Chapter 22
Health Care
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Outline
• WHERE THE MONEY GOES
AND WHERE IT COMES
FROM
• INSURANCE IN THE U.S.
• ECONOMIC MODELS OF
HEALTH CARE
• COMPARING THE U.S. WITH
THE REST OF THE WORLD
22-2
You Are Here
22-3
The Money
• 16% of GDP spent on health care (2.2
trillion of 13.8 trillion)
• 46% spent by governments (Medicare,
Medicaid etc.)
22-4
Government Health Programs
• Medicare public insurance in the
U.S. which covers those over age 65
– $431 billion
• Medicaid public insurance in the U.S.
which covers the poor
– $329 billion
22-5
Where the Private Money Comes
From
• Private Insurance
– $775 billion
• Out-of-Pocket Patient Expenses
– $264 billion
22-6
Where the Money Goes
• Hospitals
– $697 billion
• Doctors
– $479 billion
• Prescription Drugs
– $228 billion
• Research
– $40 billion
22-7
Insurance Coverage
• 82% covered all year
• 8% covered part of the year
• 10% without any insurance all year
22-8
Insurance Types
• Private Group Insurance
– 171 million
• Private Individual Insurance
– 25 million
• Medicare
– 43 million
• Medicaid
– 52 million
22-9
Why People Buy Insurance
• People who believe that their insurance
premiums will be less than their expected
health care expenditures will buy insurance.
• People who are risk averse (they would rather
pay more than their predicted expenditures to
limit their risk of large expenses) will buy
insurance.
• A person who is risk neutral (they would not
pay more than their predicted expenditure to
eliminate uncertainty) would not buy
insurance.
22-10
Vocabulary of Insurance
• Deductible the amount of health spending a year
that you have to pay before the insurance
company pays anything
• Co-payment either a set amount or the
percentage of the bill after the deductible has
been taken out that you have to pay
• Maximum out-of-pocket the most that a person
or family will have to pay over a year for all
covered health expenses
• Lifetime maximum the most that an insurance
company will pay on your health expenses over
your lifetime
22-11
Types of Insurance Plans
• Fee-for-service
• Health Maintenance Organization
(HMO)
• Preferred Provider Organization
(PPO)
22-12
Controlling Expenses
• HMO’s and PPO’s use Primary Care
Physicians (PCP’s) or Gatekeepers
who are physicians charged with
making the initial diagnosis and making
referrals
22-13
Advantages and Disadvantages
of Insurance Types
Insurance
Type
Advantage
Disadvantage
Fee-forService
1)
2)
Highest premiums, deductibles, and
co-payment rates because of little
control over expensive and
unnecessary procedures
HMO
Maximum control over expensive
and unnecessary procedures so
premiums, deductibles and copayment rates are low.
PPO
1)
2)
3)
4)
Maximum physician choice
Little insurance company
meddling in doctors’
decisions
1)
2)
Minimal physician choice
Significant meddling in
physician decisions, especially
when differing procedures
have significant cost
differences
Some physician choice
moderate premiums, deductibles and co-payment rates
some control over expensive procedures
minor meddling in physician decisions
22-14
Public Insurance: Medicare
• Those over 65 are eligible
• Part A
– Covers expenses incurred in hospitals
– Compulsory
– Financed with premiums and 1.45% payroll tax on
employers and employees
• Part B
– Covers doctor visits
– Voluntary
– Financed with premiums and general tax revenue
22-15
Public Insurance: Medicaid
• Covers the poor
– eligibility standards vary from state to state
• No premiums are required
• Some states have very small copayments
22-16
The Uninsured
• 21 million of 40-45 million go without
insurance all year
• 18-20 million are between age 18 and
34
• 8.5 million are under 18
22-17
Why Health Care is not
“Just Another Good”
• Rapid increases in quality (which get
confused as price increases)
– Treatments developed in the 1990s for AIDS
are expensive but this is a quality increase, not
a price increase
• Consumers have less knowledge about
what they are buying than they
typically do when buying goods.
22-18
Why Medicaid Raises
All Health Care Prices
P
P
S
S
P*
P*
Dpoor+nonpoor
Dpoor+nonpoor
Dpoor
Qpoor
Dnonpoor
Qnonpoor
Without Medicaid
Q/t
Dpoor
Qnonpoor
Dnonpoor
Qpoor
Q/t
With Medicaid
22-19
Why Co-Payments
Increase Prices
• Third-Party Payer: an entity other than
the consumer pays part of the costs
• If people only pay 20% of a price they
will consume much more
22-20
Modeling Third-Party Payment
P
5PA
Dwith 20% co-pay
Dno insurance
S
P’
PA
A
QA
Q/t
22-21
Moral Hazard with Health
Insurance
• Moral Hazard: the fact that having insurance
increases the demand for the good
• If people choose to smoke, to drink to
excess, to overeat and to not exercise,
because they will pay fewer of the
monetary consequences then this is moral
hazard.
22-22
The HMO Debate
• To control costs, HMOs use rules to limit
expenses.
– E.g. recuperating time in a hospital is limited for births.
• These rules sometimes conflict with
doctors’ wishes for their patients.
• With patients having little interest in
controlling costs, HMOs rely on rules to
control costs.
22-23
Organ and Blood Donation
• There is always severe organ shortage.
– Economists argue that part of the problem is that laws
prevent people from buying and selling organs.
• There is often a shortage of blood.
– Economists argue that part of the problem is that laws
prevent people from buying and selling their blood for
medical use even though they can sell their blood
plasma for cosmetic use.
22-24
The Rest of the World
• Most of the industrialized world
uses a single-payer system where
the government collects (usually
very high) taxes to pay for
everyone’s health care
22-25
International Health Care Finance
Arrangements
Country
Public
$ as a
% of
Total Hospitals
Physicians Priv. Ins
Australia
67.4 mostly public
A
a
Canada
70.4 mostly private
A, B
a
France
80.1 mostly public
A
b
Germany
mix of public and
76.7
private
A
a
Japan
82.5 mostly private
A, B
none
United
Kingdom
mostly public
86.7
trusts
C
a
United States
45.1 mostly private
A
c
a) option to purchase private insurance for all expenses
A) Mostly private Fee-for-Service
B) Government imposed fee schedule b) option to purchase private insurance for non-covered expenses
c) all non-Medicare, non Medicaid
C) Public employees
22-26
Country Comparisons
Health
Expenditures/
GDP (2004)
Infant Morality Life Expectancy
per 1000 births (2008)
(2006)
U.S.
15.3%
6.4
78.1
U.K.
8.3%
5.1
78.9
France
10.5%
3.4
80.9
Germany
10.9%
4.1
79.1
8.0%
2.8
82.0
Japan
22-27
Country Comparisons (cont.)
Five Year Survival Rates
Prostate
Cancer
Breast
Cancer
U.S.
98.6%
88.7%
U.K.
71.0%
81.0%
France
61.7%
80.3%
Germany
67.6%
71.7%
22-28
Advantages and Disadvantages
of Single-Payer Systems
• Advantages
– Universal coverage
– Low-to-no cost coverage to patients
• Disadvantages
– Long waiting lines for heart bypass and other
surgeries
– Lower Survival Rates on many ailments
– High taxes
22-29