Fiscal aspects of health systems

1. Fiscal aspects of health systems William Jack Georgetown University Motivated by “The fiscal sustainability of health care in Canada” Gregory Marchildon, Tom McIntosh, and Pierre-Gerlier Forest

2. Total health spending in Canada

3. Is spending sustainable? • 1990-2002: ~constant, 9-10% of GDP • But pressures lurk on the supply side: • New technologies • Prescription drugs …..and the demand side: • Ageing • How should additional costs be financed?

4. Outline of comments • Basic principles • Mixed systems • Some tax policy issues

5. Basic principles

6. Basic principles: I. Efficiency • Raise money with minimal distortions • Tax system design • Maybe link taxes to benefits • Spend money on the right things • There is such a thing as too much health care • Provide insurance • …..without diluting incentives

7. Basic principles: II. Equity • Redistribute from rich to poor • Use the income tax system • Generally, don’t use differential commodity taxation, or the health system • Redistribute from healthy to sick • This is insurance • Redistribute from low risks to high risks • Risk adjustment mechanisms?

8. Generating funds with mixed systems

9. Public-private mixes • Canada: separate by service type • Public insurance for physician and hospital services • Private (some public) insurance for drugs, dental, vision, long-term care • An alternative: separate by service quality • Public insurance for basic care (of all kinds) • Private insurance for higher quality care

10. Quality differentiated systems • Chile: public-private • Public health care: general tax finance • ISAPREs: risk-based premiums • Colombia: public-public • Basic “subsidized regime”: general tax finance • Higher quality “contributory regime”: payroll tax finance

11. Dual public-private systems • “Relieve the burden on the public system” • Assumes taxes on those who opt out remain in place • Allowing people to opt out with their taxes will not help budget position • Paying them to opt out could reduce net revenues • Compare with public-private education policies • Should governments subsidize private schools?

12. Insurance market competition • Can competition help us “spend the money well”? • Need to define the package – uniform or differentiated by risk? • Adverse selection – the good risks drop out • Affordability – package could be too expensive for bad risks and/or the poor • Administrative/marketing costs

13. Dual public-public systems • Price discrimination • Over-finance the higher quality public system • Use extra funds to expand lower quality system • Is this better than general taxation? • efficiency, equity, political feasibility? • Should the government get into other businesses to raise money for the poor?

14. Tax policy

15. User fees • Raising money or spending it well? • Is health care an efficient and/or equitable tax base? • or are user fees “taxes on the sick”? • “Distortionary” effects of user fees should in fact be positive • The impact on risk exposure and equity might not be

16. What is our model of demand? • Do user fees deter only the use of “unnecessary” care? • If not, then • (a) some people who need care are making bad choices, and • (b) some who don’t need care are being conned • Suggests the need for supply-side cost-sharing

17. Tax-subsidies to health insurance • Effects of tax-subsidy – too much private insurance • moral hazard? • or too little support for public insurance? • Is a tax-subsidy regressive? • (a) Effective MTRs can be high on the near-poor • (b) Optimally designed tax system might include deductibility of health

18. Tax treatment of out-of-pocket spending • Medical savings accounts • Use pre-tax income to pay OOP costs • Can this reduce moral hazard problems? • Nominal cost-sharing rate could increase • Include insured expenses in taxable income • Effect is to increase cost sharing • But nominal cost-sharing rate could fall • Is it efficient for different people to face different prices?