Health Care Reform

Health Care Reform

Kaiser FF Tracking Survey

Outline of talk • What problems must reforms address? • What have we learned from reform? • Outline some current alternatives • Examine some likely economic consequences

What we will not talk about? Single payer

Many countries have single-payer system • Generates low administrative costs but (arguably) poorer quality care • US companies process $700 billion in HC claims each year • The US is not about to get rid of a $700 billion industry

What are the issues? • Cost/Expenditures • Fiscal (taxes and expenditures) • Equity • Coverage

Expenditures on Medical Care • $2 trillion annually • 16% GDP • $6000/person • Twice as much as the median OECD country

90% more than Canada 145% more than the UK

Individual plan $4,242 total Family plan $11,480 Average Annual PremiumsCovered Workers, 2006 (KFF)

Are high expenditures a bad thing? • A key driver of health care costs is technology • MRIs/CT scans, angioplasty, anti-psychotropic drugs, hip/knee replacements, neo-natal intensive care, treatments for AIDS, statin drugs (Lipitor) • All not available 20 years ago. Now, commonplace

HIV/AIDS Drugs • Early 1990s, 8% quarterly mortality rates for patients w/ AIDS • 1995:4, 1996:1, three new drug introduced to fight virus • Work by preventing the virus from replicating in the host • Usage rates increase immediately and aggregate mortality falls 70% in 18 months

AIDS drugs are expensive, $12K/year in some cases • AIDS patients are expensive, $20K/year • This medical advance by construction increases lifetime spending by a considerably amount

ARVs increase lifespan after diagnosis with AIDS by almost 8 years • Lifetime cost of treating an AIDS patient increases by about $250K • This is expensive, but compared to many other programs, it is relatively cheap on a cost-per-life-year saved amount

NICU • Specialty wards of hospitals that provide “constant nursing and continuous cardiopulmonary and other support for severely ill infants” • Developed in late 1950 early 1970s • Growth has been rapid • NICU beds increased by 150% 1980-1995

Costs, 2001 CA • NICU discharge $50,000 • Non-NICU, $4,500 • In CA, 10% of births are for a NICU • Therefore, more than half the hospital cost of childbirth are attributable to NICUs

But…. not getting the bang per buck • Overhead costs are high (NEJM, 2003) • 31% in US • < 2% in Canada • Unnecessary care (Dartmouth Atlas) • 30% of care has little medical benefit • US performs poorly in comparison • Higher infant mortality • Lower life expectancy

4.3 years less than Japan 2.4 years Less than Canada

If you want to cut costs, where do you look? • Administrative/overhead • Unnecessary procedures • Chronic conditions

1/3 of expenses from 5 chronic conditions

Government Insurance • Federal government – largest health insurance provider – 25% of the population is insured through the Fed gov’t • Medicaid and Medicare • 95 million covered in 2006 • $540 billion • 21 percent of the federal budget

Medicare • 42.4 million recipients in 2006 • Costs in 2006 • $342 billion • 14% of Federal expenditures • Financing • Part A financed by payroll tax (2.9%) • Part B/D financed by premiums (25%) and general revenues (75%)

Future problems • Costs of program are expected to escalate between now and 2030 • At the same time, fewer workers to tax • Medicare Trustees predict • Costs > revenues by 2011 • Trust fund exhausted by 2019

Tax Treatment of Employer-Provided Health Insurance • Income from your employer is taxable • You take the income and spend it on goods • Cars, house, food, etc. • Under the tax laws, your employer cannot provide you these items directly to avoid taxes. • ‘Company cars’ used to be popular fringe benefit, now they are severely restricted

However, the Federal government has established some ‘tax preferred’ methods of compensation. • When you receive certain items, they are not taxed as income • Two largest categories • Pension contributions • Health insurance • Has been the case since 1954 • If college employee, tuition remission for your dependents

Taxes then reduce the cost of health insurance • Because you do not have to purchase insurance in after tax dollars • Ignores other important advantages of group coverage • Lower administrative costs • less adverse selection

History of tax preferred status • Modern health insurance began in 1930s • Blue Cross/Blue Shield – non-profit firms, began offering pre-paid plans for hosp and MD visits • Offered to groups of employees • The blues were a success so commercial forms began offering HI • <9% of population was covered by HI in 1940

Why offered through employee groups? • Reduce adverse selection • Lower admin costs • Wage and price controls in effect • Restricted wage hikes • To keep workers, started to offer fringes in lieu of wages • 1942 stabilization act codified • 1943 administrative tax court decision that firm payments for life insurance were not taxable as income

1943 decision generated lots of uncertainty • Decision based on analysis from life insurance provided to employees • Some question about applicability to health insurance • Certainty resolved in 1954 by IRS ruling stating explicitly that employer-sponsored HI was indeed tax preferred

Fraction of Population Covered by Private Insurance • Year Percent w/ Pvt Insurance • 1950 6.7% • 1960 50.6% • 1970 68.3% • 1980 78.1% • 1990 73.1% • 2000 72.3%

Example: Impact of Tax preferred status • $1500 weekly earnings • Tax at 30% marginal rate (state+federal+FICA+medicare) • Suppose you can get insurance for $100/week • Implications of tax preferred status • Key assumption: firm does not care how they compensate you. They only care about the total cost of employment

Firm is indifferent between paying you • $1500/week in wages or • $100/week in insurance, or $1400 in compensation • Both of these are expenses for the firm and treated equally as costs • What is the net after-tax income when health insurance is tax preferred and provided by the employer?

Without tax preferred status Receive $1500 Minus taxes $450 After tax $1050 Insurance $100 Net income $ 950 With tax preferred status: firm gives you $100 worth of insurance and $1400 in income Receive $1400 Minus taxes $420 Net income $980

You make $30/week on the deal • If the firm gives you money to buy insurance, the govt takes 30% away before you can spend it. • To get you $100 cash to buy an insurance policy, a firm would have to pay you $142.85 • Pay you $142.85 • After tax, $142.85(.7) = $100 • Notice that $42.85*.7 = $30

Tax Benefit of EPHI • A family w/ $70,000 in income • 36.5% marginal tax rate • 25% federal • 3.5% state (Indiana) • ~8% Social Security and Medicare • Want to purchase $12,000 policy in AFTER TAX DOLLARS

Without tax advantage: • Receive $18,897 in income • Pay 36.5% or $6,897 in taxes • $12,000 left over for health insurance • Net benefit of tax deduction is $6,897

Inequalities • Tax break only available to people who receive insurance from their firm • Higher income families have higher tax rates so the tax benefit to them is greater • Costs over $210 billion/year

Coverage • Uninsurance is a persistent problem in US • Dimensions of the problem • 47 million people • 16% of population • 9 million children • Uninsurance rates have increased steadily over time

Health Care Reform