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Lecture 9 Tuesday, September 30 Healthcare and the Market

Participatory Budgeting Valleijo, California

Project Expo for proposals on how to spend $2.4 million

Panel on youth participation in PB in Boston, New York, and Valleijo

WHAT ARE THE DISTINCTIVE FEATURES OF HEALTH CARE AS A COMMODITY? 1.Extraordinary value of the service 2.Ethical issues in distribution: some rationing process is inevitable 3.Information costs for average consumer 4.The problem of preventative medicine: The market for Health vs the market for Treatment 5.Supply generates demand 6.Competition between providers leads to over- investment

WHAT ARE THE DISTINCTIVE FEATURES OF HEALTH CARE AS A COMMODITY? 1.Extraordinary value of the service 2.Ethical issues in distribution: some rationing process is inevitable 3.Information costs for average consumer 4.The problem of preventative medicine: The market for Health vs the market for Treatment 5.Supply generates demand 6.Competition between providers leads to over- investment

WHAT ARE THE DISTINCTIVE FEATURES OF HEALTH CARE AS A COMMODITY? 1.Extraordinary value of the service 2.Ethical issues in distribution: some rationing process is inevitable 3.Information costs for average consumer 4.The problem of preventative medicine: The market for Health vs the market for Treatment 5.Supply generates demand 6.Competition between providers leads to over- investment

WHAT ARE THE DISTINCTIVE FEATURES OF HEALTH CARE AS A COMMODITY? 1.Extraordinary value of the service 2.Ethical issues in distribution: some rationing process is inevitable 3.Information costs for average consumer 4.The problem of preventative medicine: The market for Health vs the market for Treatment 5.Supply generates demand 6.Competition between providers leads to over- investment

WHAT ARE THE DISTINCTIVE FEATURES OF HEALTH CARE AS A COMMODITY? 1.Extraordinary value of the service 2.Ethical issues in distribution: some rationing process is inevitable 3.Information costs for average consumer 4.The problem of preventative medicine: The market for Health vs the market for Treatment 5.Supply generates demand 6.Competition between providers leads to over- investment

WHAT ARE THE DISTINCTIVE FEATURES OF HEALTH CARE AS A COMMODITY? 1.Extraordinary value of the service 2.Ethical issues in distribution: some rationing process is inevitable 3.Information costs for average consumer 4.The problem of preventative medicine: The market for Health vs the market for Treatment 5.Supply generates demand 6.Competition between providers leads to over- investment

WHAT ARE THE DISTINCTIVE FEATURES OF HEALTH CARE AS A COMMODITY? 1.Extraordinary value of the service 2.Ethical issues in distribution: some rationing process is inevitable 3.Information costs for average consumer 4.The problem of preventative medicine: The market for Health vs the market for Treatment 5.Supply generates demand 6.Competition between providers leads to over- investment

The U.S. System 1.Extremely complex & incoherent 2.Most expensive in the world and rapidly increasing costs

Key Components of the US system 1.Private fee-for-service payment 2.Employer provided insurance 3.Government provided insurance – Medicare & Medicaid 4.Government subsidized insurance: ACA 5.Direct government-provided health care 6.Pro-bono services and charity

The U.S. System 1.Extremely complex & incoherent 2.Most expensive in the world and rapidly increasing costs

The U.S. System 1.Extremely complex & incoherent 2.Most expensive in the world and rapidly increasing costs 3.Lower access than any other country. Only rich country without universal system.

Private Insurance through work Public Health plan No insurance

The dilemma of private insurance exclusions & the problem of “mandates” 1.Insurance companies make money by selling insurance to people who are healthy. This means: 2.They increase their profits by refusing to insure people with existing health problem and by refusing to renew insurance once a person gets sick. 3.To guarantee universal access to insurance, these practices have to be prevented. Insurance companies have to be prevented from refusing insurance because of existing conditions. BUT 4.This is only possible if healthy people are required to buy health insurance. Otherwise they will wait until they get sick and then buy insurance. 5.SO, if you want (a) to guarantee universal access, and (b) maintain a private health insurance market, you have to (c) require all people to buy insurance. This is called a “mandate.”

An Illustration of the “adverse selection” problem without a mandate 1.Suppose you have 10,000 people and 1,000 get sick a year and 19,000 don’t. 2.Suppose the medical expenses for those sick people are $20, Total medical costs then = $20 million/year 4.Now suppose (a) insurance companies cannot refuse people because of prior conditions and (b) there is no mandate requiring people to buy health insurance. What will the insurance premium be to cover the medical expenses? 5.Answer: $20,000/person 6.With a mandate: $1,000/person

The U.S. System 1.Extremely complex & incoherent 2.Most expensive in the world and rapidly increasing costs 3.Lower access than any other country. Only rich country without universal system. 4.Minimal concern with prevention 5.Worse health results than other rich countries

The U.S. System 1.Extremely complex & incoherent 2.Most expensive in the world and rapidly increasing costs 3.Lower access than any other country. Only rich country without universal system. 4.Minimal concern with prevention 5.Worse health results than other rich countries

Two arguments in defense of a private market-based health insurance system: 1.Competition spurs cost saving and innovation 2.Free-markets solve the “moral hazard problem”

The “Moral Hazard Problem” A moral hazard = A situation in which there is no incentive to worry about costs since someone else is paying the bill. Insurance sometimes creates a moral hazard by enabling people to engage in riskier behavior than they would otherwise. Moral Hazard in Healthcare = If you have insurance, you will tend to overuse medical services since you do not have to pay each time you go to the doctor. This has the effect of imposing costs on others. Solution = Rely on the market and competition to force down prices and enforce personal responsibility through co-pays and other charges.

Two Comparisons 1.The U.S. Veteran’s Administration Hospital system 2.The Canadian Single-payer System

Administrative overhead as a % of total costs, 2003 Source: New England Journal of Medicine 2003 (except for VHA estimate)

REASONS FOR HIGH QUALITY & LOW COST IN VETERANS HEALTH ADMINISTRATION HOSPITALS Economies of scale Ability to buy drugs at a reduced cost by negotiating discounts Incentives for investing in quality Strong incentives for preventive medicine because of the life- time link to the patient Efficient medical record and information systems and health monitoring because of this life-time connection BUT: VULNERABILITY TO UNDERFUNDING Underfunding and understaffing since beginning of Iraq War resulted in rapid increase in waiting times for service.

REASONS FOR HIGH QUALITY & LOW COST IN VETERANS HEALTH ADMINISTRATION HOSPITALS Economies of scale Ability to buy drugs at a reduced cost by negotiating discounts Incentives for investing in quality Strong incentives for preventive medicine because of the life- time link to the patient Efficient medical record and information systems and health monitoring because of this life-time connection BUT: VULNERABILITY TO UNDERFUNDING Underfunding and understaffing since beginning of Iraq War resulted in rapid increase in waiting times for service.

THE CANADIAN SYSTEM Universal Comprehensive Portable Accessible Publicly administered Diversity in organization of actual delivery: single doctor practice; community clinics; group practices; public hospitals and clinics Big Irony: In Canada there is universal public provision of insurance for everyone, but greater freedom of choice by patients and less bureaucratic hassle for doctors

Why does the U.S. not have a Universal Health System even with the new reforms? 1.Power and opposition of insurance companies 2.Power and opposition of pharmaceutical companies 3.Ideological anti-statism: strength of conservative opposition to public solutions 4.Massive misinformation campaigns about alternatives