Holcombe 22

CHAPTER
22
Health Care
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe
Health Care
Government
is involved in health care in

multiple ways
Regulator
Financier
Provider
Government
greatly influences health
care
Should government influence it more?
Randall Holcombe
22-2
Rationales for Government

Involvement
Public
Health
Contagious
disease
Negative Externality
Dissemination
of health care information
Equity
Inability
for all persons to afford health

insurance

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22-3
Public Health
Spread
of contagious diseases
Example:
typhoid fever, cholera

Opportunity for disease to spread rapidly
Government
established public health
boards
Controlled epidemics
Highly successful

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22-4
Public Versus Private Health

Many
common health problems today are

private in nature
Noncontagious
Examples:
Problems
heart disease, cancer
are serious but private

Randall Holcombe
22-5
Public Health Policy

1965
- Medicare and Medicaid created

Government paid for health care of
elderly and needy regardless of problems
nature
Distinction between public and private
health concerns has been obscured

Randall Holcombe
22-6
Health Insurance
Major
policy issues universal health

insurance
Recent problem
1940
10% population covered
Factors
making health insurance

commonplace
Rising
medical costs
Tax deductibility of employer-paid health
plans
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22-7
Moral Hazard and Adverse

Selection
Insurance
factors
industry must deal with two
Moral
hazard
Adverse selection

Randall Holcombe
22-8
Moral Hazard
Moral
hazard when an individual has

some control over events that trigger
insurance payment
Example:
Increases
driving a car
health care costs

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22-9
Adverse Selection
Adverse
selection occurs when those

most likely to make insurance claims buy
insurance, those not likely to make
claims do not
Adverse selection created because:
Individuals
have better information

Strong public sentiment about charging
higher-risk individuals more
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22-10
Moral Hazard and Adverse

Selection
Employer-provided
insurance avoids most

of the adverse selection problem
All
employees get insurance
Single-provider
insurance would eliminate

adverse selection

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22-11
Health Insurance Incentives

No
one has an incentive to control health

care costs under standard health
insurance
Marginal
cost to patient = zero

Marginal benefit to doctor is high
Incentive
to overconsume health care
services
Cost of overproduction passed onto all
health insurance
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22-12

Randall Holcombe
22-13
Two possible ways to mitigate health insurance

incentive problems
Deductibles
Individual pays first several dollars of service,
insurance pays remainder
MC still equals zero
Copayments
Patient pays a certain percentage of total bill
Bulk still paid by insurer

Randall Holcombe
22-14

HMOs
Health Maintenance Organization
Accept
payments in advance
Provide required medical care
Advantages
Incentive
to conserve costs
Disadvantages
Incentive
to conserve costs

Randall Holcombe
22-15

Hospital
Reimbursement for Insured

Expenses
Fixed
payment for certain procedures

Creates incentive to reduce costs
Historically
system
Incentive
reimbursed using cost-plus
to increase costs
Purchase
expensive equipment
Lengthen hospital stays
Randall Holcombe
22-16
The Evolution of 20th Century

Health Care
Role
of the AMA in transforming health

care in the United States
Controlled
physicians entry
Promoted fees for service
Created
current physician-patient
relationship

Randall Holcombe
22-17
Government Health Care

Programs
Medicare
Federal
program
Provides health care to the elderly
Medicaid
Run
by states, jointly financed by states and

federal government
Provides health care to needy

Randall Holcombe
22-18
Health Care Reform

Universal
coverage
Example:
the Canadian system
Advantages:
Eliminate
adverse selection
Reduces tendency to avoid preventative care
Disadvantages:
Specialist
rationed
Costs are hidden
U.S provides safety valve
Randall Holcombe
22-19
Health Care Reform

Medical
Savings Accounts (MSAs)
Provides
catastrophic coverage
Direct control of routine expenditures
Has
advantage of creating incentive to

save on routine expenditures
Does not address expensive treatments

Randall Holcombe
22-20
Health Care Reform

Mandated
Employer Coverage
Problems include:
Increases
cost of hiring workers

Negative impact on labor market for lowincome workers
Does not fulfill the goal of universal coverage
Pay
or Play
Similar
problems as employer mandates

Randall Holcombe
22-21
Interest Groups and Health

Care Reform
Health
care reform will ultimately be

determined through political process
Future of health care will be partly
determined by special interests
Doctors
Insurance
companies
Elderly

Randall Holcombe
22-22

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CHAPTER

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

is involved in health care in

greatly influences health

Rationales for Government

of health care information

for all persons to afford health

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

typhoid fever, cholera

established public health

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Public Versus Private Health

common health problems today are

heart disease, cancer

are serious but private

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Public Health Policy

- Medicare and Medicaid created

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

policy issues universal health

10% population covered

making health insurance

Moral Hazard and Adverse

industry must deal with two

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

hazard when an individual has

health care costs

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

selection occurs when those

have better information

Moral Hazard and Adverse

insurance avoids most

employees get insurance

insurance would eliminate

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Health Insurance Incentives

one has an incentive to control health

cost to patient = zero

to overconsume health care

Health Insurance Incentives

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Health Insurance Incentives

Two possible ways to mitigate health insurance

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Health Insurance Incentives

Health Maintenance Organization

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Health Insurance Incentives

Reimbursement for Insured

payment for certain procedures

reimbursed using cost-plus

The Evolution of 20th Century

of the AMA in transforming health

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Government Health Care

by states, jointly financed by states and

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Health Care Reform

the Canadian system

Health Care Reform

Savings Accounts (MSAs)

advantage of creating incentive to

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Health Care Reform