Guest Lecture 5 Health

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Guest Lecture 5Health

• Introductory Economics for the Treasury
• Dr. Paul Frijters
• http//econrsss.anu.edu.au/frijters

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Contents

• 1. Basic terms in health.
• 2. Some basic stats and basic issues.
• 3. Market failures in health and broad policy
  options.

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Basic terms

• 1. Health care inputs. Self-evident.
• 2. Health care outputs. The direct results of the
  inputs, i.e. hospital services, nursing homes,
  etc.
• 3. Health outcomes. The eventual result of health
  inputs, i.e. increased longevity of life and
  higher quality of life (Qaly quality-adjusted-lif
  e-years).

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.

• 4. Supplier induced demand. The phenomenon that a
  higher supply leads to a higher demand. Example
  you will get deferred to an eye specialist if and
  only if there is one. Without the supply of one,
  there is less demand (at the same price) for one.
• Underlying reason information asymmetry.
  Revisited later.

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.

• 5. Community rating. The principle that private
  health insurers cannot base their products on
  detailed individual information, but can only
  ascertain some general community
  characteristics.

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Some basic statistics .
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Health Expenditure
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Money and outcomes .
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Money sources and destination
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Australian Statistics
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Obesity explosion in Australia?
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Basic issues in health

• 1. Rapidly growing health care expenditure in the
  whole of the OECD.
• 2. Little improvement in terms of longevity in
  the last decade.
• 3. Many attempts at health care reform in many
  different countries.

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Underlying reasons

• For exploding health costs
• - Ageing populations in the OECD due to declining
  fertility.
• - Medical advancements meaning an expansion of
  health goods.

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health costs continued.

• - Increasing incomes in combination with health
  being a luxury good (a good whose demand
  increases with income).
• - Supply-induced demand.
• - Increased legal costs connected to an
  increasing fallacy of control (the myth that
  risk-free medical service delivery is possible).

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Underlying reasons

• For low longevity return
• - Most services that have high medical pay-offs
  have already been implemented (e.g. vaccinations,
  clean water supply, car safety belts).
• - Many new medical advances target the ills of
  old people for whom the benefit in terms of
  longevity is small after being saved from X they
  often die quickly of something else.
• Note a large slice of the increasing health
  costs are indeed spent on those very close to
  death.

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Underlying reasons

• For the attempts at health care reform
• The spiraling costs.

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Market failures in health

• 0. Large externalities of own health condition on
  others.
• 1a. People are not capable of assessing their own
  health asymmetric information.
• 1b. Patients cannot ascertain the quality and
  true price of offered products asymmetric
  information.
• 2. Medical insurers have less information about
  the health status of people than themselves
  adverse selection and moral hazard.
• 3. Increasing returns in collection of health
  insurance fees.
• 4. Local monopolies in health providers.

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0. large externalities of own health

• - individuals will underinvest in preventing own
  sickness.
• - no private provision of goods with large public
  benefits, such as vaccinations, smoking-free
  zones.
• - overuse of goods with public negative effects.
  E.g. overuse of anti-biotics.

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Policy options

• - forced public vaccinations. Various options
  refusal of non-vaccinated children at school
  refusal of employees or migrants without
  vaccinations jail terms for refusal to
  vaccinate, etc.
• - public provision or organisation of smoking
  free zones.
• - coordinated limitation of goods with negative
  effects.

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1. Asymmetric information

• - individuals have no idea how sick they are or
  how good the service provider is.
• - They will thus either have to use
  intermediaries for the missing information or be
  lead into excessive demand for services by
  materially motivated suppliers.

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Policy response

• - State production of medical monitoring of
  patients. This relies on an esprit the corps
  amongst the medical assessors (GPs).
• Note asymmetric information naturally leads to
  widespread use of medical intermediaries. These
  are known here as GPs. The question is what their
  incentives are for referrals, prescriptions, etc.

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Policy response

• - Increase public availability of medical
  information. Means accreditation of medical
  services public supply of information about
  diseases, medicine, medical services, etc..
• - Increase the possibility and incentive for
  self-treatment.
• - Use state monopsony power to buy medicine from
  private suppliers.

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2. Adverse selection in insurance

• - Community rating outlaws the use of individual
  information and increases adverse selection.
• - the highest risk people will self-select into
  insurance. The lowest risk people will not insure
  themselves.
• Note the fact that private insurance firms will
  not ensure the poor is not a market failure. To
  ensure the poor is an equity issue, addressed by
  private and/or public charity.

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2. moral hazard in insurance

• - individuals will not take into account the full
  price of activities that are dangerous to their
  own health.
• - insured individuals face low (or even zero)
  costs of using medical services. This makes
  medical services a common good (rival but
  non-excludable), with a tragedy of the commons as
  a result overuse and rationing (waiting lists).

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Moral Hazard and Health Insurance extended

• In terms of the consumer there are two types of
  moral hazard relevant to health insurance
• - The individual may influence the probability
  of falling ill through prevention, which may
  amount to a general change in lifestyle
• - In the event of illness, the associated
  financial loss (cost of treatment) is not
  necessarily fixed, since a choice between cheaper
  and more expensive treatment may be available

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Empirical Evidence on Moral Hazard

• The most convincing evidence on the effect of
  insurance on the demand for health care has come
  from the Health Insurance Experiment (HIE)
  conducted by the RAND Corporation in the US
  (Newhouse, 1974, Manning et al., 1987).
• Household were randomly assigned to health care
  plans - ranging by the amount of co-payment paid

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Main Conclusions from the study

• Per-capita total expenses on the free health care
  plan were 45 higher than those on the plan with
  a 95 coinsurance rate.
• Outpatient expenses in the free plan were 67
  higher than those on the 95 coinsurance plan,
  while outpatient visit rates were 63 higher.
• The price elasticity for all health care was
  found to be between 0.1 and 0.2, that is, a 10
  increase in user price will cause demand to fall
  by 1 to 2 per cent.

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Australian Evidence on Moral Hazard

• Savage and Wright (2003, J. Health Economics)
• Moral hazard and adverse selection in
  Australian private hospitals 1989-1990
• Study used survey data for around 23,000
  households taken from the 1989-1990 National
  Health Survey (NHS)
• Estimated the effect of having private health
  insurance on length of hospital stay

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Policy response to asymmetric inform.

• - Have a state health insurance system for all.
  This forces individuals to take up insurance, and
  hence implicitly means the low-risk people
  subsidise the high-risk ones. This also addresses
  the provision-to-the-poor-issue.
• - Allow individual information to be used by
  private health insurers.
• - Introduce costs of health services to the user
  own-risk clauses in private insurance own
  contribution costs for medicine.

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3. Increasing returns to health fee collection

• - this increases the case for having a monopolist
  in health fee collection.

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4. Local monopolies in health

• - Local GPs are sometimes the sole intermediary
  for a geographic district. Especially in remote
  areas.
• - Local hospitals are the sole service provider
  of some services (e.g. emergencies) and are
  sometimes the only providers of all services
  (remote areas).
• - Local nursing\retirement homes are often the
  sole providers in the area.

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Policy response

• - State provision of some medical services,
  relying on an esprit the sorps and benevolence
  (even if you base public sector careers on
  outcomes, the person monitoring or setting the
  rules must be benevolent).
• - Enforce standard service provision and pricing
  across service providers. Very difficult to do
  because output is hard to measure and both
  patients and medical labour are very different
  from region to region and organisation to
  organisation.
• - Create monopsony power on the demand side
  (patient unions or, equivalently, health
  authorities).

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Important caveat

• For any form of competition to work, information
  about the performance of various service
  providers would have to be collected and
  disseminated.
• Although in some countries some information is
  collected, virtually everywhere it is kept secret
  by the state for fear of public response.
• Hence, as a second best option, the enforcement
  of standard working practices seems likely to
  occur.

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Other policy options to reduce costs

• 1. Change legal liability in healthcare.
• - Limits on the amount that can awarded
  (implemented in many countries).
• - Transfer of responsibility to the buyer
  (reassertion of the caveat emptor rule).
  Equivalent to the introduction of honest
  mistake principles.
• - Penalties for unsuccessful claims (e.g. the
  English system of loser-pays-all).

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.

• 2. Cease state insurance of medical procedures
  that have too high cost per Qaly. Equivalent
  formulation basic insurance packages.
• - This happens increasingly in many countries.
• - Politicians often leave the actual choice up to
  practitioners for fear of public ridicule of
  explicit choices.
• Note the rich will then be relatively healthier.

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.

• 3. Effective competition between medical service
  providers.
• - very difficult because medical providers are
  usually local monopolies.
• - buying health care services from abroad or
  other regions (thus expanding the set of
  suppliers) is often politically opposed.
• - medical output is very difficult and expensive
  to measure (information is a pre-requisite for
  markets) ultimately, you rely on the provider to
  tell you how he or she performed.

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.

• 4. Restrict the market supply of medical health
  services.
• - (in Australia and elsewhere) limit the number
  of places to learn medicine. Result overpricing
  of those services and rationing of training
  places.
• Note limiting the supply of services without
  also controlling the price may not actually
  reduce the costs of health to consumers, but
  effectively means the state guarantees a cartel
  (a monopoly consisting of many coordinating
  providers). The recent enforcement of quotas in
  universities guarantees the Australian medical
  cartel for years to come.

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Conclusion

• 1. The health issue suffers from multiple market
  failures at the same time. Its also politically
  very sensitive. Nowhere in the OECD is the health
  market hence a free market.
• 2. Despite many attempts at increasing the use of
  market forces, there is not much evidence that
  the bang for the buck has been improved
  anywhere (the most free market, i.e. the US, is
  also the most expensive one without any
  noticeable health improvement).

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Continued

• 3. A lot of recent health issues impinge on
  personal choices (i.e. declining rates of
  physical activity, increased obesity rates, bad
  diet choices). Politicians are loathe to truly
  interfere with these choices in an obvious way,
  i.e. no fat tax, compulsory school and work
  exercise, etc. As a result the policy reaction
  to these emerging issues has been to largely
  ignore them.

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A specific Australian issue

• The tax incentives for private health insurance.
• In 1999, a subsidy was introduced whereby the
  government gave a tax credit of 30 towards the
  costs of private insurance to users.
• The costs of this scheme are close to 3 billion
  AUS.

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Incentive effects

• 1. Individuals do not bear the full costs of
  purchasing some health goods. Effect they will
  use the subsidy to purchase consumer goods that
  are only vaguely related to health. This indeed
  seems to have happened according to Abelson
  (2003, pg. 307 running shoes and gym
  membership).
• 2. Self-insurance (i.e. having no health
  insurance, but simply paying medical services as
  need arises) becomes less attractive private
  insurance for basic health goods should indeed
  increase. Abelson (2003) claims this has not
  happened for basic health services.