A Part B Part D – Rx Drug bill Medigap Medicaid Employer provided health insurance Traditional Managed care Reforming the system