Transcript Health Economics and the Health Care System

Insurance and health care
delivery
N287E Spring 2006
Professor: Joanne Spetz
26 April 2006
But wait! Let’s talk about the
problem set!
Return on Investment =
Profit margin / Asset turnover rate
Profit margin = total margin = net income /
sales
Asset turnover rate = total asset turnover =
total revenue / total assets
But wait! Let’s talk about the
problem set!
Return on Investment =
Profit margin / Asset turnover rate
Profit margin = net income / sales
= (operating revenue – operating expense –
nonoperating expense) / operating revenue
But wait! Let’s talk about the
problem set!
Return on Investment =
Profit margin / Asset turnover rate
Asset turnover rate = total revenue / total
assets
= (operating revenue) /
(current assets + fixed assets)
But wait! Let’s talk about the
problem set!
Return on Investment =
Profit margin / Asset turnover rate
=
(revenue - expense) /
revenue
revenue
(current+fixed assets)
= (revenue – expense) / (total assets)
This is the formula in the U of Missouri sheets!
And now back to our regularly
scheduled presentation!
Going back to demand for
medical care…
We believe:


Health = h(m,X)
Medical care is a “normal good”
 If price rises, demand drops
 If income rises, demand rises
Medical care does not produce
only health
Medical care also produces:


Caring
Validation
If price goes up…
Other
consumption
Indifference curve
Price increase
Drop in medical
care demand
Medical care
If income goes up…
Other
consumption
Income increase
Increase in
medical care
demand
Medical care
Changes in health status:
Change the utility function
Change the indifference curve
Other
consumption
healthy
sick
Medical care
From this we can derive
demand curves
price
Demand for sick person
Normal demand
Medical care
Demand for health care
depends on…
Price
Income
Health status
And also…


Quality of care
Time required for care
Medical care is a group of
products
Health = f(m1, m2, m3,…)
All things equal, you want:


Higher quality
Care that takes less time
You decide on demand for medical care
based on:
marginal utility = marginal cost
 In theory!

Departure from theory
Health and illness are random
You can establish a budget and
consumption plan…
And then get diagnosed with cancer
 So much for the budget!

Changes in health:
Changes in health 
Changes in demand for medical care 
Changes in spending on med care 
Since health is random, spending on
medical care will be random
Dealing with financial risk
Insurance protects against risk
Willingness to pay more than the
average loss to insure against the loss is
“risk aversion”

This results from a utility function with
diminishing returns
Diminishing marginal utility
•50% chance of
getting $100
•50% chance of
getting $50
utility
E(U)
E(U) =
.5*U($100)+.5*U($50)
$50
$100
money
Diminishing marginal utility
utility
U($75)
E(U)
Utility of $75 is bigger
than E(U)
$50
$75
$100
money
In this case, we have a plan
If you win $100, pay $25 (net=$75)
If you win $50, you receive $25
(net=$75)
Guaranteed $75
In fact, even U($70) is higher!
Insurance is demanded by the
market when there is risk
Problems with insurance

Moral hazard
 Once you have insurance you take more
risks
Smoking
 Skydiving

Insurance is demanded by the
market when there is risk
Problems with insurance

Moral hazard
 You seek more care because it’s already
paid
You can view this as a decrease in price of
medical care
 But you also have a decrease in “income”
because of the premium you paid

More insurance problems…
Adverse selection

You know more about your risk than does
your insurer
 Those with greatest risk want insurance
 You won’t seek insurance if your risk is low

Result: insurer gets a riskier group of
people than expected
How do you deal with these
problems?
Moral hazard

Copayments
 Coinsurance (percent of bill)
 Indemnity payment (flat rate)

Deductibles
 Don’t insure small losses
How do you deal with these
problems?
Moral hazard

Upper limits on payments
 Protects insurer from huge losses
 Serious health events are not insured

Managed care (more on this later…)
How do you deal with these
problems?
Adverse selection

Pre-existing condition exclusions
 These rules may prevent people from switching
jobs

Pooled purchasing of insurance
 “Group insurance”
 Common in the workplace due to tax breaks
 Can obtain economy of scale
All insurance works through
risk-pooling
Should smokers be in the same pool as nonsmokers?

What about the old and the young?
Larger pools get economy of scale

Is this fair?
Many firms self-insure


The insurance company handles administration
The company is a single risk pool
What about managed care?
Fee-for-service insurance

Insurer pays the bills as presented
Health maintenance organization

Insurer manages your care within closed network
of providers
Preferred provider organization

Insurer gives you incentives to choose preferred
providers
Point-of-service plan
What is the social problem
with health care?
Marginal cost/
Marginal benefit
True cost of care
Price the patient sees
Optimal
quantity
Actual
quantity
MB of health
care
Health costs in the U.S.
Year
Annual health Inflation
growth
1970 10.6%
5.6%
GDP growth
1980 12.9%
12.5%
10.4%
1990 10.9%
6.1%
7.5%
1997 5.4%
1.7%
5.8%
2000 8.3%
3.4%
7.4%
7.0%
Comparisons across nations
U.S.
Female Infant Spend
Spend
life exp. mort. per cap. per GDP
79.4
7.1
$4373
13.0%
Australia 81.8
5.7
$2141
8.4%
Canada
81.7
5.3
$2428
9.2%
France
82.5
4.3
$2226
9.4%
Germany 80.7
4.5
$2616
10.7%
Japan
84.0
3.4
$1852
7.4%
Mexico
77.3
25.9
$452
5.4%
Sources of insurance
Employer-based insurance




2/3 of adults have this
Often provides a choice of plans
Group purchasing gives better rates
Cost comes from your potential salary
Individual private insurance


Can be expensive
Adverse selection
Sources of insurance
Medicare





Program for the elderly, to address adverse
selection
Part A: hospital care
Part B: outpatient/primary care
Managed care plans
Medi-Gap insurance (private)
Sources of insurance
Medicaid & Healthy Kids

Medicaid
 State-federal partnership
 Until 1990s, was linked to welfare
 Available up to 200% of poverty level for children and
pregnant women
 Covers nursing homes, pharmacy

Healthy Kids
 Private-style insurance for near-poor children
 Might be available for near-poor adults
What happens if you’re
uninsured?
Hospitals are a major safety net


Public hospitals – sliding scale for cost
Other hospitals
 Charity care categories
 Uncompensated care
 Hospitals pay for charity by cost-shifting

Doctors
 Public clinics
 Self-pay (if they’ll take you)
How much does access to
care affect health?
Small effect of medical care on health
Wealth and education improve health
more than medical care


Is this because you learn about health
when you obtain education?
Or does this reflect your underlying
preferences?
Latino “paradox”
The high number of uninsured
may warrant policy action
National health reform usually focuses
on the uninsured



Medicare
Clinton Plan
Medicare reform proposals in 2000 election
Price of health care also is a concern

High inflation rate since 1960s
What about managed care’s
effects?
Major literature reviews by Miller & Luft


Equal numbers of better and worse results
Worse quality for Medicare HMO enrollees
with chronic conditions
Financial incentives to doctors have
unclear effects on quality (Armour et
al., 2001)
More managed care effects
Preventive care

Better cancer screening (Haas et al., 2002)
Mental health

Colorado study found no difference after
managed care introduced (Cuffel et al.,
2002)
Managed care & costs
Miller & Luft

No clear hospital/physician resource use
differences
Managed care probably reduced costs
through mid-1990s

Excess payments negotiated out of system
Resurgence of cost inflation in 2000s
Why is there high cost
inflation?
Administrative costs
High quality of care
Prices of inputs
New technologies


Incentive to develop new technologies due
to widespread insurance coverage
Hospitals compete by purchasing
technologies (“medical arms race”)
How would managed care
control costs?
Why would a provider contract with a
HMO/PPO?


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Guarantee a group of patients
Prevent competitor from getting those
patients
Some benefits of HMO management
services (?)