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The role of government in health care


Title: The role of government in health care Author: John Hartman Last modified by: John Hartman Created Date: 4/15/2008 9:32:04 PM Document presentation format – PowerPoint PPT presentation

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Title: The role of government in health care

The role of government in health care
  • Today Reasons for having government-provided
    health care Medicare Medicaid Reform efforts

  • We saw that health care costs (as a percentage of
    GDP) have rapidly increased over the last 50
  • Health care insurance
  • Advantages and disadvantages

  • Government-provided health care
  • Why should government provide health care?
  • Programs
  • Medicare
  • Medicaid
  • The governments role in health care reform

Why should govt provide health care?
  • Adverse selection
  • Moral hazard
  • Paternalism
  • Income too low for some people

Adverse selection
  • Recall adverse selection problem (see example to
    the right)
  • The government could force everyone into the same
    health care plan
  • Pro Adverse selection problems go away
  • Con Low-risk people subsidize high-risk people
  • Example 6 people at a firm
  • Spending if sick 10,000
  • 3 people have a high risk of getting sick
  • 10 each
  • 3 people have a low risk of getting sick
  • 5 each
  • With no employer contribution, some at low risk
    do not buy insurance

Moral hazard
  • Some activities are more likely to occur to an
    insured person
  • Bungee jumping
  • Mountain climbing
  • Skydiving
  • Smoking?
  • Bad eating habits?
  • These activities lead to inefficient outcomes
  • The government can intervene to try to discourage
    these things from occurring
  • Anti-smoking campaigns
  • Commercials promoting good eating habits
  • Prohibiting certain very dangerous activities
  • Withholding care due to dangerous activities

  • A paternalist would argue that some people dont
    get it right when it comes to health insurance
  • These people would say that everyone should be
    forced to have a minimum level of health care
  • Much of the 2008 presidential debate involved
    paternalistic arguments

Income too low for some people
  • Some people do not make enough money to afford
    health care
  • Problem made worse by increasing health care cost
    (see Downward spiral at right)
  • Young adults and noncitizens make up a
    substantial fraction of the uninsured in the US
  • Downward spiral
  • Health care costs go up
  • More people are unable to afford health insurance
  • These people must use the Emergency room, driving
    up premiums for those insured
  • When premiums go up due to increased numbers in
    the Emergency room, the cycle repeats

What does the government do?
  • The government provides over 45 of health care
    funds in the United States
  • Two main programs of government-provided health
  • Medicare
  • People 65 and older
  • Disabled people
  • Medicaid
  • Poor people

SOURCE Centers for Medicare and Medicaid Services 2005a.
  • Enacted in 1965
  • Second largest domestic spending program
  • Funded by a 2.9 percent tax on earnings of
    current workers
  • Tax split evenly between employers and employees
  • Provides health insurance to seniors and the
    disabled, primarily through the private sector
  • Seniors must have worked and paid payroll taxes
    for at least 10 years
  • About 35 million seniors enrolled

Medicare Overview
Expenditures on Medicare as a Share of GDP
Real expenditures on Medicare
SOURCE Centers for Medicare and Medicaid Services 2005a.
Different aspects of Medicare
  • Parts A and B of Medicare are the largest
  • Part A Hospital insurance
  • Part B Supplementary medical insurance
  • New Medicare component Part D
  • Prescription drug benefit

Cost control measures for Medicare
  • Before 1983, Medicare reimbursement was
    retrospective for Part A
  • Compensation is made after services are completed
  • Little incentive to economize on costs
  • Since 1983, this changed to a prospective payment
    system (PPS)
  • Compensation level is set before services start
  • 500 diagnosis related groups exist for the
    prospective payment system
  • This gives incentives to economize on costs

Cost control measures for Medicare
  • Recall DWL that occurs when MB is low
  • PPS appears to have decreased DWL
  • Average stay for Medicare patients in short-stay
    hospitals decreased from 10.5 days in 1981 to 8.5
    days in 1985
  • The decrease in stay appears to have no effect on
    health outcomes

Cost control measures for Medicare
  • To keep costs down for Part B, a resource-based
    relative value scale system is used
  • Fees are set per service provided
  • Does not necessarily keep down number of services
  • If fees are set too low, many medical practices
    will not accept Medicare patients
  • Medicare patients would then get low-quality care

Cost control measures for Medicare
  • Managed-care options
  • Since 1985, Medicare beneficiaries could enroll
    in HMOs
  • Originally, the HMO received 95 of the average
    amount that the average patient would require
  • Problem Adverse selection Healthier patients
    enrolled in HMOs ? The government was overpaying
    the HMO

Cost control measures for Medicare
  • Solution to adverse selection problem
    Risk-adjusted payments to HMOs
  • Reduced HMO enrollment
  • New methods are being tested to try to increase
    HMO enrollment and decrease costs simultaneously

Medicaid Overview
Medicaid eligibility
  • 1965 Health insurance for recipients of cash
    welfare payments
  • 1980s Children of low-income two-parent
    families became eligible
  • Children can include care to pregnant women
  • 1997 State Childrens Health Insurance Program
  • Allows states to get additional money from
    federal government to reduce number of uninsured

Financing and benefits
  • Federal and state governments share the cost
  • Poor states get higher matching rates than rich
  • Federal government contribution comes from
    general revenues
  • States must offer major services with Medicaid
  • Hospital stays, physician visits, prenatal care,
    vaccines for children

Financing and benefits
  • States have some flexibility in program
  • Example Capitation-based reimbursement is
  • Recall that health care provider receives annual
    payment per patient in their care, independent of
    services rendered
  • Some empirical evidence (Duggan 2004) shows that
    forcing people into managed care increased
    Medicaid costs
  • Questionable if the causation implied is actually
  • Other relevant factors may be missing, leading to

Medicaid stigma
  • Many people do not enroll in Medicaid
  • Guilty feelings
  • Stigmas
  • Uninformed about benefits
  • Public service announcements help to get more
    eligible children on Medicaid

Does Public Insurance Crowd Out Private Insurance?
Person who is uninsured before public insurance
Person who values private insurance relatively
Person who values private insurance relatively
Quantity of all other goods
Quantity of all other goods
Quantity of all other goods
Health insurance
Health insurance
Health insurance
Amount of publiclyprovided insurance
Amount of publiclyprovided insurance
Amount of publiclyprovided insurance
Are Medicaid expansions effective?
  • Unclear for two reasons
  • How much is due to crowding out?
  • Many eligible people do not enroll in Medicaid
  • Cutler and Gruber (1996) estimate that about half
    of new Medicaid enrollment previously had private
  • Card and Shore-Sheppard (2004) estimate that
    crowding out occurs less than Cutler and Gruber
  • They also find that take-up rates due to
    expansion are low

Another issue Job lock
  • Job lock
  • If a new job does not offer insurance due to a
    pre-existing condition, the worker will stay at
    the old job
  • Health Insurance Policy Portability and
    Accountability Act of 1996 (Kennedy-Kassenbaum
  • Provides provisions to reduce job lock
  • Mixed success

Health care reform
  • Why is health care reform a hot topic?
  • Increased costs
  • Significant portion of population without
  • Increases cost to others
  • Two parts to discuss here
  • Some questions about possible reforms
  • What has actually been passed?

Health care reform
  • Some proposals to try to solve the health care
  • Mandating everyone to have insurance
  • Hot topic in the 2008 Presidential race
  • Catastrophic insurance
  • Only provides payment when expenses become large
  • Health Savings Accounts can be used to pay for
    this type of insurance
  • Nationalized health care
  • Consumer-driven health care (CDHC)

Nationalized health care reform
  • Pros
  • Everybody is covered
  • Commodity egalitarianism
  • No adverse selection problems
  • Government can use cost-cutting measures to
    prevent care with low MB
  • Cons
  • Predetermined budget may lead to a suboptimal
    amount of health care provided
  • Long lines in some cases
  • Government determines what is medically
  • New technology may not be adopted quickly
  • Moral hazard problems

What is CDHC?
  • Recall inefficiencies of providing coverage for
    basic services
  • Over consumption of medical services
  • Deadweight loss
  • CDHC advocates health insurance to be like other
    types of insurance
  • Covers truly catastrophic events
  • High deductibles
  • Shoppers can shop many companies, not just what
    is offered by employer

CDHC example
  • Recall we have seen this type of example already
  • Provide a yearly fund to each person or family
  • Carries over to the following year if not used
  • After the yearly fund is used, up to 5,000 of
    expenses must be made out-of-pocket
  • After out-of-pocket expenses are paid, 90 of
    expenses are covered
  • Insurance for years with truly high expenses

CDHC reform
  • Pros
  • Reduces deadweight loss by letting consumer pay
    full cost of health care
  • Increased competition by allowing consumers to
    shop around
  • Cons
  • Unhealthy people could be priced out of the
    market due to high risk
  • Most consumers are unable to make completely
    informed decisions about health care
  • Routine exams and immunizations with high levels
    of positive externalities may be forgone

Is there a solution?
  • Is there a solution to the health care problems
    presented over the last week?
  • There will probably never be a complete solution
  • Security and efficiency will be at odds with
    each other
  • Some people will always choose NOT to have
    insurance unless forced to
  • Current trend More middle-class Americans are
    deciding to have little or no insurance ?
    This increases health care insurance
    premiums for those that remain insured ? Downward

Changes coming from the 2010 Reform Law soon
Is there a solution?
  • What if we are willing to accept new ways for
    health care and insurance to be administered?
  • We will likely be able to increase security
    without giving up efficiency
  • Catastrophic insurance may be most important at
    reducing risk
  • Higher deductibles, co-payments, and co-insurance
    rates can decrease loss of efficiency

Is there a solution?
  • Is prevention the key?
  • Should people be encouraged to eat healthy?
  • Should healthy food be subsidized?
  • Should unhealthy food be taxed?
  • Are taxes on smoking and alcohol set at the
    optimal level?
  • Should some drugs be legalized, taxed, and
  • Tax money can be used for health care costs

Some parts of the reform package
  • Another part of the solution General
    requirement to have health insurance
  • Most firms must provide the option
  • Most Americans would be required to buy coverage
  • Fairness issue Increased pooling
  • Companies are prevented from denying coverage due
    to pre-existing conditions

What will the reforms lead to?
  • Fewer downward spirals
  • Lower frequency of insured people paying
    uninsureds costs ? Possible reduction in
    insurance premiums
  • Probable net increase in use for services
  • Many more routine visits
  • Fewer ER visits

What is still needed?
  • Ways to deal with DWL due to not paying full cost
  • Policies to increase efficiency are needed
  • Figuring out how to pay for these reforms
  • Value added tax (VAT) needed?
  • Dealing with the high costs of the retiring Baby
    Boom generation

  • The government provides health care insurance for
    millions of Americans through Medicare and
  • Some believe that every person should be able to
    access needed health care
  • Adverse selection and moral hazard are
    significant problems
  • Health reform efforts try to increase medical
  • Paternalistic issues and efficiency are at odds
    with each other

Next lecture
  • Social Security
  • Chapter 11
  • Read pages 227, 231-235, and 239-250
  • History
  • Current structure
  • Long-run problems due to the graying of America
  • How peoples decisions differ with and without
    Social Security

  • Timothy has the following utility function
  • U(x, y) x (10,000y)½
  • x denotes Timothys consumption on everything
    except health care
  • y denotes Timothys consumption on health care
  • Note We assume no disutility from work

  • Timothy is currently working 1,500 hours per year
  • Hourly wage is 10
  • He also receives government health care, valued
    at 3,000 per year
  • Timothy could work a second job for 700 hours per
  • Hourly wage is 8
  • With the second job, Timothy would make too much
    money for government health care

  • What should Timothy do?
  • We need to find Timothys highest possible
    utility working one job
  • working both jobs

Problem Working one job
  • Total wages 15,000
  • Total government health care 3,000
  • Total benefits 18,000
  • How does Timothy maximize utility if he has
    18,000 in total benefits?
  • Note that at least 3,000 must go to health care
  • Maximize x (10,000y)½ subject to x y 18,000
    and y 3,000

Problem Working one job
  • Maximize x (10,000y)½ subject to
  • x y 18,000 and y 3,000
  • For now, ignore y 3,000
  • Maximize x (10,000y)½ subject to
  • x y 18,000
  • Equivalent to Maximize 18,000 y (10,000y)½
  • First order condition
  • 1 10,000½ / 2y½ 0
  • y 2,500
  • Since Timothy would only want 2,500 in care, he
    is constrained to take at least 3,000

Utility from working one job
  • Utility when x 15,000 and y 3,000
  • 15,000 (10,000 3,000)½ 20,477

Working two jobs
  • Wages
  • 15,000 from first job
  • 5,600 from second job
  • 20,600 total

Working two jobs
  • Timothys maximization problem
  • Maximize x (10,000y)½ subject to x y 20,600
  • Notice that x and y only need to be nonnegative
  • Maximize 20,600 y (10,000y)½
  • First order condition is the same as with one job
  • y 2,500

Working two jobs
  • What is Timothys utility if he works both jobs?
  • He spends 2,500 on health care
  • He has 18,100 left for everything else
  • Utility is 18,100 (10,000 2,500)½ 23,100

What should Timothy do?
  • Utility from one job 20,477
  • Utility from both jobs 23,100
  • Timothy should work the second job and give up
    his government health care

Is Big Brother caring for you?