HPM 2028 Final

Not all members of employer-sponsored plan are together in a single pool

Consider a firm with four employees, two younger and two older. Younger employees have lower expected healthcare costs than the older two. This firm would likely use wage pass-through to charge older employees more for their health insurance, while the younger workers pay less so they are less tempted to leave for other firms.

Why did centralized HTA arise in Beveridge systems?

Cost containment Previously done regionally which led to disparate menus within the same country Formalized on a national scale in 80s and 90s

How does Medicaid mitigate moral hazard?

Cost-sharing burdens for Medicaid enrollees are low Contain costs and curb moral hazard with a combination of eligibility and coverage restrictions Set reimbursement rates at a low level

How do we remedy mandates in compulsory insurance?

Couple mandates with subsidies for the poor or pay with payroll taxes

Drawbacks of the fee-for-service model

Coverage for specific treatments was rarely denied, even if it produces minimal benefit. Allows moral hazard to be rampant Provides ample incentive for physician-induced demand (physicians overprescribing care because they get paid more)

Patents

Create a legal monopoly and the opportunity for monopoly profits

Health insurance marketplaces

Created centralized private insurance exchanges where insurers offer plans with standardized benefits and coverage levels Households ineligible for Medicaid with incomes 400% FPL receive subsidies Originally featured mandate to carry insurance to combat adverse selection but it was overruled

How much money can the drug process cost to bring the drug to point of approval?

$500 million

Medical care CPI equation (Lasperyres index)

(qoA, qoB) - quantity of goods A and B in the bundle (poA, poB) - yesterday's prices of A and B (p1A, p1B) - today's new prices for A and B

In 2010 how much did Americans spend on medical care?

1 in every 6 dollars of the American economy is spent on medical care

How does the Beveridge system use gatekeeping to separate high benefit and low benefit patients?

All patients must first see a general practitioner before they can see a specialist

Aim of Beveridge model

Allocation of healthcare based on need and not ability to pay Elimination of price rationing Promotes equity

Private provision

Allows for competition among hospitals and preserves incentives for hospitals to operate efficiently

Health Maintenance Organization (HMO)

Alternative means of health care in which people or their employers are charged a set amount and the HMO provides health care and covers hospital costs

Example of job lock

An employee is wheel-chair bound to do MS. Looking for a new job, but his potential new employer lowers his offered wage to compensate for an anticipated rise in healthcare premiums. This deters employee from switching jobs and is unhappy and inefficient at his current job

How do Bismarck systems mitigate adverse selection?

Compulsory nature of insurance enrollment prevents the worst of adverse selection Healthy people prevented from leaving the pool completely, guarantees healthy people are still paying into the system to subsidize care for the sick

Bismark model

Compulsory private insurance Private hospitals and doctors Strict price controls set by government Balances equity and liberty Examples: Germany, Japan, Switzerland, Netherlands

Condom use in states with high AIDS prevalence

Condom use similar in high and low prevalence states in 1984 due to lack of knowledge of spread of HIV By 1990, much higher awareness of connection between HIV and unprotected sex At risk, single men in high prevalence AIDS states wore condoms more consistently than those in low-prevalence states by 1990

How does employer-sponsored health insurance hinder job mobility?

Confluence of employer-sponsored health insurance, wage pass-through and sticky wages is known as job lock Job lock distorts labor markets can reduce social welfare

Downside of stronger patents

Customers have to pay monopoly prices for a longer period Less incentive for further innovation by the same company Legal barriers to subsequent innovation by another company (other companies will not have incentive to bring drug to market due to long wait time)

Cost of banning direct-to-consumer advertising for pharma

Customers may not find out about new drugs that would benefit them

How does fee-for-service model work?

Customers receive healthcare and then the insurance company pays the doctor or hospital a fee for each service rendered

Flu vaccinations and prevalence elasticity

Data from elderly pop 1992-97 More people sought vaccination in states with more weeks on influenza and more influenza deaths Reveals prevalence elasticity and mortality elasticity

Why is HTA controversial?

Decides who receives treatment and who does not

How do we reduce queuing?

Decrease demand Increase supply

How do health resource groups set reimbursement rates?

Depending on procedure and patient age

Infection rate

Depends on how fast it spreads and prevalence

Vaccination rate

Depends on price of vaccination and prevalence of disease

Examples of health externalities

Second-hand smoke Catching an infectious disease from your neighbor Motivational benefits of living among active people Taxes paid to the government to care for sick people

The market for antibiotics

The social supply curve is higher than the private supply curve because each dose of antibiotics is more costly to society than its marginal cost of production Society as a whole pays the greater price whenever an antibiotic is purchased

Social welfare

The summed utility levels of all individuals within a society Actions that increase or decrease this quantity are said to have social benefits or costs

What are the epidemiological costs of polio?

There are zero polio cases in the US each year, so epidemiological costs are $0

Orphan drug act

This act gives incentives to companies to create drugs for rare and tropical diseases

How do variations in medical spending between regions affect health outcomes?

Despite regional variations in spending on health expenditures, health outcomes do not appear to differ between high expenditure and low expenditure regions Similar self-reported health status and mortality rates between high expenditure and low expenditure regions

1989 Measles epidemic

Did not hit all states evenly: hit states with large hispanic populations hard, while other states were barely affected Compare childhood vaccination rates between states: parents in high prevalence states brought their kids in for vaccination earlier and more consistently than parents in low-prevalence states Demand for measles vaccine proven to be prevalence-elastic

Miami and La Crosse different HPF theories: Different hospital amenities

Differences in the quality of care explain variations in spending Higher-spending hospitals may be devoting more resources on satisfaction of patients, even if those resources do not contribute directly to health (ex. state of the art building) But, patients in higher-spending regions do not report higher levels of inpatient satisfaction

Miami and La Crosse different HPF theories: Different input costs

Different locations have different costs of living But adjusting for local prices fails to significantly reduce the geographic variation per patient Medicare expenditures Does not explain why variations in spending persist at the more local level

Epidemiological cost

Direct costs of a disease - Pain and suffering from symptoms - Cost of medical care - Reduced life expectancy

How does Medicaid setting reimbursement levels at a low rate harm enrollees?

Discourages health providers from serving Medicaid patients because they will be paid less than a privately-insured patient Medicaid patients have trouble finding regular source of care, as many doctors choose not to accept Medicaid patients

Define induced innovation

Discoveries that result when innovators change their research agenda in response to profit opportunities

What principle makes excess burden and epidemiological costs vary?

Disease severity

Who is harmed by induced innovation?

Diseases that are rare (orphan diseases) Diseases that occur in developing countries (tropical diseases) Both receive less attention from researchers because there is less profit to be made

Patients in America usually have free choice of

Doctor, hospital, and insurance plan But insurance plan usually limits which doctors and hospitals a patient can see

Drawbacks of prospective payment system

Doctor-patient relationships turning adversarial One study showed that a prospective payment system in one hospital resulted in an increase in patient morality

Monitoring

Doctors and hospitals are monitored for costs and health outcomes

Hypothesis for supply-sensitive care and moral hazard

Doctors with greater access to resources will tend to overprescribe care

Once a drug is approved for sale, what happens?

Drug company obtains a temporary legal monopoly protected by a patent

Equation for medical expenditures

E = P x Q E: Expenditures on medical care P: Price of medical care Q: Quantity of medical care

Herd immunity

Each vaccination protects not only the vaccine-recipient but also neighbors as well Even unvaccinated people benefit when their neighbors, friends, coworkers and family become immune through vaccination

How are hospital budgets determined in Beveridge system?

Each year's budget determined from last year's cost adjusted for growth and inflation No incentive for hospitals to operate more efficiently (reduce costs or waiting times)

What is the excess burden of polio?

Each year, millions of infants in the US are vaccinated against polio, so excess burden is millions of dollars per year

Example of disease severity between common cold and ebola

Ebola has a greater disease severity than the common cold Common cold is ten times more common than ebola, but ten times less costly Common cold's excess burden is small because it does not induce much self protection Ebola's excess burden is high because it is so severe (take more measures against self-protection)

How do we eradicate a disease?

Eliminating all human and nonhuman reservoirs of disease

What does eradication of a disease mean?

Eliminating the possibility of new infections of a disease

What is the main route of health insurance for non-elderly Americans?

Employer-sponsored insurance

Employer-sponsored insurance

Employers are required or encouraged to offer a private insurance contract to all of their employees

How do pigouvian taxes affect positive externalities?

Encourage more consumption of goods

How does the Bismarck system operate in Taiwan?

Health insurance largely financed by payroll taxes and supplemented by tobacco tax and lottery sales revenue Comprehensive public insurance coverage No gatekeeping in Taiwan; strong electronic health record system and NHI card Health expenditures only totaled 6.4% of GDP in 2017

What does it mean by "health is contagious"?

Health is determined by the health of those around you (practically and socially contagious) Ex. Your friends getting your flu shot

Supply-sensitive care

Health services whose use depends greatly on the supply or availability of that service Ex. Doctor's reliance on MRI technology may depend on how accessible an MRI machine is to him

What tools are available to control moral hazard?

Health technology assessment (HTA) Cost-sharing Gatekeeping and queuing Prospective payments

Does managed care attract healthier or sicker patients?

Healthier customers due to adverse selection Costs may be cut just because their customers are healthier

What determines disease prevalence?

Herd immunity Responsiveness of vaccine demand to prevalence rates (as disease prevalence decreases, demand for self-protection decreases allowing disease to rebound)

Foundation Trust

High-performing hospitals apply to become this type of entity and are granted even greater autonomy from NHS

What is the main cost of public insurance?

Higher taxes

Reduce queuing: increase supply

Hire more doctors and build more hospitals Higher salaries for medical staff Outsource care to private providers (undermines system though)

Public health care provision

Hospital and clinics run by the government

Public provision

Hospitals are government-run and financed by taxes and physicians are government employees

Miami and La Crosse different HPF theories: Different medical malpractice environments

Hospitals in regions with a higher rate of medical malpractice suits practice more defensive medicine Fails to explain variations in spending within states that share the same malpractice codes

Opening up patient choice for provider

Hospitals now compete for patients

Three broad questions of the health policy trilemma

How should insurance markets work? How should moral hazard be controlled in public insurance? How should health care provider markets be regulated?

Firm-specific human capital

Knowledge and experience gained from working at a particular firm that is highly relevant there but irrelevant at other companies Workers with firm-specific human capital can be much more productive at their firm than anywhere else, so wages worker earns at the current job would exceed what they could earn at another company

How does gatekeeping keep costs down?

It eliminates frivolous appointments and focusing limited resources on patients who truly need care

How will private provision affect the poor and uninsured?

Lack of access to care

Example of price ceiling in Italy

Italian government publishes list of maximum permissible prices for each drug

Examples of induced innovation by academic and public institutions

Large-scale production of penicillin during WWII by US Department of agriculture Academic research focusing on obesity US army ceasing malaria research after Vietnam war ended and troops returned from malarial regions

Benefits of doctors having prescription power

Less intentional and unintentional abuse of drug since individuals must be prescribed drugs instead of just purchasing whatever they want from the pharmacy

Preferred Provider Organization (PPO)

Less restrictive version of HMO that does not integrate insurer and provider

What values does the American model reflect?

Liberty and free choice Prioritization of wealth over health and equity

Benefits of queues

Limit moral hazard by deterring people who do not actually need the costly procedure Treat the rich and poor equally which promotes equity

How does public insurance use gatekeeping to control costs?

Limits total number of specialists available

What factors qualify you for Medicaid?

Low income alone in expansion states Marital status, number of children, disability, health and immigration status

Drawbacks to cost-sharing

Makes healthcare less affordable for patients, which can undermine equity

Drawbacks to cost-effective analysis

Makes insurance contracts less full for patients, because some services are no longer covered Denying coverage for some treatments may be unappealing for political reasons

Dependent coverage mandate

Mandated that children can stay on parents insurance until they are 26, rather than kicking them off at 18 Good way to get young healthy people out of marketplaces and covered for longer

HTA in Bismarck countries

Many countries have moved to incorporate HTA into healthcare systems to limit wasteful technology use, but this is controversial so not every country has adopted it

Bismarck system: regulated, private health care provision

Many hospitals are private Physicians operate privately, not public employees But prices are set by the government in negotiation with providers Private providers do not have the option of offering services at higher or lower prices

What are queues usually a sign of?

Market inefficiency

Eradication campaigns become more difficult the closer they are to success

Measles in Ireland: Childhood measles went from 100,000 in 1985 to 135 in 1991, but disease rebounded in 1993 with 4,000 new cases reported Nicaraguan conditional cash transfers: In early 2000s, high prevalence of TB, measles, polio, Nicaraguan government instituted conditional cash transfer program for those who agreed to receive free vaccine, vaccination rates soared above 95%

Prevalence elasticity of demand for self protection

Measure of how demand for self protection responds to changes in the prevalence of that disease When a disease becomes more widespread, people will go to greater lengths to avoid it

Medical care consumer price index (CPI)

Measures changes in the price for medical goods and services Tells us how much more it costs this year to buy the same things we bought last year

How does Medicaid reduce economic efficiency?

Medicaid eligibility rules create a disincentive to work as hard as possible, because rising incomes can mean disqualification from Medicaid (but literature does not find this effect)

Example of cost sharing in Medicaid

Medicaid enrollees must pay first $1,156 of expenses for each hospital visit and first $140 of outpatient clinic expenses each year Forces enrollees to either economize or purchase supplemental private insurance

How does Medigap undercut moral hazard mitigation effects?

Medicare enrollees can purchase private supplemental insurance (Medigap) which pay for enrollees deductibles and copayments and undercuts moral hazard efforts

Variations in medical spending between regions

Medicare expenditures on patients in their last two years of life averaged $46k nationwide But tremendous regional variation - $59k per patient in NJ, double what was spend in ND - $83k per patient in Miami - $36k per patient in La crosse, WI Spending can even vary within the same city

Which type of error is FDA more concerned about?

Minimizing type I error, so bad drugs are not approved on the market and are more often caught due to media attention

How do patents affect low income countries?

Monopoly prices weigh more heavily on low income countries, can't have heavy duty monopoly because they cannot afford to Free rider effect

What is a ban on direct-to-consumer advertising?

Most countries do not allow pharma ads on TV, U.S. is the exception

Private health care provision in America

Most hospitals and doctor clinics are private. There is some antitrust regulation, but few legal restrictions on where doctors can practice and hospitals can open. No direct price controls enforced by the government.

How does public insurance negatively effect the economy?

Most taxes distort behavior by discourage labor and commerce, so entire economy may become less efficient as a result

Pigouvian taxes and antibiotics graph

Moves from gamma to beta by taxing them to get socially optimal amount of antibiotics produced

Example of price ceiling in UK

NHS in UK sets the price at which they are willing to purchase drugs (monopsony power)

Health Policy Trilemma

Nations have three broad goals in mind when designing health policy: health, wealth, and equity Any attempt by a nation to move closer to one of these three goals necessarily involves, if efficient, a tradeoff that moves that nation further away from another goal (all three goals can never be maximized)

Bismarck sytem: universal insurance

Nearly all of the population has health insurance coverage, either through a plan sponsored by an employer or through the government No one is denied access based on inability to pay or poor health status

Externalities in disease eradication

Negative externality: Case of disease Positive externality: Vaccination

Pigouvian subsidies for vaccines

Nicauraguan government example

Downside of weak patents

No incentive to bring new drugs to market

Do Phase III trials have complete information about a drug?

No it is too costly to test how a drug will affect all of the population, so FDA must accept some risk when approving a drug

Managed care versus fee-for-service

No systematic difference in health outcomes between managed care and fee-for-service plans Managed care organizations keep costs lower In general managed care patients are hospitalized less often and undergo fewer expensive tests. Slow proliferation of expensive technologies like MRI machines.

Does Medicaid use cost-effective analysis?

No, U.S. Medicare is forbidden by law from using CEA in coverage decisions. Medicare covers any medically effective treatment, no matter how expensive Allows moral hazard to flourish

Is employer-sponsored health insurance free?

No, it is a part of the worker's total compensation package The cost of premiums are taken out of workers wages

SIR Model graph explanation

Number of births (^b) to susceptible population Susceptible to infected: Infection rate Susceptible to recovered: Vaccination rate Susceptible to dead: Death rate of susceptible pop Infected to recovered: Recovery rate Infected to dead: Death rate of infected pop Recovered to dead: Death rate of recovered pop

Differential wage pass-through

Occurs whenever employers can observe elevated health risks among their employees

Drawbacks of public provision

Offer lower quality care Ex. Countries with public hospitals suffer longer queues

Look at graph on slide 34

Ok

Look at the market for antibiotics graph on slide 14

Ok

Review the error graph on slide 19

Ok

What are the maladies of private health care markets?

Oligopoly pricing Monopoly rents for doctors and specialists Medical arms races Physician-induced demand

Thinking about disease as a tax

Only pay the "tax" if you get sick You are more likely to get sick (have a higher tax bill) if you engage in certain behaviors You take costly measures to avoid getting sick The more you work (the higher exposure), the more tax you pay (the higher expected cost of the disease)

Problem with risk adjustment

Only taking the average cost of expenditures for the sick, doesn't account for people with higher expenditures that causes plan to lose money Difficulty in assessing risk

How does the Bismarck system operate in Japan?

Japan's system is not based on managed competition model whereby patients chose insurers System emphasizes employer-based financing of healthcare, whereby the type of company one works for determines insurance to which one belongs Patients can still choose their providers who are constrained by strict price controls

How do we mitigate adverse selection in employer-sponsored insurance?

Job-specific human capital provides a strong incentive for healthy employees with low risk of illness to pool with high risk, unhealthy employees to mitigate adverse selection

How did employer-sponsored insurance come about in U.S.?

Kaiser Permanente - managed care plans for workers in California shipyards Cheaper to provide medical care for employees directly than paying for it at outside hospitals

How has the government tried to harness power of induced innovation to fight orphan and tropical diseases?

Orphan drug act in the U.S. Advanced purchase of yet-undiscovered vaccines for HIV, malaria, TB

What happens after a patent expires?

Other companies can produce the same drug cheaply and profits sharply decrease

What is an effect of the US having no price controls on drugs?

Other countries free ride on US market for future innovation Drug companies count on making their money off US customers

Four parts of Medicare

Part A: pays for hospital care Part B: pays for outpatient care and physician services Part C: provides option to receive health insurance through private plans rather than through Plan A or B Part D: pays for prescription drugs

How does Medicare mitigate moral hazard?

Parts A and B cause patients to face cost-sharing requirements for outpatient visits and hospital stays longer than 60 days

How do employers get away with wage discrimination through sicker employees?

Passing lower wages through to sicker workers is illegal, but wage discrimination is difficult to detect and there is evidence that people have higher expected medical expenditures do earn less

How does cost-sharing limit moral hazard?

Patients are still responsible for paying some alotted cost to receive treatment

Coverage networks and vertical integration

Patients can only receive care from a specified list of providers

Cost of queues

Patients could be desperately needing quick care, but not receiving it

How does the Bismarck system operate in Germany?

Patients have the option of choosing a health insurance plan (private entities, but extensively regulated) Insurance financed by payroll taxes based on income and not health Patients and insurers free to choose health care providers, who compete to attract them Providers compete based on quality and not cost since cost is regulated by government

Costs of uninsurance

Pay for medical care out-of-pocket facing risk of catastrophic health bills and end up deferring care until it becomes an emergency

Example of prospective payment system

Pay hospitals a fixed amount for treating any heart attack patient. Gives hospitals incentives to economize in their treatment of heart attack payments because they no longer receive extra payments for doing extra work.

Prospective payment system

Payments are made to doctors or hospitals before healthcare is delivered

Fee-for-service system

Payments made after a service is rendered and the amount paid depends on how much healthcare is received Doctors have no reason to deny patients a service because the costs are too high Creates incentives for physician-induced demand

What is the cost versus benefit of herd immunity?

People balance private gains from vaccination (immunity from disease) against private costs, but a person considering vaccination ignores social benefits of herd immunity

How is epidemiology related to economics?

People change their behavior in response to the possibility of illness

Disagreement surrounding health policy trilemma

People disagree about how important each of the three is Ex. Some countries value social equity highly and are willing to pay more taxes to achieve it Some countries value health and are willing to tolerate more moral hazard or monopoly pricing to secure it

If externalities cause social harm, how might government policy restore the social optimum?

Pigouvian subsidy or tax

Health production function (HPF)

Plots relationship between expenditures and maximal level of obtainable health HPF increases with health expenditures HPF has diminishing returns to healthcare spending

Is herd immunity a positive or negative externality?

Positive externality: the social gain from each vaccination is greater than the private gain from that vaccination

Benefit of banning direct-to-consumer advertising for pharma

Prevents moral hazard (asking for a drug they do not need just because they saw it on TV) Reduces strain on doctor-patient relationships (less agitation for a drug a patient does not need)

Increasing managerial autonomy

Previously, much hospital adminstrator control constrained by government Now hospital managers have agency to adapt to local market conditions to attract more patients

What does the size of social loss depend on?

Price elasticity of the demand curve

How do negotiated fee schedules control health care spending?

Price schedules adjudge the relative value of differing healthcare services Ex. Check-up vs. heart bypass surgery Both public and private providers are bound by price negotiations and can only charge the prices that are set

Doctors in America usually have free choice of

Price to charge (kind of, usually salaried and working for organizations so the org sets the price) Where to practice Whom to treat

Price controls

Prices negotiated between providers and purchasers Allows purchasers of health care (sickness funds) to band together and exercise monopsony power

How is the Beveridge system different from Bismarck and American?

Prioritization of solidarity and equity

Major characteristics of the American model

Private health insurance markets (primary) Partial universal health insurance Private healthcare provision

How is moral hazard controlled in insurance markets?

Private insurers compete to offer customers the optimal mix of insurance coverage and moral hazard control But when governments enter the insurance market, policymakers are responsible for these decisions

Since social benefits > private benefits in herd immunity...

Private market produces fewer vaccinations than socially optimal

American model

Private markets in a central role No mandate for universal insurance No price controls Public insurance for select groups: elderly and poor Emphasis on liberty Examples: Unique to US

Variation within Beveridge systems

Problems like queues and poor hospital incentives have motivated different nations under Beveridge system to experiment with non-Beveridge elements like provider competition and HRGs

Clinical distortions

Process for setting prices would ideally result in a price for each activity equal to its marginal cost of production, but this is not always the case and price mismatches can introduce distortions in the way that doctors elect to treat their patients

The Dartmouth Atlas

Project that finds patients with diagnoses can receive dramatically different care depending on where they live No correlation found between more expensive treatment and health outcomes

Drawbacks to managed care

Promotes inequities Cut healthcare across board without using cost-effective analysis

Prevalence

Proportion of a population that has a given disease

How does means-tested insurance improve equity?

Provides healthcare for those who could otherwise not afford it

What is Medicaid?

Public insurance program that provides highly subsidized insurance coverage to low-income families

How is risk selection harmful?

Puts sick customer at a disadvantaged position Wasteful from a social perspective as any money and time dedicated to discriminate tradesoff with patient care

What occurs if gatekeeping is effective?

Queues will likely build up, meaning a lot of people needing care will not receive it quickly Potentially a huge welfare loss

How does the Beveridge model ration care if not by price rationing?

Queuing Gatekeeping Limiting coverage through HTA

SIR model of disease

S: susceptible (to infected, recovered, or death) I: infected (to recovered or death) R: recovered (to death) People can move between these states of disease

Price rationing

Scarce resources go to those willing and able to pay the most for them

Will a subsidy for vaccination be effective in controlling infectious disease?

This quantity depends on: - The infectivity of the disease (fast spread means vaccine role out must be rapid) - Prevalence elasticity (how likely are people to get the vaccine as disease rampages) - Effect of vaccine price on vaccination rate

Costs of doctors having prescription power

Time, inconvenience, expense Ex. Having to schedule an appointment and pay a copay for a drug you may have already been prescribed

Drawbacks of private provision

Too little competition leads to market power and accompanying social loss due to high prices and under provision Too much competition can exacerbate inefficient quality competition, lead to a medical arms race, and increase health care costs

Equation for total economic cost of a disease

Total economic cost = epidemiological cost + excess burden

Pigouvian subsidy equation

Total subsidy equals the per-transaction subsidy multiplied by the number of vaccines (Q*soc)(X) = (Q*soc)(ps-pc)

Risk adjustment

Transfers are based on ex ante risk assessments and not actual cost outcomes so only cover estimated expenditures and nothing beyond that Insurance funds that draw unhealthy customers are reimbursed based on how expensive their customers are expected to be, not actual cost

Where is the Beveridge model adopted?

UK, Canada, Australia, Scandinavia

Comparing levels of health between countries

Unclear whether all countries share the same health production frontier (U.S. inefficiently below frontier) or whether countries have different HPFs One possibility is that U.S. and other countries have different populations with different inherent health states, if so U.S. would lie on different HPF

What does the U.S. healthcare system lack?

Universal guaranteed insurance for all citizens

What is single-payer healthcare?

Universal public insurance because one entity (the government) pays for all care

Drawbacks of government-set prices

Unless prices are set properly, treatments priced below marginal costs may not be offered, while most profitable services may be overprescribed

Private welfare

Utility level isolated to one individual within a society Actions that increase or decrease this quantity have private benefits or costs

Example of positive externality in health

Vaccines: help yourself reduce infection and those around you

If demand for care is sensitive to supply,

We would expect hospitals with more resources to have larger expenditures

How do queues form?

When demand for specialists' services outstrips supply, queues result

How does prevalence elasticity make disease harder to eradicate?

When disease is not highly prevalent, people will take fewer precautions against getting sick

When can adverse selection become destabilizing?

When firms are not allowed to adjust their premiums

When can adverse selection arise in Bismarck systems?

When frail customers disproportionately enroll in certain funds that provide the most generous coverage Could result in separating equilibrium or adverse selection death spiral

When does risk selection occur?

When insurers seek to enroll low-risk customers and seek to avoid high-risk customers

When can adverse selection appear in a Bismarck system?

When people can choose among several insurance plans

Steady states of populations

Where are populations (susceptible, infected, recovered) are stabilized People still move between states, but the net number of people does not change The number of susceptible depends on the rate at which people exit the infected population and infectivity (does not depend on price)

How is antibiotic resistance a negative externality?

Widespread use of penicilin is responsible for increases in antibiotic resistance, breeds more resistant bacteria

Differential wage pass-through: maternity benefits

Women of childbearing age saw their salaries fall relative to men and older women in the years following the passage of a 1976 law mandating maternity care coverage for employer-sponsored insurance plans

How is the Beveridge model financed?

Health care is a good provided by the government and paid for with tax revenue

Reasons quantity of healthcare demanded may be increasing

1. An aging population: people demand more health care as they age 2. A richer population: rising incomes lead to more health care consumption 3. More insurance coverage: more insurance reduces out of pocket prices to patients of obtaining medical care 4. Increasing quality of medical care: each dollar spent on healthcare generates a higher marginal health benefit, so demand for healthcare increases

Three health policy models

1. Beveridge model 2. Bismarck model 3. American model

Options for how health insurance markets should work

1. Completely private insurance markets 2. Universal public insurance 3. Compulsory insurance 4. Employer-sponsored insurance 5. Means-tested health insurance Not mutually exclusive

Calculating the medical care CPI

1. Create a bundle of goods and services (should approximate typical consumption of goods and services demanded) 2. Compare the total cost of bundle this year to the total cost of bundle last year

How do we mitigate adverse selection in Bismarck systems?

1. Deny customers right to choose insurers in first place (ex. Japan): if you can't move across insurance plans, adverse selection is reduced 2. Restrict product differentiation: if insurance funds cannot distinguish themselves from competitors, there is little to motivate adverse selection in the first place and less inequality if separating equilibrium does emerge (ex. Germany)

Three avenues where Americans primarily purchase insurance

1. Employer-based insurance 2. Medicare 3. Medicaid

How to eliminate risk selection

1. Ex-post cost-based compensation 2. Risk adjustment

Life cycle of a drug

1. Find a chemical compound that might treat a disease 2. Test it on animals to show its' non-toxic 3. Test it on humans in three phases (low dose to health individuals, dose to unhealthy individuals, test effectiveness in preventing disease or medical conditions) 4. Get approved for sale by FDA

Two fundamental questions asked in every healthcare system

1. How much healthcare should be produced? 2. Who should get healthcare?

Three strategies to estimate welfare loss from queues

1. Hypothetical questions about how much patients would be willing to receive care now vs. later 2. Calculate welfare loss from patient willingness to pay extra for private care 3. Calculate welfare loss from patient willingness to travel to farther hospitals to receive quicker care

Reasons price of healthcare is rising

1. Increased resource costs 2. Less competitive markets: hospital mergers may have made the market more monopolistic 3. Expensive technology: if modern medical care routinely incorporates new, expensive technologies like MRI machines, the price of treating many ailments will rise

Three phases of drug trial in humans

1. Low dose to healthy individuals (~2 years) 2. Dose to unhealthy individuals (~2 years) 3. Test effectiveness in preventing disease or medical conditions (~3-4 years)

Affordable Care Act provisions

1. Medicaid expansion 2. Health insurance marketplaces 3. Dependent coverage mandate

Four rules of managed competition

1. Minimum standards: each insurance contract is required to meet a minimal standard of care; limits on copayments and deductibles 2. Open enrollment: insurers may not reject any eligible customers, even if they're not health 3. Compulsory participation: customers mandated to have and pay for coverage at all time 4. Community rating: insurers cannot set premiums using risk rating; they must be community rated

UK 2002-2008 Reforms

1. Move hospitals away from global budgets to a payment by results system 2. Allow patients freedom to choose between providers (eliminates information asymmetry) 3. Give hospital administration greater autonomy in managing hospitals Reforms set uniform prices for all hospitals, so they can only compete on quality and not price

Hypotheses to explain rising healthcare expenditures

1. Prices have increased 2. Quantity demanded has increased 3. Technological innovations and technological overuse

How should health care provision be regulated?

1. Public provision 2. Private hospital markets 3. Government-set prices

Three key traits of the Bismarck system

1. Universal insurance 2. Community rating 3. Regulated, private healthcare provision

Three defining features of the Beveridge model

1. Universal, single-payer insurance 2. Public healthcare provision 3. Free care

In 1960 how much did Americans spend on medical care?

1/20 of income

How long does a drug company hold a patent for?

17 years

When did the FDA start regulating the drug market?

1930s

Example of negative externality in health

Airplane tickets: helps yourself get somewhere, but negative effects for everyone else due to carbon emissions Antibiotics: good for health but can lead to antibiotic resistance

Who is eligible for Medicare?

All American citizens over 65 years of age, and severely disabled Americans who have been out of work for two years

Universal, single-payer insurance

All citizens receive insurance from government, financed by taxes and not premiums

How many drugs that enter Phase I of drug trials make it to Phase III?

21.5%

Race to the bottom

A dynamic in which hospitals compete to attract buyers by lowering costs, often lowering quality of patient care

Compulsory insurance

A mandate (a legal requirement that everyone in a population purchase private insurance) confronts adverse selection by effectively banning it Even healthy customers who would prefer to opt out are legally required to buy into the system

What are problems with compulsory insurance?

A mandate does not absolve government from regulating the market Mandates can be expensive, many citizens cannot afford it Mandates must be carefully defined or it may be completely ineffective

What do all three strategies to estimate welfare loss find for non-urgent procedures?

A month reduction in waiting time is only worth around $200 If people were sensitive to receiving care, this number should be a lot larger Contradicts long wait times that we see

Define managed care

A philosophy of health insurance that employs tactics intended to reduce moral hazard, physician-induced demand, and premiums

Medical inflation

A rise in the price level for medical goods and services

How can we ensure vaccination?

A subsidy or government mandate

Pigouvian tax

A subsidy or tax designed to "internalize" an externality by altering private costs and benefits

Who engages in induced drug innovation?

Academic and public institutions, even though they do not usually directly profit from their discoveries

Cost-sharing

Accomplished through the use of deductibles, copayments, and coinsurance Out-of-pocket costs that insured patients paid before receiving healthcare

Difference between adverse selection and risk selection

Adverse selection refers to behavior of insurance customers Risk selection refers to behavior of insurance providers

Tactics for risk selection

Advertise specifically to certain group Close offices in high-cost regions Reward agents who find sick customers and convince them to switch to other plans Ignore calls from sick customers who want to sign up Provide deficient care to sickly in hopes of chasing them away Hold sign-up session in buildings that are not accessible to disabled

Define externality

Any positive or negative effect that a market transaction imposes on a third party (i.e. someone other than the buyer or seller)

How can we align private and social supply curves in antibiotic market?

Applying a per-dose tax on the supplier

Example of induced innovation: changing demographics

As the US population aged between 1970-2000, drug companies turned their attention to drugs for the elderly (glaucoma medication, etc.)

Example of healthcare expenditures in La Crosse vs. Miami

Average Medicare expenditures in last two years of life Miami: $83k La Crosse: $36k But have the same level of health

Type I error

Bad drugs are approved

How would public provision reduce cost and increase quality of care?

Banishing oligopoly power and medical arms races

What are the costs of means-tested insurance?

Basically identical to the costs of expanding public health insurance in other ways: higher tax burdens and greater moral hazard

Why do queues arise in Beveridge system?

Because governments mandate free or very-low cost care, so demand can be high

Why is Medicare expensive?

Because it covers populations that are generally less healthy than the general population, which tends to demand lots of medical care Also reimburses for any procedure shown to be medically effective, regardless of cost Sets premiums below actuarially fair level

New technologies in the CPI: cure for Hodgkin's Lymphoma

Before 1950, no cure available, so price was infinite and quantity was zero In 2020, cure is available, price is finite and quantity is positive Causes price of Hodgkin's cure to fall dramatically

Benefits of public provision

Better at controlling health care costs

How do Beveridge and Bismarck models compare?

Beveridge systems emphasize equity and equal access to care Bismarck systems emphasize patient choice and provider competition

What system has higher healthcare expenditures, Bismarck or Beveridge?

Bismarck

How are salaries for healthcare workers set in Beveridge system?

By government, market cannot equilibrate so supply reaches demand High demand and low supply results in queues

How does employer-sponsored insurance combat adverse selection?

By pooling employees that have differing levels of health together

Drawback of employer-sponsored insurance

Can create labor market inefficiencies, and not appropriate for unemployed populations (children, retirees, disabled)

Denials of coverage

Care may not be covered if it is not cost-effective

Free care

Care provided for free at government hospitals Free at the point of care Some exceptions for prescription drugs, eye care, and dentistry

How does prospective payment limit moral hazard?

Charges are not based on procedures performed, but on the condition of the patient who is admitted

Risk rating

Charging different premiums to different customers based on their personal risk of needing healthcare

Community rating

Charging everyone in the insurance pool the same premium Payment based on income rather than health

Pigouvian taxes on disease

Classic remedy for negative externalities Taxes on the sick when they venture out in public and imperil susceptible people

How does the Bismarck system operate in Switzerland?

Closely resembles Germany: insurers are heavily regulated and compete to attract customers that are required to purchase coverage Switzerland pioneered managed care plans like HMOs

Kefauver-Harris Amendment of 1962

Companies must prove new drugs are safe and efficacious through clinical trials

Payment by results system

Compensates hospitals based on number of procedures conducted rather than fixed annual budget Determined by health resource groups

What happens when there are no health externalities?

Competitive markets reach an efficient outcome Taxes and subsidies distort the efficient outcome

Differing preferences for health

Even if a country is productively inefficient and on its own HPF, this does not imply that the country is spending the optimal amount of money on healthcare Ex. Possible that marginal dollar spent on education or parks produces more utility than the marginal dollar spent on healthcare (allocatively inefficient, since it spends too much on healthcare relative to other activities)

Clinical distortions: prices are set too high

Example: Japan Prices for pharmaceuticals deliberately set higher than price charged by drug companies Japanese physicians often opt to sell higher-priced drugs resulting in increased pharmaceutical expenditures

Clinical distortions: prices are set too low

Example: U.S. Cochlear implant technology initially had low reimbursement rates for Medicare and Medicaid Physicians performing implantation would be reimbursed less than the cost of the surgery Only limited number of patients received cochlear implants in U.S.

Medicaid expansion

Expands Medicaid coverage dramatically by forcing states to cover broader classes of people Added nearly 15 million to Medicaid roles Expansion is optional

Why don't Beveridge countries who want competition maintain both private and public sectors?

Fear that a parallel system will undermine solidarity of system: potential for two-tier system where rich patients go to private system and poorer are stuck in public system

Who is Medicaid run by?

Federal AND state government

HPFs of Miami and La Crosse if they are on the same HPF

Figure A hypothesis: Miami and La Crosse lie on the same HPF, then Miami could be achieving the same level of health for much low expenditures

HPFs of Miami and La Crosse if they are on different HPFs

Figure B hypothesis: Miami and La Crosse lie on different HPFs, they may both be investing in health optimally given local characteristics and constraints This variation in spending would not necessarily represent wasteful spending or technology overuse

Why do healthy employees stay in their jobs, even when they're subsidizing their unhealthy coworkers?

Firm-specific human capital

What do Pigouvian subsidies cost to consumers?

Flow directly to consumers, but are not totally costless Government must raise money for a subsidy through tax revenue, which may be distortionary Fund Pigouvian subsidies with Pigouvian taxes!!!

How does the Bismarck system operate in France?

French workers do not have choice between plans, but all plans are more or less identical Large degree of choice when it comes to choosing a provider France known for modest coverage of ambulatory services (supplementary insurance to fill gaps) Operates as a fee-for-service system

Free rider effect

Gaining the benefits of group membership by avoiding costly obligations of membership and by allowing other members to incur those costs Ex. If the US has patent protections, companies will develop new drugs even if there are weak patent protections in India

How has have healthcare expenditures been limited in Bismarck systems?

Gatekeeping

What are tactics of managed care?

Gatekeeping Coverage networks and integration Monitoring Salaries and fixed payments Denials of coverage

Gatekeeping and queuing

Gatekeeping entails a tiered system of doctors that patients must visit in a specified order

Cost-effective analysis

Gathers information about treatment options and determines which options produce the most additional health for the least cost

What countries use the Bismarck system?

Germany, France, Belgium, Netherlands, Japan, Switzerland

How can we fix lack of access to care for poor people in private provision system?

Give tax breaks to non-profit hospitals which historically have attended to the poor and vulnerable

Type II error

Good drug is rejected or delayed

How can we reach a socially desirable market with health externalities?

Government interventions Ex. Public health efforts, like flu vaccination campaigns or quarantines to combat Ebola

How does HTA play a role in Beveridge system?

Government pays for healthcare, so HTA aids in cost containment + determines which services are available and which services are not Patients may have to go abroad to access services denied by HTA

Universal public insurance

Government provides insurance to all citizens and finances it with taxes Appealing because it side-steps adverse selection and ends uninsurance Furthers the goal of equity, because the poor pay little or nothing for coverage Steps must be taken to control moral hazard, which can explode the government budget if left unchecked

Government-set price

Governments aim to prevent private providers from exercising market power and keep healthcare affordable Price controls in theory could contain hospital costs

How would public provision reduce efficiency compared to private market?

Governments are vulnerable to agency problems, because government workers have less incentive than private workers to ensure success of possible Government systems also lack clear feedback mechanisms to correct them if they are not succeeding

Why is it difficult to eradicate a disease?

Hard to find and eliminate disease in all non-human reservoirs Hard to access remote, undeveloped regions where the last cases of a disease preside Demand for self-protection decreases when disease prevalence is low

How does job lock distort labor markets and reduce mobility?

If person switches a job, they may have to wait a period of time to get onto a new health plan People with chronic conditions may be valuable to other jobs, but can't afford to go without health insurance for any period of time

What would be an issue with putting a private sector in Beveridge systems?

If private sector pays healthcare workers better, better doctors will leave the public sector and undermine solidarity

When would payment by results system backfire?

If reimbursement rates are set improperly

Example of private welfare

If someone is smoking in a cafe, private welfare is only concerned with the costs of smoking done to the smokers body and no one else

When will a vaccine subsidy be effective?

If vaccine demand is price elastic (subsidy will increase vaccine demand) Infectivity is low (Low infectivity means more people are susceptible and therefore market for vaccination is larger, high infectivity means more people would be in recovery quicker and less people would want vaccine) Prevalence elasticity is low (Reduction in disease prevalence does not reduce demand for vaccine)

Pigouvian subsidies and herd immunity graph

If we subsidize consumption of a good we can get them to move from alpha to gamma on private demand curve to increase quantity consumed and social efficiency level of consumption Eliminates social loss

Drawback of last resort laws

Impose costs and deter hospitals from building emergency rooms and trauma centers

Explain how the thalidomide and europe tragedy affected the drug market worldwide

In 1960s, thalidomide was prescribed to pregnant women with morning sickness that caused birth defects in over 10,000 newborns Drug was pulled from the shelves and promoted stricter drug regulation throughout the world

Adverse selection in Beveridge systems vs. Bismarck systems

In Beveridge nations, everyone is insured in the same pool so adverse selection does not exist Bismarck nations are not immune to adverse selection

Differential wage pass-through: obesity

In jobs with employer-sponsored health insurance, obese people earn much less than their thin coworkers. In jobs with no insurance, obese and thin earn about the same wage.

Private insurance markets

In private markets, only the frail customers are insured fully and much of the population is underinsured Under certain conditions a completely private market can unravel completely, leading to uninsurance for everyone Minimizes government involvement, but maximizes adverse selection Taxpayers happy with low tax bills, but many citizens cannot afford full insurance

Medical care CPI graph

In the last 30 years, U.S. medical care CPI has remained consistently higher than overall inflation

Price discrimination in pharmaceutical market

In theory, drug companies could sell there drugs for different prices in different countries but black-market importation makes this impossible

Who finances the Bismarck system?

Income taxes Rich and healthy subsidize poor and sick

Reduce queuing: decrease demand

Increase use of gatekeeping Stricter eligibility threshold for care Prioritizing patients so not just first-come first-serve

As sick taxes increase, excess burden...

Increases When income taxes are high, people will look for loopholes (ex. offshore banking) to avoid them. The cost of taking time to find these loopholes is the excess burden of the income tax. As diseases get more severe, people take more costly measures to avoid them (ex. Case of ebola causes town to quarantine and fly in uncontaminated food)

What are queues a sign of in the presence of moral hazard?

Indication of inflated demand This means limiting number of specialists may save money without sacrificing health

How did reforms aim to reduce costs and wait times in public hospitals?

Instead of annual budgets, hospitals had to vie against other regional hospitals for contracts from a government buyer Buyers gave contracts to hospitals on basis of cost, service, and waiting times

Bismarck system: community rating

Insurance is financed through taxes (based on income), not premiums (based on health status) Rich and healthy subsidize poor and sick Operates under managed competition

Managed competition model

Insurance is not run by the government, but instead multiple private, non-profit entities called sickness funds Heavily regulated

What does disease eradication due to economic cost?

It eliminates all economic cost (epidemiological costs and excess burden of disease)

Infection hazard rate

Rate at which susceptible members of the population become infected with a given disease

How do pigouvian taxes affect negative externalities?

Reduce consumption of goods

Downside of price controls

Reduce incentive for research

How does cost-effective analysis limit moral hazard?

Reduces spending on inefficient, costly treatments and makes entire system cheaper

What if price rationing was set in place instead of queue in the previous model?

Reduces waiting times because low-benefit patients would never sign up for treatment, but this also removes poor patients who would highly benefit from treatment because they cannot afford it

Social demand curve

Reflects the collective decisions of people in the market about whether they want to vaccinate at price P For flu vaccinations: Social demand curve is greater than private demand curve (captures positive externality of herd immunity) Socially efficient equilibrium is higher than private equilibrium > shifted to the right of private demand curve

Private demand curve

Reflects the private decisions of people in the market about whether they want to vaccinate at price P These decisions reflect only private costs and benefits NOT social costs and benefits (herd immunity ignored)

Results of the 2002-2008 Reforms

Reforms reduced mortality rates and lowered waiting times Foundation Trust hospitals grossly abused managerial autonomy (cut patient quality in order to decrease costs) Important to prevent another race to the botton

Problem with ex-post cost-based compensation

Removes incentive for insurance funds to treat patients efficiently, if they provide more treatment they will be reimbursed regardless

Last resort laws

Require hospitals to provide emergency care to incoming patients regardless of citizenship status or ability to pay Promote equality

Dartmouth Atlas researcher perspective on differing HPFs

Researchers argue that all theories are insufficient for explaining all of the variation in Medicare expenditures - no one theory in local differences can account for all the variation in expenditures

How does the Bismarck system operate in the Netherlands?

Resembles Germany's managed competition model The Netherlands finances insurance jointly by payroll contributions and additional premiums

How does Medicaid control cost of prescription drugs?

Restricts the set of prescription drugs available to Medicaid enrollees and setting reimbursement rates at a low level List of drugs available often excludes expensive branded drugs when generic alternatives are available

How do queue-based systems promote equity?

Rich and poor alike must wait for care But can create political backlash

Rising healthcare costs due to rising demand

Rising health care costs for this reason are not necessarily bad, people are not necessarily worse off

Rising healthcare costs due to rising prices

Rising healthcare costs can harm consumers Health is getting more expensive to produce, so people will either have to cut back on healthcare or spend more money to stay healthy

Ex-post cost-based compensation

Sickness funds with sicker customers and higher expenditures are reimbursed with transfers from funds that had healthier customers and lower expenditures

How could queues be inefficient?

Since it is first come first serve, there is a chance that low benefit patients receive treatment before high-benefit patients Inefficiency arises because care is free for everyone, low-benefit patients do not internalize costs of care so they join queue anyway

Beveridge model

Single-payer insurance Public provision of healthcare (physicians are government employees) Very little cost sharing at point of services Emphasis on equity Examples: UK, Scandinavia, Canada, Australia, NZ

Pigouvian taxes and antibiotics market

Social cost of each dose includes not only the private cost of manufacturing, but also its role in antibiotic resistance Private drug manufacturer only considers costs of production, so private supply curve understates social cost More drugs than socially optimal are purchased, and a social loss results

Social surplus vs. social loss for the market for flu vaccinations

Social surplus: still benefit accruing to others when an individual gets vaccinated Social loss: welfare loss of people not getting vaccination

How does the Bismarck system balance solidarity and liberty?

Solidarity: poorest and sickest members of society are supported by the system, which grants subsidized health insurance to the least able to afford it (subsidy paid by healthy and wealthy) Liberty: patients and doctors at liberty to make fundamental economic choices like which hospital to visit, which insurance contract to take, where to open a new clinic/hospital

How did reform effect wait times and health outcomes?

Some evidence that wait times decreased Data on outcomes not widely available, incentive for hospitals to skimp on quality in order to lower costs

Miami and La Crosse different HPF theories: Differing levels of severity of illness

Spending variation reflects differing levels of illness severity in different regions (ex. Maybe diabetics in La Crosse are healthier than in Miami) If lower medical expenditures in La Crosse result from healthier patients living there, the variation in spending would be warranted

Consequences of Medicaid being jointly run by federal and state government?

States have wide latitude to set budgets, determine eligibility rules, and decide how generous Medicaid is Medicaid coverage can vary greatly state to state

Trade-off of Kefauver-Harris Amendment?

Stops or delays the process of drugs coming to market that are effective

How did the Kefauver-Harris Amendment impact pharmaceuticals?

Stricter regulations led to a lower number of new chemical entities on the market

Failures in Switzerland

Subsidies have failed to keep up with rising insurance premiums and vast disparities in premiums between cantons have appeared

Means-tested insurance

Subsidized insurance for the poor Ex. Medicaid

Partial universal health insurance in America

Subsidized universal health insurance is provided to two vulnerable populations: the elderly (through Medicare) and the poor (through Medicaid)

Who pays for Medicare?

Taxpayers

Potential problems in calculating Laspeyres index?

Technological change: original bundle no longer reflects actual purchases Ex. polio vaccines have replaced treatment like iron lung, blood transfusions are much safer now due to improved screening techniques

Monopsony power

The ability of a firm to dictate drug prices in the market

What happens if the Laspeyres index rises?

The consumers are worse off Ex. If Laspeyres index rises by 5%, consumers are 5% worse off because healthcare they want to consume is 5% more expensive

Excess burden

The cost associated with the activities people undertake in order to avoid a disease Cost of missed work/school days, cost of vaccines/face masks/condoms, lost tourism in malaria-infested regions

Even though polio has been eradicated in the US, what economic cost does it impose?

The cost of making the vaccine and the time it takes public health workers to administer it

Wage pass-through

The costs of insurance effectively come out of the worker's wages Amount employer spends on healthcare adjusts with inflation but wages remain static to offset increasing insurance

Who are price ceilings set by?

The government

How do queues limit moral hazard?

The hassle of waiting in line constitutes a non-financial cost that patients must "pay" for care

Salaries and fixed payments

The insurer pays a fixed amount for care; not fee-for-service

Private health insurance markets in America

The non-elderly and non-poor seek insurance on the private market, which is centered around employer-based health insurance pools

Who is harmed by price rationing?

The poor