1. Government and Health Care Roughly 15 cents of every dollar spent in US is on health care US health care spending equaled $5841 per person in 2002 Governments (federal and local) account for almost half of all health care spending in US Most government spending on health care comes from Medicare (insurance for elderly) and Medicaid (health insurance for the impoverished)

2. Government and Health Care If consumption of health care services generate external benefits, then there is economic justification for some government subsidy. What are some of the external benefits of health care consumption?

3. Government and Health Care Motive for government subsidy of health care goes beyond external benefits arguments Health care resources are scarce and consumption of good must be rationed Most goods in general are rationed by markets in which only those willing (able) to pay for good will acquire it

4. Health Care and Rationing Many people do not support idea that health care rationed solely by markets Example:  In 2006, 3,916 kidney patients died awaiting a kidney transplant  Most kidney donors are people who died but had agreed to have their organs harvested  Live kidney donations are rare but perfectly acceptable; we have two kidneys but only need one  There is no market for live kidney donations

5. Health Care and Rationing Consumption of health care considered more a right, than is consumption of other goods “Motive by government to subsidize health care is more one of redistributing income than it is to internalize externalities” Do you agree?

6. Breakdown of Insurance Coverage The proportions with private and government insurance add to more than 85% because some people have both Insurance Status in 2004Percent of US population With Health Insurance84.3% Private Insurance 68.1% Employer Based 59.8% Purchased Individually 9.3% Government Provided Insurance 27.2% Without Health Insurance15.7%

8. Health Care and Insurance Consumers normally demand health only when sick or injured The uncertainty of requiring (demanding) health care and the potentially high cost leads consumers to rationally demand health insurance Notes on Insurance: 1.While government insurance programs cover only a quarter of those insured, government pays for close to half of health care expenditures  Due to health care demands by the elderly (over 65) who all fall under Medicare.  Long term care for the impoverished elderly is financed by medicaid and accounts for most of that programs expenditures.

9. Notes on Insurance 2.A small fraction of the population accounts for the majority of health care expenditures: in 2002, 5% of Americans incurred almost half the health care costs in the US.5% of Americans incurred almost half the health care costs 3.Most of the roughly 44 million Americans without health insurance have family incomes at least twice the poverty line They are non-elderly people whose incomes are too high to qualify for medicaid or CHIPS 4.Insurance lowers the marginal cost of the decision to consume health care (example)– typically insurance covers only part of the health care costs for insured individualsexample This may increase consumption of health care among the insured beyond the point that would be considered efficient

10. Health Insurance and the Market –With no insurance equilibrium at point E where SMC=SMB (Q 1 ) –With insurance covering 90% of costs, quantity demanded rises from Q 1 to Q 2 –Cost of health care now higher –“Too much” health care may be provided Price (per visit) Number of visits to hospital SMC $500 SMB $75 Q1Q1 Q2Q2 E A B $750

11. Notes on Insurance 5.Public policies that lower marginal private cost of acquiring health care may increase the social cost of providing it Federal government encourages purchase of health insurance by not taxing employee compensation in the form of health insurance expenditures Employees must pay taxes on every dollar earned in wages but do not pay taxes on the dollar amount of health insurance offered by employers; there is no cap on this tax subsidy The increased health care costs make it more difficult for those without insurance to acquire health care

12. Health Insurance and the Market 6.Adverse selection causes non-employment based insurance to be very expensive 7.The share of US income spent on health is at least 40% higher than in European countries40% higher than in European countries This may reflect the market response to lower private costs of health care due to public and private insurance, together with the fact that, a.Decisions on who receives care is less dependent on government in the US than in such countries as the UK b.Hospitals in the US compete for insured patients by acquiring medical technology that is much less prominent in other countries acquiring medical technology

13. Example of Opportunity Cost of Health Care Assume engineering services and health care use similar resources Assume health care consumption at Q 1 with no insurance and Q 2 with insurance The opportunity cost to society of increasing health care Q 1 to Q 2 is the decrease in engineering E 1 to E 2 If benefits of health care less than opportunity cost, then there’s inefficiency Health Care ServicesQ1Q1 Q2Q2 Engineering Services E1E1 E2E2 a e

14. Physician/Population Ratio in 2001 The UK has 190 doctors per 100,000 population Canada has 195 doctors per 100,000 The US has 275 doctors per 100,000

15. Policy Alternatives 1.Single Payer Single health plan administered by governmental agency Basic health coverage package offered to everyone Physicians bill government health agency according to fee schedule determined between agency and physicians Hospital budgets determined by government agency

16. Policy Alternatives 2.Pay or play employer mandate Employers forced to either provide a certain level of health coverage or pay a tax that will finance government sponsored health insurance for their workers 3.Mandatory Health Insurance Those who are presently uninsured will pay a financial penalty if they do not purchase health insurance The poor will receive subsidies to assist in purchasing insurance Massachusetts presently has a mandatory insurance law California was considering it

17. Policy Alternatives 4.Medical Savings Accounts Individuals contribute to individual account (for example $3000 a year) that can be used only for medical expenses Money put into accounts not counted as taxable income If total medical expenses in a year less than $3000, individual able to invest the difference – or use the money to pay next year’s premium If total medical expenses more than $3000, individual gets complete coverage for health expenses