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The Politics of Healthcare and Healthcare Financing Greg Shaw Department of Political Science Illinois Wesleyan University.

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1 The Politics of Healthcare and Healthcare Financing Greg Shaw Department of Political Science Illinois Wesleyan University

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3 Governments or Markets? Trust in gov’t nearly as strong a predictor of the presidential vote as party ID (wow!) Trust in Congress Fear of bureaucracy? … but should this mean we put our trust in markets? Unlimited consumer choice? Is all shopping equal? Are all shoppers equally competent? The consumer-driven health care movement

4 When individuals more directly experience the true cost of the healthcare goods and services they might consume, they consume fewer services, and in a ways that most appropriately meet their needs Policy implications: ◦ Design policies that more fully expose individuals to the costs they generate ◦ Raise co-payments: individuals will have more skin in the game ◦ Foster comparative shopping: voucher-ize Medicare? ◦ Inform consumers of the cost: on the W2 form employers must list the full price of the insurance premium CDHC: The basic argument & implications

5 Unpacking the CDHC Argument Less consumption? Curtailing consumption for, but not for under-users? ◦ This isn’t a one-size solution A high knowledge requirement: determining when and how to curtail consumption is hard ◦ How good are your self- diagnostic skills? Who is primarily responsible for high consumption? Providers, product marketing, insecure consumers, or something else? Do people defer healthcare purchases when in medical need or crisis? What about services for their kids? More efficient consumption? Do patients know which services to select? ◦ Do you know the difference in outcomes between physical therapy and spinal surgery? Who makes these determinations? That is, when patients go shopping, who decides what goes in the cart? How to determine where to focus one’s services: is my dermatological health more important than my gastrointestinal health? Where do I add most value? How to decide this for another person? Can patients haggle effectively and shop comparatively? ◦ Do we need a culture shift?

6 Q: “Is this medically necessary?” A: “ … we just routinely do this …”

7 … notice that there is no way to objectively determine an optimal level of healthcare service consumption ◦ Some have argued that this implies everything is subjective, in terms of what services count as “basic” healthcare. Perhaps one can believe this to be true and simultaneously believe that there’s a basic level of care needed to sustain normal longevity and activity levels … but beyond mere survival …? ◦ Pushing this argument implies that medical needs are entirely the products of one’s consumer tastes. If one believes this, one also likely believes that there is absolutely no minimum threshold for service provision; fixing a broken arm? … that’s only important if one has an (arbitrarily determined) taste for that particular service. Before we go much further … Yikes! Do you believe this?

8 This study is still the gold standard (large N, good design, cross-time, etc.) Federally funded; designed to search for ways to save money on the then-still-fairly-new Medicaid program 1974-1982: a 3-5 year experience for 2,000 non-elderly participants Operated in 6 sites to ensure demographic diversity Nationally representative sample, with exclusion of persons earning more than $25K (or about $80K in 2006 dollars) Random assignment to various co-payment levels: zero, 25%, 50%, and 95% Participants were compensated, so that none was worse off financially relative to any insurance coverage that they had at the beginning of the experiment $1,000 limit on out-of-pocket (even lower for the poor); full coverage after that The RAND Corporation Experiment

9 Demand was somewhat elastic as a function of price Moving from free to 25% co-pay corresponded to an average reduction in consumption of 4.25% Consumption under the free plan was 45% higher than in the 95% co-pay plan No demand elasticity for in-patient services for children Demand elasticity was higher among low-income participants than among the economically better off Demand elasticity was greater for mental health services, but otherwise differed little between categories of services Most of the differences in consumption occurred in the number of initial contacts, not in the number of services obtained once a person visited a doctor or hospital The RAND Study: Key Findings

10 Services were grouped into highly effective (trauma fractures, pneumonia), moderately effective (hemorrhoids, hay fever), and less effective (varicose veins) Participants were not selective among these categories when seeking to reduce consumption: they strongly tended to reduce consumption across the whole range of services No differences in inappropriate hospital admissions across the co-pay categories Punch-line: cost-sharing is a blunt tool for controlling consumption The RAND Study: Key Findings

11 Supporters pointed to this as conclusive evidence of demand elasticity as a function of price Lingering questions about the health consequences for the sick - poor (reduced health status when not in the free category … in fact, the sick-poor faced higher mortality rates under cost-sharing, and many of those who lived dropped out, so the findings may understate the impact of cost-sharing on the sick-poor) The HMO component of the study showed that managed care can reduce consumption approximately as much as can cost-sharing (this speaks as much to limits on providers as it does limits on consumers) No evidence that higher co-pays reduced risky behavior (such as smoking, not wearing seat belts, alcohol, or less physical exercise); challenging part of the “too much insurance argument”? This study may not speak to the elderly Medicare population well ◦ Service consumption is much higher among the elderly (they’re less likely to curtail consumption due to their limited resources) The RAND Study: Implications

12 A Critique of CDHC People do not consume medical services in anything like direct proportion to their incomes – buying healthcare services isn’t like buying cars or houses ◦ The rich don’t consume as much as they can ◦ People don’t seem to respond to cost-sharing when it comes to their kids’ care ◦ The poor don’t refrain altogether from consuming (though they refrain more than do upper-income persons under cost-sharing) ◦ People do not tend to be especially price-sensitive: once at the doctor’s, they consume services in ways that don’t reflect their income Radical information asymmetry between providers and patients Approximately 70% of health care dollars are spent on 10% of the population in a typical year, and the healthy 50% of the population consume only 3% of the dollars: imposing cost-sharing on the healthy won’t save us much

13 A Critique of CDHC Difficulties with haggling: life vs. death, docs dislike haggling, information asymmetry again CDHC is predicated on reasonably good health and regular income: ◦ Depending on the version of the argument, this is:  Personally empowering; but also …  Anti-risk polling regarding non-catastrophic services (we’re all on our own)  Anti-poor people (they’re on their own) ◦ How does this help individuals who are old and sick? (back to the 70% / 10% problem) Evolving belief in health as a basic human right (not to be commoditized – think: EMTALA of 1986)

14 Firm limits on expenditures can control costs: ◦ The spread of HMOs (mid- to late-1990s) corresponded with a partial bending of the cost curve ◦ Medicare inflation was reduced with the introduction of the DRG in 1983 Insight: patients may not be the ones who can most effectively put the squeeze on expenditures; the organizers of payment systems seem to do this more effectively Some reflections on costs

15 Toward an Alternative Vision Markets produce lots of wealth and lots of poverty Recognizing the strengths and limits of the market model for healthcare financing ◦ Competition where it works, public provision where it’s needed Providing coverage by other means A pragmatic approach: a healthy workforce (and kids too!)

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