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Health Services Policy Reform Partial Facts and Partial Myths. Dale Lehman Professor of Economics Director, MBA Program Alaska Pacific University October 24, 2009 The three legged stool. Cost Why are the US costs so high? Who pays for this?.

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Health Services Policy Reform Partial Facts and Partial Myths

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health services policy reform partial facts and partial myths

Health Services Policy ReformPartial Facts and Partial Myths

Dale Lehman

Professor of Economics

Director, MBA Program

Alaska Pacific University

October 24, 2009

the three legged stool
The three legged stool


Why are the US costs so high?

Who pays for this?


Who is uninsured?

How good is our coverage?


What do we get for our money?

How does the US rank?

cost oecd 2007
Cost (OECD, 2007)

Conclusion: The US spends a LOT more than other countries


what medical services are available for our
What Medical Services are Available for our $?

Conclusion: Overall medical service availability does not account for our higher costs

how does our use of medical services compare
How does our use of medical services compare?

Conclusion: it’s not the usage that accounts for the higher costs in the US, although there are some anomalies

what do we get for our money
What do we get for our money?

Conclusion: we don’t live longer


“Differences in Disease Prevalence As A Source Of The U.S. – European Health Care Spending Gap,” Thorpe,, Health Affairs, Oct. 2007 (2004 data)

Over age 50 population

Disease prevalence is higher in the US than in Europe

Treatment rates are higher in the US than in Europe


US lives are shorter, but much is due to other causes of death (accidents, crime, etc.) – but also higher infant mortality and less use of services by the uninsured.

OECD, Country Surveys, the USA, chapter 3, “Health Care Reform, 2008

how does our lifestyle compare
How does our lifestyle compare?

Conclusion: we don’t live healthy lifestyles – this should affect our spending on health care

What about genetics?

Costs: Doctor Salaries - US doctors are paid more… but they may work more hours and do pay more for their education

Wide ranges of estimates, but US doctors earn more – true for both primary care doctors and hospital doctors

Source: “Comparing Physicians’ Earnings: Current Knowledge and Challenges, A Report for the Department of Health, NERA Economic Consulting, 2004

us prices are higher
US Prices are higher

International Federation of Health Plans, 2009

other factors not much difference can be attributed to supply restrictions or malpractice
Other factors – not much difference can be attributed to supply restrictions or malpractice

Does not include legal defense and defensive medicine expenditures


US Comparisons of Services with the OECD“US Health Care Spending: Comparison with Other OECD Countries,” CRS Report for Congress, September 17, 2007

US is lower than OECD in

US is higher than OECD in

Organ transplants

Some intensive procedures (e.g., angioplasty, coronary bypass grafts, hip replacements, etc.)

Nurses per acute hospital bed

Medical salaries – but also, educational expenses and hours

Procedure prices

Administrative expenses

Public health expenditures

Caloric and sugar intake

Medical errors

  • Hospital stays per person
  • Length of stay
  • Doctor visits
  • Pharmaceuticals share of health care spending – but prices for new drugs (and usage) are higher in the US – generics are lower
  • Alcohol and tobacco use
  • Waiting time for elective procedures – but US is not low for scheduling office visits
access who are the uninsured
Access: Who are the uninsured?

Source: Kaiser Family Foundation, from Census, Agency for Health Care Research & Quality, NHIS


The uninsured are mostly working, disproportionately low income, less educated, minority, and in relatively good health

does insurance matter diagnosis of late stage cancer uninsured vs privately insured
Does Insurance Matter?Diagnosis of Late-Stage Cancer: Uninsured vs. Privately Insured

Ratio of probability of diagnosis of late vs. early stage cancer, Uninsured/private insurance

Equal likelihood between Uninsured and Insured

NOTE: Odds ratios were adjusted for age, sex, race/ethnicity, facility type, region, and income and education on basis of postal code. They represent the odds of being diagnosed with stage III or state IV cancer vs. stage I cancer.

Analysis based on cases occurring between 1998-2004.

SOURCE: Kaiser Family Foundation, based on Halpern MT et al, Association of insurance status and ethnicity with cancer stage at diagnosis for 12 cancer sites: a retrospective analysis." The Lancet Oncology. March 2008.

who pays for the 57 4 billion of care of the uninsured
Who pays for the $57.4 Billion of Care of the Uninsured?
  • 25% paid out of pocket
  • Of the remaining, 75% from Federal and State Dollars
  • 25% from Physicians and Hospitals
  • The Physician and Hospital Share is <2% of Total Private Insurance Spending
  • If all the uninsured had full insurance and used the same amount of care as the currently insured, their health care costs would increase from $176 Billion to $300 Billion, and the health care share of GDP would go from 16.5% to 17.3%
  • Little Evidence of Cost-Shifting of Uncompensated Care
  • Of Course, Cost-Shifting is a Larger Issue (Medicare, Medicaid)

Have hospital costs been shifted to private insurance?

  • It has little correlation with the uninsured or uncompensated care
  • What drives the significant changes over time? Medicare/Medicaid payments levels? Managed care? Hospital Market Power? Other?
a much more significant cost shifting
A much more significant cost-shifting

Source: McKinsey Global Institute


Concentration of Health Care Spending in the U.S. Population, 2006

Percent of Total Health Care Spending








Note: Dollar amounts in parentheses are the annual expenses per person in each percentile. Population is the civilian noninstitutionalized population, including those without any health care spending. Health care spending is total payments from all sources (including direct payments from individuals, private insurance, Medicare, Medicaid, and miscellaneous other sources) to hospitals, physicians, other providers (including dental care), and pharmacies; health insurance premiums are not included.

Source: Kaiser Family Foundation calculations using data from U.S. Department of Health and Human Services, Agency for Healthcare Research and Quality, Medical Expenditure Panel Survey (MEPS), 2006.

health insurance coverage of workers by firm size 2007
Health Insurance Coverage of Workers, by Firm Size, 2007

Notes: Public includes Medicaid, CHIP, other public insurance (mostly Medicare and military-related, e.g., Veterans Administration and TRICARE). Self-employed includes those who describe themselves as being both self-employed and working in firms with less than 25 workers.

Source: Kaiser Commission on Medicaid and the Uninsured and Urban Institute analysis of the 2008 ASEC Supplement to the Current Population Survey.

who pays for health insurance
Who Pays for Health Insurance?
  • AK average single premium = $4539 (16% average employee share)
  • AK average family premium = $12,198 (24% average employee share)
  • Employer Share: 11% of payroll costs (national median)
  • Economic theory tells us that “who pays?” is more subtle than that
administrative costs
Administrative Costs
  • Medicare: 2% of total Medicare spending, but excludes premium collection, billing (adjustments make it around 6%)
  • Private insurers: 12% of total insurance company spending (includes advertising and profits) – ranges from 7% for large (>1000) employer coverage to 30% for individuals – but does not account for higher overall Medicare spending (also does not include provider costs)
  • Per individual: Medicare - $509, private - $453, but more services are used
  • 2003 study of US and Canada (1999 data) concluded that 31% of US medical costs and 16.7% of Canada’s costs are due to administration (includes provider costs)
number of insurance products
Number of Insurance Products

A more down-to-earth view

competition and the public option
Competition and the “Public Option”
  • Scenario 1: the public option picks up all the sickest, leaving healthier patients for private insurers
  • Scenario 2: the public option has lower costs than private insurance (either through efficiency or inherent advantages), and ends up becoming the only insurance option
  • Scenario 3: the public option competes with private insurers on a level playing field, thereby increasing competitive outcomes
  • I cannot predict which is most likely – but 3 is least likely, based on my experience with managed competition
what about incentives
What about incentives?
  • Providers have incentives to provide more (and more expensive) services, not necessarily health or efficiency.
  • Insurers have incentives to insure healthy people (not sick ones) and to choose cumbersome processes to deny care/payment
  • Patients (insured ones) have incentives to seek care regardless of price
  • Fixing these incentives is not so easy – no system has found the answer


We pay more because we are sicker, more diverse, provide more expensive treatments, have higher prices, and spend more on administration


Access to services is very uneven, depending on income and employment


We live about as long (after adjusting for non-health related mortality) – quality?

Future trends: aging population + shortage of providers + rising costs = a more difficult balancing act