Economics 141A Economics of Government Behavior I

1
Economics 141A Economics ofGovernment Behavior I
Professor Francesca MazzolariFall 2006Lecture 26
2
Reminder

• Final, Wednesday Dec.6, 8-10 am, in this
  classroom
• TAs Discussion Session, today, February Dec. 1,
  1-250 pm, SSTR 103

3
Outline

• Finish discussion of health care reform in the
  United States
• A one-minute overview of the Medicaid program
• Review for the Final
• True/False questions
• Brief explanation

4
Health care reform issues at stake

• The rapidly rising health care costs
• What drives the ever-increasing health care
  costs?
• Quality-improving technological change in the
  delivery of health care.
• Thus, it is not clear whether society actually
  wants health care costs to be controlled.
• This argument is not inconsistent with the fact
  that we seem to be on the flat of the curve
• On average, the technological advances are
  extremely valuable
• However, on the margin, they may be inappropriate
  and ineffective.
• Difficult to target away from those who are on
  the flat of the curve.

5
Health care reform issues at stake

• The growing number of uninsured
• Many of the uninsured do not have access to a
  pooling mechanism (e.g., group rates).
• Creating a large pool, which could lower the
  administrative costs, could help.
• But adverse selection still remains a concern.
• Another concern is that not all workers are
  offered insurance, and not all workers take-up
  the employer insurance they are offered.
• A mandate is a legal requirement for employers to
  offer insurance or for individuals to obtain some
  type of insurance coverage.
• They tend to be politically unpopular, however.

6
Incremental reforms

• Minor reforms that could help with rising costs
  and the number of uninsured.
• Controlling fraud and waste
• could save money in the short-run, but it is not
  a long-run cost-control strategy.
• Lowering physician fees can control costs
• But it is likely to restrict access to care (as
  for Medicaid enrollees)
• Minor reforms to partially reduce the number of
  uninsured
• State laws to guarantee access of small firms and
  individuals to insurance markets have not been
  successful in reducing the number of uninsured.
• Continuing to expand the social safety net
• this raises the prospect of crowd-out.
• Tax subsidies could make insurance more
  affordable
• but the prices would be the high ones from the
  non-group market.
• No pooling mechanism

7
Fundamental reforms

• National health insurance
• It is a system whereby the government provides
  insurance to all its citizens, without
  involvement of a private insurance industry.
• Canadas system follows this model.
• Advantages
• Fully solves the problem of the uninsured.
• Reduces administrative costs.
• Has comprehensive cost controls
• Solves some inefficiencies like job lock.
• Drawbacks
• Massive government expenditures.
• National budgeting may not allow doctors to use a
  technology that is worth its high cost.

8
Fundamental reforms

• Building on the existing hybrid of private and
  public sector insurance.
• State government could create new pools of
  private insurance plans, then impose an
  individual mandate and offer subsidies to the
  poor
• Advantages
• Less new public financing.
• More politically feasible.
• Disadvantages
• High administrative costs remain.
• Tension between cost-conscious decision making
  and adverse selection death spirals. The sick
  could end up in much more expensive plans.
• Creates two-tier medical care, which may be
  undesirable from an equity perspective.

9
MEDICAID Program Details
IV.

• Medicaid serves low-income groups who are
  largely
• Women and children
• Disabled or elderly
• Medicaid is administered by the states, but
  financed jointly by the federal government and
  the state.
• In poor states like Mississippi, the federal
  government pays nearly 4 for every 1 the state
  contributes.
• In richer states, like Massachusetts, the federal
  government pays 1 for every 1 the state
  contributes.

10
Medicaid Who is eligible?

• The Medicaid program can be characterized into
  three eras
• 1960s,1970s Tight link between cash welfare
  eligibility and Medicaid eligibility. Low income
  limits and stringent family structure
  requirements.
• 1980s Delinking between Medicaid eligibility and
  cash welfare. Modestly higher income limits and
  broader family structure requirements.
• 1990s onward Much higher income limits through
  the SCHIP program.

11
What health services does Medicaid cover?

• The benefits of Medicaid are similar to private
  plans, except there is little or no patient
  coinsurance or copayments.
• Federal rules require that the full Medicaid
  program cover major services like physician and
  hospital care.
• All states have also chosen to cover other,
  expensive, optional benefits almost all cover
  prescription drugs, optometrist services, and
  dental.
• As a consequence, Medicaid is much more generous
  than virtually any private plan.

12
Medicaid How do providers get paid?

• Although the services are generous, the
  reimbursement to health care providers is not.
• Medicaid reimburses physicians at a much lower
  level than the private sector.
• For example, childbirth is reimbursed at about
  half the private-sector rate.
• Physicians are often unwilling to serve Medicaid
  patients.
• One-third of doctors serve no Medicaid patients.

13
Review

• Consider a welfare program under which
  individuals are guaranteed a certain minimum
  level of benefits (G). The benefits are then
  taxed away one-for-one with an individuals
  non-welfare income (Y), until the recipient no
  longer receives benefits from the program.
  Increasing non-welfare income through more
  aggressive child support collections would be
  expected to reduce welfare participation rates.

14
Enforcing child support
VII.

Consumption
Some individuals will be lifted off welfare
UZ''
G
UZ'
Child support amount
UZ
Leisure
But the child support is implicitly taxed at
100 so there is no incentive for women on
welfare to help track down deadbeat dads
15
Enforcing child support
VII.

• But, if child support is not taxed, then
  welfare participation is expected to increase

Consumption
20,000
Child support amount
10,000
Child support amount
1000
2000
Leisure
16
Review

• Poverty rates based on levels of family
  consumption are generally lower than poverty
  rates based on levels of family income.

17
Review

• Imagine that the probability of having a car
  accident is 10 percent for all drivers. An
  insurance company is offering a policy that
  promises a 10 net payout in the event of an
  accident for every 1 paid in premiums. If sold,
  this policy would be expected to make positive
  profits for the company.

18
Review

• Moral hazard is one of the problems that afflicts
  insurance markets due to imperfect or asymmetric
  information. An example of moral hazard is when a
  worker who is injured on the weekend pretends the
  injury happened at work in order to qualify for
  Workers Compensation benefits.

19
Review

• If whether or not an individual is a low or high
  risk type is unobservable, private insurance
  companies cannot offer unlimited insurance at
  rates appropriate to high risk individuals.

20
Consumer heterogeneity

• Two risk types
• Low risk individuals (healthy/careful) pL
• High risk individuals (sick/careless) pH

21
Case 1 Type is observable

• Full information
• Insurance company can offer two different
  actuarially fair policies
• Low-risk individuals
• High-risk individuals
• First-best separating equilibrium
• Both types face actuarially fair insurance
• Both types choose full insurance

22
Case 2 Type is unobservable

• The insurer knows that there are 2 types how
  many of them, but does not know the category each
  individual belongs to
• 2a) Insurance companies cannot offer unlimited
  actuarially fair insurance to all types
• - If company asks individuals their types, the
  high-risk ones will mask as low-risk causing
  negative profits
• 2b) Adverse selection may also preclude companies
  from offering insurance at actuarially fair rates
  based on the average risk level

23
Case 2 Type is unobservable
IV.

• 2c) Private insurance companies can offer two
  insurance contracts
• Contract 1 m1 pH and b1 ?
• Contract 2 m2 pL and b2 k? for 0ltklt1
• Individuals of different types self-select into
  different policies
• High risk types purchase full insurance at
  actuarially fair rates
• Low risk types purchase partial insurance at
  actuarially fair rates
• Example traditional health insurance plans
  versus HMOs (low-benefit low-cost option bought
  by healthy consumers)

24
Case 2 Type is unobservable
IV.

• What can private insurance companies do?
• 2c) Offer two insurance contracts
• Second-best separating equilibrium
• High risk types purchase full insurance at
  actuarially fair rates
• Low risk types purchase partial insurance at
  actuarially fair rates
• Unlike the pooling equilibrium, this separating
  equilibrium is not efficient because the careful
  are only getting partial insurance
• Example traditional health insurance plans
  versus HMOs (low-benefit low-cost option bought
  by healthy consumers)

25
Review

• Workers are more likely to take-up unemployment
  insurance if they anticipate having a long spell.
  One way to measure the effect of unemployment
  insurance benefit generosity on the duration of
  unemployment is to compare spell lengths across
  unemployed individuals who take-up and do not
  take-up benefits. This method is likely to lead
  to an understatement of the true causal effect of
  benefit generosity on spell duration.

26
Review

• Making hard-to-diagnose injuries, such as back
  pain, ineligible for Workers Compensation
  benefits is one way to reduce the moral hazard
  costs associated with the program.

27
Review

• Because of the way it is financed, the
  unemployment insurance systematically subsidizes
  firms in high-layoff industries.

28
Answers

• True
• False
• False
• True
• False
• False (the method is likely to lead to an
  OVERSTATEMENT of the true causal effect of
  benefit generosity on spell duration)
• True
• True