1. ANNOUNCEMENTS 1.New Chapter on Finance is available at Learn@UW. 2.Updated chapters on Healthcare and the Environment also available at Learn@UW. 3.All slides and podcasts for lectures also available through a link at Learn@UW. 4.The University is now issuing free Wisconsin voter ID cards at Union South. Any US citizen who has lived at their address for a month by the time of an election, is eligible to vote in Wisconsin.

2. Lecture 9 Tuesday, September 30 Healthcare and the Market

3. Participatory Budgeting Valleijo, California

4. Project Expo for proposals on how to spend $2.4 million

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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

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

18. 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

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

21. 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.

22. Private Insurance through work Public Health plan No insurance

24. 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.”

25. 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 $20,000. 3.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

26. 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

27. 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

32. 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”

33. 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.

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

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

36. 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.

37. 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.

38. 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

41. 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