1. Chapter 22
This chapter addresses the rising cost of health care in the United States. We will discuss both the economic and noneconomic costs associated with providing health care to the American public.
We will end by summarizing the goals of the legislation passed in 2010, the Patient and Affordable Care Act (PPACA).
Health Care
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2. U.S. Emphasis on Private Health Insurance
Patient Protection & Affordable Care Act (2009)
During WWII employers offered insurance
Continued as an employee benefit
Led to overuse & higher prices
Tendency to regulate industry
Canada has nationalized healthcare where the government uses taxes to pay for health care for every resident. Private health insurance is uniquely American. Health insurance was used during WWII for expanding businesses to attract workers under the constraints of government-imposed wartime wage and price restrictions. After WWII, companies continued to offer health insurance to attract employees.
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3. Costs and Access Costs increased rapidly Higher prices
Increased quantity of services
Projected to grow at 5.8% annually over next 10 years
Access
49 million uninsured
On March 23, 2010, President Barack Obama signed the Patient Protection and Affordable Care Act (PPACA) into law. New controversial power was given to the government for universal health insurance coverage. Health care spending is about 17.9% of GDP which is nearly one-fifth of the U.S. economy.
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4. Health Care Spending
These two figures break down the sources of health care funds as well as where the money is spent.
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5. Health Care Spending
In this figure, you can see that health care expenditures as a percentage of GDP have been growing.
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6. Health Care Spending
Spending on health care is the highest in the United States as a percentage of GDP compared to other nations.
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7. Health Care Spending Is the U.S. healthier? Longer life expectancies
Most advanced medical equipment and technologies
Half of medical research funding is in U.S.
Increase in breast cancer mortality
TB has reappeared
AIDS epidemic
US life expectancy has increased by 7 years since Increases in research funding has led to a decrease in many diseases. Production of health care uses scarce resources; total output of health care, at the margin, may be worth less than alternative goods. The U.S. may be consuming health care where MC>MB, therefore, there is an overallocation and efficiency loss to society.
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8. Economic Implications of Rising Costs
Reduced access to care
Labor market effects
Slower wage growth
Part-time and temporary workers
Outsourcing and offshoring
Personal bankruptcies
Impact on government budgets
Rising health care costs cause employers to reduce, or eliminate, offering health insurance. The wages grow at a slower pace because health care costs make up a larger percentage of pay. Employers save money on health care if workers are part-time or temporary. Spending through Medicare and Medicaid is the fastest growing segment of the federal budget, and states can’t cover their share.
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9. Limited Access The poor are likely to be uninsured
Make “too much” to qualify for Medicaid
Waiting for treatment increases costs
As one’s income rises, one is more likely to be insured. Low wage earners may make too much money to qualify for Medicaid but not enough to buy healthcare in the open market.
Emergency rooms treat all people, insured or not, and this must be paid for by shifting the costs onto others. When people wait before seeking medical care, their illness has often progressed and is significantly worse, requiring more treatment.
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10. Why the Rapid Rise in Costs?
Peculiarities of the health care market
Ethical and equity considerations
Asymmetric information
Positive externalities
Third-party payments: insurance
Healthcare is looked upon as entitlement due to ethical considerations. Is it not like considering which car you can afford or buy? Healthcare buyers have a lack of knowledge about procedures and tests which leads to asymmetric information. There are positive spillover costs to society due to improved healthcare, immunizations, etc. Consumers pay lower “out of pocket” or true prices of health care because four-fifths of insurance is paid through public or private insurance. Therefore, people don’t make choices based on the true cost of resources and tend to over use it.
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11. Why the Rapid Rise in Costs?
Increasing demand for health care
Rising income
Role of elasticity
Aging population
Unhealthy lifestyles
Role of doctors
Supplier induced demand
Defensive medicine
Medical ethics
Healthcare is a normal good with an income elasticity coefficient that is about 1 and a price elasticity of demand coefficient that is as low as .2. Aging populations and unhealthy lifestyles will likely cause the demand for healthcare to increase. Physicians may increase the demand for healthcare in several ways, also.
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12. Why the Rapid Rise in Costs?
Role of health insurance
The moral hazard problem
Less prevention
Overconsumption
Government tax subsidy
Rationing to control costs
Health insurance, like most insurance, is a way to pay a known cost in exchange for protection of an uncertain, but potentially much larger cost.
This could lead to two behavior changes by the insured. First, they might adopt a less healthy life style, encouraging behavior that requires more health care. Second, insured people may seek visits to the doctor more often since the cost beyond a fixed premium is only a modest deductible.
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13. Why the Rapid Rise in Costs?
Without Health
Insurance
With Health
Insurance Q P S S Pb b
Efficiency
Loss from
Over-Allocation a Pa Pa
This figure shows the allocation of resources for those with insurance and those without insurance. This lower after-insurance price results in overconsumption. Pc c D D Qa Qa Qc
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14. Supply Factors in Rising Health Costs
Supply of physicians
Slow productivity growth
Changes in medical technology
Relative importance of supply and demand factors
The supply of physicians in the US has increased over the years; however, this supply has not kept up with the increase in the demand for physicians’ services. Health care is a service, and it is generally more difficult to increase productivity for a service than for goods. Some technological advances in the way we deliver healthcare have lowered costs; however, more often those medical technologies have been more expensive.
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15. Cost Containment: Altering Incentives
Deductibles and copayments
Health Savings Accounts (HSA)
Managed care
Preferred Provider Organizations (PPO)
Health Maintenance Organizations (HMO)
Medicare and DRG
Limits on malpractice awards
Controlling the growth of health care cost, prices, and spending has long been the major objective. This list details some of many efforts focused towards that goal.
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16. Patient Protection & Affordable Care
Preexisting conditions, caps, and drops
Employer mandate
Personal mandate
Covering the poor
Insurance exchanges
Other provisions
Taxes
We finish this chapter by highlighting some of the major provisions of the PPACA. Other provisions can be found in the 2400-page document or at
a federal government website managed by the U.S. Department of Health & Human Services.
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17. Patient Protection & Affordable Care
Objections and alternatives
Greater inefficiencies in health care
First step to national health insurance
Lack of revenue sources
Increased consumption
Need to force consumers to weigh marginal benefits and costs
The passing of the PPACA was not without strong opposition. Some of the major objections are listed here. One thing is clear, in evaluating the pros and cons of the PPACA, this will not be the last word on health care reform in America.
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18. Singapore’s Health Care System
Rated by WHO as one of the best
Spent only 4% of GDP on health care
Competition between hospitals
Increased out-of-pocket expenses
Citizens required to save 6% of income in MediSave
Singapore delivers some the best health care in the world. The Last Word in this chapter provides a more detailed analysis of how this is accomplished.