1. Health System Reform © Allen C. Goodman, 1999

2. 2 Major Themes Lower costs, or lower growth in costs. Provision of (more) equitable access to care for all citizens or residents.

3. Individual v. Employer Mandates In US, we typically deal with employer- provided health insurance. Let’s assume (first) that employees don’t value mandate inherently. We’ve seen something like this before. Workers Wage rate Demand Supply D w/ mandates L0L0 w0w0 w1w1 L1L1 Who pays? Wage cost to firm

4. Individual v. Employer Mandates Workers Wage rate Demand Supply D w/ mandates L0L0 w0w0 w1w1 L1L1 Who pays? Wage cost to firm

5. Individual v. Employer Mandates Workers Wage rate Demand Supply D w/ mandates L1L1 w0w0 w1w1 Who pays? Wage cost to firm

6. Answer -- depends on the supply elasticity If you can’t escape a tax (supply is inelastic), it falls on you! We learned, of course that some of the mandates may be valuable. If they are, the burden on the employees is lessened. Workers Wage rate Demand Supply D w/ mandates L0L0 w0w0 w1w1 L1L1 Supply’ If mandate costs $z and is worth $z w2w2

7. Employer Mandates Employer mandate is a tax on labor. Can mess up the capital labor choice. Can lead to unemployment, “wrong” capital-labor ratio. Labor Capital L0L0 K0K0 (K/L) 0 (K/L) 1

8. Idea: Individual Mandate We “require” that the person buy some health care policy -- typically with a high deductible. What this will do is to insure against catastrophic events. People buy insurance -- clip a coupon to their income tax (kind of like the car insurance coupon that you put on your license plate application). If they don’t buy it, they must pay some amount to be in a gov’t pool. What about poor people? Ans> We subsidize their purchase. Phase out the subsidy as income rises, although this could imply a fairly high marginal tax rate.

9. People like the tax break with employer- provided insurance Lots of proposals have been built around the notion that the gov’t may want to encourage health insurance. Alternatively, one might have to build in incentives to get people to switch from tax-preferred employer insurance. Remember, if you make $1,000/week and are in the 28% tax bracket, if you want to buy $50 of health insurance per week, your net income will be: 0.72 * 1000 - 50 = 670. If your employer buys it for you, your net income will be: 0.72 * (1000 - 50) = 684 The $14 difference is 0.28 * 50. Why?

10. If gov’t wants to encourage ind. mandate... May stipulate that it will subsidize the first $x of coverage for the individual. Again, person clips the coupon to the tax return (like a W- 4), and gets a percentage rebate. Any insurance OVER the $x of coverage gets NO rebate. This encourages people to buy cheaper, high-deductible catastrophic care coverage, rather than more expensive full-coverage policies. Some of the medical savings account proposals look like this.

11. If we can change insurance system, we reduce moral hazard and reduce health care costs Insurance is related to the expected loss – in health care this is related in part to the price of care. Increased price of care is related to an increased demand for insurance, as we note in the upward sloping I curve in Figure. Quantity of ins. Price of care I curve

12. Interaction of insurance and price of care The second impact is that of insurance on the price of care, and the induced demand in the market due to moral hazard. Curve P 1 shows that if product supply curve is horizontal, the insurance will not increase the price of care above PC 1. The equilibrium is at point A. Quantity of ins. Price of care I curve PC 1 A Q1Q1 P 1 - horizontal product supply

13. Interaction of insurance and price of care If, however, increased insurance means a lower out-of-pocket price to the consumers, and the supply curve is upward slopin, the market price may rise, yielding curve P 2. We see here that the increased price due to moral hazard, leads to an increased demand for insurance, which again feeds back on price of care, and so on. The moral hazard together with the demand for insurance leads to a new equilibrium B with higher price of care PC 2, and higher quantity of insurance Q 2. Quantity of ins. Price of care I curve PC 1 A Q1Q1 B Q2Q2 PC 2 P 1 - horizontal product supply P 2 - upward sloping product supply