Presentation on theme: "Objectives For you to be able to:"— Presentation transcript:
1 Application: Adverse selection and moral hazard in the finance and supply of health care
2 Objectives For you to be able to: Explain how problems of adverse selection arise in relation to health insurance. Explain how the problems associated with adverse selection in relation to health insurance can be resolved. Explain why equity issues may arise as a result of the solutions to adverse selection employed by private insurance providers. Explain how these equity issues can be addressed.Explain how consumer and supplier moral hazard arises in the context of health care provision. Using examples, discuss how the problems associated with moral hazard in health care provision can be resolved.
3 Suggested background reading Allen et al Managerial Economics. Norton. Chapters 14-15Kreps, D. M Microeconomics for Managers. Norton Chapters (16-17 provide more background)Frank, R. H Microeconomics and behaviour. McGraw Hill. Chapter 6Wall,S., Minocha, S. and Rees, B International Business, Pearson. Chapter 6Grimes, P, Register, C. and Sharp, A Economics of Social Issues, McGraw Hill. Chapter 15Rasmusen, E Games and Information, Blackwell. Chapters 7-9And any introductory Health Economic text you can access e.g. Mooney, G., (2003) Economics, Medicine and Health Care, Dorset: Prentice Hall
4 Sources of imperfect and asymmetric information in health care markets Health care finance: Health care providers (e.g. insurers, government) are relatively uninformed about a client’s health risk and health related behaviourThe doctor-patient relationship: The consumer/patient is relatively uninformed about health care treatments but the health practitioner is relatively informedImplies potential for moral hazard and adverse selection - particularly in private health insurance marketsProblems vary depending on systemAsymmetric information and the principle agent model can be applied to the doctor-patient relationship. Leads to moral hazard, adverse selection in provision/supply and agency issues in demand e.g. the potential for supply induced demandThe rationale for public support is based on arguments and theory in health economicsKey are the particular characteristics of the market for health care and the potential for market failures that relate to these characteristics. In addition, part of the problem is that the demand for health care is both irregular and unpredictable plus risky (with some probability of death). It is also financially expensive and outcomes of treatment are uncertainPoints to consider:Purchasing insurance is the utility maximising decision for a risk averse individual in an uncertain world;Characteristics of the health care and health care insurance market are likely to lead to market failure;Moral hazard is likely operate in a private health care insurance marketMeasures to counter moral hazard have implications for equity in health care provisionPublic intervention in health care provision may lead to greater social welfare than depending upon competitionBroad topics:Market failure in Health care; Consumer and provider moral Hazard; Measures to counter Moral Hazard; Adverse selectionUncertainty and health care; Utility maximisation under uncertaintyPrivate insurance in health care provision
5 Different health care systems Pure market provisionHealth care is like any other good and demand and supply respond efficiently to price - Embodies consumer sovereignty in a decentralised marketPrivate insurance based approachPrivate Insurance (or no insurance) and minimal state controlEmployer or individual based insurance plus private ownership of health care supplyThe USA (although some publicly funded health as well; Medicare, Medicaid)Culyer, Maynard and Williams (1981)In a private system if a person has no insurance then consumption is constrained by price and incomeIf the insurer pays all the bills then consumption is not constrained by price and medics have no incentive to ration demand efficiently
6 Different health care systems Public production, allocation and financeAim is improvement of health for the populationHealth is a right and access is by needUniversal medical carePublic/tax financed - mostly free at point of serviceEarnings related social-insurance contributionsTax funding plus public ownership/control of health care supply e.g. UK, Sweden, New ZealandMixed public/private involvement e.g. private provision but public financegovernment tax-based subsidies to a privatised system or tax-based national insuranceCompulsory cover through tax system supplemented by tax funding plus some private sector involvement in supply of healthcare e.g. Canada, GermanySingapore (some government subsidy through taxation)Culyer, Maynard and Williams (1981)In a private system if a person has no insurance then consumption is constrained by price and incomeIf the insurer pays all the bills then consumption is not constrained by price and medics have no incentive to ration demand efficiently
7 Horses for courses?Different countries may not want the same things from their health care systemAll have different advantages and disadvantagesThe US system has short waits but the UK NHS is more equitable/accessibleLife expectancy is more or less the sameWomen: 80.4 in the UK, 79.8 in the USAMen: 75.7 in the UK, 74.4 in the USALife expectancy data is for 2001 – data from OECD Health Data 2004Table in Folland et al page 511 gives some comparative date on wait times, costs and access
9 Problems for all health systems Cost containment: Most countries (except the UK) have seen an escalation in health expenditureE.g USA medical spending as a % of GDP was 14.6%; Canada 9.6%; UK 7.7%; France 9.7%(OECD Health Data,Possible explanations:Availability of new and expensive technologyThird-party payment due to asymmetric information as well as uncertainty and riskBoth doctor and patient have an incentive to consume health care as long as there is some positive benefit---this is a moral hazard problemDoctors are paid a fee for services by a third party e.g. insurance company or government (not the patient) so marginal cost of health care is ‘free’ to the patient and doctor is not constrained by patient’s ability to pay – can lead to high service costs and fees – SID.Maybe less of a problem when there are state imposed spending limits (as in the UK, Canada)UK has escaped this problem through government control of expenditureOECD Health Data 2004: A comparative analysis of 30 countries, Paris: OECD (www.oecd.org)E.g. In 1985 spending on physician services was 72% higher, fees (in all categories) were 239% higher and the net incomes of doctors were also higher in the US compared with Canada but the quantity of care per capita was lower in the US (Fuchs, V. R. and Hahn, J. S., 1990, How does Canada do it? A comparison of expenditures for physicians’ services in the United States and Canada, New England Journal of Medicine, 323: in Folland et al page 505).
10 Adverse selection and moral hazard in health-care Adverse selection due to imperfect information about individual risksConsumer moral hazard as people can influence the probability of ill healthProducer/supplier moral hazard as doctors do not bear the costs of treatment:Moral hazard and adverse selection are agency problems. In relation to finance and insurance an asymmetry in information arises due to the patient being better informed about their own state of health
11 Adverse selection in private health insurance Adverse selection arises from the information asymmetry about health risks between the insurance company and the insured personInsurance company (principal) only knows average risk in a populationIndividual (the agent) knows more about own health riskAdverse selection results from asymmetric information about health risks but insurance companies are just trying to minimise their costs.Solutions have significant and generally undesirable, implications for social welfare.some people will be uninsured – the most at riskAdverse selection is a market failure – the methods insurance companies use to circumvent adverse selection are a consequence but mean high risk people will not be able to afford insurance – separating instead of pooling contracts
12 Adverse selection in private health insurance If insurance contracts/premiums based on average risk (community ratings)only people of average or higher than average risk will buy the insurance - more than averagely healthy people will not buy expensive insuranceImplies adverse selectionputs the insurance companies at risk of paying out more than they receiveNegative impact on profits as premiums based on average risk not high risk of the people who actually buy the insurance.Adverse selection results from asymmetric information about health risks but insurance companies are just trying to minimise their costs.Solutions have significant and generally undesirable, implications for social welfare.some people will be uninsured – the most at riskAdverse selection is a market failure – the methods insurance companies use to circumvent adverse selection are a consequence but mean high risk people will not be able to afford insurance – separating instead of pooling contracts
13 Solutions for the insurance companies Insurance companies use ‘screening’ methods to identify high and low risk people e.g. base premium calculations on medical examinations, individual experience of ill-health, lifestyles (smoking, occupation) and other characteristics e.g. age, ethnicity, gender, wealth.This can lead to premiums that are too high for many sick people (or those most at risk) to affordHighest premiums unaffordable by poorer people but they are at the most risk so they are the people likely to be charged higher premiumsImplies rationing by price, income and riskSome people unable to acquire private insurance because they are high risk and/or too poor
14 Rationing in a private market for health care: no excess supply/demand at the equilibrium price but this does not mean everyone is coveredPriceS = MCD = MWPUninsured demanddue to rationing by pricePpSee Folland et al (2007: page 231) for a discussion of some of the myths about the uninsured in the USA. In million or 18.7% of the US non- elderly population was uninsured (the elderly are insured though Medicare). Over 1/3 of uninsured people need care but don’t get it and nearly half postpone it. Less than a ¼ of families with at least on uninsured member report having received care for free or at reduced rates. If not covered by job- related health insurance costs for the individual are high – average annual cost for a family was about $3,300 in 2005.SeePublic provision addresses some of these issues by pooling riskQpQuantity
15 Problematic side of private based system like the one in the USA Coverage problemsMore than 20% of the US population are without health care coverageHighest infant mortality rate of developed countries.Myths about the uninsured in the USA:uninsured-fact-sheet.pdf
16 Why, if at all, does it matter if poorer and/or sicker people are not covered by health insurance? If it does matter, what possible solutions are there for this coverage problem?
17 Why access to health care matters Poorer people are more likely to suffer from ill-health – poverty as a cause of ill-healthThe poor tend to be ill more often and more severely ill than the rich. They live shorter lives and are in poorer health while they are alive“A boy born in Hackney, next to Newham, is more than twice as likely to die in the first year of his life as a boy born in Bexley, in the south-east suburbs.” Carvel, 2001A strong relationship between health and economic status within and between countries“First and foremost there is a need to reduce greatly the burden of excess mortality and morbidity suffered by the poor” WHO, 1999WHO, 1999, The World Health Report, Geneva, WHO
18 2 way causalityThe links between poverty and ill-health are not just one wayIll-health can cause or worsen povertybut if good health care reaches the poor, it can help to relieve povertyPolicy directed to health can therefore have positive economic implications for individuals and countriesExternality effects: Ill-health leads to a decline in productivity and earningsThe loss from AIDS death in Zaire has been estimated to equal 10 years of average per capital incomeA typical Tanzanian AIDS death has been estimated to involve a loss of 18.3 years of average per capita income.See Over, Mead et al 1988 The direct and indirect cost of HIV infection in developing countries: The cases of Zaire and Tanzania, 4th International Conference on AIDS, Stockholm, June 12-16
19 Why access to health care matters --equity issues People are concerned about the health of others and inequalities in health – more so than inequalities in incomeA kind of externality - humanitarian overspillLeads to general support of a health-care system that is redistributive or at least provides a safety netEnabling people on low incomes to access more health-care than they could afford to buy in a competitive health care marketGives a role of government in health-care
20 Why access to health care matters - global public health issues Externality effects of ill-health that extend beyond national bordersTransmission of diseases (e.g. HIV/AIDS, tuberculosis, malaria)Heightened by travel but incidence and impact highest in Sub-Saharan Africa, Middle East and IndiaThreat of bio-terrorismThe emergence of drug-resistant strains of disease e.g. tuberculosis, Malaria and leprosySee Johnson-Lans, S., 2006: chapter 13 A Health Economics Primer, Pearson-Addison Wesley USA
21 Social insurance as a policy solution to the coverage problem Potential for adverse selection in health care and related coverage problems weakened by public provisionAS and related coverage problem spread of compulsory/universal social insurance schemes in health:Social insurance schemes enable risk pooling - the state insurse the ‘uninsurable’ by compelling universal coverageReduces the risk of adverse selectionThe state = third party in the relationship between patients and health practitionersi.e compel coverage of low risk and rich people as well as high risk people
22 Moral hazard in health care provision and finance Consumer moral hazardSupplier moral hazard
23 Consumer Moral HazardConsumer moral hazard arises because insurance (private and social) reduces the cost of consuming health care at the point of consumption.As the cost of consumption falls, the cost of being ill is reducedincentives to reduce the risk of falling ill are reducedpeople take risks with their health through health related (bad) behaviourSmoking, driving recklessly, poor diet, less exercise
24 Consumer Moral HazardLess personal investment in health implies higher consumption of health care than if there were no insuranceSocially inefficient outcomeHigher costs for private (and public) health insurance companies – lower profits (higher taxes)
25 Measures to counter consumer moral hazard Insurance basedInsurance + organisation basedNon-price rationing (state provision)
26 1. Insurance based solutions Co-payments, coinsurance and deductibles - The insured person pays some fraction of the cost of the procedure - out of pocket expenditures.Co-payments: flat rate charges (e.g. prescriptions)Coinsurance (% share of total cost)Deductibles (e.g. excesses)Limitations: Fixed maximum coverage schemes; the financial exposure of the insurer is fixed.E.g. life time coverage limitedThe insured have an incentive to ensure that costs remain within the agreed value as excesses will have to be met by them.Evidence from health insurance experiments have found that utilisation is reduced by some of these kinds of methodsLike and excess agreement.Deductibles: Not all provision covered by insuranceCo-insurance: consumer pays a fraction of billCan also get combinations of deductibles and coinsurance
27 Evidence relating to hospital use and different payment schemes: RAND Health Insurance ExperimentRandomized families to health insurance plans that varied cost sharing from none ("free care") to a catastrophic plan that approximated a large 95% family co-insurance deductible (with a stop-loss limit of $1,000 in late-1970s dollars - scaled up for the low-income population).The participants in the large-deductible plan (95 percent coinsurance) used percent fewer services than those in the free-care plan….23 percent less likely to be hospitalized in a yearSubstantial reductions in use were found among all income groupsBut how did this impact on health?The RAND HIE was an experimental study of health care costs utilization and outcomes in the United States, which assigned people randomly to different kinds of plans and followed their behaviour, in As a result, it provided stronger evidence than studies that examine people afterwards who were not randomly assigned. It concluded that cost sharing reduced "inappropriate or unnecessary" medical care, but also reduced "appropriate or needed" medical care. It did not have enough statistical power to tell whether people who got less appropriate or needed care were more likely to die as a result.Stop-loss limit sets limit to pay out – i.e. it’s a loss limit in this case for insureeA limit on the amount that a policyholder must make in coinsurance and out-of-pocket payments per year on an insurance policy. Generally the stop-loss limit is stated as a flat dollar amount (e.g, $5,000). Once the stop-loss limit has been reached, the health insurance company picks up all remaining expenses for the year.
28 Evidence relating to health status: RAND Health Insurance Experiment For most people enrolled in the RAND experiment (mainly typical of Americans covered by employment-based insurance) the variation in use across the plans appeared to have minimal to no effects on health status.But for those who were both poor and sick (might be covered by Medicaid or lacking insurance) the reduction in use was harmful.E.g. Hypertension was less well controlled among that group, sufficiently so that the annual likelihood of death in that group rose approximately 10 percent.
29 Impact of the RAND Health Insurance Experiment There is still a debate over the appropriate role for patient cost sharing… whether any reduction in use induced by increased cost sharing was among "necessary" or "unnecessary" services and therefore whether it adversely affected health.
30 Alternative solutions to consumer moral hazard: Managed care agreements Insurers enter into volume discount contracts with specific providers.Insured must pay extra to use ‘non-preferred providers’ e.g. US arrangements.Managed Care Plans (Health maintenance organisations, HMOs) and Preferred provider agreements (PPOs)Fairly comprehensive care but eitherall care is delivered through the plan’s network e.g. in HMOs primary care physicians authorise servicescoverage greater (costs lower) e.g. when when using the PPO’s provider networkCommon in the US and also some south American countries e.g. ArgentinaIn the USA PPOs are now more prevalent than HMOsSome evidence that costs lower for consumers and less use of expensive resources with managed care but selection bias problems and issues related to quality of care(see Drummond et al pp 256-9)
31 No patient is refused access to health care But………… Alternative solutions to consumer moral hazard: Non-price rationing (public finance/provision)No patient is refused access to health careBut…………Capacity is fixed leading to waiting lists for certain therapies.People pay a time cost which should discourage unnecessary use.
32 Rationing under social provision : excess demand at the administered price, Pa → waiting lists S: inelastic as determined by statePriceExcess demand= Waiting lists or time based rationingD = MWPPcPa= Unmet demandSupply is not price sensitivePc is the market clearing price – since this is above Pa there is excess demand which in this case implies time related rationing.In the UK waiting lists/excess demand have lead to the development of private health markets for services for those who have the appropriate ability to pay (i.e. at a price higher than Pa and probably higher than Pc as well since supply is price responsive)Qp Q*Quantity
33 Rationing under social provision can also lead to a private market for health care - a useful safety valve for the state system?PriceS = MCD = MWPRevenue to private systemPpThis is what happens in the UK. In Canada there was no private alternative until 2005 though some Canadians can use the US health system if they want to avoid waiting and can afford to.Qpr < Q* - QpQuantity
34 Provider moral hazardProvider moral hazard derives from the infrastructure of modern health care, where a third party (insurance or state) pays for the health care provided by the doctor.The payer may have different priorities to either the doctor or patient.Systems will reflect the payer’s utility function; e.g. maximising population health gainImpacts on pay contracts (for medics) e.g. treatment fees
35 Implications of third party payment If doctors are paid a fee for services by a third party (insurance company or government - not the patient) then the marginal cost of health care is ‘free’ to the patient and doctor is not constrained by patient’s ability to payMoral hazard can arise because:Information asymmetry between doctor and the patientThe doctor does not know the cost of medical careThe doctor has a financial or similar incentive to increase consumption of health care e.g. fee for service arrangements,Can lead to supplier induced demand (SID); demand higher than socially efficienti.e. Institutional arrangements are important in determining the relevance of agency literature to understanding incentives and observed behaviours in the health care system.
36 Supplier Induced Demand (SID) “Supplier induced demand is the amount of demand created by doctors, which exists beyond that which would have occurred in a market in which consumers are fully informed.” Donaldson & Gerard (1992)“Supplier induced demand exists when the physician influences a patient’s demand for care against the physicians interpretation of the best interest of the patient.” McGuire, T. (2000)Doctors have the potential to induce demand for health careThe empirical evidence tends to support the existence of SID – but it is not conclusive.It may not be possible to prove the existence of SIDT. G McGuire Handbook of health economics, in: AJ Culyer and JP Newhouse, Editors, Handbook of Health Economics, Elsevier, Washington DC (2000) – Also see RP Ellis and TG McGuire (1986) Provider behavior under prospective reimbursement, Journal of Health Economics 5 (1986), pp. 129–Donaldson C. and Gerard K., (1992) The Visible Hand: The Economics of Health Care Financing, London: Macmillan
37 Diagrammatic illustration E0 = Initial equilibriumFollowing an increase in overall supply (to S1) due to an increase in funding (new doctors or hospitals etc), doctors increase demand (to D1) to maintain (or increase) target income.E1= resulting equilibriumS0S1E1E0Empirical Evidence e.g. Fuchs, Birch, Norwegian Primary Care, AustraliaIf demand is inelastic (which is probably the case as it’s a necessity) the increase in supply leading to a decrease in price) will lower revenue/incomeSee appendix: SID can also result in a decrease in demandD1D0Q Q1Q
38 Implications SID (excess demand) can lead to: Higher service costs and fees: rising health care costsHigher usage of new and expensive technologyPotentially less of a problem when there are state imposed spending limits (as e.g. in the UK, Canada)The NHS is cheap by international standards and health outcomes not that much different - supply side incentives to economize through budgets and method of doctor payment (Doctors are not paid directly for medical activity)E.g. In 1985 spending on physician services was 72% higher, fees (in all categories) were 239% higher and the net incomes of doctors were also higher in the US compared with Canada but the quantity of care per capita was lower in the US (Fuchs, V. R. and Hahn, J. S., 1990, How does Canada do it? A comparison of expenditures for physicians’ services in the United States and Canada, New England Journal of Medicine, 323: in Folland et al page 505).The empirical evidence tends to support the existence of SID – but it is not conclusive.It may not be possible to prove the existence of SID as the direction of causality could go either way
39 Questions to consider: 1 Questions to consider: 1. What sort of health system is in place where you are (or where you come from)? and; 2. how does this system address potential problems of adverse selection and moral hazard? 3. what are the advantages and disadvantage of this system?
40 Policy implications: Social insurance as an alternative to market provision Market failures in health care due to asymmetric information lead to problems associated with moral hazard and adverse selectionAlso other market failures due to:Externalities; Uncertainty; Economies of scale; Entry barriers leading to a near monopoly of control by medical practicionersExplains the spread of compulsory and universal social insurance schemes in health provision:Reduces the risk of adverse selection: the state can insure the ‘uninsurable’ by compelling universal coverage - risk poolingReduces some moral hazard problems: the state can act as a third party in the relationship between patients and health practitionersThe characteristics of health care are not consistent with the assumptions of the competitive market model. Distinguishing characteristics of the medical care market that imply imperfections and potential for market failure (Arrow 1963)General Interdependence – externalities; Increasing returns to scale – diseconomies of small scale (need large numbers to pool risk); Entry restrictions; Routine price discrimination;Imperfect informationTherefore, it is unlikely that a competitive market model will produce health care in an efficient manner; There is potential for market failures. Where the market fails, Arrow argues that social welfare will be best served by the state providing health care insurance of some sortRisk pooling via universal coverage i.e. compel coverage of low risk and rich people as well as high risk peopleE.g. Law of large numbers applies in insurance: enough people need to be insured in order that risks are pooledPayouts are potentially very large in the case of infectious diseases
41 Does this approach imply an idealised view of public system …its guiding principle the improvement of the health of the population at large; it allows selective access according to effectiveness of health care in improving health (need). It seeks to improve the health of the population at large through a tax financed system free at the point of service. It allows public ownership of the means of production subject to central control of budgets; it allows some physical direction of resources; and it allows the use of countervailing monopsony power to influence the rewards of suppliers.”Culyer, Maynard and Williams, 1981
42 Criticisms of the UK NHS Consumers have no choice (the NHS is a monopoly)But patients can change doctors and ask for second opinionsSpends too much on bureaucracySpending is low by international standardsRationing problems: not enough resources are allocated to the NHS leading to waiting listsFunding has risen and is now budgeted to reach 9.4% of GDPAllocation problemsThe way it allocates resources to different treatmentsPerverse incentives, over-centralisation, lack of accountability and inflexibilityThe way resources are allocated to different geographical regionsEqualisation or by need? The latter is currently the aimPerverse incentives e.g. consultants don’t necessarily gain more resources if they treat more patientsCentralisation: e.g. pay agreements leading to staffing problems, lack of coordination between NHS and related activities paid for by social security budget e.g. caringLack of accountability: what do things costs and are budgets being kept?Inflexibility: difficulty to close a ward/hospital that is not needed
43 Does the alternative suggest an idealised view of private system “..guiding principle consumer sovereignty in a decentralised market, in which health care is selective according to willingness and ability to pay. It seeks to achieve this sovereignty by private insurance; it allows insured services to be available freely at time of consumption; it allows private ownership of production and has minimal state control over budgets and resource distribution; and it allows the reward of suppliers to be determined by the market.”Culyer, Maynard and Williams, 1981
44 Rationing and allocation are problems (all types of systems) Conflict between maintaining quality and incentives to cut costs; being cost effectiveConflict between limited resources and coverage - implies a need for some kind of rationingEven more of a problem if also trying to maintain universal coverage and if rationing is not by price then who receives treatment and when?E.g. costs are rising in Canada as well and the federal government is looking to either reduce costs or raise taxation. But goals to be met through planning (e.g. reductions in capacity, substitution of outpatient for inpatient care, regionalisation) rather than competition.
45 Rationing problems under social provision Limited resources in public health care systems mean that policymakers need to address allocation problemsFor instance, should public health care systems fund cosmetic surgery or very expensive surgery that leaves patients with low life expectancy?What are the consequences of this kind of funding?
46 Case study 1Jake and Bunty both need kidney transplants but there is only enough capacity to treat one of them, even though both will die quickly if untreated.How would you decide which patient to treat?What information would you ask for before making a decision?
47 Suppose you know that Jake is younger than Bunty but Jake is heavier drinker
48 Case study 2Jessie and Rosie both need medical treatment. Jessie requires a relatively cheap hip replacement but Rosie requires expensive heart surgery. Capacity is limited and it is only possible to treat one of them over the short-term (6 months). Rosie will die quickly if untreated. Jessie won’t die but she is in severe pain.How would you decide which patient to treat?What information would you ask for before making a decision?
49 Suppose you know that Rosie is older and has other health issues but Jessie is otherwise healthy
50 Criteria for rationing The ‘Fair Innings’ argumentYounger people given priority in health careConsistent with QALY maximisationResponsibilities (Etzioni, 1988)Smokers given lower priority in health careSocial contracts and fairness (Rawls, 1972)Health care goes to people because they need it: a ‘needs’ approachInconsistent with QALY maximisationFirst come first served subject to budgetsA lotteryEtzioni, A., 1988, The Moral Dimension: Towards a New Economics, New York, Free PressRawls, J., 1972, A Theory of Social Justice, Oxford, Oxford University PressAccording to Mooney (2003: 51)The ‘needs’ approach is related to the idea of ‘merit goods’ and reflects judgements of some elite in this case medical peopleDifficult to establish priorities under a ‘needs’ approach is target setting an alternative?Williams proposed the fair inning argument (1997); in which QALYs ‘received’ should be considered in order to equalise life time expected QALYs.Dolan (1998) reports that individuals weight health gain to those with the worst health profile more highlyShift from 0.2 to 0.4 has the same value as a shift from 0.4 to 0.8.Tsuchiya (2001) reports differential weights for young and old5 year olds = 1.8; 35 years = 1; and 70 years = 0.6
51 Economics based criteria - micro level efficiency The cost/quality/coverage conflict suggests there is a role for economic evaluation to maximise the use of limited resourcesE.g. health economic evaluation methods such as Quality Adjusted Life Years (QALYs)Multidimensional measure/index of health that combines quantity of life (life expectancy) with quality of life in a single indexWhat should be the priorities? E.g self-esteem, dignity, prevention, physical exercise, community buildingShould there be more incentives to be more efficient?QALYs help to judge relative priorities:Treatments with the same costs but higher QALYs should get priorityIf costs per treatment for the same health problems are different, marginal costs per QALY can be compared and treatments with cheapest QALYs given priorityTreatments for different health problems with lower marginal costs per QALY should get priorityQALY league tables devisedQALY league tables helping to answer questions like:If there are no more resources available, can some amount of resources be moved from programme X to programme Y and as a result increase total benefits?If more resources become available where should they be allocated in order to increase total benefits most?If resources are cut from which programmes should resources be withdrawn in order to minimise the impact on total benefits?But criticisms of QALYs e.g. more information needed about costs and benefits and also:The view that health status cannot be measured -methods may need to go beyond just measuring health i.e. wider individual and social benefits as well as costEven if it can be measured, QALYs are an inadequate way of doing soBut what are the alternatives in terms of outcome/output measurement?There has to be priority setting since health care resources are scarce – choices have to be made
52 Criteria for rationing applied to case study 1 QALY maximisation and the Fair Innings argument would dictate that in case study 1Jake would have priority if he were younger (assuming that either patient would have a similar quality of life)But isn’t Bunty’s claim just as legitimate? Would we have to give Jake priority? What if Jake was only a few years/weeks younger than Bunty?As Jake is a heavier drinker the responsibilities argument would favour Buntybut what if he only drinks a little more than Bunty?Nevertheless, resource constraints mean equal rights to treatment cannot be recognised – choices have to be madeOr equity of access – in the Margolis (1982) context of allowing a concern for ‘doing our fair share’Margolis H (1982) Selfishness, Altruism and Rationality, Cambridge: Cambridge University Press
53 Final points and questions: is any kind of health care system is optimal? How should health care systems balance the ever- increasing benefits provided by scientific research, the costs of provision and the protection of human rights?New drugs, equipment and treatments are solutions to health problems but they are expensivePoorer people can be excluded under private insurance but there are limited resources in publicly funded systemsNo health care system is perfect.The problems of health systems in different countries are to some extent predictable outcomes of their chosen health-care strategyIs some kind of managed competition (an internal market) within a publicly funded system a solution or should some aspect be completely privatised?
54 Test your understanding Try to answer the following:In the context of health care insurance explain how adverse selection problems can arise and how they could be resolved.Explain how consumer and supplier moral hazard can arise in the context of health care provision. How can the associated problems be resolvedHow can and how should health care be rationed?
55 Extra material on the advantages and disadvantages of different health care systems – for background only
56 Questions to considerWhat are the advantages/disadvantages of public health care systems?What are the advantages/disadvantages of private systems?What would be your preferred health care system and why?No health care system is perfect. The problems of the health system in each country are predictable outcomes of its chosen health-care strategy. Discuss with examples from at least two countries.
57 Advantages of public health systems not related to asymmetric information Most social insurance schemes also redistribute from the rich to the poor through income related paymentsThey promote equity in health careE.g. by promoting early diagnosis as treatment is mostly freemay enhance fairness in societyBut if individual choice is weighted more highly then this is better served under a privately funded or perhaps a mixed system
58 Other specific and tangible advantages of public health systems They Avoid the need for safety-net facilitiesThey promote universal coverage and by doing so improve health and productivity of the population through accessibilityWeakens the link between poverty and ill health if health care is provided on the basis of need rather than incomeBy delivering health care to low-income people – more than they could buyEvidenceCountries that rely more on private insurance (e.g. the USA, Switzerland) have regressive health care financing systems overallHealth care finance is more unequal than pre-tax incomes: people on low incomes buy less insurance but pay on average a higher proportion of their income for itMore variation in countries where there is social insurance:In France and the UK health care finance is progressive; in Germany and the Netherlands it is regressiveSee Rice T., 2002 The Economics of Heath Care Reconsidered, Health Administration Press: Chicago
59 Other specific and tangible advantages of public health systems Cheaper admin costs as no need to verify eligibilityGive provider monopsony power to the provider to enable lower costs/chargesE.g. monopsony power of NHS keeps prices low (e.g. drugs, equipment)See Rice T., 2002 The Economics of Heath Care Reconsidered, Health Administration Press: Chicago
60 Resource/service cost determination under competition on buyers side PriceD = MWPS = MCPcExpenditure or Resource costs under competitionQuantityQc
61 Resource/service cost determination under competition and monopsony PriceMCD = MWPS = ACExpenditure or Resource costs under monopsonyMonopsonist equates MC (higher than S = AC since average resource price/costs rise as more are demanded/bought – all supply factors are paid more) and MR = DPrice lower, total costs lower, but less resources bought.PmQuantityQm
62 Less tangible advantages of public health systems Titmuss (1970) described the establishment of the UK NHS in the following way:“The most unsordid act of British social policy in the twentieth century has allowed and encouraged sentiments of altruism, reciprocity and social duty to express themselves; to be made explicitly and identifiable in measurable patterns of behaviour by all”He showed that supplying blood through voluntary donation was more effective/more efficient than the commercial alternativeBehaviour characterised by altruism has wider positive effects?Public health systems encourage altruism; A kind of positive caring externality?Titmuss 1970 The Gift Relationship (From Human Blood to Social Policy)
63 Disadvantages of public health systems Medical practitioners don’t face up to resource constraints; provider moral hazard remains an issueNeed better incentives to be efficient – but how?Market? Community?People’s expectations of the health service are unrealisticRedistributive social insurance schemes may be perceived negativelyCompels coverage of low risk and rich people (as well as high risk people)Mooney, 2003 page 130
64 Example of more market based system: the USA Primarily a private enterprise based health care system but four public health care funding streams:Medicare – health care funding for the elderlyFederal health care fundingMedicaid – health care funding for the poorCollaboration between Federal Government and the States.Veterans Administration Health CareFederal Government funding for veterans of the armed services.Health insurance for federal and state employees.USAMedicare is a federal program of subsidised medical insurance for senior citizens designed to resemble the coverage they had via insurance plans while in work. Financed through taxation. Enacted in Part A is mandatory and covers acute care hospital services (up to 150 days) and some posy-hospital services (mostly time limited). Part B is voluntary and is a subsidised plan covering medical expenses other than hospital bills.Medicaid – provides health care to certain low-income families and individuals – largest group of people covered is children but most expenditure is for the disabled and the second largest expenditure goes to the elderly poor for nursing home and home care. Most poor families do not qualify for Medicaid. Some pregnant women are covered by Medicaid. Finance is federal and state taxation. All benefits are means tested and the means testing includes personal property.InsurancePrivate health care insuranceComprehensive; Insurance with co-payments and/or deductiblesHealth care providers separate from insurance companiesHigh administration costsPrivate For-Profit hospitals and private Not-for-Profit hospitalsPublic Hospitals (state rather than federal)Primary Care DoctorsCare provided on a Fee-for-Service basis.Managed care e.g. Health Maintenance Organisations, Preferred Provider AgreementsHMOs: firms’ of doctors provide insurance and health through pre-payment systems; provides complete pre-specified health care package to subscribers - Managed care in this way is similar to idea of GP fundholders in the NHS (1991) (replaced by Primary Care Trusts in 1997)PPOs provide two tier insurance, no physician gatekeepers but coverage greater (costs lower) when using the PPOs provider network
65 Problematic side of USA system As well as coverage problems as already discussedMore than 20% of population without health care coverageAlso too expensive – perhaps due to consumer and supplier moral hazardhighest utilisation of high tech health care.More than 17% of GDP spent on health care.
66 Alternative more mixed systems; Canada National Health Insurance system with universal coverageCollaboration between provincial and national governments.75% of health care expenditure Province/territory administration of comprehensive and universal care supported by grants from federal governmentHospitals are private institutions but budgets approved by provincesMost physicians are in private practice but paid by provinces on nationally agreed fee-for-service base under negotiated fee schedulesSystem is generally seen as less costly and more effective than the US systemthe Canadian system as a yardstick/benchmark? Essentially publicly funded. Called Medicare as well: no financial barriers to access and portable across provinces.Originated in 1930s but reforms in 1957, 1966 and 1972Not all services are free at point of use to all i.e. not all services covered under the publicly funded system. But these supplementary health benefits such as prescription drugs, dental care, vision care, appliances etc are free to seniors, children and social assistance recipients.And administration cost is relatively low.
67 Some comparative statistics Which system is the most successful?
68 Theoretical appendix: SID can also imply reductions in demand in response to changes in funding E0 = Initial equilibriumFollowing a reduction in supply (funding); doctors reduce demand to maintain target income. E1 = resulting equilibriumFollowing an increase in supply doctors increase demand to maintain target income. E2= resulting equilibriumS1S0S2E1E0E2D2D0D1Q