Econ 6038: Lecture Four Healthcare Financing

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Econ 6038 Lecture Four Healthcare Financing

• Raymond Yeung
• http//web.hku.hk/rytyeung
• 10 October 2005

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Contents

• Flow of fund in the healthcare sector
• Options in financing
• Payment methods and its economics
• Country examples

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The flow of funds in healthcare
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Terminology

• Financing often refers to raising or collecting
  the revenue from users
• Funding allocating the revenues to
  organizations that are responsible for the
  service provision
• Remuneration compensating the individuals
  employed in the provider organization

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The flow of funds

• Users are the community receiving the medical
  care services
• Government, insurance firm or social insurance
  organization raise and pool the funds from the
  users
• Providers are firms that manage the delivery of
  medical services. They can be in the form of
  individual physician, partnership, statutory
  bodies, managed care organizations

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Fund raising options

• Private sources
• Direct payments out-of-pocket (OOP)
  expenditures
• Private insurance premium
• Public sources
• Social insurance premium
• Tax

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The Chinese National Health Accounts
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The US National Health Accounts(http//www.who.in
t/nha/country/USA.xls)
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Sources of fund in Hong Kong(Leung, Tin, Yeung
et al, 2005)
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The mix of private fund in Hong Kong(Leung, Tin,
Yeung et al, 2005)
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Pros and cons of different options

• Economic efficiency level of distortion to the
  ideal, optimal outcome e.g. excess burden of
  taxation, moral hazard etc
• The extent of risk protection
• Administrative efficiency
• Equity
• Sustainability

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Economic inefficiency from moral hazard
Excessive use due to moral hazard
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Equity consideration

• Vertical people contribution to healthcare
  should vary in relation to peoples ability to
  pay
• Horizontal people should pay the same if they
  have equal ability to pay
• Benefit principle those who benefit from a
  service should pay for the service

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The economics of financing options

• The ability to pool risk and equity are often the
  major consideration in many countries
• Tax and social insurance are often preferred as
  they can pool risk effectively. The tax system
  also provides a mechanism to promote vertical
  equity progressive
• The drawback of all prepaid methods is its
  inability to control the uses and chasing the
  deficit due to grow in expenditure

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Medical saving accounts

• A dynamic variant of OOP private financing
• Dynamically it insures oneself against the risk
  across time precautionary
• In the US, MSA refers to pooling fund for major
  incidence
• In Hong Kong and Singapore, MSA refers to a
  mandatory contribution to ones own future

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Lifetime utility of individual facing healthcare
risk
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MSA can improve consumer welfare as delta W is
strictly greater than zero.
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Payment mechanism to providers

• Fee-for-service (FFS) provider receives a
  payment each time when they perform the service
• Diagnosis-based provider receives a fixed,
  pre-specified amount for each instance in which
  they treat an individual with a specified
  diagnosis (e.g. pnumonia, compound fracture)
• Capitation a fixed rate per period of time
• Global budget an organization receives a total
  budget for a defined period of time
• Salary/Wage payment to physicians per period of
  time

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The economics of the payment methods

• Asymmetric information results in the suppliers
  ability to influence demand
• FFS may result in over provision of services
• Other payment methods can manage the incentive of
  the provider
• Pre-paid or pre-specified methods can often
  suppress the incentive to earn more
• They may however result in under-provision or
  cream-skimming

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Integrating risk pooling and service provision
Pooling agencies
Salary, profit sharing
Capitation
Users/patients
Providers
Services
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Different types of managed care plans

• Health maintenance organizations (HMOs) with
  primary care physician as gatekeeper for cost
  containment
• Preferred provider organizations (PPOs) divert
  patients to see the networked providers
• Point-of-service (POS) combine HMO with PPO

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International healthcare financing systems

• UK tax based financing and salary-based
  reimbursement
• US insurance financing and managed care
• China insuranceOOP financing and FFS payment
• HK - ??