McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 20 Health Care

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter Outline WHERE THE MONEY GOES AND WHERE IT COMES FROM INSURANCE IN THE U.S. ECONOMIC MODELS OF HEALTH CARE COMPARING THE U.S. WITH THE REST OF THE WORLD

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. The Money 14% of GDP spent on health care (1.2 trillion of 10 trillion) 43% spent by governments (Medicare, Medicaid etc.)

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Government Health Programs Medicare public insurance in the U.S. which covers those over age 65 –$214 billion Medicaid public insurance in the U.S. which covers the poor –$186 billion

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Where the Private Money Comes From Private Insurance –$355 billion Out-of-Pocket Patient Expenses –$187 billion

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Where the Money Goes Hospitals –$391 billion Doctors –$269 billion Prescription Drugs –$100 billion Research –$22 billion

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Insurance Coverage 84% covered all year 11% covered part of the year 5% without any insurance all year

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Insurance Types Private Group Insurance –168 million Private Individual Insurance –22 million Medicare –36 million Medicaid –28 million

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. 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.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Types of Insurance Plans Fee-for-service Health Maintenance Organization (HMO) Preferred Provider Organization (PPO)

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Advantages and Disadvantages of Insurance Types Insurance TypeAdvantageDisadvantage Fee-for-Service1)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

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Public Insurance: Medicaid Covers the poor –eligibility standards vary from state to state No premiums are required Some states have very small co- payments

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. The Uninsured 21 million of million go without insurance all year million are between age 18 and million are under 18

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. 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.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Modeling Third-Party Payment 5P A P Q/t A PAPA D no insurance QAQA S D with 20% co-pay P’

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. 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.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. 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.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. 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.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Country Comparisons Health Expenditures/ GDP (1998) Infant Morality per 1000 births (1999) Life Expectancy U.S U.K France Germany Japan

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. 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 –High taxes