The Economics of Health Care

1
The Economics of Health Care

• Mark Schug, Ph.D.
• September 12, 2008

2
Overview

• Review of markets
• Demand for health care
• Supply for health care
• Role of health insurance
• Reforms in health care

3
The Natoin at the Crossroads?

• Option one
• Strengthen command-and-control governance in the
  health-care sector.
• Eventually have government-managed health care of
  the sort we see in Canada and the UK.

4
Wisconsin at the Crossroads

• Option two
• Establish policies that increase competition in
  the health-care sector.
• Shift responsibilities increasingly toward
  individual consumers.

5
Characteristics of a Market Economy

• Private property
• Self-interested behavior
• Consumer sovereignty
• Profit Motive
• Competition
• Voluntary exchange
• Limited role of government

6
Most of the Time Americans Trust Markets
Most sectors of our economy are marked by strong
competition and profit seeking.

• Retail
• Tourism
• Manufacturing
• Housing
• Most food production
• Financial legal services
• Most transportation
• And so forth

7
Americans Have Less Trust in Markets in Some
Sectors

• Environment

• Health Care

8
Markets and Health Care

• The problem in health care is not the existence
  of markets, but the lack of markets.

9
Markets and Health Care The Lasik and Optional
MRI Markets
Consider market-driven health care Lasik eye
surgery

• High Patient Satisfaction
• High-tech
• Prices have fallen (38 decline since 1998)
• Optional MRIs provide another example
• Whats different?

10
Peculiarities of the Health Care Market

• Spending
• A 2007 report projected that health care spending
  is projected to double to 4.1 trillion in
  2016,consuming 21 of GDP.
• Uninsured
• The 2007 Current Population Survey showed that
  while poverty was down and median income was up,
  the number of people without health insurance
  increased from 44.8 million (15.3) to 47 million
  (15.8).
• Price
• We are reluctant to allocate health care on price
  alone.
• We believe that it is unjust to deny health care
  to those who need it.
• Information
• Consumers depend heavily on the knowledge of
  health care providers.

11
National Spending on Health Care

• Health care spending in the United States has
  grown rapidly since the 1960s, at an average rate
  of 10 percent a year.

National Health Expenditures (NHE), Aggregate and
Share of Gross Domestic Product (GDP), 1960-2016
Source Employee Benefit Research Institute
estimates from Centers for Medicare and Medicaid
Services and U.S. Department of Commerce.
(2006-2016 data are projected.)
12
Peculiarities of the Health Care Market

• Positive externalities Improved health care
  provides benefits that help non-paying third
  parties.
• Vaccines fight polio, small pox
• Healthy workforce
• Third party payments
• Most health care costs are paid for by private or
  public providers rather than individuals - - the
  ABCs of health care.

13
Applying Supply and Demand Analysis to the Health
Care Market
14
Law of Demand

• At higher prices people buy less.
• At lower prices, people buy more.

15
Demand

• Heath care is a normal good
• Increased income causes an increase in demand.
• Health care is less sensitive to price increases
• Inelastic
• Viewed as a necessity

16
Demand for Other Necessities

• Is obtaining health care really more important
  than other necessities provided by markets?
• Food?
• Housing?

17
Demand

• More diseases and maladies are being treated.
• Improved medical knowledge on how to diagnose
  disease.
• Improved medical knowledge on how to treat
  disease.
• Improved technologies that allow earlier
  detection and better outcomes.

18
Demand

• Care is often provided in an emergency.
• Consumers prefer long term relationships - - they
  dont shop around.
• Consumers with health insurance are less
  concerned with price increases.

19
Demand

• Aging population
• Over 20 of the population will be over 65 by
  2030.
• High risk takers
• Abuse of alcohol and tobacco
• Illegal drugs

20
Supplier-Induced Demand

• Physicians are often paid on a fee for service
  basis.
• Physicians are encouraged to practice defensive
  medicine.
• Physicians are obliged to sustain life - - at
  high costs.

21
Demand Government Tax Subsidy

• Employees do not pay federal income tax or SS tax
  on the value of their health insurance.
• Employees often request and receive more of their
  total compensation as non-taxed healthcare and
  less in taxed wages.

22
Law of Supply

• At higher prices, producers provide more.
• At lower prices, producers produce less.

23
Supply

• Supply of physicians and nurses has increased but
  not kept pace with demand.
• Incomes are high.
• Training costs are very high.
• The average training cost is 200,000.

24
Supply

• The service sector lags in productivity gains.
• Medical technology works oddly
• High initial costs.
• But pressures exist not to wait for the cost
  declines.
• Prescription drugs and organ transplants are
  expensive.

25
Role of Health Insurance
26
Quick U.S. Health Insurance History

• Several attempts at national health insurance
  failed
• Roosevelt 1912
• Employer sponsored insurance programs grew
  rapidly in the 1930s and 1940s
• Private-sector insurance companies preferred to
  sell to the employer healthier easier to deal
  with large firms
• Employers paid full premium
• Post World War II economy booming
• Employers were searching for ways to recruit
  workers
• One idea exempt the money they use to purchase
  health insurance from income taxes
• Companies could (and still can) deduct money they
  used to purchase health insurance from their
  income (which consumers cannot do)
• Employees came to see health benefits as
  freebies and not part of their total
  compensation
• Health care costs began to rise rapidly and firms
  searched for ways to control costs
• HR solution employees pay more
• Rise of Managed Care HMO Act 1973 Nixon
  Firms must offer HMO
• Today new ideas to control costs and increase
  coverage
• Government provided universal coverage
• Consumer driven market reforms

27
The Role of Health Insurance

• Moral hazard
• One party to an agreement alters his or her
  behavior in a way that is costly to others.
• Nobody spends somebody elses money as wisely as
  he spends his own.
• Milton Friedman
• Example Imagine that bank tellers no longer have
  alarms to hit when they are being robbed. Banks
  pass along losses to insurance companies.

28
The Role of Health Insurance

• People with health insurance paid for by others
  may take fewer steps to be careful.
• People with health insurance paid for by others
  may use more health care than they would if they
  were paying for it out-of-pocket.

29
Reforming Health Care

• Thinking Economically About Health Care

30
Criteria to Consider

• Health care is not a free good. Do proposed
  changes provide the greatest benefits at the
  lowest costs?
• Increase price competition?
• Lead to better informed consumers?
• Increase individual responsibility?
• Limit the role of government?

31
Systems in Other Countries

• Canada
• U.K.

• Most people in the United States have fairly
  decent coverage but a large segment has less.
• In many other countries, everybody is guaranteed
  decent standard coverage and a few may have more.
  
• One approach creates a safety net for the poor
  the other creates an escape valve for the
  middle class.

32
The Canadian System

• Before 1947 U.S. and Canadian health care systems
  were similar.
• In 1948 Provinces began social insurance plans
  (started in Saskatchewan).
• In 1966, Canada established Medicare universal
  social insurance program provided exclusively by
  the government.

33
The Canadian System

• Covers all medically necessary services.
• Private insurance is not allowed.
• Each province has its own system (with
  commonalities imposed by the federal government).
• Hospitals under control of provinces (total
  budget cap).
• Physicians are in private practice like U.S.
• Results in slow technology growth - - hospitals
  are banned from private capital markets for
  expansion, equipment and so forth.

34
Canadas Health Care System

• Rationing of care leads many Canadians to seek
  treatment in U.S.
• Thriving market for Canadian patients in Buffalo,
  Detroit, and Seattle
• Typically, they pay out-of-pocket

• Access to a waiting list is not access to
  health care.
• Chief Justice Beverly McLachlin 6/13/05
• Led to some reimbursement (over year long wait
  for hip replacement)

35
The U.K. System

• British National Health Service (BNHS) was formed
  in 1948.
• Socialized medicine
• Government provided medical care own hospital
  and clinics.
• Health care workers are government employees.
• Small private insurance market thrives for the
  wealthy.
• Lack of physicians major flight to U.S. and
  Canada in 1960s and 1970s.

36
Comparing the Systems
37
Where Do We Go From Here?

• Types of Reforms
• Government Control
• Government Mandate
• Consumer Driven
• Universal coverage is goal for each.
• How we get there differs - - a lot!

38
Criteria to Consider

• Health care is not a free good. Do proposed
  changes provide the greatest benefits at the
  lowest costs?
• Increase price competition?
• Lead to better informed consumers?
• Increase individual responsibility?
• Limit the role of government?

39
Clintons Plan

• Every American required to have coverage.
• Income-related tax subsidies to make affordable
  for all.
• Private and public plan options through new
  Health Care Choices Menu operated by federal
  government.
• Require large employers to offer health
  insurance options.

• Cost 110 Billion
• Half from savings
• Half from eliminating employer health care
  deduction for workers over 250,000 and
  discontinuing tax cuts for this group.

40
Obamas Plan

• Require all children to have coverage.
• Require all employers to offer meaningful
  coverage or contribute to new public program.
• Create new National Health Insurance Exchange
  where individuals and small business can purchase
  health care.

• Cost 50-65 Billion
• Most from savings
• Rest from discontinuing tax cuts for those making
  over 250,000 per year.

41
McCains Plan

• Opposes mandates.
• Provide a tax credit of 2,500 (individuals) and
  5,000 (families) to all individuals and families
  for the purchase of insurance.
• Reform the tax code to eliminate bias toward
  employer-sponsored health insurance.

• No discussion yet of costs

42
Consumer Driven Reform Details

• Unleash entrepreneurs
• Government
• Let market work
• Enforce rules and transparency
• Insurance plans
• High deductible
• More choice for consumers across state boundaries
• Consumers
• Control own money
• Providers
• Focus Factories

• Tax free Health Savings Accounts (HSAs)
• Employee and employer portion is yours to spend
  on health care (insurance and treatment)
• What you dont spend, keep for next year or
  retirement
• Government subsides those that cannot afford
  health insurance.
• Government requires publication of price and
  quality information.

43
Review

• What are the characteristics of markets?
• What is demand? How is demand somewhat different
  for health care
• What is supply? How is supply somewhat different
  for health care
• What is moral hazard?
• What criteria would an economic thinker use to
  consider reforms in health care?
• Which reforms meet the criteria better than
  others?

44
Healthy Wisconsin

• 15.2 billion program.
• 14.5 payroll tax.
• State employee level of benefits, plus mental
  health parity/AODA.
• Nearly every Wisconsin resident would be covered.
• Administered by a Governor-appointed board of
  trustees.

45
Eligibility

• Maintain a permanent Wisconsin home for twelve
  months.
• Maintain a substantial presence, as board
  defined.
• Under 65.
• Six-month waiting period for new residents.
• Dependent children pregnant women eligible day
  one.
• Gainfully employed eligible day one.
• Not eligible for Medicaid or BadgerCare

46
Benefit Levels

• State employee level of benefits.
• 300 adult/600 family annual deductible.
• No deductible for preventative care.
• 20 per visit co-pays.
• No co-pays for preventative care.
• Drug co-pays of 5/15/40.
• Yearly cost sharing maximum of 2,000/individual
  or 3,000/family.

47
Funding Healthy Wisconsin

• Employee payroll tax of 2 - 4 of Social
  Security wages. 
• Employer payroll tax of 9 - 12 of Social
  Security wages.
• Self-employed payroll tax of 9 - 10.
• Proponents calculate average monthly assessment
  of 370 employer assessment per employee and 140
  employee assessment.

48
Plan Challenges

• In a study, the Lewin Group warned that
• Employers may be discouraged from moving to
  Wisconsin.
• The payroll tax could discourage the creation of
  new Wisconsin businesses.
• The payroll tax may be a disincentive for
  higher-wage workers to locate in Wisconsin.
• Such a plan could be a disincentive to work.
• Up to 8,100 low-wage jobs lost.
• Negative effect on Wisconsin wages.

49
Other Challenges

• Payroll tax unlikely to keep pace with health
  care costs.
• Winners uninsured and government, Losers
  small business and high wage firms.
• Very powerful board life and death decisions
  no representatives from health care industry.

50
Stock Tips for 2008

• If you want to be make big bucks in an uncertain
  market, you may want to be aware of the mergers
  that are bring predicted.
• Polygram Records, Warner Brothers, and Zesta
  Crackers will join forces and become
• Polly Warner Cracker

51
Stock Tips for 2008

• 3M will merge with with Goodyear and will be
  known as
• MMMGood
• Zippo Manufacturing, Audi Motors, Dofaco, and
  Dakota Mining will merge and become
• ZipAudiDoDa

52
Stock Tips for 2008

• FedEx is expected to join its major competitor,
  UPS, and become
• Fed Up
• Grey Poupon and Docker Pants are expected to
  become
• Poupon Pants

53
Stock Tips for 2008

• Fairchild Electronics and Honey Well is scheduled
  to become
• Fairwell Honeychild

54
Art History ResearchThe Van Gogh Family

• Obnoxious brother
• Dizzy Aunt
• Brother who ate prunes
• Brother who worked at a convenience store
• Grandfather from Yugoslavia

• Please Gogh
• Verti Gogh
• Gotta Gogh
• Stop N Gogh
• U Gogh

55
Art History ResearchThe Van Gogh Family

• Cousin from Illinois
• Magician uncle
• Mexican cousins half-brother
• Constipated uncle
• Ballroom dancing aunt

• Chica Gogh
• Wherediddy Gogh
• Amee Gogh
• Cant Gogh
• Tan Gogh

56
Art History ResearchThe Van Gogh Family

• Bird lover uncle
• Nephew psychoanalyst
• Brother who was a Beatle

• Flamin Gogh
• E Gogh
• Rin Gogh

57
The Economics of Health Care

• Mark Schug, Ph.D.
• July 17, 2008