THE HEALTH-CARE DILEMMA

Facts

  • Health care spending as a percentage of GDP has gone from 5.3% in 1960 to near 14% today.
  • Spending on health care has tripled in real terms since 1960.
  • Annual health care prices from 1960 to 1990 have been rising 2% faster than the rate of inflation
  • Around 37 million Americans are uninsured (almost 15% of population)
  • Over 30% of all health care expenditures are for Medicare and Medicaid
  • Demographics suggest that demand for Medicare & Medicaid will increase faster than in recent history over the next few decades

Powerpoint slide show

Causes of Increase in Health Expenditures

Expenditure on health care is Price x Quantity, so expenditure goes up when prices go up, when quantity of medical care provided goes up, or both.

Increase in Quantity of Health Care

In theory, quantity increases when the demand curve shifts to the right, or when the supply curve shifts to the right.

Reasons for increase in Quantity:

  1. Partial Cost Pricing: with health insurance, a 3rd party (i.e. the insurance company) often pays the majority of costs. The consumer may pay only 25% or less of total health care costs directly. Since consumers consume until MB = MC, the 3rd party system lowers their MC and encourages them to purchase more health care. (Demand-effect.) Empirical estimates of the overconsumption of health care due to partial cost pricing have found this factor to be fairly insignificant (at most 10%) because demand for health care is very inelastic.
  2. Physician-Induced Demand: the argument is because consumers have a significant disadvantage as to health care knowledge, they rely on their doctor to prescribe the service. The physician may "overtreat" the patient to increase income. Several factors limit this like 2nd opinions, workload of physicians, growth in the number of physicians and the corresponding competition that creates, ethics of doctors. (Demand effect)
  3. Defensive Medicine: doctors prescribe more treatment and tests than they otherwise would because of fear of getting sued. Empirical evidence is not clear whether or not this is important. (Demand effect)
  4. Technological Change: medical research combined with third-party payments have made new machines more abundant than is cost-effective. (Supply Effect)
  5. Demographics/Preference for Health Care: perhaps more people require health care because our population is aging. Also, the advance in technology allows us to live longer and use more health care. We can treat things that before were untreatable. (Demand or Supply effect)

Increase in Price of Health Care

Price could rise due to demand shifting to the right or supply shifting to the left. Reasons for price of health care rising:

  1. All the reasons above that increased the demand for health-care also have the consequence of increasing the price of health-care.
  2. Rising costs of inputs. This includes doctor's salaries, cost of machines, technology. The problem here is that it is difficult to put a price on health or life and patients are not very price-sensitive when shopping around for health. Also, information is poor and complex. The law of demand works poorly here because "other things are not equal."
  3. Cost Shifting. Since nearly 15% of our population has no health care, the insured subsidize the care that non-insured people receive. Often this is in the emergency room where care is the most expensive. Hospitals and ultimately insurance companies pass this cost on to those which health insurance. As the number of uninsured rise, health costs rise even more than they would have.

Solutions to Slowing Expenditures on Health Care

Note: Solutions and Values

Proposed solutions to meet the health care challenge necessarily embody values. Solutions must satisfy the goals and value systems that we have as a nation. Economics can (usually) predict and explain the outcomes of each policy, but cannot dictate which one is "better." The "best" solution depends upon our values. For example, do we want a system with coverage for every U.S. citizen? Do we like the way the system is run now, based on ability to pay, with the government picking up the tab for the elderly and poor? Should health care for all the elderly, even the wealthy, be paid for by the government (i.e. taxpayers)? Is access to quality health care a market "good" to be purchased or a "right" that each person has.

I. Relatively small reforms without overhauling the current system:

Switch to managed care (HMO's, PPO's) where competition works better by forcing doctors to perform services for pre-set fees. Risks are also better spread around and there is a check on unneeded services. This also reduces Physician-Induced Demand because in HMO's the Physician has an incentive not to order unnecessary tests. Cost shifting is reduced too. A negative is that care may suffer for the sick because doctors have incentives not to treat patients in order to save money (whether they act on those incentives is up to the individual doctor). For examples, cancer may not be detected early if doctors refuse to run tests.

Limits on malpractice and malpractice awards will reduce defensive medicine, but will put the patient more at risk of not being compensated (fully) for damages.

Utilization reviews keep hospital stays short and prevent unnecessary treatment (but may also provide lower quality care). An example is allowing mother and baby only 24 hours for a birth.

II. National Health Care: The Single Payer System

The government covers all citizens and we pay nothing or a small copayment for services. This covers everyone equally and creates large government bureaucracies to manage health care. Questions: How would a single payer system stop the increase in health expenditures? What happens when funding for health care "runs out?" Who gets service as funds are rationed? This solution may be more "fair" but less "efficient."

For an attack on the Canadian single-payer system, click here.

This site supports California's movement towards the single-payer system. Check out the gopher site and Prop. 186 quesions and answers.

III. National Health Care: Employer-Based Coverage

Every citizen would have health coverage and businesses would be required to provide coverage for employees and their families. Government would provide coverage for everyone else. The system would switch increasingly to managed care, cost shifting would be greatly reduced. Initially, at least, total health care expenditures would rise as uninsured receive coverage. (Clinton's Plan is in this category).

IV. Insurance Reform

Reform #1: Eliminate preexisting conditions. Insurance companies must insure anyone regardless of preexisting conditions. This will drive up premiums in part by allowing individuals to buy insurance only after they are sick. Premiums wouldn't rise though if people are required to have health care, i.e. Employer-Based Coverage.

Reform #2: Make health coverage portable. This will give more individual security but may increase premiums. (This seems less controversial than other ideas.) We have partial portability through COBRA laws.

Reform #3: Group rating: everyone pays the same rate for insurance. Here the young and health pay more, the elderly and sick pay less. If people are not required to buy insurance, health, young people drop out, raising premiums as sicker people are left in the pool. This may not happen if people are required to buy health insurance.

V. Reductions in Government Paid Health Care

To slow health-care costs, the government reduces payments for Medicare and Medicaid. This will shift the costs to others, maybe the elderly themselves, taxpayers, doctors, hospitals, etc. Some group(s) will continue to pay for the coverage that the government does not pay for. Some current proposals: move elderly into HMO's and require the elderly to pay more based on income. These proposals shift the burden to doctors and the elderly.