HEALTH ECONOMICS Lecture 3: Health care systems

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HEALTH ECONOMICSLecture 3 Health care systems
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Outline

• Market failure ? government intervention
• Design of health care systems
• Group work part 1
• Health system of your home country
• Break
• Group work part 2
• Assessing performance of health systems
• WHO assessment of performance

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Assignment

• Essay format
• Introduction
• Main text
• Conclusion
• Economic arguments
• Economic theory
• Empirical evidence
• Can briefly highlight other arguments
• Scottish NHS
• Faces similar issues to UK NHS
• Current state of play

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The way that health care is
supplied varies markedly from country to country,
stretching on the one hand from the U.K.
National Health Service to the more
market-oriented system of the U.S.A, from
salaried systems for the medical profession to
fee-per-item of service, from zero money prices
at the point of consumption, to substantial
co-payment by consumers. (Mooney, 1992)
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Free markets in health care

• What would happen if all health care would be
  bought and sold in the market?
• Fiercely debated
• Green argues that the market would deliver the
  best possible care at the lowest possible cost
• Most economists argue that the special
  characteristics of health care results in market
  failure and that government intervention is
  required
• Free markets in health care are very rare
• US comes closest

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Conditions perfect market

• Numerous small producers with no market power
• No restrictions on potential producers entering
  the market
• Perfect knowledge
• No externalities

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Perfect knowledge?

• Uncertainty regarding
• When am I going to need health care?
• The costs of health care?
• The effects of health care on health status?
• Cannot plan future consumption
• ? People take out health care insurance
• premium expected health care expenditure plus
  admin costs and profits

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Why do unregulated health insurance markets
fail?

• Diseconomies of small scale
• Excessive administrative and marketing costs
• Higher premium levels ? people not covered
• Solution public insurance (economies of scale,
  no exploitation, whole population covered)
• For example
• USA private insurance - admin costs 13-22
• Australia public system - admin costs 5

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Why do unregulated health insurance markets
fail?

• Adverse selection
• Asymmetry of information buyers have more
  information
• about their risk status than sellers
• Community rated (average) premium
• Premium too high for low risks who drop out ?
  average risk increases ? premium increases
• Leads to experience or risk rating

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Why do unregulated health insurance markets
fail?

• Moral Hazard
• third party payment
• do not bear the costs of health care
• Consumer moral hazard
• adopt less healthy lifestyles
• more likely to use health care
• Provider moral hazard
• doctors and hospitals
• recommend more treatment than necessary (SID)

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Moral Hazard

• Can lead to cost escalation
• Increases in premiums
• People do not insure and so have difficulty
  accessing health care
• Policies
• - a role for consumer charges?
• - give doctors a budget (fundholding and HMOs)
• - gatekeepers
• - capped budgets

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Licensure

• There has never been a free market for doctors
• Need for standards and control over conduct in
  health care market is universally accepted
• Those permitted to practice must hold minimum
  qualifications

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Asymmetry of information

• consumer wants health status
• cannot buy health status
• buys health care in expectation it will
  contribute to health status
• Market fails to provide information on the effect
  of health care
• on health status

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Market failure due to asymmetry of information

• Asymmetry of information
• doctors act as agents for patients
• agency relationship
• potential for supplier-induced demand (SID)
• the amount of care the patient would have
  demanded if they had the same information and
  knowledge as the doctor
• doctors own interests versus patients interests

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Market failure due to asymmetry of information

• Policies
• - Regulation and licensure of medical
  profession
• - Payments systems
• - Make patients better consumers
• - Doctor-patient relationship
• information transfer
• involvement in decision making

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Market failure due to externalities

• Externalities
• costs and benefits from decision-making that
  affect others well being
• positive externality
• Vaccination
• caring externality
• negative externality
• communicable diseases
• iatrogenic illness (hospital acquired infections)
• Not accounted for in unregulated markets - market
  may under provide health care
• Leads to government subsidisation of health care

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The perfect market

• Why is it important when it doesnt exist?
• Need to use it as a standard to compare what
  happens in the real world
• Need to understand it, since people do advocate
  its use in health care
• Maximises consumer well-being (utility) within
  the resources available to society (allocative
  efficiency)
• Need to try and replicate its desirable outcomes

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Designing a health care system

• Decide on method of raising money - this will
  influence population coverage
• After this, there are questions common to many
  systems
• How will hospitals and other institutions be
  rewarded?
• How will doctors and other professions be
  remunerated?
• Are you going to have user charges? If so, to
  what extent?
• How will the market be organised? Competitive
  or non-competitive?

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Health care financing systems
Publicly financed
Privately financed
Out of pocket payments
Social insurance
Private insurance
Taxation based systems
Co-payment and user fees
Group/ind. schemes
General taxes
Single fund
HMOs/PPOs .
Multiple funds
Full payment .
Hypothecated taxes
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Public/private mix
PROVISION
Private
Public
Public
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1
FINANCE
Private
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Managed care HMOs PPOs

• Health maintenance organisations (HMOs)
• Provide (or arrange and pay for) comprehensive
  health care for a fixed periodic per capita
  payment which is paid by the consumer
• Four types
• Staff model
• Group model
• Network model
• Independent practice association

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Managed care HMOs PPOs

• Preferred Provider Organisations (PPOs)
• A group of doctors and/or hospitals that provides
  medical service only to a specific group or
  association
• Rather than prepaying for medical care, PPO
  members pay for services as they are rendered
• The PPO sponsor (employer or insurance company)
  generally reimburses the member for the cost of
  the treatment, less any co-payment percentage

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Social health insurance

• Characteristics
• Compulsory membership
• Payroll deduction of contributions
• Run by public bodies
• Redistributional policies

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Payment systems

• Doctors
• fee-for-service
• capitation
• salary
• Hospitals
• global budgeting
• per diem payment
• diagnostic related groups (DRG)

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Cost sharing

• Several forms possible
• deductible
• pre-specified fixed amount
• copayment
• Advantages
• patient bears some of financial cost
• transfer of financial burden

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Competition

• Competition
• between providers
• between purchasers
• private insurers
• public purchasers
• Will it improve efficiency?

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Dutch health care system

• Method of raising money
• Exceptional Medical Expenses Act (AWBZ)
• Social Insurance payments
• Private Insurance payments
• Way hospitals are rewarded
• Prospective functional budgeting
• Way hospital consultants are remunerated
• Fee for service (but agreed volume of services)
• Way GPs are remunerated
• Capitation for publicly insured
• Fee for service for privately insured

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Dutch health care system

• User charges
• publicly insured drugs
• privately insured mostly copayment
• Competition
• possible between sickness funds, but regional
  monopolies
• private insurance companies

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2006 reforms

• Single health insurance system
• Covers a basic package
• Mandatory
• Can change insurer every year
• Insurer has to accept everyone

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Comparing health care systems

• Points to remember
• Different mixes of health care finance
  provision in different countries reflect ideology
• A health care system designed to meet the
  ideology of one country is unlikely to
  successfully meet the criteria of another
  ideology in a different country
• Rival ethical bases (Culyer, Maynard Williams,
  1981)
• Viewpoint A
• access to health care is similar to access to
  other goods and is part of societys reward
  system
• Viewpoint B
• access to health care is a citizens right which
  should not depend on income or wealth

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ExampleSystem X (U.S.A.?)

• Guiding principle consumer sovereignty
• Access according to willingness to pay
• Private insurance with cost sharing
• Private ownership of medical facilities
• Minimal state control over budgets resource
  distribution
• Rewards of suppliers determined by markets

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ExampleSystem Y (U.K.?)

• Guiding principle improvement of health of
  entire population
• access according to need
• Tax based finance system, free at point of use
• Public ownership of medical facilities
• Central control over budgets resource
  distribution
• Countervailing monopsony power to influence
  rewards of suppliers