Government and Health Care

1
Government and Health Care

• Roughly 15 cents of every dollar spent in US is
  on health care
• US health care spending equaled 5841 per person
  in 2002
• Governments (federal and local) account for
  almost half of all health care spending in US
• Most government spending on health care comes
  from Medicare (insurance for elderly) and
  Medicaid (health insurance for the impoverished)

2
Government and Health Care

• If consumption of health care services generate
  external benefits, then there is economic
  justification for some government subsidy.
• What are some of the external benefits of health
  care consumption?

3
Government and Health Care

• Motive for government subsidy of health care goes
  beyond external benefits arguments
• Health care resources are scarce and consumption
  of good must be rationed
• Most goods in general are rationed by markets in
  which only those willing (able) to pay for good
  will acquire it

4
Health Care and Rationing

• Many people do not support idea that health care
  rationed solely by markets
• Example
• In 2006, 3,916 kidney patients died awaiting a
  kidney transplant
• Most kidney donors are people who died but had
  agreed to have their organs harvested
• Live kidney donations are rare but perfectly
  acceptable we have two kidneys but only need one
• There is no market for live kidney donations

5
Health Care and Rationing

• Consumption of health care considered more a
  right, than is consumption of other goods
• Motive by government to subsidize health care is
  more one of redistributing income than it is to
  internalize externalities Do you agree?

6
Breakdown of Insurance Coverage

• The proportions with private and government
  insurance add to more than 85 because some
  people have both

7
(No Transcript)
8
Health Care and Insurance

• Consumers normally demand health only when sick
  or injured
• The uncertainty of requiring (demanding) health
  care and the potentially high cost leads
  consumers to rationally demand health insurance
• Notes on Insurance
• While government insurance programs cover only a
  quarter of those insured, government pays for
  close to half of health care expenditures
• Due to health care demands by the elderly (over
  65) who all fall under Medicare.
• Long term care for the impoverished elderly is
  financed by medicaid and accounts for most of
  that programs expenditures.

9
Notes on Insurance

• A small fraction of the population accounts for
  the majority of health care expenditures in
  2002, 5 of Americans incurred almost half the
  health care costs in the US.
• Most of the roughly 44 million Americans without
  health insurance have family incomes at least
  twice the poverty line
• They are non-elderly people whose incomes are too
  high to qualify for medicaid or CHIPS
• Insurance lowers the marginal cost of the
  decision to consume health care (example)
  typically insurance covers only part of the
  health care costs for insured individuals
• This may increase consumption of health care
  among the insured beyond the point that would be
  considered efficient

10
Health Insurance and the Market

• With no insurance equilibrium at point E where
  SMCSMB (Q1)
• With insurance covering 90 of costs, quantity
  demanded rises from Q1 to Q2
• Cost of health care now higher
• Too much health care may be provided

11
Notes on Insurance

• Public policies that lower marginal private cost
  of acquiring health care may increase the social
  cost of providing it
• Federal government encourages purchase of health
  insurance by not taxing employee compensation in
  the form of health insurance expenditures
• Employees must pay taxes on every dollar earned
  in wages but do not pay taxes on the dollar
  amount of health insurance offered by employers
  there is no cap on this tax subsidy
• The increased health care costs make it more
  difficult for those without insurance to acquire
  health care

12
Health Insurance and the Market

• Adverse selection causes non-employment based
  insurance to be very expensive
• The share of US income spent on health is at
  least 40 higher than in European countries
• This may reflect the market response to lower
  private costs of health care due to public and
  private insurance, together with the fact that,
• Decisions on who receives care is less dependent
  on government in the US than in such countries as
  the UK
• Hospitals in the US compete for insured patients
  by acquiring medical technology that is much less
  prominent in other countries

13
Example of Opportunity Cost of Health Care

• Assume engineering services and health care use
  similar resources
• Assume health care consumption at Q1 with no
  insurance and Q2 with insurance
• The opportunity cost to society of increasing
  health care Q1 to Q2 is the decrease in
  engineering E1 to E2
• If benefits of health care less than opportunity
  cost, then theres inefficiency

14
Physician/Population Ratio in 2001

• The UK has 190 doctors per 100,000 population
• Canada has 195 doctors per 100,000
• The US has 275 doctors per 100,000

15
Policy Alternatives

• Single Payer
• Single health plan administered by governmental
  agency
• Basic health coverage package offered to everyone
• Physicians bill government health agency
  according to fee schedule determined between
  agency and physicians
• Hospital budgets determined by government agency

16
Policy Alternatives

• Pay or play employer mandate
• Employers forced to either provide a certain
  level of health coverage or pay a tax that will
  finance government sponsored health insurance
  for their workers
• Mandatory Health Insurance
• Those who are presently uninsured will pay a
  financial penalty if they do not purchase health
  insurance
• The poor will receive subsidies to assist in
  purchasing insurance
• Massachusetts presently has a mandatory insurance
  law
• California was considering it

17
Policy Alternatives

• Medical Savings Accounts
• Individuals contribute to individual account (for
  example 3000 a year) that can be used only for
  medical expenses
• Money put into accounts not counted as taxable
  income
• If total medical expenses in a year less than
  3000, individual able to invest the difference
  or use the money to pay next years premium
• If total medical expenses more than 3000,
  individual gets complete coverage for health
  expenses