1. 1 of 47 Public Finance and Public Policy Jonathan Gruber Fifth Edition Copyright © 2016 Worth PublishersCopyright © 2010 Worth Publishers

2. 2 of 47 Public Finance and Public Policy Jonathan Gruber Fifth Edition Copyright © 2016 Worth Publishers 15 Heather Luea and Dan Sacks P R E P A R E D B Y 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? 15.4 Conclusion Health Insurance I: Health Economics and Private Health Insurance

3. 3 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15 Health Improvements and Health Spending Since 1950: o Medical technology has improved dramatically. o Mortality from heart attack fell by 70%, infant mortality fell by 80%. o Health spending grew from 5% to 17% of GDP. Yet all is not well for the U.S. health care system. o There are huge disparities in medical outcomes. o The United States is the only major industrialized nation without universal access to health care. o The Affordable Care Act attempts to address the gaps in health care in the United States, but many are still without coverage.

4. 4 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.1 Healthcare Spending in the OECD Nations, 2012 In 2012, the United States devoted nearly twice as much of its economy to health care as did Sweden or the United Kingdom.

5. 5 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.1 Distribution of National Health Expenditures in the United States, 2013 CategoryShare of Spending Hospital care32% Physician, clinical care20 Prescription drugs9 Nursing home care5 Other personal health care15 Other health spending16 Home health care3 Almost a third of the typical health dollar is spent on hospital care and a fifth is spent on physician care.

6. 6 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.1 Americans’ Source of Health Insurance Coverage, 2013 People (millions) Private201.1 Employment-based169.0 Direct purchase34.5 Public107.6 Medicare49.0 Medicaid54.1 TRICARE/CHAMPVA14.1 Uninsured42.0 Nearly two-thirds of insured Americans have private health insurance, largely through employers. Roughly one-sixth of Americans are uninsured.

7. 7 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.1 The United States is a major outlier in international terms when it comes to health care spending. APPLICATION: Finding the Inefficiency in U.S. Healthcare - International Comparison of Indicators of Health System Outcomes

8. 8 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.1 The United States lags behind other countries internationally. The United States has the highest per person health care costs of this set of countries. The United States has the highest rate of infant mortality. The United States has the highest rate of preventable death. The United States has the highest rate of going without care over the past year because of cost. APPLICATION: Finding the Inefficiency in U.S. Healthcare - International Comparison of Indicators of Health System Outcomes

9. 9 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.1 The three largest sources of wasteful spending are high prices, excess administration costs, and unnecessary or inefficiently delivered services. APPLICATION: Finding the Inefficiency in U.S. Healthcare - Why Is Health Care So Expensive in the United States?

10. 10 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.1 Arises primarily from the fragmented nature of our health care insurance and delivery system. The administrative costs of private insurance in the United States average about 15%, more than twice the average for other developed nations. Health care providers that have different private and public owners, and have to deal with multiple private and public health care payers, spend a huge amount in billing and collecting payments. A study by Himmelstein et al. (2014) found that hospitals spend 1.43% of GDP on administrative costs. APPLICATION: Finding the Inefficiency in U.S. Healthcare - Wasted Administrative Spending

11. 11 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.1 The United States pays higher prices on average for services and drugs. APPLICATION: Finding the Inefficiency in U.S. Healthcare - High Prices

12. 12 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.1 Prices are higher because: Other nations impose much stronger regulatory controls on the prices of medical services and drugs. Medical goods and services in the United States reflect a hybrid mix of public price setting and private competition, which results in higher overall prices. APPLICATION: Finding the Inefficiency in U.S. Healthcare - Why Are Prices So Much Higher?

13. 13 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.1 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: o Deductibles—limit to cost individual pays o Copayment—fixed payment individual pays o Coinsurance—percentage of each bill individual pays How Health Insurance Works: The Basics

14. 14 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.1 In 2013, about 64% of the U.S. population had private health insurance. Private insurance is provided by employers and by the nongroup insurance market. Nongroup insurance market: The market through which individuals or families buy insurance directly rather than through a group, such as the workplace. Private Insurance

15. 15 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.1 One reason employers provide insurance is to pool risks. o 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 law of large numbers helps achieve this goal. By pooling all employees, employer-provided health insurance also avoids adverse selection. Why Employers Provide Private Insurance, Part I: Risk Pooling

16. 16 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.1 Employers also provide insurance because it is subsidized. 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. Why Employers Provide Private Insurance, Part II: The Tax Subsidy

17. 17 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.1 Illustrating the Tax Subsidy Jim Peter Wage30 Employer health insurance spending 05 Pre-tax wage3025 After-tax wage2016.67 Personal health spending40 After-tax, after-health spending income 1616.67 Peter enjoys higher after-tax, after-health spending income.

18. 18 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.1 Why Employers Provide Private Insurance, Part II: The Tax Subsidy The subsidy to employer-provided health insurance is generally not well understood. Subsidy to employees not employers. Employer is indifferent between payments in wages and in health insurance (both are tax deductible). Worker prefers to be paid in health insurance rather than wages, the worker reduces her tax payments. To end the tax subsidy, don’t increase the corporate tax paid by the firm; instead, include employer spending on health insurance as part of an employee’s taxable income.

19. 19 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.1 The nongroup insurance market was traditionally not a well-functioning market. Nongroup insurance was not always available. Those in the worst health were often unable to obtain coverage (or obtain it only at an incredibly high price). A central feature of the ACA was an effort to reduce these barriers to the nongroup insurance market. Banned pre-existing conditions exclusions and disallowed higher charges for less healthy enrollees. Provided tax credits that subsidize the cost of insurance. The Other Alternative: Nongroup Insurance

20. 20 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.1 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. Medicare is financed by a payroll tax on employees and employers. Medicare

21. 21 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.1 Medicaid: A federal and state program that provides health care for the poor. Medicaid benefits are targeted at several groups: o Those who qualify for cash welfare programs o Most low-income children in the United States o Most low-income pregnant women o All very low-income families o The low-income elderly and disabled Medicaid

22. 22 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.1 TRICARE o Administered by the Department of Defense o Serves military retirees and the families of active- duty, retired, or deceased service members CHAMPVA o Civilian Health and Medical Program for the Department of Veterans Affairs o A health care program for disabled dependents of veterans and certain survivors of veterans TRICARE/CHAMPVA

23. 23 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.1 Who are they? There are 42 million in the United States without any insurance coverage. The uninsured have lower-than-average incomes. In 2012, nearly two-thirds of the uninsured came from families where one or more members were full-time workers. About 7.6% of the uninsured are children. The Uninsured

24. 24 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.1 They may be counting on uncompensated care. o Uncompensated care: The costs of delivering health care for which providers are not reimbursed. Insurance may cost too much, given risks and prices. Insurers may be unwilling to insure the worst risks because of fears of adverse selection. They are not appropriately valuing insurance coverage. Why Are Individuals Uninsured?

25. 25 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.1 There are several reasons to care about the uninsured. There are physical externalities associated with communicable diseases. There is a significant financial externality imposed by the uninsured on the insured. Care is not delivered appropriately to the uninsured. Paternalism and equity motivations. Why Care about the Uninsured?

26. 26 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.1 A final reason for caring about the uninsured is that becoming uninsured is a concern for millions of individuals who currently have insurance. o 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. Why Care about the Uninsured?

27. 27 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.1 Is job lock an important problem in reality? Difference-in-difference strategies: o Compare a treatment group who value insurance highly with a control group who do not. State law changes: o Laws allowing workers to purchase their employer- provided health insurance after leaving their jobs. Overall, job lock appears quantitatively important. EVIDENCE: Health Insurance and Mobility

28. 28 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.2 The generosity of health insurance is measured along two dimensions: o Generosity to patients o Generosity to providers Most generous plans (to patients) provide first-dollar coverage. o First-dollar coverage: Insurance plans that cover all medical spending, with little or no patient payment. How Generous Should Insurance Be to Patients?

29. 29 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.2 The consumption-smoothing benefit from first-dollar coverage of minor and predictable medical events is small for two reasons: o Risk-averse individuals gain little utility from insuring a small risk. o Individuals are much more able to self-insure such spending than to self-insure large and unpredictable medical events. On the other hand, the moral hazard costs are large. Consumption-Smoothing Benefits of Health Insurance for Patients

30. 30 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.2 RAND Health Insurance Experiment (HIE): evidence on the elasticity of health care demand. o Medical care demand is price sensitive: Free care plan used one-third more care than 95% coinsurance plan. o Yet more generous plans did not improve health… o …Except for low-income, chronically ill people. o These findings largely supported by subsequent quasi- experimental studies. How Elastic Is the Demand for Medical Care? The RAND Health Insurance Experiment

31. 31 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.2 Optimal health insurance: Trades off moral hazard against risk protection. First dollar coverage bad for moral hazard, not very valuable risk protection. Therefore, optimal health insurance policy: o Individuals bear a large share of medical costs within some affordable range. o Only fully insured against very large costs. Optimal Health Insurance

32. 32 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.2 Most coverage appears more generous than is optimal, and many people don’t have coverage. Why are people either uninsured or “overinsured”? The tax subsidy: For people with employer-sponsored health insurance, better to take payment in insurance than in wages. Why Is Insurance So Generous in the United States?

33. 33 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.3 Managed care: An approach to controlling medical costs using supply-side restrictions such as limited choice of medical provider. One form of managed car are preferred provider organizations. o Preferred provider organization (PPO): A health care organization that lowers care costs by shopping for health care providers on behalf of the insured. o Avoids difficulty of the shopping for doctors. Managed Care and Prospective Reimbursement

34. 34 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.3 Health maintenance organizations are a second kind of managed care organization. o 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. o In the classic staff model, HMOs hire their own physicians and may have their own hospitals. Managed Care and Prospective Reimbursement

35. 35 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.3 Managed care organizations are paid by prospective reimbursement, not retrospective. Prospective reimbursement: The practice of paying providers based on what treating patients should cost, not on what the provider spends. Payment is the same regardless of spending, so there is an incentive to reduce costs. Managed Care and Prospective Reimbursement

36. 36 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.3 Spending o HMOs spend much less per enrollee than do traditional retrospective reimbursement plans. o But HMOs have a strong incentive to select low- cost patients. o Studies that use random assignment to HMO still find cost savings. The Impacts of Managed Care

37. 37 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.3 Quality o Do HMOs reduce spending by cutting wasteful care? o Or, do they cut important care as well? o Many studies, no consensus on whether HMOs provide lower quality care. The Impacts of Managed Care

38. 38 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.3 The advent of managed care has clearly lowered reimbursement to providers, and 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. How Should Providers Be Reimbursed?

39. 39 of 47 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 Fifth Edition Copyright © 2016 Worth Publishers 15.4 Most individuals have private health insurance, for large firms this is a well-functioning insurance market. For small firms and individuals, there are more failures, contributing to 42 million Americans 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. Cost sharing has been used to address moral hazard on the patient side, and managed care has arisen on the provider side. Conclusion