Chapter 9
Government and
Health Care
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Printed in the United States of America
ISBN 0-03-033652-X
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Government Health Care Spending
Government represents 45.5% of the $1.1
trillion spent on Health Care.
19% of the Federal Budget is devoted to
health care issues.
Copyright 2002 by Thomson Learning, Inc.
Figure 9.1 U.S. Health Expenditures as a
Percentage of GDP 1960-1998
25
Percent
20
15
10
1960 1965 1970 1975 19801985 1990 1995 2000
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Year
Why Health Care is Different
Uncertainty:
People do not typically know what their
health care expenses will be.
Insurance:
Because of uncertainty people typically buy
health insurance.
This means that people do not typically pay
the full marginal cost of their health
expenses.
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Health Insurance Coverage
82% of Americans are covered.
44 million are uncovered.
Copyright 2002 by Thomson Learning, Inc.
Figure 9.2 Financing Health Care Expenditures in
the United States, 1998
Individual Out-of-Pocket 17%
Governments 45%
Private Health Insurance 33%
Private Charity and Other 5%
Copyright 2002 by Thomson Learning, Inc.
Price (Dollars per Unit Service)
Figure 9.3 Health Insurance and the Market for
Health Care
Marginal
Supply =
Social Cost
P2
A
C
Loss in Net Benefits
P2
P2
Demand = Marginal
Social Benefit
Q*
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Q1
Problems with Health Insurance
Asymmetric Information:
Sellers know more about the health care
needs than buyers.
This can lead to over-consumption.
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Problems with Health Insurance
(continued)
Adverse Selection
People at greater risk for high health expenses will
purchase health insurance even at very high
premiums.
At those higher premiums people who are healthy
may opt to go without insurance leading to a
situation where insurance companies must raise
rates.
This problem can create a vicious cycle that drives
insurance companies out of business and leaves
people without health insurance.
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Problems with Health Insurance
(continued)
Third-Party Payments
Neither the insured nor the physician has
incentive to keep costs down.
This leads to over-consumption.
Patients evaluate the benefits of a
procedure against only a fraction (their
coinsurance rate) of the cost.
Copyright 2002 by Thomson Learning, Inc.
Figure 9.4 Government Health Spending, 1965-1998
in billions (Selected Years)
$500.4
$500
Government Health Spending
(Billions of Dollars)
$456
$400
$330
$300
$253.1
$200
$174.6
$105.1
$100
$27.6
$45.3
$8.3
$0
1965
1970
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1975
1980
1985
Year
1989
1991
1995
1998
Problems with Health Insurance
(continued)
Moral Hazard
People with insurance often behave in
ways that cause them to need the
insurance.
People may fail to eat right and exercise
knowing that they have health insurance to
help defray the monetary costs of such a
decision.
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Other Features Contributing to
Inefficiency and High Cost
Malpractice Insurance: Doctors must pay high
malpractice insurance premiums. These costs are
passed on to health insurance companies and then on
to patients in the form of higher insurance premiums.
Uninsured Patients: Doctors and hospitals that accept
Medicaid patients are not able to deny service to
patients based on their ability to pay.
Technological Advance: Third-party payments
encourages over-consumption of health care services
which leads to over-development of health care
technology.
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Governments and Health Care:
Compensating for Market
Failure
Market Imperfection
Government Reaction
Asymmetric Information
FDA drug approval
Adverse Selection with
the retired population
Medicare
Income Inequality
Medicaid
Public Health
Vaccinations and
Research
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Why Worry About Growth in
Health Care Costs
An increasing share of income is devoted to
health care which implies other priorities lose
out.
High health insurance costs for employers
cause them to hire contract labor.
Employees with a poor health history can be
inefficiently locked into particular jobs.
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Government Health Insurance
Program
Medicare
Spending in
Billions
216.6
Medicaid
170.6
Other
113.2
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Medicare
65 and older
38 million covered
Part A: Hospitals
Part B: Doctors
Prescription Drugs and Long-Term care
are not covered
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Cost Containment in Medicare
Prospective Payments and the DRG
The Diagnosis Related Group is a broad
type of illness.
Payments to hospitals are made based on the
DRG and are the same regardless of actual
costs.
This creates an incentive for hospitals to control
costs because if they succeed they get to keep
the savings.
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Medicaid
Medicaid is health insurance coverage
for the poor.
Eligibility is tied to the income of the
household.
Children of low income people can be
eligible even when their parents are not.
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Indirect Government Subsidies
of Health Care
Because employer-paid health
insurance premiums are not subject to
the income tax, this constitutes a
substantial subsidy to health insurance.
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Cost to Workers of Health Insurance
(Dollars per Month)
Figure 9.5 The Effect of Preferential Tax Treatment
of Employer-Provided Health Insurance
225
Taxable Income
Lost to Governments
150
Demand for
Health Insurance
0
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Q1
Q2
Quantity of Health Insurance
The Impact of Coinsurance on
the Price of Health Care
Low coinsurance rates cause patients
to ignore health care costs.
This increases demand and
encourages an inefficiently high level of
consumption.
Copyright 2002 by Thomson Learning, Inc.
Price (Dollars per Unit if Service)
Figure 9.6 How an Increase in Coinsurance Can
Reduce Health Care Spending and Improve
Efficiency in the Market for Health Care Services
Supply
P4
P3
P2
P1
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A
E
A
B
B
Demand
Q* Q1
Health Care Services per Year
Controlling Costs Through
Managed Care
HMOs (Health Maintenance Organizations)
are forms of insurance that pay a capitation
or a fixed amount of money for every patient
in their care. This puts pressure on HMOs to
control costs.
PPOs (Preferred Provider Organizations) are
forms of insurance that negotiate a reduced
fee structure for participating physicians.
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Controlling Medicare and
Medicaid Expenses
Medicare: Prospective payments for
DRGs.
Problem: encourages early discharge and
low levels of service.
Medicaid: low reimbursement rates
reduce doctor incentives to provide
service.
Problem: reduces access to quality care in
many places.
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Universal Coverage
The U.S. has more than 40 million
uninsured.
It is one of only a few countries without
universal health insurance guaranteed
by government.
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Universal Coverage
Gaps in Coverage
The U.S. has more than 40 million
uninsured.
It is one of only a few countries without
universal health insurance guaranteed by
government.
No long-term coverage.
Copyright 2002 by Thomson Learning, Inc.
U.K. System
National Health Service
Capitation paid to general practice physician
Universal coverage
Specialists difficult to see
Waiting lists for common operations; low
cancer survival rates
Capital expenses budgeted by a national
board
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Canadian System
Provincial governments administer the
system.
Costs shared by national and provincial
taxes.
Waiting lists and shortages cause the
wealthy to go to U.S. for service.
Copyright 2002 by Thomson Learning, Inc.