Health Insurance in the U.S. An Overview

October 23, 2006

By the end of this lecture, you should be able to:

Explain level of health care costs in US relative to other developed countriesDiscuss whether HC expenditures are “worth it”Explain sources of health care cost growthDiscuss sources of payment for HC in US, and the “problem of the uninsured”

Health Care in Global Perspective

Health insurance is common to all developed countriesMechanism differs

England and Italy finance health care through general taxation and provide services publicly (at least historically)Canada and Germany finance insurance publicly but contract for services through private providers

US Health Care System

United States distinctive in several ways:

We spend much larger fraction of GDP on health care than other nationsMost global health care innovation is due to R&D done in the United StatesFormal insurance coverage is not universal in the US• The elderly and the poor rely on government• Others depend on employers

How much do we spend?

The United States in 2002 spent $5,267 per capita

Switzerland, the second highest per capita spending in the OECD, spent $3,446Median OECD country spent $2,193

This was 14.6% of U.S. GDP in 2002Only two other countries – Switzerland and Germany – exceeded 10% of GDP

Source: Anderson, et al, Health Affairs, Jul/Aug 2005, Vol. 24, Issue 4, pg. 903

Is this a Problem?

Individual perspective

Employer perspective

Federal budget perspective

Economy wide perspective

Do we get what we pay for?

InputsNumbers of beds, physicians, etc. per capita

OutcomesInfant mortalityLife expectancy

Inputs

For number of hospital beds per capita, U.S. is in bottom quartile of OECDNumber of physicians per capita is below OECD median Number of nurses per capita is below OECD medianBut … we might be using our resources more efficiently

Outputs: Life expectancy at Birth

Country Female Male

Japan 83.6 77.0

Canada 81.5 75.4

Germany 79.9 73.6

U.K. 79.3 74.4

U.S. 79.4 72.7

These are 1996 numbers

Outputs: Infant Mortality Rates

Country Rate

Japan 0.4

Canada 0.6

Germany 0.5

U.K. 0.6

U.S. 0.8

These are 1996 numbers

Limits of International Comparisons?

Not necessarily “fair” to compare US costs to other countries

Not necessarily due to waste or inefficiencyFinancial incentives for innovation exist hereWe spend on R&D, and other countries benefit does not necessarily mean we spend too much – if we value the output

So the level is high, but what about growth rates?Health care is growing faster than GDP in most countries

In U.S., health spending rose from 13% of GDP in 1992 to 14.6% of GDP in 2002This 1.6% increase relative to GDP is twice the 0.8% increase of the OECD medianThis was even during a time when managed care and increased cost sharing were credited for holding down spending in U.S.!

Escalating Costs of Health Care

Year % GDP

1960 5.3

1970 7.3

1980 9.2

1990 12.6

2002 14.6

Discussion: What is the Cause?

Why do you think HC costs are rising?

What causes health care cost growth?Many potential candidates

Technological progress new proceduresRising income greater demandIncreased 3rd party paymentsAging populationMore doctors physician induced demandMore expensive conditions (HIV, drug treatment)Increasing malpractice awards“Easy access” – no waiting lists, etc.Other?

What does the evidence say?

It’s the Prices …

The United States pays much higher prices than other countries for pharmaceuticals, hospital stays, and physician visits. Ex: Average cost of a hospital day in the U.S. in 2002 was $2,434, compared with $870 in Canada.But it just shifts the puzzle – why are prices so high?

A Leading Cause - Technology

Over half of the rise in U.S. health care spending is due to new technology

MRIs, CAT scans, organ transplants, new prescription drugs• Most of these did not exist 40 years ago!

As our national income rises, we use more of these productsCosts may rise quickly, but so might the benefits?

A Leading Cause - The Role of Third Party Payers …

Finkelstein (BusinessWeek article)Consumers opt for more care if someone else pays for itInsurance provides guaranteed source of revenue for hospitals and other health providers (e.g., to build new facility)

EvidenceIntroduction of Medicare – in areas where there was little pre-existing insurance (e.g., South), health spending soared, while it had little effect in areas where insurance as already common (e.g. New England)

Other Reasons - Aging Population

The elderly consume much more health care per capita than younger cohorts

Leading edge of baby boom generation is turning 60 …

Access to Care

Many OECD countries imposed “supply constraints” over the past 3 decades.

Limiting the number of hospital beds Controls on diffusion of technologyLimits on numbers of physicians

U.S. has fewer of these, but presumably use them more intensively

Lack of “Waiting Lists”

Unlikely to help reduce costs by much

Procedures for which there are wait lists constitute a small fraction of overall spendingWhile countries with wait lists have lower costs than U.S., so do countries without waiting lists

Malpractice LitigationDept of Health and Human Services reports that “Americans spend far more per person on the costs of litigation than any other country in the world.”

U.S. had 50 percent more malpractice claims filed per capita than U.S. or Australia and 350 percent more than CanadaMalpractice payments per ruled or settled case about $265k in U.S. in 2001, slightly lower than in Canada and the UK

While it raises average cost, it is not clear it can really explain the trend

Costs of Medical MalpracticeLegal costs

Direct cost of awardsLegal costs of defending malpractice claimsUnderwriting insurance against claimsAll these only account for 0.5% of HC spending

Defensive medicineTest or procedures ordered to protect physician against risk of lawsuitCost estimates vary widely – perhaps as high as 5-9 percent of total HC spending

Indirect CostsSpecialist shortages in some areas due to high malpractice insurance premiums

Who Pays for Care?Source Groups

CoveredShare of

populationShare of

payments

Medicare Elderly, disabled

13% 22%

Medicaid Elderly, blind, disabled, poor women/children

10 15

Other Military 1 8Employer Workers &

dependents56

53Nongroup Families 6Uninsured 16 2

The UninsuredApproximately 15% of individuals in US are not covered by insurance – 44 million peopleImplications are controversial

Some choose to go withoutSome Medicaid eligible but have not taken up (though likely will if need care)Many uninsured receive free care from emergency rooms, etc.

One could argue that we have universal (if inefficient) catastrophic coverage delivered through complex patchwork of vehicles

Characteristics of Uninsured

Most have jobsMore like to be in service sectorMajority are low incomeBut some have high incomeYoung adults more likely to be uninsuredMinorities more likely to be uninsuredUnmarried more likely to be uninsuredLess educated more likely to be uninsured

Insurance as a Policy Issue

44 million uninsuredBut ¼ are short spells (< 4 months)

Many more underinsured Still more at risk of being uninsuredChildren at riskFederal deficit (Social Security HI fund)Cost of health insurance to business

Our HC Journey

U.S. Medicare SystemPart APart BPart D – Rx Drug billMedigap

MedicaidEmployer provided health insurance

TraditionalManaged careReforming the system