Comparative Systems © Allen C. Goodman, 2014

Criticisms of U.S. System Gaps in Medicare, Medicaid The “uninsured,” approximately 50 million (almost one in six). What does the rest of the world have to tell us?

A Typology of Contemporary Health Care Systems Gordon (1988) develops a useful typology of four health benefit systems: 1. Traditional Sickness Insurance - This is fundamentally the private insurance market approach, with state subsidy. Coverage is basically employment-related. This type of system originated in Germany, and other countries which pioneered health care insurance. 2. National Health Insurance - The state establishes a national- level health insurance system. Canada has the most immediate experience with this organization. Sometimes referred to as single payer. 3. National Health Service - The state provides the health care. The United Kingdom is a prime example of this approach. 4. Mixed System - Mixed elements of above programs. Several countries including the United States fall into this group.

Health Expenditure Shares

High Expenditure Levels What are Americans getting for their spending. High expenditures may have three meanings: a. High average level of services b. High resource costs of services c. Inefficient provision of services.

High Expenditure Levels What are Americans are getting for their spending. However, high expenditures may have three meanings: a. High average level of services b. High resource costs of services c. Inefficient provision of services. In looking at cross-country differences, we keep these points in mind. A high level of services reflects at least the possibility that the populations have chosen to spend their incomes in this fashion. Cross-national studies indicate a fairly substantial income elasticity for health care. Thus U.S. expenditure levels reflect in part the high per capita income level in the United States.

Non-cash aspects of the care In looking at health care costs in a national setting, people may find themselves in one of three "states of the world": - well (not ill) - waiting for treatment (when ill) - being treated. When being treated, the costs to society are usefully considered as the price of the treatment, multiplied by the quantity of the treatment. However, there is more to health care costs than simply dollars spent. A health care system can help people feel better when well. We do this in the United States by prenatal and infant care, inoculation, good nutrition (no bacon cheeseburgers), and good habits (no smoking). Other countries do this better. The United Kingdom has a far more comprehensive system of treating expectant mothers, infants, and children.

A health care system can help people who are waiting for treatment. Consider someone who is awaiting a hip replacement. This is not life-threatening, but it may be painful.  In the United States, we replace hips immediately, and we need enough facilities to do so. Maintaining these operating rooms and surgical teams is costly.  In Canada, the patient may have to wait months for hip replacement. Does Canada save health care money by making the patient wait? Yes it does! Is it costless? Not to the patient who is awaiting care! Rationing health care moves the costs "off budget" but they are still costs. Non-cash aspects of the care

A Model of Rationed Health Care and Private Markets Key feature of NHS is that supply is presumably inelastic w.r.t. price. If we allowed price to adjust to P c, there is no excess demand. At P*, however, there is excess demand, and to avoid long queues, people go to the private sector. NHS P QNQN PcPc P* DnDn SnSn QoQo Q* What does “inelastic” mean?

A Model of Rationed Health Care and Private Markets People who didn’t value health more than P c aren’t going to go to the private market, BUT Some of those who are rationed out, value it at more than P c, so they’ll go to the private market. NHSPrivate PP QNQN QPQP PcPc P* DnDn SnSn PpPp QpQp QoQo Q* DpDp SpSp

References Anderson, Gerard F., Peter S. Hussey, Bianca K. Frogner, and Hugh R. Waters “Health Spending In The United States and The Rest Of The Industrialized World,” Health Affairs 24 (4) (2005): Anderson, Gerard F., Uwe E. Reinhardt, Peter S. Hussey, and Varduhi Petrosyan, “It’s The Prices, Stupid: Why The United States Is So Different From Other Countries,” Health Affairs 22 (3) (2003):

Payment Mechanisms D Rents Expendit ures = Resourc e Costs D Price Q* Quantity Price Q* P* Price Q* Quantity SSS Resourc e Costs MRMC a. Competitive c. Monopsonistic QbQb QcQc Bold outlines refer to total expenditures PbPb PcPc b. Monopolistic D Economists often implicitly view expenditures in the context of perfectly competitive markets. If valid, total health expenditures (the numerator of fraction of GDP going to health care, indicated by the box with bold outlines) accurately reflects resource costs P* of health care at the margin.

Payment Mechanisms D Rents Expendit ures = Resourc e Costs D Price Q* Quantity Price Q* P* Price Q* Quantity SSS Resourc e Costs MRMC a. Competitive c. Monopsonistic QbQb QcQc Bold outlines refer to total expenditures PbPb PcPc b. Monopolistic D Q < Q*; Expenditures higher Q < Q*; Expenditures higher Monopolists do MC = MR, able to raise prices above those in perfectly competitive markets thus earning “rents,” the excess of the prices actually received by sellers above the minimum prices the sellers would have to be paid to sell into the market.

Payment Mechanisms D Rents Expendit ures = Resourc e Costs D Price Q* Quantity Price Q* P* Price Q* Quantity SSS Resource Costs MRMC a. Competitive c. Monopsonistic QbQb QcQc Bold outlines refer to total expenditures PbPb PcPc b. Monopolistic D Q < Q*; Expenditure s higher Q < Q*; Expenditure s higher Resource costs (box defined by supply curve) are considerably less than the total expenditures, with the difference going as rents to providers. Q b < Q*, under competitive markets.

Payment Mechanisms D Rents Expendit ures = Resourc e Costs D Price Q* Quantity Price Q* P* Price Q* Quantity SSS Resourc e Costs MRMC a. Competitive c. Monopsonistic QbQb QcQc Bold outlines refer to total expenditures PbPb PcPc b. Monopolistic D Q < Q*; Expenditures lower Q < Q*; Expenditures lower Countries differ in the degree to which they reduce the supply side rent through the creation of market power on the buy (monopsony) side of the market.

Payment Mechanisms D Rents Expendit ures = Resourc e Costs D Price Q* Quantity Price Q* P* Price Q* Quantity SSS Resourc e Costs MRMC a. Competitive c. Monopsonistic QbQb QcQc Bold outlines refer to total expenditures PbPb PcPc b. Monopolistic D Q < Q*; Expenditures lower Q < Q*; Expenditures lower A single-payer system would be called a “pure monopsony.” Pure monopsonist who must pay increased resource costs to all supply factors, faces a market marginal cost curve, not unlike the monopolist’s marginal revenue curve. Here, producer provides quantity Q c, but out of pocket resource costs are much smaller than others.

Payment Mechanisms D Rents Expendit ures = Resourc e Costs D Price Q* Quantity Price Q* P* Price Q* Quantity SSS Resourc e Costs MRMC a. Competitive c. Monopsonistic QbQb QcQc Bold outlines refer to total expenditures PbPb PcPc b. Monopolistic D Same DWL w/ monopoly or monopsony. A single-payer system would be called a “pure monopsony.” Pure monopsonist who must pay increased resource costs to all supply factors, faces a market marginal cost curve, not unlike the monopolist’s marginal revenue curve. Here, producer provides quantity Q c, but out of pocket resource costs are much smaller than others.

Observations In Canada, Europe, and Japan, more market power is on the buy side. –In each of the Canadian provinces, for example, the health insurance plans operated by the provincial governments constitute pure monopsonies: They purchase (pay for) all of the health services that are covered by the provincial health plan and used by the province’s residents. Even pure monopsonists are ultimately constrained by market forces on the supply side—that is, by the minimally acceptable prices of the providers of health care below which they will not supply their goods or services BUT monopsonistic buyers enjoy enough market clout to drive down the prices paid for health care and health care inputs fairly close to those reservation prices.

Observations In the U.S., although the Medicare and Medicaid programs do possess some monopsonistic purchasing power, and large private insurers may enjoy some degree of monopsony power in some localities, the highly fragmented buy side of the U.S. health system has been relatively weak by international standards. This is one factor, among others, that might explain the relatively high prices paid for health care and for health professionals in the United States.

Prices and Quantities For the United States, most measures of aggregate utilization such as physician visits per capita and hospital days per capita typically lag below the medians of other Western countries. Since spending is a product of both the goods and services used and their prices, this implies that much higher prices are paid in the United States than in other countries. But U.S. policymakers need to reflect on what Americans are getting for their greater health spending. Anderson et al (2003) conclude that the answer lies in the higher prices paid by U.S. health consumers.

Do waiting times make a difference? If consumers in other countries must wait for procedures that US consumers can get immediately, then the international consumers are bearing waiting time costs that do not enter national accounts. Anderson et al (2005) argue that the procedures for which waiting lists exist in some countries represent a small part of total health spending. Using U.S. survey data, they calculated the amount of U.S. health spending accounted for by the fifteen procedures that account for most of the waiting lists in Australia, Canada, and the United Kingdom. Total spending for these procedures in 2001 was $21.9 billion, or only 3 percent of U.S. health spending in that year.

Medical Liability System Mello and colleagues (2009) provided updated analysis to address the claim that the U.S. medical liability system leads to unneeded care and extra expenses. They examine indemnity payments, administrative costs, and the identifiable hospital and physician costs due to defensive medicine. They estimate these costs to be $55.6 billion, in 2008 dollars, or about 2.4% of total health care spending. This leads to two inferences. –First, not all of these costs represent waste – some of them almost certainly provide positive benefits to the patients, or appropriately deter potential malpractice. –Second, even eliminating all defensive medicine would have only a minor impact on overall health care spending.

Goodman Paper - Estimating Equation ln q h =  0 +  1 ln y +  2 ln p h +  3 ln p o + u,(1) q h is quantity of health services, y is an appropriate income per capita measure, p h is the price of health services, and p o is the price of all other goods. Demand homogeneity implies that:  1 +  2 +  3 = 0.(2) Why? If income and all prices increase by α, then q should be unchanged. How are expenditures related to incomes and prices? b 3 + b 1 + b 2 = 0 b 3 = -b 1 - b 2

Goodman Paper - Estimating Equation ln q h =  0 +  1 ln y +  2 ln p h +  3 ln p o + u,(1) Then: ln q h =  0 +  1 ln y +  2 ln p h + (-  1 -  2 )ln p o + u, ln p h + ln q h =  0 +  1 ln y + (1 +  2 ) ln p h + (-  1 -  2 )ln p o + u, ln e h =  0 +  1 (ln y – ln p o ) + ln p h +  2 (ln p h - ln p o ) + u, ln e h – ln p o =  0 +  1 (ln y – ln p o ) + (ln p h – ln p o )+  2 (ln p h - ln p o ) + u, ln (e h /p o ) =  0 +  1 ln (y/p o ) + (1 +  2 ) ln (p h /p o ) + u. (3) where ln e h = ln p h + ln q h.

Price p h is related to income In rich countries relative prices of nontraded goods (like health care) may be higher. –Kravis and Lipsey think there may be higher productivity in traded goods sector. –Bhagwati thinks there may be more capital intensive production in traded goods sector.

Table 3 Pooled regressions. Inclusion of price terms reduces income elasticities, by a small amount R 2 is pretty good at the outset. Yet adding more variables can be very useful. By standard criteria, the additions are significant. Toggle to spreadsheet.

Impacts If we’re drawing a picture, can we do some analysis? Four types of systems –Sickness fund (less control) –National health insurance (more) –National health service (more) –Mixed system (less) Impacts seem small. BUT if you look at interactions, the impacts are substantive.