Economics 387 Lecture 16 Health System Reform Tianxu

Economics 387 Lecture 16 Health System Reform Tianxu Chen

Outline • • Goals of Reform Ensuring Access to Care Competitive Strategies Health System Reform and International Competitiveness • Quality of Care • The Patient Protection and Affordable Care Act (PPACA) of 2010 • Conclusions

GOALS OF REFORM • There is broad agreement that reform must address four major issues: – A health “safety net” for all residents, irrespective of age, health status, or employment status – Mechanisms that promote cost containment – Choice for patients and providers – Ease in administration

Basic Issues in Reform • One fundamental question is service coverage. • A related issue is whethere will be cost-sharing for covered services and, if so, the extent of it. • A third major issue is the cost of reform and how it will be funded. • The most challenging issue is to determine whether health reform will build largely on the existing framework of government programs and private employment-based insurance.

The Costs of Universal Coverage • From society’s point of view, the incremental cost of NHI in the United States is the extra total expenditure on health care that would be incurred if we switched to national health insurance.

Incremental Costs • The truly incremental costs stem from several sources. First, the major reason for switching to a NHI plan is to extend coverage to the 50 million uninsured. Second, the insured population will incur some incremental cost to the extent that an NHI plan provides greater typical coverage than people already choose to buy or have provided to them by other sources. Third, any tax-supported system of financing care potentially entails a deadweight loss to society.

ENSURING ACCESS TO CARE Employer Versus Individual Mandates • Under the employer mandate, the employer must procure health insurance for its employees and their dependents. • Under the individual mandate, all residents are obligated to purchase health insurance for themselves and their families, either from private insurance (individually purchased) or through a group.

Employer Versus Individual Mandates • Economists would argue that in either case, the individual will pay the majority of the cost of a mandate. Employer mandates will ultimately be shifted backwards to individual workers. Individual mandates are more clearly seen as falling to individuals and their families.

Separation of Health Insurance from Employment • In redesigning a health system, a good argument can be made for revising or replacing the prevailing system of employer -provided insurance. • Health insurance would no longer be dependent on employment status and coverage would be portable.

Single Payer Versus Multiple Insurers • In principle, costs can be reduced by consolidating insurers if there are economies of scale in administration or if gains can be made from pooling those insured. However, the same administrative technology is available to the private sector, and if further economies were possible, it is likely that surviving private firms would be those who merged to take advantage of the economies, provided the existing firms were not earning monopoly profits.

Single Payer Versus Multiple Insurers • However, the single-payer system reduces costs by eliminating the multiple forms and policy rules that face hospitals, clinics, and nursing homes. • The operation of the government enterprise also raises issues of incentives. Government may fail to reduce costs because it usually lacks the profit incentive and the discipline of market competition.

Single Payer Versus Multiple Insurers • A potential benefit of the single-payer system lies with the possibility of common coverage. • In contrast, the availability of many policies from many companies offers variety, tailoring policies to the individual preferences for cost-sharing features and coverage.

COMPETITIVE STRATEGIES Overview • The battle is over the superiority of: increased government involvement through both expanded regulation and additional government programs to provide or finance health care, or an increased emphasis on market mechanisms and market forces with corresponding decreases in the use of regulatory instruments.

Overview • Proponents of further regulation tend to argue that information imperfections, flawed agency relationships, and other distortions cannot be readily corrected by attempts to promote partial forms of competition.

Overview • A competitive health care policy is one that relies primarily on financial incentives rather than controls to achieve goals. Those supporting this approach believe that market participants respond to changes in prices in a predictable and substantial way. Supporters of competitive approaches also argue that even imperfections in their strategies are preferable to the distortions caused by imperfect regulation.

Development of Alternative Delivery Systems • The dominant competitive strategy, which evolved in the 1970 s, has been the promotion of delivery systems that can provide an alternative to traditional fee-for-service. • The cornerstone of this strategy has been the promotion of health maintenance organizations (HMOs), preferred provider organizations (PPOs), and other forms of managed care.

Consumer-Driven Health Plans and Health Savings Accounts • In most cases, a CDHP features a highdeductible health plan combined with an Health Reimbursement Arrangement (HRA) or Health Saving Account (HSA). • The motive for the CDHP is the desire to create highly informed consumers and to give them the incentives and the tools so that they take charge of their health care decisions.

Evidence on CDHPs and HSAs • Feldman and colleagues (2007) do not find significant savings for those enrolled in CDHPs. • Dixon et al. (2008) found that enrollees in the high-deductible CDHP were more likely to cut back on utilization.

Drawbacks to CDHPs and HSAs • Healthier individuals are more likely to be attracted to high deductible health plans, leaving sicker higher cost populations to be insured by other plans. • Patients may have incentive to scrimp on preventive care. • HSAs are more difficult to administer.

Drawbacks to CDHPs and HSAs • A small proportion of individuals with serious chronic and acute conditions account for a large share of annual health care spending. These patients will have exceeded their maximum out-of-pocket requirements and may not have a strong incentive to economize on their use of health care.

Other Market Reforms • Two other reforms are important to proponents of market-based solutions: The first deals with the tax subsidy of employer -provided insurance. A second important reform under the competitive approach is the elimination of many mandated benefits as a way of increasing the availability of lower-priced insurance policies.

Representation of the Competitive Approach • The two broad strategies of the competitive approach are to reduce demand from D 1 to D 2 and to increase supply from S 1 to S 2. Together these can reduce usage and expenditures. Figure 23 -2 The Intended Effects of Competitive Strategies on Demand Supply

Competitiveness • Many business leaders believe that the United States is at a competitive disadvantage compared to countries with social insurance programs. • Economists point out two features of employerbased universal health insurance that contradict such claims: Health insurance is part of the total labor compensation package, and the incidence of the implied tax falls primarily on the worker.

QUALITY OF CARE Major Quality Issues • 1. Moral hazard and the overutilization associated with insurance (a theme we have stressed throughout the text). • 2. Applications of cost-effectiveness analyses to distinguish economically efficient from inefficient procedures, technology and levels of care. • 3. The greater use of financial incentives.

THE PATIENT PROTECTION AND AFFORDABLE CARE ACT (PPACA) OF 2010 Significant PPACA Provisions • Require most U. S. citizens and legal residents to have health insurance, the individual mandate. • Penalize employers with 50 or more full-time employees that do not offer coverage at a fee of $2, 000 per full-time employee. • Expand Medicaid to all non-Medicare eligible individuals under age 65 (children, pregnant women, parents, and adults without dependent children) with incomes up to 133% of the federal poverty level FPL with a benchmark benefit package.

Significant PPACA Provisions • Require most U. S. citizens and legal residents to have health insurance, the individual mandate. • Penalize employers with 50 or more full-time employees that do not offer coverage at a fee of $2, 000 per full-time employee. • Expand Medicaid to all non-Medicare eligible individuals under age 65 (children, pregnant women, parents, and adults without dependent children) with incomes up to 133% of the federal poverty level FPL with a benchmark benefit package.

Significant PPACA Provisions • Establish state-based health insurance exchanges, where individuals and small businesses can compare policies and buy coverage, administered by a governmental agency, or a non-profit entity. • Establish a uniform set of benefits, called Essential Health Benefits, with 10 major areas of coverage including prescription drugs and preventive services. • Eliminate cost-sharing for Medicare-covered preventive services recommended by the U. S. Preventive Services Task Force, and waive the Medicare deductible for colorectal cancer screening tests.

How well does PPACA address reform goals? • • Creating a safety net Cost containment Choice for patients and providers Ease in administration

The Cost of the PPACA • It is difficult to predict changes in health care spending under the PPACA. • In an early forecast by analysts at CMS, Sisko et al. (2010) estimated that national health care spending as a share of GDP will be 0. 3 percentage points higher (about $88 billion) in 2019 than without PPACA. • Analysts expect Medicare to be $86. 4 smaller under PPACA in 2019 than under previous assumptions; they expect Medicaid/CHIP, in contrast, to be $89. 9 billion larger.

Table 23 -1 Congressional Budget Offices Estimated Effects of the Insurance Coverage Provisions of the PPACA

Table 23 -2 Estimated Fiscal Effects of PPACA

CONCLUSIONS • Cost-containment and reduction or elimination of the number of uninsured are the principal goals of health system reform in the United States. • Other goals include administrative simplicity and choice for providers and patients.

CONCLUSIONS • Improving the quality of care is also emerging as a national priority. • The most serious obstacle to reform the divide over whether to expand the government’s role through mandates, additional regulations, and tax subsidies or whether to rely increasingly on markets through deregulation and tax changes that neutralize the current bias toward subsidized, employer-based insurance.

CONCLUSIONS • The PPACA is a long-term “fix” in that provisions will step in gradually until 2018, which formulates an individual mandate for consumers to purchase health insurance and provides market-pooling mechanisms to make the insurance available to many who were previously not able to get it.