Health Care Reform: An Economic Perspective

1. Health Care Reform:An Economic Perspective Bill Evans Department of Economics and Econometrics

2. Motivation for talk • No Federal reform effort since 1994 • Re-emergence as a political issue • Reform packages from nearly all presidential candidates • States are forcing the issue

3. Kaiser Family FoundationTracking Survey – June 2007 • What two issues you would most like to hear the presidential candidates talk about? • Iraq 43% • Health care 21% • Immigration 18% • Economy 13% • Gas price/Energy 12% • Terrorism/Nat. Sec. 7%

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

5. Talk may be premature • Uncertain who the Democratic nominee will be • one plan will become irrelevant • Plan of the presumptive Republican nominee somewhat ill-formed at this point

6. What we will not talk about? Single payer

7. 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

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

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

10. 90% more than Canada 145% more than the UK

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

14. 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

15. 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

17. 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

18. 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

19. 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

20. 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

22. 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

23. 4.3 years less than Japan 2.4 years Less than Canada

24. If you want to cut costs, where do you look? • Administrative/overhead • Unnecessary procedures • Chronic conditions • 20% of people responsible for 80% spending

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

26. Government Insurance • Federal government – largest health insurance provider • Medicaid and Medicare • 95 million covered in 2006 • $540 billion • 21 percent of the federal budget

27. 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%)

28. 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

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

33. Tax System Equity • EPHI health insurance is a tax-free fringe benefit • Greatly reduces the cost to consumers of purchasing insurance • Has encouraged the growth of EPHI • Now, most people w/ private insurance get is through their employers

34. Tax Benefit of EPHI • A family w/ $70,000 in income • 36.4% marginal tax rate • 25% federal • 3.4% state (Indiana) • ~8% Social Security and Medicare • Want to purchase $12,000 policy in AFTER TAX DOLLARS

35. Without tax advantage: • Receive $18,897 in income • Pay 36.4% or $6,897 in taxes • $12,000 left over for health insurance • Net benefit of tax deduction is $6,897

36. 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

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

39. 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

40. Race White 10.8% Black 20.5% Hispanic 34.1% Age <18 11.7% 18-24 29.3% 25-34 26.9% 35-64 16.0% 65+ 1.5% Family Income <$25K 24.9% $25-$50K 21.1% $50-$75K 14.4% >$75K 8.5% Who are the uninsured?

41. Time Series • Number uninsured • 31 million in 1987 • 47 million in 2006 • Percent uninsured • 12.6 in 1987 • 15.8 in 2006

42. What have we been doing the past 13 years? • Two major efforts aimed at coverage • Medicare Part D • SCHIP program • Movement to managed care • BUT….Most of the ‘action’ has been with states • unsuccessful but informative

43. Small Group Reform • People without EPHI or small firms must purchase insurance in the ‘Small Group’ Market • Small groups tend to have • Higher prices • Higher administrative fees • Prices that are volatile

44. Prices are a function of the demographics • Concern: prices for some groups too high • Lower prices for some by “community rating” • Nearly all states have adopted some version of small group reform in 1990s

45. What happened? • Increased the price for low risk customers • Healthy 30 year old pays $180/month in PA • $420/month in NJ with community ratings • Low risks promptly left the market • Which raised prices • Policy did everything wrong

46. Lesson • Idea was correct: • Use low risk to subsidize the high risk • But you cannot allow the low risk to exit the market

47. Massachusetts Reform

48. MA Reform: Romney • Most ambitious state reform to date • Many features but….. • Most striking component: Individual mandate • Required by law to carry insurance

49. MA Reform • If you require insurance, you need to make it affordable • State subsidizes purchases for poor • Firms must establish Section 125 plans • Established the “Connector”

50. Connector • Merge of individual and small group market • Market maker in insurance • Community rating • Requirements on what plans must have