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

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Health care reform an economic perspective

Health Care Reform:An Economic Perspective

Bill Evans

Department of Economics and Econometrics


Motivation for talk
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


Kaiser family foundation tracking survey june 2007
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%


Outline of talk
Outline of talk

  • What problems must reforms address?

  • What have we learned from reform?

  • Outline some current alternatives

  • Examine some likely economic consequences


Talk may be premature
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



  • Many countries have single-payer system

  • Generates low administrative costs but (arguably) poorer quality care

  • US companies process $700 billion in HC claims each year

  • The US is not about to get rid of a $700 billion industry


What are the issues
What are the issues?

  • Cost/Expenditures

  • Fiscal (taxes and expenditures)

  • Equity

  • Coverage


Expenditures on medical care
Expenditures on Medical Care

  • $2 trillion annually

  • 16% GDP

  • $6000/person

  • Twice as much as the median OECD country


90% more than

Canada

145% more

than the UK


Average annual premiums covered workers 2006 kff

Individual plan

$4,242 total

Family plan

$11,480

Average Annual PremiumsCovered Workers, 2006 (KFF)


Are high expenditures a bad thing
Are high expenditures a bad thing?

  • A key driver of health care costs is technology

  • MRIs/CT scans, angioplasty, anti-psychotropic drugs, hip/knee replacements, neo-natal intensive care, treatments for AIDS, statin drugs (Lipitor)

  • All not available 20 years ago. Now, commonplace


Hiv aids drugs
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




NICU years

  • Specialty wards of hospitals that provide “constant nursing and continuous cardiopulmonary and other support for severely ill infants”

  • Developed in late 1950 early 1970s

  • Growth has been rapid

    • NICU beds increased by 150% 1980-1995


Costs 2001 ca
Costs, 2001 CA years

  • NICU discharge $50,000

  • Non-NICU, $4,500

  • In CA, 10% of births are for a NICU

  • Therefore, more than half the hospital cost of childbirth are attributable to NICUs


But not getting the bang per buck
But…. not getting the yearsbang per buck

  • Overhead costs are high (NEJM, 2003)

    • 31% in US

    • < 2% in Canada

  • Unnecessary care (Dartmouth Atlas)

    • 30% of care has little medical benefit

  • US performs poorly in comparison

    • Higher infant mortality

    • Lower life expectancy


4.3 years years

less than

Japan

2.4 years

Less than

Canada


If you want to cut costs where do you look
If you want to cut costs, where do you look? years

  • Administrative/overhead

  • Unnecessary procedures

  • Chronic conditions

    • 20% of people responsible for 80% spending


What are the issues1
What are the issues? years

  • Cost/Expenditures

  • Fiscal (taxes and expenditures)

  • Equity

  • Coverage


Government insurance
Government Insurance years

  • Federal government – largest health insurance provider

  • Medicaid and Medicare

    • 95 million covered in 2006

    • $540 billion

    • 21 percent of the federal budget


Medicare
Medicare years

  • 42.4 million recipients in 2006

  • Costs in 2006

    • $342 billion

    • 14% of Federal expenditures

  • Financing

    • Part A financed by payroll tax (2.9%)

    • Part B/D financed by premiums (25%) and general revenues (75%)


Future problems
Future problems years

  • 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


What are the issues2
What are the issues? years

  • Cost/Expenditures

  • Fiscal (taxes and expenditures)

  • Equity

  • Coverage


Tax system equity
Tax System Equity years

  • 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


Tax benefit of ephi
Tax Benefit of EPHI years

  • 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


Without tax advantage
Without tax advantage: years

  • 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


Inequalities
Inequalities years

  • 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


What are the issues3
What are the issues? years

  • Cost/Expenditures

  • Fiscal (taxes and expenditures)

  • Equity

  • Coverage


Coverage
Coverage years

  • 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


Who are the uninsured

Race years

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?


Time series
Time Series years

  • Number uninsured

    • 31 million in 1987

    • 47 million in 2006

  • Percent uninsured

    • 12.6 in 1987

    • 15.8 in 2006


What have we been doing the past 13 years
What have we been doing the past 13 years? 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


Small group reform
Small Group Reform years

  • 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


  • Prices are a function of the demographics years

  • 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


What happened
What happened? years

  • 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


Lesson
Lesson years

  • Idea was correct:

    • Use low risk to subsidize the high risk

  • But you cannot allow the low risk to exit the market



Ma reform romney
MA Reform: Romney years

  • Most ambitious state reform to date

  • Many features but…..

  • Most striking component: Individual mandate

    • Required by law to carry insurance


Ma reform
MA Reform years

  • If you require insurance, you need to make it affordable

  • State subsidizes purchases for poor

  • Firms must establish Section 125 plans

  • Established the “Connector”


Connector
Connector years

  • Merge of individual and small group market

  • Market maker in insurance

  • Community rating

  • Requirements on what plans must have


Connector1
Connector years

  • Cheapest individual plans cost about $200/month

  • 40-60% lower than average plan

  • Was achieved primarily by higher cost sharing


Results from ma
Results from MA years

  • It was estimated that 500K were uninsured and 300K have been added to insurance rolls

  • State underestimated

    • Number uninsured

    • Uninsured eligible for subsidized care

  • Cost of the program are exceeding expectations


Exporting ma plan
Exporting MA Plan? years

  • Plan is being studied extensively by

    • Other states

    • Presidential candidates

  • MA is very unique so it might not travel

    • Lower uninsurance rate (9%)

    • Unique fiscal situation that was used to finance the law


Other reform plans
Other reform plans years

  • Obama and Clinton have offered detailed plans

  • Both loosely based on the MA reform

  • Clinton’s is nearly identical to Edward’s

  • Maintain EPHI as basis of system

  • Try to lower costs to those without EPHI so they can afford insurance

  • Plans vary in detail but contain many similarities



Clinton
Clinton years

  • Those without insurance can purchase through same insurance members of Congress have

  • Insurance subsidies for low income

  • Reliance on preventive care/disease management to reduce costs to make affordable

  • Individual mandates


Obama
Obama years

  • Mandates for children

  • Employer mandates

  • Expansion of SCHIP/Medicaid


Cost savings proposals in obama s plan
Cost savings proposals yearsin Obama’s Plan

  • Health IT systems

    • $10 billion/year for 5 years

  • Heavy emphasis on disease management

    • Effort to standardize care for chronically ill

  • Performance based rewards (MD’s)

  • Rx reform (generics, importation, negot.)


Pay or play
Pay or Play years

  • Firms must pay 5% wage bill to health insurance or pay that as a fine

  • Proposed in 26 states in 2006

  • Language -- firms must pay ‘their fair share’

  • Problem: ignores the realities of the labor market



Will firms pay or play
Will firms pay or play? years

  • In March 2007, Private industry

    • Average hourly comp. $27.61

    • Wages/salaries $18.34 (71%)

    • Health insurance $ 1.83 (7.1%)

  • Wal-Mart pays 5-7%

    • Only 40% Wal-Mart workers receive their care through the firm


Cost reduction
Cost reduction years

  • Variety of ways to reduce costs

    • Computer investments (medical records)

    • Preventive services

    • Disease management

    • ‘Best practices’

  • Way to ‘self finance’ plans

  • Problem

    • Returns are years away

    • Preventive/DM not really cost saving


Example cervical cancer screening
Example: Cervical Cancer Screening years

  • 11,500 cases in 2007, approx. 4000 deaths

  • 4th leading cause of cancer death in women

  • Cheap test available – Pap smear $40

  • Expensive to treat ($30,000/case)

  • Consider universal testing every three years for women 45-64


  • 37 million in this group years

  • Cancer incidence rate of 16/100,000

  • Approx 6000 new cases per year

  • Suppose test every three years prevents ALL cervical cancers for 3 years

  • Costs $1.1 billion

  • Save: $540 million

  • Net – program cost $560 million


Result
Result years

  • Universal testing is a good idea

    • saves lives

    • it is a COST EFFECTIVE

  • However, in most cases, mass screening is not COST SAVING



What is different now
What is different now? be true, but I don’t know of any evidence that preventive care actually saves money,”

  • Leaves current system intact, builds out

  • Individual mandates

  • Pay or play

  • Belief we can generate more uniformity in practice patterns to save costs


What is missing
What is missing? be true, but I don’t know of any evidence that preventive care actually saves money,”

  • Little discussion of Medicare

  • Attacks costs by spending more money

  • Little discussion about the need for more cost sharing


Mccain
McCain be true, but I don’t know of any evidence that preventive care actually saves money,”

  • Uninsurance is a problem of cost

  • Attack costs, reduce premiums, increase coverage ,

  • Offers variety of proposals designed to drive down costs

    • Increase competition in insurance

    • Malpractice reform

    • Increase accountability


Highlights
Highlights be true, but I don’t know of any evidence that preventive care actually saves money,”

  • Purchase insurance from nationwide pools

  • Obtain insurance through any group, not just employers

  • Encourage retail medical outlets

  • Base pay on performance

  • Establish national standards for treatment


Tax credits
Tax Credits be true, but I don’t know of any evidence that preventive care actually saves money,”

  • Eliminate tax deductibility of EPHI

  • Replace with tax credit for people with health insurance

    • $2500 for individuals

    • $5000 for families

  • Tax benefit the same for everyone, regardless of income


Concerns
Concerns be true, but I don’t know of any evidence that preventive care actually saves money,”

  • The subsidy rate is not high enough for low income people

  • What will happen to employer-provided health insurance?


Summary
Summary be true, but I don’t know of any evidence that preventive care actually saves money,”

  • Clinton

    • Primarily attacks uninsurance problem

      • Individual mandates

      • Pay or play

    • Imposes lots of (potentially costly) programs like preventive medicine

    • Individual mandates make the plan politically challenging


  • Obama be true, but I don’t know of any evidence that preventive care actually saves money,”

    • Attacks costs first

    • Most aggressive cost-saving but, benefits are years away from being realized

    • Some impact on uninsurance through expansions of SCHIP/Medicaid, pay-or-play

    • Benefits to working uninsured will be long in the future when/if costs have been reduced


  • McCain be true, but I don’t know of any evidence that preventive care actually saves money,”

    • Riskiest program because it blows up EPHI

      • Replaces with a tax credit

    • Estimates suggest it will have minimal impact on uninsurance

    • Questionable impact on costs -- any benefits are long in the future


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