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Health Economics By Jamie Wagner, Ph.D Candidate and Jennifer Davidson, M.Ed.

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Presentation on theme: "Health Economics By Jamie Wagner, Ph.D Candidate and Jennifer Davidson, M.Ed."— Presentation transcript:

1 Health Economics By Jamie Wagner, Ph.D Candidate and Jennifer Davidson, M.Ed.

2 U.S. Health Care Spending

3 Why are we spending so much? Aaron (1991) Expansion of 3 rd party payment system (Insurance) Increased use of medical technology New technology increases costs Aging of the population Expanded medical malpractice Other factors Physician-induced demand Unhealthy lifestyles Ethical considerations—we are dealing with human life

4 Health System Goals Access to care—Is medical care a “right”? Who’s covered? What’s covered? What is basic medical/health care? Quality of Care Medical efficacy Medical outcomes Costs of care Who pays? Individual spending their own money vs. spending someone else’s money How much does it cost?

5 Making Decisions is Tough! On your own fill out the Federal Budget Exercise You have $1000,000,000 for new domestic programs— rank the 8 programs from the highest priority (#1) to lowest priority (#8) In groups of 3-4 repeat the process (you may only have one list per group What is an opportunity cost?

6 What is Obamacare? Affordable Care Act signed by President Obama on March 23, 2010 (10 yr process to expand health insurance coverage) Two primary mechanisms to increase health insurance coverage Expanding Medicaid Creation of the State Exchanges ACA sets standards for qualified health plans

7 What is Obamacare? Cont. A few changes to insurance: Coverage for Pre-existing Conditions Adults under 26 covered under parent’s insurance Preventative care at no additional cost to you No more lifetime limits on coverage Insurance can no longer end your coverage for a mistake you made Goal: Make Insurance Affordable for All

8 Health Care Mandate Passed by the US Supreme Court June 2012 (5-4 vote) Americans must pay for insurance or pay a penalty (Assessed on tax return and administered by IRS) Some Americans are exempt from this mandate (Poor, old, those between jobs, those in jail, etc.) Firms with 50 full-time employees will have to pay a penalty of $2000/employee if they do not provide coverage Feb. 14 extension: Medium firms (50-99 workers) given until 2016 (extended from 2015 in July 2, 2013 extension) to comply Large firms (100+ workers) beginning in 2015 have to offer coverage to 70% (down from 95%) of full-time workers

9 Who is paying for all of this? A few prominent taxes to help pay for everyone who was previously uninsured.9% increase in Medicare payroll tax for individuals making more than $200k or couples making more than $250k 2.9% excise tax applied to everything sold by medical device manufacturers 10% tax on indoor tanning

10 State Exchanges States required to establish health insurance exchanges by January 2014 Required to be a state agency or non-profit entity Exchanges must provide standardized info on all insurance options including benefits, premiums, and subsidies so people can compare benefits.

11 State Exchanges cont. States needed to decide by the end of 2012 whether they were going to set up: Federal Exchange (default) State-Based Exchange Partnership Exchange How are the exchanges supposed to reduce costs? Increase insurance competition Increase risk pools Do you know what your state chose???

12 Yellow/gold—federal exchange (default) Dark blue—state exchange Light blue—partner exchange (state and federal)

13 State Exchanges Today cont. State-based exchanges are likely to shut down… Massachusetts needs to start over with new software used in other states Maryland has to shift to a different IT system because of a massive crash around launch day Oregon cannot produce a website where insurance seekers can sign up—Federal government may be taking over Oregon

14 Health Care Market What does the demand curve represent? Willingness and Ability to Pay for Health Care If there’s a shortage, how do we decide who will get treatment? P Q S D Health Care P* Q* PcPc PcPc Shortage

15 Who get’s a Kidney? Assume that all suffer equally from urgent cases of kidney failure and that those who do not receive a transplant will die within a year Criteria you may use to decide: 1) a person’s merit 2) their contribution to society (past and present) 3) their ability to pay 4) their need 5)their age Work in groups of 2-4 and decide who gets the kidney and why

16 If you gave the kidney to… Dr. M., he died of a massive coronary two years after receiving the kidney. Bonnie T., she went on to medical school and became and obstetrician. Fred S., he quit medical school and divorced his wife. Agnes M., she won the state lottery and became and instant millionaire. Ellen R., she became a lawyer, working to defend the poor.

17 How can we decrease the price of health care? Can we decrease the price of health care in a way that will not cause a shortage—i.e. without setting a regulated price (price ceiling)? P Q S D P* Q* Decrease Demand Increase Supply D’ P’ Q’ S’ P’ Are there any consequences???

18 Market Failure Departure from perfect competition Market failure is rampant in health care—the government must step in Is health care a right? How much intervention is the right amount? Medical care delivery is inefficient—why? Malpractice lawsuits Financing care for the poor is a major issue—what is the optimal tax to fund this or should we fund this at all?

19 Market Failure cont. People Know what they need People have full information People’s actions affect only themselves There is perfect competition Medical Care …need is unpredictable …people are poorly informed …there are many externalities …competition is limited (licensing, FDA, drug patents, ets.)

20 Adverse Selection in Health Insurance Markets Originally created by Ashely Hodgson (JEE, Vol. 45, No.2, Apr-June 2014) Adapted by Jennifer Davidson, M.Ed. and Jamie Wagner, Ph.D. Candidate

21 Your role – 30 people in our risk group Our risk pool Most people fall into the healthy category; the top 5 percent of patients in the US spend 50% of health care dollars (Kaiser Family Foundation Estimate, 2012) Your role provided to you Age Any medical issues you have Probability of a minor incident costing $8,000 Probability of a major incident costing $200,000

22 Budgeting Once assigned character construct your budget Based on average salary Median income for a single adult in the US was $30,880 in 2012 (US Census) Adjusting for taxes translates into roughly $2,345 per month Must include Housing Transportation Food Utilities Healthcare Clothing Entertainment

23 Average Cost of Health Care $8,233 per person in 2010 (OECD, 2012) $5,615 individual premium for employer-sponsored insurance 2012 (Kaiser Family Foundation survey, 2012) $15,745 family premium for employer sponsored insurance 2012 (Kaiser Family Foundation survey, 2012) What is “affordable” health care? ACA – costs less than 9.5% of individual household income and covers 60% of medial costs.

24 Health Insurance Decision Self select, depending on your health status, into Gold, Silver, or Bronze Gold No copayment required/no deductible required Silver 20 percent copay/$500 deductible Bronze 30 percent copay/$1000 deductible

25 Make Selections

26 Debrief What happened to prices and why? Gold – increase or decrease Silver – increase or decrease Bronze – increase or decrease If we were to run it again based on the new prices for each plan, what would happen? Almost everyone choose bronze (except maybe the sickest) Some healthy patients drop out? How high would a tax penalty have to be to stop them from dropping out?

27 Adverse Selection “Death spiral” The presence of high-cost consumers in the market pulls up the average cost of service, pulling up the price. An increase in price decreases the number of low- cost consumers who purchase insurance. The decrease in the number of low-cost consumers pulls up the average cost of insurance. In the extreme case, this upward spiral continues until all insurance customers are high-cost people.

28 Three-Legged Stool of the ACA The requirement that insurers accept all applicants, regardless of pre-existing conditions (also known as guaranteed issue) The mandate requiring all citizens to buy health insurance (also known as the individual mandate) The government subsidies assisting low-income people in buying insurance

29 Health Econ Wrap-up cont. People choose. Choices are made everyday all the time! Do I get health insurance or not? Should I continue to smoke or quit smoking? People’s choices involve costs. If I did not have health insurance before and I get it now, I avoid paying the mandated tax. If I choose not to get insurance I pay the tax. People respond to incentives in predictable ways. A high enough tax will incentivize me to not buy the health insurance. If the insurance costs more than the tax I will pay the tax.

30 Health Econ Wrap-up People create economic systems that influence individual choices and incentives. We have a system and the Affordable Care Act with the interest of influencing behavior—forcing folks to buy insurance People gain when they trade voluntarily. What choice did people make prior to the ACA? Did they voluntarily purchase insurance? People’s choices have consequences that lie in the future. There are consequences for buying insurance. There are consequences for not buying insurance.

31 Thank you!!!

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