Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 1 of 39 Health Insurance I: Health Economics and Private Health Insurance 15.1 An Overview of Health Care in the United States 15.2 How Generous Should Insurance Be to Patients? 15.3 How Generous Should Insurance Be to Medical Providers? Health Reform Options 15.4 Conclusion

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 2 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E Despite the huge benefits reaped from the U.S. health care system, all is not completely well. First, there are enormous disparities in medical outcomes. Second, the United States is the only major industrialized nation that does not endeavor to provide universal access to health care for its citizens.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 3 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.1 An Overview of Health Care in the United States

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 4 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.1 An Overview of Health Care in the United States

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 5 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.1 An Overview of Health Care in the United States

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 6 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 7 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 8 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 9 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 10 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.1 How Health Insurance Works: The Basics Individuals, or firms on their behalf, pay monthly premiums to insurance companies. In return, the insurance companies pay the providers of medical goods and services for most of the cost of goods and services used by the individual. There are three types of patient payments:  Deductibles.  Copayment.  Coinsurance. An Overview of Health Care in the United States

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 11 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.1 Private Insurance nongroup insurance market The market through which individuals or families buy insurance directly rather than through a group, such as the workplace. An Overview of Health Care in the United States

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 12 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.1 Private Insurance Why Employers Provide Private Insurance, Part I: Risk Pooling risk pool The group of individuals who enroll in an insurance plan. The goal of all insurers is to create large insurance pools with a predictable distribution of medical risk. The statistical law of large numbers states that as the size of the pool grows, the odds that the insurer will be unable to predict the average health outcome of the pool falls. An Overview of Health Care in the United States

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 13 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.1 Private Insurance Why Employers Provide Private Insurance, Part II: The Tax Subsidy tax subsidy to employer-provided health insurance Workers are taxed on their wage compensation but not on compensation in the form of health insurance, leading to a subsidy to health insurance provided through employers.  TABLE 15-2 An Overview of Health Care in the United States

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 14 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.1 Private Insurance Why Employers Provide Private Insurance, Part II: The Tax Subsidy The subsidy to employer-provided health insurance is generally not well understood. This is not a subsidy to employers but rather a subsidy to employees for insurance purchased in the employment setting. From the employer’s perspective, whether she pays you in wages or health insurance is irrelevant; either way, a dollar of employer spending has the same effect on the firm’s bottom line (since any type of employee compensation is deductible from corporate taxation). From the worker’s perspective, however, there is a large difference: by being paid in health insurance rather than wages, the worker reduces her tax payments. If the government wanted to end the tax subsidy, it would not do so by increasing the corporate tax paid by the firm; it would instead include employer spending on health insurance as part of an employee’s taxable income. An Overview of Health Care in the United States

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 15 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.1 The nongroup insurance market is not a well-functioning market. Nongroup insurance is not always available. Those in the worst health are often unable to obtain coverage (or obtain it only at an incredibly high price). An Overview of Health Care in the United States Private Insurance The Other Alternative: Nongroup Insurance

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 16 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.1 An Overview of Health Care in the United States Medicare Medicare A federal program that provides health insurance to all people over age 65 and disabled persons under age 65. Every citizen who has worked for ten years in Medicare-covered employment (and their spouse) is eligible for Medicare at age 65.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 17 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.1 An Overview of Health Care in the United States Medicaid Medicaid A federal and state program that provides health care for the poor. Medicaid benefits are targeted at several groups:  Those who qualify for cash welfare programs.  Most low-income children in the United States.  Most low-income pregnant women.  The low-income elderly and disabled.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 18 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.1 An Overview of Health Care in the United States TRICARE/CHAMPVA TRICARE is a program administered by the Department of Defense for military retirees and the families of active-duty, retired, or deceased service members. CHAMPVA, the Civilian Health and Medical Program for the Department of Veterans Affairs, is a health care benefits program for disabled dependents of veterans and certain survivors of veterans.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 19 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.1 An Overview of Health Care in the United States The Uninsured Who are they?  The uninsured have lower-than-average incomes.  In 2007, nearly two-thirds of the uninsured came from families where one or more members were full-term workers.  Almost one-fifth of the uninsured are children.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 20 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.1 An Overview of Health Care in the United States The Uninsured Why are Individuals Uninsured?  Risk-averse individuals may be unwilling to purchase insurance if it is not available at an actuarially fair price.  Insurers may be unwilling to insure the worst risks because of fears of adverse selection.  They may be rationally forgoing insurance because the odds of illness are low.  They simply can’t afford the high costs of health insurance.  They are not appropriately valuing insurance coverage. uncompensated care The costs of delivering health care for which providers are not reimbursed.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 21 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.1 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.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 22 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.1 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. job lock The unwillingness to move to a better job for fear of losing health insurance. Health insurance availability may inhibit productivity-increasing job switches.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 23 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.1 An Overview of Health Care in the United States HEALTH INSURANCE AND MOBILITY Is job lock an important problem in reality? Initially, a large literature compared the mobility rate of those who have and do not have health insurance. A more sophisticated literature in the 1990s surmounted this problem in two different ways: Studies used a difference-in-difference strategy that compared a treatment group of those who valued health insurance particularly highly with a control group of those who did not. Studies examined the impact of state laws that allowed workers to continue to purchase their employer-provided health insurance for some period of time after leaving their jobs. The results from these studies support the notion that job lock is quantitatively important. M P I R I C A L E V I D E N C E E

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 24 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.2 How Generous Should Insurance Be to Patients? The generosity of health insurance is measured along two dimensions: Generosity to patients. first-dollar coverage Insurance plans that cover all medical spending, with little or no patient payment. Generosity to providers.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 25 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E Consumption-Smoothing Benefits of Health Insurance for Patients 15.2 How Generous Should Insurance Be to Patients? The consumption-smoothing benefit from first-dollar coverage of minor and predictable medical events is small for two reasons: Risk-averse individuals gain little utility from insuring a small risk. Individuals are much more able to self-insure such spending than to self-insure large and unpredictable medical events.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 26 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E Moral Hazard Costs of Health Insurance for Patients 15.2 How Generous Should Insurance Be to Patients?  FIGURE 15-3

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 27 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E Moral Hazard Costs of Health Insurance for Patients 15.2 How Generous Should Insurance Be to Patients? The “Flat of the Curve”  FIGURE 15-4

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 28 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.2 How Generous Should Insurance Be to Patients? The Problem with McAllen, Texas APPLICATION  In June, 2009, physician and health care expert Atul Gawande published an article in The New Yorker exploring the experience of McAllen County, Texas, the second most expensive health-care market in the United States. In 2006, the Medicare program spent $15,000 per enrollee in McAllen, twice the national average, and $3000 more than the entire per capita income of its residents. The “Dartmouth Atlas,” which charts spending across areas on medical care, has shown that there are wide variations in spending that do not seem to be associated with better outcomes. Higher spending in one area versus another may be due to differences across the areas in patient sickness. There is no evidence that the more expensive areas deliver higher quality medical care. This striking series of findings has motivated many to argue that savings can be wrung from our health care system without sacrificing the quality of patient care. 

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 29 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E How Elastic Is the Demand for Medical Care? The RAND Health Insurance Experiment 15.2 How Generous Should Insurance Be to Patients? The best evidence on the elasticity of demand for medical care comes from one of the most ambitious social experiments in U.S. history: the RAND Health Insurance Experiment (HIE). The findings of the HIE were striking: Medical care demand is price sensitive: individuals who were in the free care plan used about one-third more care than those paying 95% of their medical costs. Those who used more health care due to the lower price did not, on average, see a significant improvement in their health. For those who are chronically ill and don’t have sufficient income to easily cover copayments, there was some deterioration in health.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 30 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E Why Is Insurance So Generous in the United States? 15.2 How Generous Should Insurance Be to Patients? The optimal health insurance policy is one in which individuals bear a large share of medical costs within some affordable range, and are only fully insured when costs become unaffordable Optimal Health Insurance

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 31 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E Why Is Insurance So Generous in the United States? 15.2 How Generous Should Insurance Be to Patients? Why are people either uninsured or “overinsured”? The 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.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 32 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.2 How Generous Should Insurance Be to Patients? Health Savings Accounts APPLICATION  Removing or capping the tax subsidy to employer-provided health insurance is a straightforward means of addressing overinsurance, but would be politically difficult because it would be attacked as a large tax increase on workers. health savings account (HSA) A type of insurance arrangement whereby patients face large deductibles, and they put money aside on a tax-free basis to prepay these deductibles. Unfortunately, HSAs have a number of disadvantages as well: This new tax break will be expensive in terms of foregone tax revenue. A flat deductible alone is not the right structure for encouraging the proper use of medical care. If the right way to address overinsurance is to limit the employer exclusion, then HSAs represent the wrong direction for tax policy. 

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 33 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E Why Is Insurance So Generous in the United States? 15.2 How Generous Should Insurance Be to Patients? The Access Motive A second reason why insurance may be so generous is that the traditional analysis overstates the costs of moral hazard. Moral hazard is measured only by the substitution effect of social insurance programs. The income effect of social insurance programs, the extent to which you change behavior because you are richer, is not moral hazard. Psychological Motivations Finally, the third reason why insurance may be so generous is that there may be motivations for holding insurance that go beyond the simple expected utility model.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 34 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.3 managed care An approach to controlling medical costs using supply-side restrictions such as limited choice of medical provider. Preferred Provider Organizations One fundamental failure in medical markets is that it is very difficult to shop for a medical provider. preferred provider organization (PPO) A health care organization that lowers care costs by shopping for health care providers on behalf of the insured. How Generous Should Insurance Be to Medical Providers? Managed Care and Prospective Reimbursement retrospective reimbursement Reimbursing physicians for the costs they have already incurred.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 35 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.3 How Generous Should Insurance Be to Medical Providers? Managed Care and Prospective Reimbursement Health Maintenance Organizations health maintenance organization (HMO) 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. In the classic staff model, HMOs hire their own physicians and may have their own hospitals. prospective reimbursement The practice of paying providers based on what treating patients should cost, not on what the provider spends.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 36 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.3 How Generous Should Insurance Be to Medical Providers? The Impacts of Managed Care Spending The consistent finding of a very large literature in health economics is that HMOs spend much less per enrollee than do traditional retrospective reimbursement plans. Quality Do HMOs underprovide, or do they simply serve to correct some of the natural excesses of retrospective reimbursement? There is now an enormous literature on the impact of HMOs on patient treatment, and the answer is a definite maybe.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 37 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.3 How Generous Should Insurance Be to Medical Providers? How Should Providers Be Reimbursed? The advent of managed care has clearly lowered reimbursement to providers, but it has not measurably lowered the quality of care those providers deliver. The key question for the future is whether additional “tightening” of the prospective reimbursement system is needed.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 38 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.4 Most individuals have private health insurance, and for those employed by large firms this is a well-functioning insurance market. For small firms and individuals there are more failures in the insurance market, one possible reason that almost 46 million Americans are uninsured. Risk-averse individuals greatly value the consumption-smoothing benefits of having their medical bills paid. There are clear moral hazard costs as well, both on the patient and provider side. Some cost sharing has been used to address moral hazard on the patient side, and managed care has arisen as a means of addressing moral hazard on the provider side. The success or failure of these approaches is not yet fully apparent. Conclusion

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 40 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 16.6 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. Fundamental cost control in the United States is difficult: There is an enormous amount of waste in our medical system. We could produce similar health outcomes with much less spending. Much of what has driven the rapid rise in health care spending in the United States has been quality-improving technological change in the delivery of health care.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 41 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 16.6 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 2008 is $4,704 per year for individuals and $12,680 for families. Individual Mandates mandate A legal requirement for employers to offer insurance or for individuals to obtain some type of insurance coverage.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 42 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 16.6 Lessons for Health Care Reform in the United States 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.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 43 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 16.6 Lessons for Health Care Reform in the United States The Massachusetts Experiment with Incremental Universalism APPLICATION  Incremental reform is not necessarily inconsistent with universal coverage. In 2006, Massachusetts introduced a plan that filled in the holes in its existing system of private and public coverage to move toward universal coverage:  A new program was established (“Commonwealth Care”) to provide free insurance coverage for all residents below 150% of the poverty line and heavily subsidized coverage for those up to 300% of the poverty line.  While there were no subsidies available above 300% of the poverty line, there were major changes to improve the insurance market.  The law specified that all adults in the state must be covered by health insurance, but only to the extent that such insurance was deemed “affordable”. The Massachusetts reform has successfully achieved its goals. Yet while it decreased the numbers of uninsured, it did not explicitly address the more difficult issue of cost control, and health care costs continue to rise faster than personal incomes in the state. 

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 44 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E Reform Efforts in Lessons for Health Care Reform in the United States As of August 2009, Congress had agreed on several principles to guide reform. There are a number of contentious problems that remain before reform can become reality:  Financing.  The role of the “public option.”  The importance of long-term cost control, referred to as “bending the cost curve downward.” One of the major difficulties facing health reformers is how much they can count on new ideas to deliver the savings that are needed to finance expanded coverage.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 45 of 39 C H A P T E R 1 5 ■ H E A L T H I N S U R A N C E I : H E A L T H E C O N O M I C S A N D P R I V A T E H E A L T H I N S U R A N C E 15.4 Most individuals have private health insurance, and for those employed by large firms this is a well-functioning insurance market. For small firms and individuals there are more failures in the insurance market, one possible reason that almost 46 million Americans are uninsured. Risk-averse individuals greatly value the consumption-smoothing benefits of having their medical bills paid. There are clear moral hazard costs as well, both on the patient and provider side. Some cost sharing has been used to address moral hazard on the patient side, and managed care has arisen as a means of addressing moral hazard on the provider side. The success or failure of these approaches is not yet fully apparent. Conclusion

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers

47 of 23 C H A P T E R 4 ■ B U D G E T A N A L Y S I S A N D D E F I C I T F I N A N C I N G 47 of 35 How American Health Care Killed My Father Illustration by Mark Hooper The Atlantic Sept by David Goldhill URL for this page is <

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 48 of 23 C H A P T E R 4 ■ B U D G E T A N A L Y S I S A N D D E F I C I T F I N A N C I N G Problems with Current efforts Not following a rational business model Reform is only targeting incremental change -extending insurance benefits -using bureaucratic rules to control costs Need to deal with incentives 48 of 35

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 49 of 23 C H A P T E R 4 ■ B U D G E T A N A L Y S I S A N D D E F I C I T F I N A N C I N G Foundation of the health care problem A problem with incentives Need to: -reduce (not expand) role of insurance -focus government role on things such as safety net, catastrophic coverage, enforce standards, competition -stop Ponzi scheme financing, hidden subsidies, unclear pricing, -focus on consumer driven

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 50 of 23 C H A P T E R 4 ■ B U D G E T A N A L Y S I S A N D D E F I C I T F I N A N C I N G Health Insurance is not health care Health insurance used for major illnesses and health care expenses Health care began as non wage benefit during WWII Moral Hazard issues are HUGE -changes behavior of insuree and HC providers -insured consume more HC -HC providers provide more -HC demand has no limit Spend other people’s money differently than your own Hard to control costs in this arrangement

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 51 of 23 C H A P T E R 4 ■ B U D G E T A N A L Y S I S A N D D E F I C I T F I N A N C I N G Problems with current Health care system, contd. Uncompetitive (hospital regulated) Medicare costs are running away Consumers don’t know price of what they are buying Benefits of new Technology not passed on 51 of 35

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 52 of 23 C H A P T E R 4 ■ B U D G E T A N A L Y S I S A N D D E F I C I T F I N A N C I N G Potential problems of comprehensive health care reform Moral hazard Distorted incentives Bias toward treatment Lack of transparency Curbs on competition 52 of 35

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 53 of 23 C H A P T E R 4 ■ B U D G E T A N A L Y S I S A N D D E F I C I T F I N A N C I N G How to address Health Care reform Move away from comprehensive health insurance model Address universal coverage by subsidizing insurance for low income Consumer-focused health care reform -cash pay for routine health care expenses -HSA for major medical issues -offer catasrophic health care policies -more transparency in fees Financing reform -capture the $1.7 million of lifetime health care costs --subsidize low income g 53 of 35

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 54 of 23 C H A P T E R 4 ■ B U D G E T A N A L Y S I S A N D D E F I C I T F I N A N C I N G Issues in shifting to a consumer-focused system Shifting from health industry-complex to a consumer-based Politics of transitioning 54 of 35