Health Care Chapter 21 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives Rising health care costs Economic implications Problem of limited access to health care for the uninsured The market for health care Potential reforms of the U.S. health care system Recent legislation 21-2

Health Care Facts 16% of GDP in 2006, up from 5.2% in % of U.S. employment Overall prices 3.3% higher each of last 4 years Spending to grow 7.3% per year next 10 years 45 million uninsured 21-3

Health Care Expenditures 2006 Data Health Care Expenditures Sources of Funds Nursing Homes Prescription Drugs Program Administration Doctors Dental, Vision, Misc. Hospitals 8% 10% 7% 21% 23% 31% Medicaid Medicare Military, Other Public Insurance Other Private Expenditures Copayments, Deductibles, Etc. Private Health Insurance 34% 15% 12% 13% 7% 19% 21-4

Health Care Spending Percentage of GDP, Selected Nations, 2005 United States Switzerland France Germany Canada Australia Italy United Kingdom Japan Mexico Source: Organization for Economic Cooperation and Development 21-5

Economic Implications of Rising Costs Reduced access to care Labor market effects –Slower wage growth –Part-time and temporary workers –Outsourcing and offshoring Personal bankruptcies Impact on government budgets 21-6

Other Issues Are we healthier? –Yes Too much spending? –Maybe Limited access –The uninsured 21-7

Why the Rapid Rise in Costs? Peculiarities of the health care market –Ethical and equity considerations –Asymmetric information –Positive externalities –Third-party payments: insurance 21-8

Increasing Demand Rising income –Role of elasticity Aging population Unhealthy lifestyle Role of doctors –Supplier induced demand –Defensive medicine –Medical ethics 21-9

Role of Health Insurance The moral hazard problem –Less prevention –Overconsumption Government tax subsidy 21-10

Q P Q P 0 0 Why the Rapid Rise in Costs? D S QaQa PaPa Without Health Insurance With Health Insurance D S QaQa PaPa QcQc PcPc Insurance and the overallocation of resources to health care a b c Efficiency Loss From Overallocation 21-11

Supply Factors Supply of physicians Slow productivity growth Changes in medical technology Relative importance of supply and demand factors 21-12

Health Care System Reform Universal access –“Play or pay” –Tax credits and vouchers –National health insurance Cost containment: altering incentives –Deductibles and copayments –Managed care (PPO and HMO) –Medicare and DRG system 21-13

Recent Laws and Proposals Prescription drug coverage –Medicare Part D Health savings accounts Limits on malpractice awards 21-14

Mandatory Health Insurance Massachusetts in 2007 Proof of insurance or pay fee Eliminate free riders Expected to reduce cost for some Will increase demand State subsidy Neighboring state issues May not work for entire nation 21-15

Key Terms deductibles copayments fee for service defensive medicine tax subsidy “play or pay” national health insurance (NHI) preferred provider organization (PPO) health maintenance organization (HMO) diagnosis-related- group (DRG) system Medicare Part D health savings account (HSA) 21-16

Next Chapter Preview… Immigration 21-17