Distinctive Features of Healthcare as a Commodity

1. Lecture 9 Tuesday, February 14, 2017 Healthcare and the Market

2. https://vimeo.com/136276681

3. WHAT ARE THE DISTINCTIVE FEATURES OF HEALTH CARE AS A COMMODITY? • Extraordinary value of the service • Ethical issues in distribution: some rationing process is inevitable • Information costs for average consumer • The problem of preventative medicine: The market for Health vs the market for Treatment • Supply generates demand • Competition between providers leads to over-investment

4. WHAT ARE THE DISTINCTIVE FEATURES OF HEALTH CARE AS A COMMODITY? • Extraordinary value of the service • Ethical issues in distribution: some rationing process is inevitable • Information costs for average consumer • The problem of preventative medicine: The market for Health vs the market for Treatment • Supply generates demand • Competition between providers leads to over-investment

5. WHAT ARE THE DISTINCTIVE FEATURES OF HEALTH CARE AS A COMMODITY? • Extraordinary value of the service • Ethical issues in distribution: some rationing process is inevitable • Information costs for average consumer • The problem of preventative medicine: The market for Health vs the market for Treatment • Supply generates demand • Competition between providers leads to over-investment

6. WHAT ARE THE DISTINCTIVE FEATURES OF HEALTH CARE AS A COMMODITY? • Extraordinary value of the service • Ethical issues in distribution: some rationing process is inevitable • Information costs for average consumer • The problem of preventative medicine: The market for Health vs the market for Treatment • Supply generates demand • Competition between providers leads to over-investment

7. WHAT ARE THE DISTINCTIVE FEATURES OF HEALTH CARE AS A COMMODITY? • Extraordinary value of the service • Ethical issues in distribution: some rationing process is inevitable • Information costs for average consumer • The problem of preventative medicine: The market for Health vs the market for Treatment • Supply generates demand • Competition between providers leads to over-investment

8. WHAT ARE THE DISTINCTIVE FEATURES OF HEALTH CARE AS A COMMODITY? • Extraordinary value of the service • Ethical issues in distribution: some rationing process is inevitable • Information costs for average consumer • The problem of preventative medicine: The market for Health vs the market for Treatment • Supply generates demand • Competition between providers leads to over-investment

9. WHAT ARE THE DISTINCTIVE FEATURES OF HEALTH CARE AS A COMMODITY? • Extraordinary value of the service • Ethical issues in distribution: some rationing process is inevitable • Information costs for average consumer • The problem of preventative medicine: The market for Health vs the market for Treatment • Supply generates demand • Competition between providers leads to over-investment

10. The U.S. System • Extremely complex & incoherent • Most expensive in the world and rapidly increasing costs

11. Key Components of the US system • Private fee-for-service payment • Employer provided insurance • Government provided insurance – Medicare & Medicaid • Government subsidized insurance: ACA • Direct government-provided health care • Pro-bono services and charity

12. The U.S. System • Extremely complex & incoherent • Most expensive in the world and rapidly increasing costs

14. The U.S. System • Extremely complex & incoherent • Most expensive in the world and rapidly increasing costs • Lower access than any other country. Only rich country without universal system.

15. Uninsured in 2010 = about 48 million Uninsured in 2016 = about 27 million

19. The dilemma of private insurance exclusions & the problem of “mandates” • Insurance companies make money by selling insurance to people who are healthy. This means: • They increase their profits by refusing to insure people with existing health problem and by refusing to renew insurance once a person gets sick. • To guarantee universal access to insurance, these practices have to be prevented. Insurance companies have to be prevented from refusing insurance because of existing conditions. BUT • This is only possible if healthy people are required to buy health insurance. Otherwise they will wait until they get sick and then buy insurance. • SO, if you want (a) to guarantee universal access, and (b) maintain a private health insurance market, you have to (c) require all people to buy insurance. This is called a “mandate.”

20. The dilemma of private insurance exclusions & the problem of “mandates” • Insurance companies make money by selling insurance to people who are healthy. This means: • They increase their profits by refusing to insure people with existing health problem and by refusing to renew insurance once a person gets sick. • To guarantee universal access to insurance, these practices have to be prevented. Insurance companies have to be prevented from refusing insurance because of existing conditions. BUT • This is only possible if healthy people are required to buy health insurance. Otherwise they will wait until they get sick and then buy insurance. • SO, if you want (a) to guarantee universal access, and (b) maintain a private health insurance market, you have to (c) require all people to buy insurance. This is called a “mandate.”

21. The dilemma of private insurance exclusions & the problem of “mandates” • Insurance companies make money by selling insurance to people who are healthy. This means: • They increase their profits by refusing to insure people with existing health problem and by refusing to renew insurance once a person gets sick. • To guarantee universal access to insurance, these practices have to be prevented. Insurance companies have to be prevented from refusing insurance because of existing conditions. BUT • This is only possible if healthy people are required to buy health insurance. Otherwise they will wait until they get sick and then buy insurance. • SO, if you want (a) to guarantee universal access, and (b) maintain a private health insurance market, you have to (c) require all people to buy insurance. This is called a “mandate.”

22. The dilemma of private insurance exclusions & the problem of “mandates” • Insurance companies make money by selling insurance to people who are healthy. This means: • They increase their profits by refusing to insure people with existing health problem and by refusing to renew insurance once a person gets sick. • To guarantee universal access to insurance, these practices have to be prevented. Insurance companies have to be prevented from refusing insurance because of existing conditions. BUT • This is only possible if healthy people are required to buy health insurance. Otherwise they will wait until they get sick and then buy insurance. [This is another free-rider problem!] • SO, if you want (a) to guarantee universal access, and (b) maintain a private health insurance market, you have to (c) require all people to buy insurance. This is called a “mandate.”

23. The dilemma of private insurance exclusions & the problem of “mandates” • Insurance companies make money by selling insurance to people who are healthy. This means: • They increase their profits by refusing to insure people with existing health problem and by refusing to renew insurance once a person gets sick. • To guarantee universal access to insurance, these practices have to be prevented. Insurance companies have to be prevented from refusing insurance because of existing conditions. BUT • This is only possible if healthy people are required to buy health insurance. Otherwise they will wait until they get sick and then buy insurance.[This is another free-rider problem!] • SO, if you want (a) to guarantee universal access, and (b) maintain a private health insurance market, you have to (c) require all people to buy insurance. This is called a “mandate.”

24. An Illustration of the “adverse selection” problem without a mandate • Suppose you have 20,000 people and 1,000 get sick a year and 19,000 don’t. • Suppose the medical expenses for those sick people are $20,000. • Total medical costs then = $20 million/year • Now suppose (a) insurance companies cannot refuse people because of prior conditions and (b) there is no mandate requiring people to buy health insurance. What will the insurance premium be to cover the medical expenses? • Answer: $20,000/person • With a mandate: $1,000/person

25. The U.S. System • Extremely complex & incoherent • Most expensive in the world and rapidly increasing costs • Lower access than any other country. Only rich country without universal system. • Minimal concern with prevention • Worse health results than other rich countries

26. Examples of weak preventative measures • Absence of free universal vaccinations • No universal pre-natal care: $1 prenatal care leads to $3 saving in post-natal care • Weakness of occupational health and safety regulation enforcement • No mandatory helmet laws for biking & motorcycles

27. The U.S. System • Extremely complex & incoherent • Most expensive in the world and rapidly increasing costs • Lower access than any other country. Only rich country without universal system. • Minimal concern with prevention • Worse health results than other rich countries

32. Two arguments in defense of a private market-based health insurance system: • Competition spurs cost saving and innovation. • Free-markets solve the “moral hazard problem.”

33. The “Moral Hazard Problem” A moral hazard = A situation in which there is no incentive to worry about costs since someone else is paying the bill. Insurance sometimes creates a moral hazard by enabling people to engage in riskier behavior than they would otherwise. Moral Hazard in Healthcare = If you have insurance, you will tend to overuse medical services since you do not have to pay each time you go to the doctor. This has the effect of imposing costs on others. Solution = Rely on the market and competition to force down prices and enforce personal responsibility through co-pays, deductibles, paperwork and administrative controls.

34. Counter-arguments • Competition argument • For profit hospitals are not more efficient; just more selective. • Increasing competition can  increased costs. Supply creates demand. • 2. Moral hazard argument • Real problem is people wait too long to go to the doctor not that they overuse health care • As long as there is insurance, there will be some moral hazard problem. But: the efforts to deal with the problem cost more than the problem itself.

35. Counter-arguments • Competition argument • For profit hospitals are not more efficient; just more selective. • Increasing competition can  increased costs. Supply creates demand. • 2. Moral hazard argument • Real problem is people wait too long to go to the doctor not that they overuse health care • As long as there is insurance, there will be some moral hazard problem. But: the efforts to deal with the problem cost more than the problem itself.

36. Two Comparisons • The U.S. Veteran’s Administration Hospital system (before the Iraq and Afghanistan wars) • The Canadian Single-payer System

37. Administrative overhead as a % of total costs, 2003 Source: New England Journal of Medicine 2003 (except for VHA estimate)

38. REASONS FOR HIGH QUALITY & LOW COST IN • VETERANS HEALTH ADMINISTRATION HOSPITALS • (before the Iraq and Afghanistan wars) • Economies of scale • Ability to buy drugs at a reduced cost by negotiating discounts • Incentives for investing in quality • Strong incentives for preventive medicine because of the life-time link to the patient • Efficient medical record and information systems and health monitoring because of this lifetime connection • BUT: VULNERABILITY TO UNDERFUNDING • Underfunding and understaffing since beginning of Iraq War resulted in rapid increase in waiting times for service.

39. REASONS FOR HIGH QUALITY & LOW COST IN • VETERANS HEALTH ADMINISTRATION HOSPITALS • (before the Iraq and Afghanistan wars) • Economies of scale • Ability to buy drugs at a reduced cost by negotiating discounts • Incentives for investing in quality • Strong incentives for preventive medicine because of the life-time link to the patient • Efficient medical record and information systems and health monitoring because of this lifetime connection • BUT: VULNERABILITY TO UNDERFUNDING • Underfunding and understaffing since beginning of Iraq War resulted in rapid increase in waiting times for service.

40. THE CANADIAN SYSTEM • Universal • Comprehensive • Portable • Accessible • Publicly administered • Diversity in organization of actual delivery: single doctor practice; community clinics; group practices; public hospitals and clinics • Big Irony: In Canada there is universal public provision of insurance for everyone, but greater freedom of choice by patients and less bureaucratic hassle for doctors

43. Why does the U.S. not have a Universal Health System even with the ACA reforms? • Power and opposition of insurance companies • Power and opposition of pharmaceutical companies • Ideological anti-statism: strength of conservative opposition to public solutions • Massive misinformation campaigns about alternatives