1. 1 Health Care Reform

2. 2 Kaiser FF Tracking Survey What two issues you would most like to hear the presidential candidates talk about? IssueJune 07Dec 07March 08 Iraq43%35%32% Health care21%30%28% Immigration18%17%14% Economy12%21%45% Gas Prices12%7%---- Terrorism7%6%

3. 3 Outline of talk What problems must reforms address? What have we learned from reform? Outline some current alternatives Examine some likely economic consequences

4. 4 What we will not talk about? Single payer

5. 5 Many countries have single-payer system Generates low administrative costs but (arguably) poorer quality care US companies process $700 billion in HC claims each year The US is not about to get rid of a $700 billion industry

6. 6 What are the issues? Cost/Expenditures Fiscal (taxes and expenditures) Equity Coverage

7. 7 Expenditures on Medical Care $2 trillion annually 16% GDP $6000/person Twice as much as the median OECD country

8. 8 90% more than Canada 145% more than the UK

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10. 10 Average Annual Premiums Covered Workers, 2006 (KFF) Individual plan –$4,242 total Family plan –$11,480

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12. 12 Are high expenditures a bad thing? A key driver of health care costs is technology MRIs/CT scans, angioplasty, anti-psychotropic drugs, hip/knee replacements, neo-natal intensive care, treatments for AIDS, statin drugs (Lipitor) All not available 20 years ago. Now, commonplace

13. 13 HIV/AIDS Drugs Early 1990s, 8% quarterly mortality rates for patients w/ AIDS 1995:4, 1996:1, three new drug introduced to fight virus –Work by preventing the virus from replicating in the host Usage rates increase immediately and aggregate mortality falls 70% in 18 months

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15. 15 AIDS drugs are expensive, $12K/year in some cases AIDS patients are expensive, $20K/year This medical advance by construction increases lifetime spending by a considerably amount

16. 16 ARVs increase lifespan after diagnosis with AIDS by almost 8 years Lifetime cost of treating an AIDS patient increases by about $250K This is expensive, but compared to many other programs, it is relatively cheap on a cost-per-life-year saved amount

17. 17 NICU Specialty wards of hospitals that provide “constant nursing and continuous cardiopulmonary and other support for severely ill infants” Developed in late 1950 early 1970s Growth has been rapid –NICU beds increased by 150% 1980-1995

18. 18 Costs, 2001 CA NICU discharge $50,000 Non-NICU, $4,500 In CA, 10% of births are for a NICU Therefore, more than half the hospital cost of childbirth are attributable to NICUs

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20. 20 But…. not getting the bang per buck Overhead costs are high (NEJM, 2003) –31% in US –< 2% in Canada Unnecessary care (Dartmouth Atlas) –30% of care has little medical benefit US performs poorly in comparison –Higher infant mortality –Lower life expectancy

21. 21 4.3 years less than Japan 2.4 years Less than Canada

22. 22 If you want to cut costs, where do you look? Administrative/overhead Unnecessary procedures Chronic conditions

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24. 24 1/3 of expenses from 5 chronic conditions

25. 25 What are the issues? Cost/Expenditures Fiscal (taxes and expenditures) Equity Coverage

26. 26 Government Insurance Federal government – largest health insurance provider – 25% of the population is insured through the Fed gov’t Medicaid and Medicare –95 million covered in 2006 –$540 billion –21 percent of the federal budget

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28. 28 Medicare 42.4 million recipients in 2006 Costs in 2006 –$342 billion –14% of Federal expenditures Financing –Part A financed by payroll tax (2.9%) –Part B/D financed by premiums (25%) and general revenues (75%)

29. 29 Future problems Costs of program are expected to escalate between now and 2030 At the same time, fewer workers to tax Medicare Trustees predict –Costs > revenues by 2011 –Trust fund exhausted by 2019

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33. 33 What are the issues? Cost/Expenditures Fiscal (taxes and expenditures) Equity Coverage

34. 34 Tax Treatment of Employer- Provided Health Insurance Income from your employer is taxable You take the income and spend it on goods –Cars, house, food, etc. Under the tax laws, your employer cannot provide you these items directly to avoid taxes. –‘Company cars’ used to be popular fringe benefit, now they are severely restricted

35. 35 However, the Federal government has established some ‘tax preferred’ methods of compensation. –When you receive certain items, they are not taxed as income Two largest categories –Pension contributions –Health insurance Has been the case since 1954 –If college employee, tuition remission for your dependents

36. 36 Taxes then reduce the cost of health insurance Because you do not have to purchase insurance in after tax dollars Ignores other important advantages of group coverage –Lower administrative costs –less adverse selection

37. 37 History of tax preferred status Modern health insurance began in 1930s –Blue Cross/Blue Shield – non-profit firms, began offering pre-paid plans for hosp and MD visits –Offered to groups of employees –The blues were a success so commercial forms began offering HI –<9% of population was covered by HI in 1940

38. 38 Why offered through employee groups? –Reduce adverse selection –Lower admin costs –Wage and price controls in effect Restricted wage hikes To keep workers, started to offer fringes in lieu of wages 1942 stabilization act codified 1943 administrative tax court decision that firm payments for life insurance were not taxable as income

39. 39 1943 decision generated lots of uncertainty –Decision based on analysis from life insurance provided to employees –Some question about applicability to health insurance Certainty resolved in 1954 by IRS ruling stating explicitly that employer-sponsored HI was indeed tax preferred

40. 40 Fraction of Population Covered by Private Insurance YearPercent w/ Pvt Insurance 1950 6.7% 196050.6% 197068.3% 198078.1% 199073.1% 200072.3%

41. 41 Example: Impact of Tax preferred status $1500 weekly earnings Tax at 30% marginal rate (state+federal+FICA+medicare) Suppose you can get insurance for $100/week Implications of tax preferred status Key assumption: firm does not care how they compensate you. They only care about the total cost of employment

42. 42 Firm is indifferent between paying you –$1500/week in wages or –$100/week in insurance, or $1400 in compensation Both of these are expenses for the firm and treated equally as costs What is the net after-tax income when health insurance is tax preferred and provided by the employer?

43. 43 Without tax preferred status Receive $1500 Minus taxes $450 After tax $1050 Insurance $100 Net income $ 950 With tax preferred status: firm gives you $100 worth of insurance and $1400 in income Receive $1400 Minus taxes $420 Net income $980

44. 44 You make $30/week on the deal If the firm gives you money to buy insurance, the govt takes 30% away before you can spend it. To get you $100 cash to buy an insurance policy, a firm would have to pay you $142.85 –Pay you $142.85 –After tax, $142.85(.7) = $100 –Notice that $42.85*.7 = $30

45. 45 Tax Benefit of EPHI A family w/ $70,000 in income 36.5% marginal tax rate –25% federal –3.5% state (Indiana) –~8% Social Security and Medicare Want to purchase $12,000 policy in AFTER TAX DOLLARS

46. 46 Without tax advantage: Receive $18,897 in income Pay 36.5% or $6,897 in taxes $12,000 left over for health insurance Net benefit of tax deduction is $6,897

47. 47 Inequalities Tax break only available to people who receive insurance from their firm Higher income families have higher tax rates so the tax benefit to them is greater Costs over $210 billion/year

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49. 49 What are the issues? Cost/Expenditures Fiscal (taxes and expenditures) Equity Coverage

50. 50 Coverage Uninsurance is a persistent problem in US Dimensions of the problem –47 million people –16% of population –9 million children Uninsurance rates have increased steadily over time

51. 51 Who are the uninsured? Race –White 10.8% –Black20.5% –Hispanic34.1% Age –<1811.7% –18-2429.3% –25-3426.9% –35-6416.0% –65+ 1.5% Family Income –<$25K24.9% –$25-$50K21.1% –$50-$75K14.4% –>$75K 8.5%

52. 52 Time Series Number uninsured –31 million in 1987 –47 million in 2006 Percent uninsured –12.6 in 1987 –15.8 in 2006

53. 53 Asymmetric Information Parties on the opposite side of a transaction have different amounts of information Example: when you get your car fixed, the mechanic knows what is wrong and how to fix it, you do not Health care ripe w/ problems of asymmetric information

54. 54 Problem of individual insurance Consider situation where people can purchase individual health insurance policy Problem for insurance companies –They do not know who has the highest risk of expenditures –People themselves have an idea whether they are a high risk person

55. 55 Can lead to poor performance in the private insurance market Demonstrate in simple numeric example the problem of ‘adverse selection’ Result: those purchasing individual insurance are a non-representative portion of the population

56. 56 Market for Lemons Nice simple mathematical example of how asymmetric information (AI) can force markets to unravel Attributed to George Akeloff, Nobel Prize a few years ago Good starting point for this analysis, although it does not deal with insurance

57. 57 Problem Setup Market for used cars Sellers know exact quality of the cars they sell Buyers can only identify the quality by purchasing the good Buyer beware: cannot get your $ back if you buy a bad car

58. 58 Two types of cars: high and low quality High quality cars are worth $20,000, low are worth $2000 Suppose that people know that in the population of used cars that ½ are high quality –Already a strong (unrealistic) assumption –One that is not likely satisfied

59. 59 Buyers do not know the quality of the product until they purchase How much are they willing to pay? Suppose you purchase a car at this price and get a “good” car, what do you do? Suppose you get a lemon? What are some solutions to the market for lemons? Extend this example to health insurance?

60. 60 What have we been doing the past 13 years? Two major efforts aimed at coverage –Medicare Part D –SCHIP program Movement to managed care BUT….Most of the ‘action’ has been with states –unsuccessful but informative

61. 61 Small Group Reform People without EPHI or small firms must purchase insurance in the ‘Small Group’ Market Small groups tend to have –Higher prices –Higher administrative fees –Prices that are volatile

62. 62 Prices are a function of the demographics Concern: prices for some groups too high Lower prices for some by “community rating” Nearly all states have adopted some version of small group reform in 1990s

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64. 64 Difference in Difference Before Change After ChangeDifference Small firm in reform state (T) Y t1 Y t2 ΔY t = Y t2 -Y t1 Small firm no reform state (C) Y c1 Y c2 ΔY c =Y c2 -Y c1 DifferenceΔΔY ΔY t – ΔY c

65. 65 Effect of full reform on Employer- provided ins. rates, CPS State Firm SizeBeforeAfterΔ ReformSmall39.3637.39-1.97 No ref.Small47.1847.04-0.14 ΔΔ-1.83 ReformLarge75.7973.71-2.08 No ref.Large79.6177.36-2.25 ΔΔ0.17 ΔΔΔ-2.00

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67. 67 What happened? Increased the price for low risk customers –Healthy 30 year old pays $180/month in PA –$420/month in NJ with community ratings Low risks promptly left the market Which raised prices Policy did everything wrong

68. 68 Lesson Idea was correct: –Use low risk to subsidize the high risk But you cannot allow the low risk to exit the market

69. 69 Massachusetts Reform

70. 70 MA Reform: Romney Most ambitious state reform to date Many features but….. Most striking component: Individual mandate –Required by law to carry insurance

71. 71 MA Reform If you require insurance, you need to make it affordable State subsidizes purchases for poor Firms must establish Section 125 plans Established the “Connector”

72. 72 Connector Merge of individual and small group market Market maker in insurance Community rating Requirements on what plans must have

73. 73 Connector Cheapest individual plans cost about $200/month 40-60% lower than average plan Was achieved primarily by higher cost sharing

74. 74 Results from MA It was estimated that 500K were uninsured and 300K have been added to insurance rolls State underestimated –Number uninsured –Uninsured eligible for subsidized care Cost of the program are exceeding expectations

75. 75 Exporting MA Plan? Plan is being studied extensively by –Other states –Presidential candidates MA is very unique so it might not travel –Lower uninsurance rate (9%) –Unique fiscal situation that was used to finance the law

76. 76 Other reform plans Obama and Clinton have offered detailed plans Clinton loosely based on the MA reform Clinton’s is nearly identical to Edward’s Maintain EPHI as basis of system Try to lower costs to those without EPHI so they can afford insurance Plans vary in detail but contain many similarities

77. 77 Democratic plans EdwardsObamaClinton Pay or PlayYes ‘Connector’ Type plan Yes Subsidize/ Tax credits Yes Individual mandates YesNoYes

78. 78 Clinton Those without insurance can purchase through same insurance members of Congress have Insurance subsidies for low income Reliance on preventive care/disease management to reduce costs to make affordable Individual mandates

79. 79 Obama Mandates for children Employer mandates Expansion of SCHIP/Medicaid

80. 80 Cost savings proposals in Obama’s Plan Health IT systems –$10 billion/year for 5 years Heavy emphasis on disease management –Effort to standardize care for chronically ill Performance based rewards (MD’s) Rx reform (generics, importation, negot.)

81. 81 Pay or Play Firms must pay 5% wage bill to health insurance or pay that as a fine Proposed in 26 states in 2006 Language -- firms must pay ‘their fair share’ Problem: ignores the realities of the labor market

82. 82 Insurance is one component of a compensation package Increased costs in one area will be paid for by reducing on costs in another (wages) In long run, costs will be borne by workers

83. 83 Will firms pay or play? In March 2007, Private industry –Average hourly comp.$27.61 –Wages/salaries$18.34 (71%) –Health insurance$ 1.83 (7.1%) Wal-Mart pays 5-7% –Only 40% Wal-Mart workers receive their care through the firm

84. 84 Cost reduction Variety of ways to reduce costs –Computer investments (medical records) –Preventive services –Disease management –‘Best practices’ Way to ‘self finance’ plans Problem –Returns are years away –Preventive/DM not really cost saving

85. 85 Example: Cervical Cancer Screening 11,500 cases in 2007, approx. 4000 deaths 4 th leading cause of cancer death in women Cheap test available – Pap smear $40 Expensive to treat ($30,000/case) Consider universal testing every three years for women 45-64

86. 86 37 million in this group Cancer incidence rate of 16/100,000 Approx 6000 new cases per year Suppose test every three years prevents ALL cervical cancers for 3 years Costs $1.1 billion Save: $540 million Net – program cost $560 million

87. 87 Result Universal testing is a good idea –saves lives –it is a COST EFFECTIVE However, in most cases, mass screening is not COST SAVING

88. 88 “It’s a nice thing to think, and it seems like it should be true, but I don’t know of any evidence that preventive care actually saves money,” Jon Gruber, MIT Economics professor and architect of the Massachusetts Connector plan

89. 89 What is different now? Leaves current system intact, builds out Individual mandates Pay or play Belief we can generate more uniformity in practice patterns to save costs

90. 90 What is missing? Little discussion of Medicare Attacks costs by spending more money Little discussion about the need for more cost sharing

91. 91 McCain Uninsurance is a problem of cost Attack costs, reduce premiums, increase coverage, Offers variety of proposals designed to drive down costs –Increase competition in insurance –Malpractice reform –Increase accountability

92. 92 Highlights Purchase insurance from nationwide pools Obtain insurance through any group, not just employers Encourage retail medical outlets Base pay on performance Establish national standards for treatment

93. 93 Tax Credits Eliminate tax deductibility of EPHI Replace with tax credit for people with health insurance –$2500 for individuals –$5000 for families Tax benefit the same for everyone, regardless of income

94. 94 Concerns The subsidy rate is not high enough for low income people What will happen to employer-provided health insurance?

95. 95 Summary Clinton –Primarily attacks uninsurance problem Individual mandates Pay or play –Imposes lots of (potentially costly) programs like preventive medicine –Individual mandates make the plan politically challenging

96. 96 Obama –Attacks costs first –Most aggressive cost-saving but, benefits are years away from being realized –Some impact on uninsurance through expansions of SCHIP/Medicaid, pay-or-play –Benefits to working uninsured will be long in the future when/if costs have been reduced

97. 97 McCain –Riskiest program because it blows up EPHI Replaces with a tax credit –Estimates suggest it will have minimal impact on uninsurance –Questionable impact on costs -- any benefits are long in the future