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CHAPTER 10
GOVERNMENT
AND THE MARKET
FOR HEALTH
CARE
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Figure 10.1: Uses of health care funds in the
United States (2004)
Other (10%)
Research (2%)
Public Health Activity (3%)
Hospital Care (32%)
Administrative (7%)
Nursing Home Care (6%)
Prescription Drugs (11%)
Home Health Care (3%)
Dental Services (4%)
SOURCE: Centers for Medicare and Medicaid Services [2005a].
Physician and Clinical
Services (22%)
10-2
Figure 10.2: Sources of health care funds in the
United States (2004)
Other Government
Payments (13%)
Private Health
Insurance (35%)
Medicaid and SCHIP
(16%)
Medicare (17%)
Other Private
Payments (7%)
SOURCE: Centers for Medicare and Medicaid Services [2005a].
Out-of-Pocket
Payments (13%)
10-3
Private Health Insurance

World War II Era Price Controls

Restrict Pay

Not Health Insurance

1940-50

9.1% to 50.3%
10-4
Private Health Insurance

Implicit Federal Tax Subsidy

Health Care Not Taxed!

$50,000 in Wages

$5,000 in Health Care

Suppose 25% Tax Rate

$45K Plus Health Care

Better?
10-5
The Advantages of Employer-Provided
Health Insurance

Increase the risk pool

Reduce adverse selection

Lower administrative costs
10-6
Employer-Provided Health Insurance and
Job Lock

Job lock

Health Insurance Policy Portability and
Accountability Act of 1996 (KennedyKassenbaum Act)

Include New Employees who Previously had
Insurance within 12 Months

Even with Preconditions
10-7
Cost Control and Private Insurance

Cost-based reimbursement (fee-for-service)

Managed care

Capitation-based reimbursement

Health Maintenance Organizations (HMOs)

Preferred Provider Organizations (PPOs)

Point-of-service (POS)
10-8
Medicare: Overview
Figure 10.3: Medicare expenditures (1966-2004)
350
3
2.5
250
2
200
1.5
150
1
100
Expenditures as % GDP
Real Expenditures (2004 $ Billions)
300
0.5
50
0
0
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Year
Expenditures (Billions $)
SOURCE: Centers for Medicare and Medicaid Services [2005a].
Expenditures as % of GDP
10-9
How Medicare Works


Benefits

Part A – Hospital insurance (HI)

Part B – Supplementary medical insurance (SMI)
Financing

Payroll tax funds HI

General revenues fund SMI
10-10
Prescription Drug Benefit

Part C – Medicare Advantage

Part D – Prescription Drug Benefit

Monthly premium

Low deductible

Donut hole

Generous coverage for high costs
10-11
Cost Control Under Medicare

Medicare’s retrospective payment system

Medicare’s prospective payment system


Diagnosis related groups

Resource-based relative value scale system
Medicare Managed Care
10-12
Medicare: Impacts on Spending and Health

Expenditures on health care for the elderly

Health outcomes
10-13
Medicaid: Overview

Medicaid

Low Income

44.7 million (2005)


48.5% Children
State Children’s Health Insurance Program
10-14
Figure 10.4: Medicaid expenditures (1966-2004)
3
300
2.5
250
2
200
1.5
150
1
100
Expenditures as % GDP
Real Expenditures (2004 $ Billions)
350
0.5
50
0
0
1966 1968 1970
1972 1974 1976 1978 1980 1982 1984
1986 1988 1990 1992 1994 1996
1998 2000 2002 2004
Year
Expenditures (Billions $)
Expenditures as % GDP
SOURCE: Centers for Medicare and Medicaid Services [2005a].
10-15
Financing and Administration

Joint Federal-State financing

State administration
10-16
Benefits

States obligated to offer minimum package of
benefits

States may offer more generous benefits

State administrative flexibility
10-17
Medicaid: Impacts on Health

Take-up rate

5 to 25% after expansions

Problem?

Crowding out

Empirical Evidence:

Are Medicaid expansions effective?

Crowding Out and No Take Up
10-18
Quantity of all other goods
Quantity of all other goods
Quantity of all other goods
Does Public Insurance Crowd Out Private
Insurance?
F
A
F
A
B
C
0
A
B
B
M
Amount of publicly
provided insurance
F
C
0
M
Health insurance
Amount of publicly
provided insurance
C
0
M
Health insurance
Amount of publicly
provided insurance
Health insurance
10-19
Review: Problems with US Health Care

High Costs

Supply Shortage

Technology

Inefficient Insurance



Deadweight Losses
Lack of Risk Pooling
Low Levels of Health
10-20
Health Care Reform

Individual Mandates

Health Savings Accounts

Not Taxed



unless used for non-health care
Catastrophic Insurance Policy
Single Payer
10-21
Health Care Reform

Who supports universal health care?

Who support health care reform this year?

Should employers be fined if they do not
provide health insurance?

Should taxes be raised on the wealthy to
reform health care?

Should the government mandate everybody
have health care?
10-22