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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


145% more

than the UK

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
  • 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
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
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
  • 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
  • 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 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

4.3 years

less than


2.4 years

Less than


if you want to cut costs where do you look
If you want to cut costs, where do you look?
  • Administrative/overhead
  • Unnecessary procedures
  • Chronic conditions
    • 20% of people responsible for 80% spending
what are the issues1
What are the issues?
  • Cost/Expenditures
  • Fiscal (taxes and expenditures)
  • Equity
  • Coverage
government insurance
Government Insurance
  • Federal government – largest health insurance provider
  • Medicaid and Medicare
    • 95 million covered in 2006
    • $540 billion
    • 21 percent of the federal budget
  • 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
  • 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?
  • Cost/Expenditures
  • Fiscal (taxes and expenditures)
  • Equity
  • Coverage
tax system equity
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
tax benefit of ephi
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
without tax advantage
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
  • 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?
  • Cost/Expenditures
  • Fiscal (taxes and expenditures)
  • Equity
  • 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
who are the uninsured

White 10.8%

Black 20.5%

Hispanic 34.1%


<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
  • 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?
  • 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
  • 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
  • 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?
  • 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
  • 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
  • Most ambitious state reform to date
  • Many features but…..
  • Most striking component: Individual mandate
    • Required by law to carry insurance
ma reform
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”
  • Merge of individual and small group market
  • Market maker in insurance
  • Community rating
  • Requirements on what plans must have
  • 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
  • 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?
  • 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
  • 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
  • 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
  • Mandates for children
  • Employer mandates
  • Expansion of SCHIP/Medicaid
cost savings proposals in obama s plan
Cost savings proposals in 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
  • 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
Insurance is one component of a compensation package
  • Increased costs in one area will be paid for by reducing on costs in another (wages)
  • In long run, costs will be borne by workers
will firms pay or play
Will firms pay or play?
  • 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
  • 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
  • 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
  • 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
  • Universal testing is a good idea
    • saves lives
    • it is a COST EFFECTIVE
  • However, in most cases, mass screening is not COST SAVING
“It’s a nice thing to think, and it seems like it should be true, but I don’t know of any evidence that preventive care actually saves money,”
  • Jon Gruber, MIT Economics professor and architect of the Massachusetts Connector plan
what is different now
What is different now?
  • 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?
  • Little discussion of Medicare
  • Attacks costs by spending more money
  • Little discussion about the need for more cost sharing
  • 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
  • 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
  • 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
  • The subsidy rate is not high enough for low income people
  • What will happen to employer-provided health insurance?
  • 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
    • 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
    • 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