2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved. Chapter 12: Health and health care Barr: Economics of the Welfare State: 4e

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved. Organization of the chapter 1. Introduction 2. Aims 3. Methods 4. Assessment of the UK system of health care 5. Reform 6. Conclusion

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved. 1. Introduction The view that ‘health care and education are basic rights and therefore should be provided by the state’ is illogical because the words ‘and therefore’ do not follow from the initial premise. If health care, etc., are basic rights, then so is food, which is provided well enough by the private sector The National Health Service (NHS) is mainly publicly funded and mainly publicly organised Why?

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved. 2. Aims

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved. 2.1 Concepts The objective: improved health Sources of good health Income/wealth Individual choice A person’s environment Access to health care Inheritance, e.g. physical or emotional strength Thus health outcomes do not depend only on access to health care

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved. Instrumental objectives: efficiency and equity Efficiency: if we spent nothing on health, people would die unnecessarily; if we spent the whole of GDP on health care, there would be no food and we would die of starvation. The optimal quantity lies somewhere between Equity: no unambiguous definition

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved Measuring costs and benefits Measuring costs: feasible, though not without its problems Benefits are hard to quantify: Health is hard to measure Causality is complex Improved health is hard to value

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved. 3. Methods 3.1.Theoretical arguments for intervention 1: Efficiency

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved. 1) Information problems Are individuals well-informed about the nature of the product? Much information is complex Mistaken choice can be costly There may not be time to acquire information Are people well- informed about prices? Are people well-informed about the future?

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved. 2) Insurance problems Premium = (1+α) pL

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved. Conditions under which competitive insurance will be efficient 1 Probabilities must be independent 2 Probability must be less than one 3 Probability must be known or estimable 4 No adverse selection 5 No moral hazard Endogenous probability Third-party payment problem

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved. Actuarial medical insurance: What economic theory predicts Gaps in coverage Chronic/congenital health problems The elderly Maternity Uninsured risk-averse individuals Exploding costs

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved. 3) The remaining assumptions Competition. Is medical care competitive How useful is competition? Externalities Increasing returns to scale

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved Theoretical arguments for intervention 2: Equity Horizontal equity Vertical equity The role of giving

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved Types of intervention Pure market provision. Mixed public/private involvement Public production, allocation, and finance

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved. 4. Assessment of the UK system of health care

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved Institutions The operation of the NHS –Production Primary health care Hospitals and community health services –The individual consumption decision –Finance Primary Care Trusts and general practitioners Hospitals and consultants –The aggregate production decision, i.e. setting budget limits Private health care: a small sector involving slightly more than 10% of the population

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved Assessment 1: Efficiency The NHS: a genuine strategy Demand side: Decisions about treatment are made by doctors Treatment is tax-financed and free at point of use Supply side: Doctors are not paid a fee for service Health care is rationed by the NHS budget and by administrative means

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved Assessment 2: Equity The unimportance of income in determining access to health care The system allows action on the distribution of health care by region Outcomes The distribution of health The distribution of health care Redistributive effects of the NHS

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved. 5. Reform

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved Mainly private approaches: example, the USA Problems with private medical insurance: High and rising costs Gaps in coverage Unequal access

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved. Health spending, various countries, 2001 Health spending per head, US$ PPP Health spending, per cent of GDP Canada France Sweden UK USA 2,792 2,561 2,270 1,992 4,

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved. Attempts to contain costs Diagnosis-related groups (DRGs) Preferred provider organizations (PPOs) Health maintenance organizations (HMOs) A ‘firm’ of doctors; members pay insurance contributions to the HMO, which provides treatment or arranges for treatment by others Analytically, the HMO merges the doctor and the insurance company

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved. Pros and cons of HMOs Advantages: some downward pressure on costs Disadvantages: Does nothing to address gaps in coverage Incentives to ‘cream skimming’ High administrative costs Continuing consumer information problems

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved. The Stanford university scheme The university contracts with a small number of insurers Each insurer must offer a policy with three elements An agreed core package Premiums unrelated to individual risk Agreement to accept all applicants The university operates a system of redistribution towards plans that attract higher-than-average risks Employees can choose which plan to join The university contributes a fixed sum to each person’s medical insurance, broadly equal to the cost of the cheapest of the approved policies

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved. What is the resulting scheme? Private medical insurance? Decentralised social insurance?

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved Public funding plus private production: example Canada In the Canadian system, health care is mostly publicly funded mostly privately delivered Cost containment is a continuing issue Access to health care is generally good

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved NHS reforms Successive governments have maintained reliance on public funding Reforms have concerned attempts to make the supply-side more responsive Quasi markets Policies to increase consumer choice

2 H i g h e r E d u c a t i o n © Oxford University Press, All rights reserved. 6 Conclusions Options are limited There is no perfect solution Economic theory and international experience both point to two effective strategies: Mainly public funding (taxation or social insurance) plus public production; or Mainly public funding plus private production plus regulation to contain costs.