Chapter 22 Health Care Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

22-2 Chapter Outline WHERE THE MONEY GOES AND WHERE IT COMES FROM INSURANCE IN THE U.S. ECONOMIC MODELS OF HEALTH CARE COMPARING THE U.S. WITH THE REST OF THE WORLD

22-3 You Are Here

22-4 The Money 16% of GDP spent on health care (2.2 trillion of 13.8 trillion) 46% spent by governments (Medicare, Medicaid etc.)

22-5 Government Health Programs Medicare public insurance in the U.S. which covers those over age 65 –$431 billion Medicaid public insurance in the U.S. which covers the poor –$329 billion

22-6 Where the Private Money Comes From Private Insurance –$775 billion Out-of-Pocket Patient Expenses –$264 billion

22-7 Where the Money Goes Hospitals –$697 billion Doctors –$479 billion Prescription Drugs –$228 billion Research –$40 billion

22-8 Insurance Coverage 82% covered all year 8% covered part of the year 10% without any insurance all year

22-9 Insurance Types Private Group Insurance –171 million Private Individual Insurance –25 million Medicare –43 million Medicaid –52 million

22-10 Why People Buy Insurance People who believe that their insurance premiums will be less than their expected health care expenditures will buy insurance. People who are risk averse (they would rather pay more than their predicted expenditures to limit their risk of large expenses) will buy insurance. A person who is risk neutral (they would not pay more than their predicted expenditure to eliminate uncertainty) would not buy insurance.

22-11 Vocabulary of Insurance Deductible the amount of health spending a year that you have to pay before the insurance company pays anything Co-payment either a set amount or the percentage of the bill after the deductible has been taken out that you have to pay Maximum out-of-pocket the most that a person or family will have to pay over a year for all covered health expenses Lifetime maximum the most that an insurance company will pay on your health expenses over your lifetime

22-12 Types of Insurance Plans Fee-for-service Health Maintenance Organization (HMO) Preferred Provider Organization (PPO)

22-13 Controlling Expenses HMO’s and PPO’s use Primary Care Physicians (PCP’s) or Gatekeepers who are physicians charged with making the initial diagnosis and making referrals

22-14 Advantages and Disadvantages of Insurance Types Insurance Type AdvantageDisadvantage Fee-for- Service 1)Maximum physician choice 2)Little insurance company meddling in doctors’ decisions Highest premiums, deductibles, and co-payment rates because of little control over expensive and unnecessary procedures HMOMaximum control over expensive and unnecessary procedures so premiums, deductibles and co- payment rates are low. 1)Minimal physician choice 2)Significant meddling in physician decisions, especially when differing procedures have significant cost differences PPO1)Some physician choice 2)moderate premiums, deductibles and co-payment rates 3)some control over expensive procedures 4)minor meddling in physician decisions

22-15 Public Insurance: Medicare Those over 65 are eligible Part A –Covers expenses incurred in hospitals –Compulsory –Financed with premiums and 1.45% payroll tax on employers and employees Part B –Covers doctor visits –Voluntary –Financed with premiums and general tax revenue

22-16 Public Insurance: Medicaid Covers the poor –eligibility standards vary from state to state No premiums are required Some states have very small co- payments

22-17 The Uninsured 21 million of million go without insurance all year million are between age 18 and million are under 18

22-18 Why Health Care is not “Just Another Good” Rapid increases in quality (which get confused as price increases) –Treatments developed in the 1990s for AIDS are expensive but this is a quality increase, not a price increase Consumers have less knowledge about what they are buying than they typically do when buying goods.

22-19 Why Medicaid Raises All Health Care Prices P* Q poor Q nonpoor D poor+nonpoor P* Q poor Q nonpoor P Q/t S D poor D nonpoor Without Medicaid Q/t S P D poor D nonpoor With Medicaid

22-20 Why Co-Payments Increase Prices Third-Party Payer: an entity other than the consumer pays part of the costs If people only pay 20% of a price they will consume much more

22-21 Modeling Third-Party Payment 5P A P Q/t A PAPA D no insurance QAQA S D with 20% co-pay P’

22-22 Moral Hazard with Health Insurance Moral Hazard: the fact that having insurance increases the demand for the good If people choose to smoke, to drink to excess, to overeat and to not exercise, because they will pay fewer of the monetary consequences then this is moral hazard.

22-23 The HMO Debate To control costs, HMOs use rules to limit expenses. –E.g. recuperating time in a hospital is limited for births. These rules sometimes conflict with doctors’ wishes for their patients. With patients having little interest in controlling costs, HMOs rely on rules to control costs.

22-24 Organ and Blood Donation There is always severe organ shortage. –Economists argue that part of the problem is that laws prevent people from buying and selling organs. There is often a shortage of blood. –Economists argue that part of the problem is that laws prevent people from buying and selling their blood for medical use even though they can sell their blood plasma for cosmetic use.

22-25 The Rest of the World Most of the industrialized world uses a single-payer system where the government collects (usually very high) taxes to pay for everyone’s health care

22-26 International Health Care Finance Arrangements Country Public $ as a % of TotalHospitalsPhysiciansPriv. Ins Australia 67.4mostly publicAa Canada 70.4mostly privateA, Ba France 80.1mostly publicAb Germany 76.7 mix of public and privateAa Japan 82.5mostly privateA, Bnone United Kingdom 86.7 mostly public trustsCa United States 45.1mostly privateAc A) Mostly private Fee-for-Service B) Government imposed fee schedule C) Public employees a) option to purchase private insurance for all expenses b) option to purchase private insurance for non-covered expenses c) all non-Medicare, non Medicaid

22-27 Country Comparisons Health Expenditures/ GDP (2004) Infant Morality per 1000 births (2006) Life Expectancy (2008) U.S.15.3% U.K.8.3% France10.5% Germany10.9% Japan8.0%

22-28 Country Comparisons (cont.) Five Year Survival Rates Prostate Cancer Breast Cancer U.S.98.6%88.7% U.K.71.0%81.0% France61.7%80.3% Germany67.6%71.7%

22-29 Advantages and Disadvantages of Single-Payer Systems Advantages –Universal coverage –Low-to-no cost coverage to patients Disadvantages –Long waiting lines for heart bypass and other surgeries –Lower Survival Rates on many ailments –High taxes