1. HEALTH BUDGETING & ECONOMICS
THE HEALTH CARE MARKET

2. Why is the health care debate so contentious?
Access to health care can be a life or death decision
There is uncertainty with regard to an individual’s health. A small accident or illness can have catastrophic financial consequences.
The govt of Zimbabwe spends approximately ______________ on health care. This has increased over time from roughly 5% in 1960.
Whereas spending on other “critical” categories such as housing, clothing, and food have decreased as a percentage of GDP.

3. What attributes of health care may justify government involvement?
1. Uncertainty and Risk due to Asymmetric Information
Asymmetric information means that one party in the exchange has more or better information than another party in the exchange.
With health care some individuals may know if they are in a high risk or low risk category for illness and base decision to buy insurance on relative costs and benefits.
The insurance company can’t determine who is high risk and low risk and therefore charges an average premium to all clients.

4. REASONS CONTINUED
means the people that choose to buy insurance are typically those in high risk categories who believe the benefits > costs;
those that think they are at low risk may not buy insurance expecting to accrue few benefits from health insurance but would have to pay the costs associated with premiums.
Hence, insurance companies may end up insuring a pool of proportionately more high risk applicants.
People who have insurance may overuse health care by engaging in more risky behavior or more costly behavior (unnecessary procedures and testing) because they are covered and pay very little in incremental costs.

5. The role of Insurance
Buyers pay insurance premiums, to the providers of insurance, which in turn contractually agree to cover the costs associated with health care expenditures should an adverse event or illness occur.
In general, higher premiums are associated with greater coverage.
What motivates consumers to buy insurance?
Consumers like to “smooth the risk” associated with such events occurring so they do not have the potential for large out of pocket expenses associated with an illness.
The price a consumer is willing to pay for insurance depends on the probability of an adverse event occurring, the financial impact of such an event (the costs) and the price of the insurance.

6. Why can’t private markets efficiently provide health care?
Given the ability to set premiums it seems that private markets for insurance should work without the need for government intervention. However, there is also a problem of asymmetric information in the market for health care. Emily may know her probability of getting sick based on family history, her personal medical history, stress, environmental factors, etc. However, the insurance company will not have access to similar information.

7. How should firms cover these losses?
If the firm knew which clients were at high risk and which were low risk they could theoretically charge different prices.
Firms typically don’t have this information.
If firms have evidence of “pre-existing conditions” that signal higher expenditures in the future then firms often don’t cover those medical expenses.
Suppose the firm knowing its expected payout is $45,000 and wants to spread the risk by making the average premium $4,500 for each of the ten people in an effort to cover costs. Would the firm survive?

8. is there a way for private markets to deal with asymmetric information without government ?
Use of “experience ratings” can reduce or eliminate problems associated with asymmetric information.
Commonly done for life insurance where a battery of blood tests must be undertaken in addition to questionnaire regarding use of tobacco, alcohol, etc.
Experience ratings are also common practice in auto insurance.

9. Health Insurance and Moral Hazard
Another consequence of insurance is moral hazard or the tendency to engage in risky or costly behavior because you are insured against adverse events.
With health insurance plans, the more a plan smoothes the risk to individuals of lost income by covering health care costs, the more it leads to inefficient overconsumption of health care through an increase in risky and/or costly behavior.
Risky behavior includes:
Costly behavior includes:

10. Rich countries spend more—but us spends proportionately more!

11. Reading Chart 3 above: (taken directly from OECD publication)
If per capita income is around $20,000, a country is ‘expected’ to spend about $1,500 per person on health (and indeed this is the case for countries like Slovakia and Hungary), whereas if per capita income is $40,000, health spending of a bit more than $3,500 would be predicted.
The relationship is simply an empirical observation: it does not imply that a country should be spending at or near the line, but it is a convenient way of thinking about national health spending levels.
There are significant differences across countries: Canada spends a lot more than Australia, for example, though income levels are similar. But the United States is the biggest outlier, by a wide margin. A country with the income level of the United States would be expected to spend around $2,500 less per capita than it actually does – equivalent to $750billion per year.

12. Common explanations and myths about health care cost increases
There are many common explanations for the rising health care costs in the US.
Empirical evidence suggests that the change in age structure accounts for a small fraction of increased costs.
Additionally, life expectancies in all countries are increasing with medical technology and other countries have not experienced the same rapid increase in costs.

13. Increases in health costs continued
2.Health care is a “normal good” indicating that with higher income growth we see higher demand for medical services thereby increasing costs. 3. Improvements in medical training, services, equipment are costly and therefore positively impact health care costs. One major problem with comparing health care systems internationally is accounting for differences in health care quality across countries.

14. Sources of Health Care Funds in ZIM (2014)

15. U.S.health care funds (2007)
Source: Centers for Medicare and Medicaid Services [2008c].

16. International comparisons: Categories of health spending
In what categories of cost is the US relatively high relative to OECD countries? (taken from “Written Statement to the Senate Committee on Aging” by Mark Pearson)
1. In-patient spending: is health care spending for treatment of patients staying in the hospital.
In-patient spending in the US is higher than in other OECD countries.
Part of this is due to: physicians’ salaries in the US being much higher than in other countries—particularly specialty doctors. There is a pervasive shortage of doctors in the US.
Part of this is due to the vast number of medical procedures being done in US not done in the same quantity in other countries (cesearan sections, knee replacements, diagnostic testing like MRIs, CAT scans, etc).
Part of this is due to the practice of:
In patient spending has been growing somewhat less rapidly than other categories of spending.

17. Spending categories continued
2. Out-patient care spending: is health care procedures and treatment done in a hospital or clinic where the patient goes home after the procedure (does not stay overnight in the hospital).
Out patient spending is also highest in the United States, being more than three-times greater than in France, Germany and Japan, and growing very rapidly indeed. The growth rate is high in other countries as well, but from a lower basis.
Much of the out-patient spending in the US is for elective (non-necessary) surgical procedures.
Elective procedures accounted for ___________ of the increase in growth in US health care costs between 2003 and 2006, compared to Canada’s ___________.

18. Spending categories continued
3. Administrative costs are high.
medical regulations, bureaucratic systems of complicated insurance programs mixed with government programs increases administrative costs
4. Pharmaceutical spending is higher in the US than in any other country, but it accounts for a smaller share of total health spending than in other countries.
Branded drug costs in the US:
Generic drugs in US are:

19. Spending categories continued
5. Long-term care spending: includes spending for those in nursing homes, skilled nursing centers, assisted living centers, home health care, etc.
long term care spending is a little higher than in other countries, but proportionally accounts for less spending than elsewhere.

21. Health Care Costs and Health Outcomes: U.S., Canada, United Kingdom

22. Other sources of funding
Annual fee on manufacturers and importers of some medical devices.
Annual fee on certain makers of branded prescription drugs.
Increases medical tax deduction threshold from 7.5% to 10% of adjusted gross income.