Healthcare
Why do we care?
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Big national debate
Important element of social welfare
Important distribution impacts
Important efficiency impacts
Ends, means and allocation
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What are the desirable ends?
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What are the scarce resources?
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A healthy population
World’s best healthcare system?
Lots of debate over details, but as a society, we made
the decision we don’t want hospitals turning people
away to die in the street.
Our national health care system: Drs., hospitals, R&D,
technology, etc.
How do we allocate?
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We want to achieve our desirable ends as cost
effectively as possible.
Is private sector or government sector most cost
effective?
Why should government
be involved?
If we have decided Drs. and
hospitals can’t turn people away,
then who should pay?
Market failures
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Public goods
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Adverse selection
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Contagious disease, tuberculosis, AIDS
Societal attitudes towards health
Technology and information
Money spent denying care
Costs of not providing care
Moral Hazard
Market failures
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Preventative vs. curative care
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People change insurers every 18 months
Costa Rican miracle
Economies of scale
Competition, Market size and poor information
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What happens to price when # of hospitals increases?
Do people shop around for bargain prices?
Frank’s neurosurgery: The works--$200
Perverse incentives
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Traditional
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Managed care
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Maximize profits by over-treating
Producer tells consumers what they need
More they sell, the more they profit
The sicker the patient, the more money they make
Patients change providers, so preventative care not
cost effective
Maximize profits by denying treatment
Market solution
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Health care system provides health. Providers only
get paid when patient is healthy
Competitive advantage
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Private sector covers large chunk of private
health care costs
Can GM and Ford compete with foreign
companies if they pay $1000 in health insurance
per car?
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NYT article, 7/27/04: G.M. and Ford have lagged
behind Toyota and Honda in part because the
American makers' research and development budgets
have been crimped by high overhead costs, like
health insurance premiums, which are a much smaller
issue in countries like Japan.
People with pre-existing conditions can’t change
jobs, even if they would be more productive
doing something else
The Current System
Medicaid
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Means tested
40 million+ participants
$220 billion +
Much larger than other aid programs for
the poor
Administered by states, funded by states
and fed.
Medicaid notch
Medicare
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Not means tested, for elderly and disabled
39.6 million enrollees
$254+ billion/yr and rising
Payroll tax like SS
Supplemental medical insurance funded
from general revenue, massively
subsidized
Other government expenditures
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Center for Disease Control
National Institute for Health
Tax subsidies for employer provided health
insurance
VA
Hospital subsidies
Gov’t employees
Department of health and human services, etc.
Who Pays for Health Care?
Amount in 1998
(billions)
Percent
Government
$736.8
64.1%
Medicare
$216.2
Medicaid
$170.6
Premiums for public employees
$67.3
Tax subsidy for private insurance
$124.8
Other*
$157.9
Private employers
$216.5
18.8%
Individuals (excludes tax subsidy)
$195.8
17.0%
Total
$1149.1
100%
Source: Himmelstein & Woolhandler – Unpublished analy sis of NCHS data, Health Affairs 1999;18(2):176
* Includes VA, NIH, subsidy for public hospitals, worker’s comp, health departments etc.
Who pays for uninsured?
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Hospitals
Insured
Uninsured
Anything wrong with the current
system?
Issues with Medicare and Medicaid
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Very high share of government
expenditures, growing more rapidly than
SS
Politically sensitive issue
Unsustainable growth rate
Lack of coverage
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44 Million uninsured Americans for at least
a year
80 million plus for some time during the
year
Numbers are rising
Cost Effectiveness
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US healthcare costs highest in the world,
2X Germany and Canada per capita
Double digit rates of increase (15% in
2003)
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Lies, damn lies and statistics
US has some of lowest indicators among
developed nations
U.S. Public Spending Per Capita for Health
is Greater than Total Spending in Other Nations
U.K.
$1,670
Sweden
$1,750
Japan
$1,850
France
$2,230
Canada
$2,430
Germany
$2,620
U.S.
$2,600
$0
$1,000
$1,760
$2,000
$3,000
$4,000
$ Per Capita
Total Spending
U.S. Public
U.S. Private
Note: Public includes benefit costs for govt. employees & tax subsidy for private insurance
Source: NEJM 1999; 340:109; Health Aff 2000; 19(3):150
$5,000
Costs in 2000
Country
 Canada
 England (U.K.)
 France
 Italy
 Japan
 United States
% of GDP
9.1
7.3
9.5
8.1
7.8
13
Health Outcomes
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In Study of 13 most developed nations, United States ranks an
average of 12th (second from the bottom) for 16 available health
indicators.
13th (last) for low-birth-weight percentages
13th for neonatal mortality and infant mortality overall 14
11th for post neonatal mortality
13th for years of potential life lost (excluding external causes)
11th for life expectancy at 1 year for females, 12th for males
10th for life expectancy at 15 years for females, 12th for males
10th for life expectancy at 40 years for females, 9th for males
7th for life expectancy at 65 years for females, 7th for males
3rd for life expectancy at 80 years for females, 3rd for males
10th for age-adjusted mortality
Percent of Population with
Government-Assured Insurance
100%
100%
100%
100%
100%
100%
Japan
U.K.
92%
80%
60%
45%
40%
20%
0%
U.S.
Germany France
Canada Australia
Note: Germany does not require coverage for high -income persons, but virtually all buy coverage
Source: OECD, 2002 - Data are for 2000 or most recent year available
Why are costs so high and rising?
Improved technologies
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Heart disease
Pharmaceuticals
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Statins
Viagra etc.
Administrative costs
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US vs. Canada
1999
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$1059 per capita in US, or 31%
$307 per capita in Canada, or 16.7%
Overhead for Canada’s national health
insurance program 1.3%
Thousands of private insurers dramatically
increase paperwork and bureaucracy
Pharmaceuticals
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Americans pay 2 times as much as
Canadians for identical drugs
Pharmaceutical companies have the
highest profit margins of any industry
Companies recently busted for paying Drs.
to prescribe their drugs
Advertising
Drug Companies spend more on
advertising than R&D
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- AstraZeneca (producer of Tamoxifen): In
FY1999 AstraZeneca reported spending only
16%, ($2.4 billion) on research and
development. In comparison, it reported
pocketing more than 24% ($3.69 billion) in
beforetax profits while spending more than 31%
($4.8 billion) on marketing and administration.
- Merck and Pfizer spent just 11.2% of its
revenues on R&D in 1997 on R&D. At the same
time, these companies pocketed 18.6% in pure
profit and spent 28.9% on advertising
(Sager/Socolar study, Boston University)
Federal Government does
substantial R&D
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According to a May, 2000 congressional Joint Economic
Committee report, The Federal government funds about
36% of all U.S. medical research
Major drugs have been developed with taxpayer-funded
research: Of the 21 most important drugs introduced
between 1965 and 1992, 15 were developed using
knowledge and techniques from federally funded
research. Of these, NIH research led to the development
of 7 drugs to treat patients with cancer, AIDS,
hypertension, depression, herpes and anemia
A study of 32 drugs introduced before 1990 found that
without the contributions of government laboratories and
non-commercial institutions, approximately 60% of the
drugs would not have been discovered or would have
been delayed. “This suggests public sector research is
becoming more important over time” (Maxwell and
Eckhart – 1990)
Profit motive
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1% of patients incur 27% of costs
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Private sector spends lots of money making
sure they do not insure these people
End up on government tab or in emergency
room
Very high profits in sector
Rent seeking activities and fraud
Emergency rooms and curative
medicine
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People denied care unless it is an
emergency
Preventative medicine does not maximize
profits
Potential Solutions
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HMOs/Managed care
Mixed private/public (Clinton’s plan)
Medical savings accounts
Prescription drug benefit
Government subsidized insurance
Single payer, single risk pool