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Chapter 9 continued: health care


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Title: Chapter 9 continued: health care

Chapter 9 continued health care
is there a way for private markets to deal
with asymmetric information without government ?
  • Use of experience ratings can reduce or
    eliminate problems associated with asymmetric
  • Experience rating
  • Commonly done for life insurance where a battery
    of blood tests must be undertaken in addition to
    questionnaire regarding use of tobacco, alcohol,
  • Experience ratings are common practice in auto

Problem with health care and experience ratings
  • Improving efficiency by reducing problems
    associated with asymmetric information has
    serious equity consequences.
  • Those people who are genetically at a higher risk
    for adverse health events will pay higher
    premiums and may be priced out of the market.
  • Potential solution of community ratingpooling
    a community of people into one plan.
  • employer-mandated coverage in which large
    employers with a pool of many people with
    different risks are combined into one insurance
    plan with uniform premium rates.
  • Government provided mandatory health care
    coverage for the entire population setting
    uniform rates for premiums.

Advantages and disadvantages of community ratings
  • Advantage
  • Disadvantage this community rating means that
    some people may have to pay premiums above the
    plans worth to them individually (not rewarding
    those with healthy lifestyles that have little or
    no need for insurance), while others would prefer
    to pay more money in order to buy more insurance.

Health Insurance and Moral Hazard
  • Another consequence of insurance is moral hazard
    or the tendency to engage in risky or costly
    behavior because you are insured against adverse
  • With health insurance plans, the more a plan
    smoothes the risk to individuals of lost income
    by covering health care costs, the more it leads
    to inefficient overconsumption of health care
    through an increase in risky behavior.
  • Risky behavior includes
  • Costly behavior includes

Degree of moral hazard and type of insurance
  • The degree of moral hazard depends on the type of
  • Insurance with a copayment
  • Co-insurance

Moral hazard graphing
Moral hazard graphing continued
US health expenditures --gdp
US spending per capita is much higher than other
Rich countries spend morebut us spends
proportionately more!
Reading Chart 3 above (taken directly from OECD
  • If per capita income is around 20,000, a
    country is expected to spend about 1,500 per
    person on health (and indeed this is the case for
    countries like Slovakia and Hungary), whereas if
    per capita income is 40,000, health spending of
    a bit more than 3,500 would be predicted.
  • The relationship is simply an empirical
    observation it does not imply that a country
    should be spending at or near the line, but it is
    a convenient way of thinking about national
    health spending levels.
  • There are significant differences across
    countries Canada spends a lot more than
    Australia, for example, though income levels are
    similar. But the United States is the biggest
    outlier, by a wide margin. A country with the
    income level of the United States would be
    expected to spend around 2,500 less per capita
    than it actually does equivalent to 750billion
    per year.

Categories of health spending
  • In what categories of cost is the US relatively
    high relative to OECD countries? (taken from
    Written Statement to the Senate Committee on
    Aging by Mark Pearson)
  • 1. ___________________is higher than in other
    OECD countries, but not by as much as might be
    expected, given differences in GDP.
  • This reflects in part a data problem some
    spending which would be classified as in-patient
    care in other countries is classified in
    out-patient care in the United States. It has
    been growing somewhat less rapidly than other
    categories of spending.
  • 2. ___________________ is also highest in the
    United States, being more than three-times
    greater than in France, Germany and Japan, and
    growing very rapidly indeed. The growth rate is
    high in other countries as well, but from a lower

Spending categories continued
  • 3. _____________________ are high.
  • 4. ______________________ is higher in the US
    than in any other country, but it accounts for a
    smaller share of total health spending than in
    other countries.
  • 5. _____________________ is a little higher than
    in other countries, but proportionally accounts
    for less spending than elsewhere.

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US ranking on expensive procedures
US health outcomeslife expectancy and infant
mortality rates
Current health care reform bill
  • Mandatory Health Care will expand coverage to
    approximately 32 million Americans currently
  • Additionally, insurance companies will not be
    allowed to deny children coverage based on
    pre-existing conditions (begins 6 months from
  • Insurance providers will no longer anyone
    coverage based on pre-existing conditions
    (beginning in 2014)
  • Children may stay on their parents health plan
    until the age of 26.

mandates of the bill
  • Individual mandate everyone must purchase health
    insurance or face a 695 annual fine (there are
    some exceptions for low-income people). This does
    not apply to illegal immigrants (approximately 11
    million people). Effective January 2014.
  • Employer-mandate medium sized businesses are
    employers with more than 50 employees and must
    provide health insurance or pay a fine of 750
    per worker, per year. If employees receive
    federal subsidies for purchase of health
    insurance this fine may be increased to 2,000
    per worker, per year.
  • small businesses with 25 or fewer employees
    will earn a tax credit up to 50 of their
    employees health care coverage expenses.
    Otherwise, these employees may buy into the
    Health Exchange in their state.

What is a health exchange?
  • Each state will create a health exchange in which
    those uninsured citizens and self-employed
    citizens can purchase health insurance.
  • A separate exchange is to be created for small
    businesses to purchase coverage.
  • Subsidies will be available for those qualifying
    based on income. General rule will be that
    individuals and families with income between 133
    and 400 of the poverty level will receive
    subsidies to reduce the cost of health insurance.
  • For those families earning below the 133 poverty
    level (29,327 for a family of four), Medicaid
    will provide coverage.

Funding for the bill--taxes
  • A new Medicare payroll tax on investment income
    (unearned income) starting in 2010. 3.8 tax on
    investment income for families earning more than
    250,000 per year.
  • New Medicare tax on the wealthy earning over
    250,000. Medicare tax of 0.9.
  • Excise tax on Cadillac insurance plans high
    end insurance plans worth over 27,500 for
    families will result in a 40 tax on insurance
  • Excise tax of 10 on indoor tanning.

Other sources of funding
  • Annual fee on manufacturers and importers of some
    medical devices.
  • Annual fee on certain makers of branded
    prescription drugs.
  • Increases medical tax deduction threshold from
    7.5 to 10 of adjusted gross income.
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