Chapter 9 continued: health care

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Chapter 9 continued health care
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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
  information.
• 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,
  etc.
•  
• Experience ratings are common practice in auto
  insurance.

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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.

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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.

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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
  events.
• 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

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Degree of moral hazard and type of insurance

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

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Moral hazard graphing
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Moral hazard graphing continued
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US health expenditures --gdp
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US spending per capita is much higher than other
countries
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Rich countries spend morebut us spends
proportionately more!
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Reading Chart 3 above (taken directly from OECD
publication)

• 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.

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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
  basis.

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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
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US health outcomeslife expectancy and infant
mortality rates
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Current health care reform bill

• Mandatory Health Care will expand coverage to
  approximately 32 million Americans currently
  uninsured.
• Additionally, insurance companies will not be
  allowed to deny children coverage based on
  pre-existing conditions (begins 6 months from
  now)
•  
• 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.

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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.

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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.

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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
  companies.
• Excise tax of 10 on indoor tanning.

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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.