Chapter 22Health Care

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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Chapter Outline

•WHERE THE MONEY GOES AND WHERE IT COMES FROM

• INSURANCE IN THE U.S.•ECONOMIC MODELS OF

HEALTH CARE•COMPARING THE U.S. WITH

THE REST OF THE WORLD

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You Are Here

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The Money

• 16% of GDP spent on health care (2.2 trillion of 13.8 trillion)

• 46% spent by governments (Medicare, Medicaid etc.)

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Government Health Programs

• Medicare public insurance in the U.S. which covers those over age 65 – $431 billion

• Medicaid public insurance in the U.S. which covers the poor– $329 billion

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Where the Private Money Comes From

• Private Insurance– $775 billion

• Out-of-Pocket Patient Expenses– $264 billion

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Where the Money Goes

• Hospitals– $697 billion

• Doctors– $479 billion

• Prescription Drugs– $228 billion

• Research– $40 billion

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Insurance Coverage

• 82% covered all year• 8% covered part of the year• 10% without any insurance all

year

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Insurance Types

• Private Group Insurance– 171 million

• Private Individual Insurance– 25 million

• Medicare– 43 million

• Medicaid– 52 million

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Why People Buy Insurance• People who believe that their insurance

premiums will be less than their expected health care expenditures will buy insurance.

• People who are risk averse (they would rather pay more than their predicted expenditures to limit their risk of large expenses) will buy insurance.

• A person who is risk neutral (they would not pay more than their predicted expenditure to eliminate uncertainty) would not buy insurance.

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Vocabulary of Insurance• Deductible the amount of health spending a year that

you have to pay before the insurance company pays anything

• Co-payment either a set amount or the percentage of the bill after the deductible has been taken out that you have to pay

• Maximum out-of-pocket the most that a person or family will have to pay over a year for all covered health expenses

• Lifetime maximum the most that an insurance company will pay on your health expenses over your lifetime

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Types of Insurance Plans

• Fee-for-service• Health Maintenance

Organization (HMO)• Preferred Provider

Organization (PPO)

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Controlling Expenses

• HMO’s and PPO’s use Primary Care Physicians (PCP’s) or Gatekeepers who are physicians charged with making the initial diagnosis and making referrals

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Advantages and Disadvantages

of Insurance TypesInsurance Type

Advantage Disadvantage

Fee-for-Service

1) Maximum physician choice

2) Little insurance company meddling in doctors’ decisions

Highest premiums, deductibles, and co-payment rates because of little control over expensive and unnecessary procedures

HMO Maximum control over expensive and unnecessary procedures so premiums, deductibles and co-payment rates are low.

1) Minimal physician choice

2) Significant meddling in physician decisions, especially when differing procedures have significant cost differences

PPO 1) Some physician choice2) moderate premiums, deductibles and co-payment

rates3) some control over expensive procedures4) minor meddling in physician decisions

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Public Insurance: Medicare• Those over 65 are eligible• Part A

– Covers expenses incurred in hospitals– Compulsory – Financed with premiums and 1.45%

payroll tax on employers and employees

• Part B– Covers doctor visits– Voluntary– Financed with premiums and general tax

revenue

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Public Insurance: Medicaid

• Covers the poor – eligibility standards vary from state to

state

• No premiums are required• Some states have very small

co-payments

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The Uninsured

• 21 million of 40-45 million go without insurance all year

• 18-20 million are between age 18 and 34

• 8.5 million are under 18

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Why Health Care is not “Just Another Good”

• Rapid increases in quality (which get confused as price increases)– Treatments developed in the 1990s for

AIDS are expensive but this is a quality increase, not a price increase

• Consumers have less knowledge about what they are buying than they typically do when buying goods.

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Why Medicaid Raises All Health Care Prices

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Why Co-Payments Increase Prices

• Third-Party Payer: an entity other than the consumer pays part of the costs

• If people only pay 20% of a price they will consume much more

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Modeling Third-Party Payment

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Moral Hazard with Health Insurance

• Moral Hazard: the fact that having insurance increases the demand for the good

• If people choose to smoke, to drink to excess, to overeat and to not exercise, because they will pay fewer of the monetary consequences then this is moral hazard.

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The HMO Debate

• To control costs, HMOs use rules to limit expenses. – E.g. recuperating time in a hospital is limited for

births.

• These rules sometimes conflict with doctors’ wishes for their patients.

• With patients having little interest in controlling costs, HMOs rely on rules to control costs.

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Organ and Blood Donation

• There is always severe organ shortage.– Economists argue that part of the problem is that

laws prevent people from buying and selling organs.

• There is often a shortage of blood.– Economists argue that part of the problem is that

laws prevent people from buying and selling their blood for medical use even though they can sell their blood plasma for cosmetic use.

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The Rest of the World

• Most of the industrialized world uses a single-payer system where the government collects (usually very high) taxes to pay for everyone’s health care

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International Health Care Finance Arrangements

Country

Public $ as a % of Total Hospitals Physicians Priv. Ins

Australia 67.4 mostly public A a

Canada 70.4 mostly private A, B a

France 80.1 mostly public A b

Germany 76.7mix of public and

private A a

Japan 82.5 mostly private A, B none

United Kingdom 86.7

mostly public trusts C a

United States 45.1 mostly private A c

A) Mostly private Fee-for-ServiceB) Government imposed fee scheduleC) Public employees

a) option to purchase private insurance for all expensesb) option to purchase private insurance for non-covered expensesc) all non-Medicare, non Medicaid

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Country ComparisonsHealth Expenditures/ GDP (2004)

Infant Moralityper 1000 births (2006)

Life Expectancy(2008)

U.S. 15.3% 6.4 78.1

U.K. 8.3% 5.1 78.9

France 10.5% 3.4 80.9

Germany 10.9% 4.1 79.1

Japan 8.0% 2.8 82.0

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Country Comparisons (cont.)Five Year Survival Rates

Prostate Cancer

Breast Cancer

U.S. 98.6% 88.7%U.K. 71.0% 81.0%France 61.7% 80.3%Germany

67.6% 71.7%

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Advantages and Disadvantages

of Single-Payer Systems• Advantages

– Universal coverage– Low-to-no cost coverage to patients

• Disadvantages– Long waiting lines for heart bypass and

other surgeries– Lower Survival Rates on many ailments– High taxes