HealthcareHealthcare

Why do we care?Why do we care?

Big national debateBig national debate Important element of social welfareImportant element of social welfare Important distribution impactsImportant distribution impacts Important efficiency impactsImportant efficiency impacts

Ends, means and allocationEnds, means and allocation What are the desirable ends?What are the desirable ends?

A healthy populationA healthy population World’s best healthcare system?World’s best healthcare system? Lots of debate over details, but as a society, Lots of debate over details, but as a society,

we made the decision we don’t want hospitals we made the decision we don’t want hospitals turning people away to die in the street.turning people away to die in the street.

What are the scarce resources?What are the scarce resources? Our national health care system: Drs., Our national health care system: Drs.,

hospitals, R&D, technology, etc.hospitals, R&D, technology, etc. How do we allocate?How do we allocate?

We want to achieve our desirable ends as cost We want to achieve our desirable ends as cost effectively as possible. effectively as possible.

Is private sector or government sector most Is private sector or government sector most cost effective?cost effective?

Why should government Why should government be involved?be involved?

If we have decided Drs. and If we have decided Drs. and hospitals can’t turn people hospitals can’t turn people

away, then who should pay?away, then who should pay?

Market failuresMarket failures

Public goodsPublic goods Contagious disease, tuberculosis, AIDSContagious disease, tuberculosis, AIDS Societal attitudes towards healthSocietal attitudes towards health Technology and informationTechnology and information

Adverse selectionAdverse selection Money spent denying careMoney spent denying care Costs of not providing careCosts of not providing care

Moral HazardMoral Hazard

Market failuresMarket failures

Preventative vs. curative carePreventative vs. curative care People change insurers every 18 monthsPeople change insurers every 18 months Costa Rican miracleCosta Rican miracle

Economies of scaleEconomies of scale Competition, Market size and poor Competition, Market size and poor

informationinformation What happens to price when # of hospitals What happens to price when # of hospitals

increases?increases? Do people shop around for bargain prices?Do people shop around for bargain prices? Frank’s neurosurgery: The works--$200Frank’s neurosurgery: The works--$200

Perverse incentivesPerverse incentives

TraditionalTraditional Maximize profits by over-treatingMaximize profits by over-treating Producer tells consumers what they needProducer tells consumers what they need More they sell, the more they profitMore they sell, the more they profit The sicker the patient, the more money they The sicker the patient, the more money they

makemake Managed careManaged care

Patients change providers, so preventative care Patients change providers, so preventative care not cost effectivenot cost effective

Maximize profits by denying treatmentMaximize profits by denying treatment Market solutionMarket solution

Health care system provides health. Providers Health care system provides health. Providers only get paid when patient is healthyonly get paid when patient is healthy

Competitive advantageCompetitive advantage Private sector covers large chunk of Private sector covers large chunk of

private health care costsprivate health care costs Can GM and Ford compete with foreign Can GM and Ford compete with foreign

companies if they pay $1000 in health companies if they pay $1000 in health insurance per car?insurance per car? NYT article, 7/27/04: G.M. and Ford have NYT article, 7/27/04: G.M. and Ford have

lagged behind Toyota and Honda in part lagged behind Toyota and Honda in part because the American makers' research and because the American makers' research and development budgets have been crimped by development budgets have been crimped by high overhead costs, like health insurance high overhead costs, like health insurance premiums, which are a much smaller issue in premiums, which are a much smaller issue in countries like Japan. countries like Japan.

People with pre-existing conditions can’t People with pre-existing conditions can’t change jobs, even if they would be more change jobs, even if they would be more productive doing something elseproductive doing something else

The Current SystemThe Current System

MedicaidMedicaid

Means testedMeans tested 40 million+ participants40 million+ participants $220 billion +$220 billion + Much larger than other aid programs Much larger than other aid programs

for the poorfor the poor Administered by states, funded by Administered by states, funded by

states and fed.states and fed. Medicaid notchMedicaid notch

MedicareMedicare

Not means tested, for elderly and Not means tested, for elderly and disableddisabled

39.6 million enrollees39.6 million enrollees $254+ billion/yr and rising$254+ billion/yr and rising Payroll tax like SSPayroll tax like SS Supplemental medical insurance Supplemental medical insurance

funded from general revenue, funded from general revenue, massively subsidizedmassively subsidized

Other government expendituresOther government expenditures

Center for Disease ControlCenter for Disease Control National Institute for HealthNational Institute for Health Tax subsidies for employer provided Tax subsidies for employer provided

health insurancehealth insurance VA VA Hospital subsidiesHospital subsidies Gov’t employeesGov’t employees Department of health and human services, Department of health and human services,

etc.etc.

Who Pays for Health Care?

100%$1149.1Total

17.0%$195.8Individuals (excludes tax subsidy)

18.8%$216.5Private employers

$157.9Other*

$124.8Tax subsidy for private insurance

$67.3Premiums for public employees

$170.6Medicaid

$216.2Medicare

64.1%$736.8Government

PercentAmount in 1998

(billions)

Source: Himmelstein & Woolhandler – Unpublished analy sis of NCHS data, Health Affairs 1999;18(2):176

* Includes VA, NIH, subsidy for public hospitals, worker’s comp, health departments etc.

Who pays for uninsured?Who pays for uninsured?

HospitalsHospitals InsuredInsured UninsuredUninsured

Anything wrong with the current Anything wrong with the current system?system?

Issues with Medicare and MedicaidIssues with Medicare and Medicaid

Very high share of government Very high share of government expenditures, growing more rapidly expenditures, growing more rapidly than SSthan SS

Politically sensitive issuePolitically sensitive issue

Unsustainable growth rateUnsustainable growth rate

Lack of coverageLack of coverage

44 Million uninsured Americans for at 44 Million uninsured Americans for at least a yearleast a year

80 million plus for some time during 80 million plus for some time during the yearthe year

Numbers are risingNumbers are rising

Cost EffectivenessCost Effectiveness

US healthcare costs highest in the US healthcare costs highest in the world, 2X Germany and Canada per world, 2X Germany and Canada per capitacapita

Double digit rates of increase (15% Double digit rates of increase (15% in 2003)in 2003) Lies, damn lies and statisticsLies, damn lies and statistics

US has some of lowest indicators US has some of lowest indicators among developed nationsamong developed nations

U.S. Public Spending Per Capita for Healthis Greater than Total Spending in Other Nations

Note: Public includes benefit costs for govt. employees & tax subsidy for private insuranceSource: NEJM 1999; 340:109; Health Aff2000; 19(3):150

$1,670

$1,750

$1,850

$2,230

$2,430

$2,620

$1,760$2,600

$0 $1,000 $2,000 $3,000 $4,000 $5,000

U.K.

Sweden

Japan

France

Canada

Germany

U.S.

$ Per Capita

Total Spending U.S. Public U.S. Private

Costs in 2000Costs in 2000

CountryCountry % of GDP% of GDP CanadaCanada 9.1 9.1 England (U.K.)England (U.K.) 7.3 7.3 FranceFrance 9.5 9.5 Italy Italy 8.1 8.1 JapanJapan 7.8 7.8 United StatesUnited States

13 13

Health OutcomesHealth Outcomes In Study of 13 most developed nations, United States ranks an In Study of 13 most developed nations, United States ranks an

average of 12th (second from the bottom) for 16 available health average of 12th (second from the bottom) for 16 available health indicators. indicators.

13th (last) for low-birth-weight percentages 13th (last) for low-birth-weight percentages 13th for neonatal mortality and infant mortality overall 14 13th for neonatal mortality and infant mortality overall 14 11th for post neonatal mortality 11th for post neonatal mortality 13th for years of potential life lost (excluding external causes) 13th for years of potential life lost (excluding external causes) 11th for life expectancy at 1 year for females, 12th for males 11th for life expectancy at 1 year for females, 12th for males 10th for life expectancy at 15 years for females, 12th for males 10th for life expectancy at 15 years for females, 12th for males 10th for life expectancy at 40 years for females, 9th for males 10th for life expectancy at 40 years for females, 9th for males 7th for life expectancy at 65 years for females, 7th for males 7th for life expectancy at 65 years for females, 7th for males 3rd for life expectancy at 80 years for females, 3rd for males 3rd for life expectancy at 80 years for females, 3rd for males 10th for age-adjusted mortality 10th for age-adjusted mortality

Percent of Population withGovernment-Assured Insurance

Note: Germany does not require coverage for high-income persons, but virtually all buy coverageSource: OECD, 2002 - Data are for 2000 or most recent year available

92%100% 100% 100% 100% 100%

45%

0%

20%

40%

60%

80%

100%

U.S. Germany France Canada Australia Japan U.K.

Why are costs so high and rising?Why are costs so high and rising?

Improved technologiesImproved technologies

Heart diseaseHeart disease PharmaceuticalsPharmaceuticals

StatinsStatins Viagra etc.Viagra etc.

Administrative costsAdministrative costs

US vs. CanadaUS vs. Canada 19991999

$1059 per capita in US, or 31%$1059 per capita in US, or 31% $307 per capita in Canada, or 16.7%$307 per capita in Canada, or 16.7% Overhead for Canada’s national health Overhead for Canada’s national health

insurance program 1.3%insurance program 1.3% Thousands of private insurers Thousands of private insurers

dramatically increase paperwork and dramatically increase paperwork and bureaucracybureaucracy

PharmaceuticalsPharmaceuticals

Americans pay 2 times as much as Americans pay 2 times as much as Canadians for identical drugsCanadians for identical drugs

Pharmaceutical companies have the Pharmaceutical companies have the highest profit margins of any industryhighest profit margins of any industry

Companies recently busted for Companies recently busted for paying Drs. to prescribe their drugspaying Drs. to prescribe their drugs

AdvertisingAdvertising

Drug Companies spend more on Drug Companies spend more on advertising than R&Dadvertising than R&D

- - AstraZeneca AstraZeneca (producer of Tamoxifen): In (producer of Tamoxifen): In FY1999 AstraZeneca reported spending only FY1999 AstraZeneca reported spending only 16%, ($2.4 billion) on research and 16%, ($2.4 billion) on research and development. In comparison, it reported development. In comparison, it reported pocketing more than 24% ($3.69 billion) in pocketing more than 24% ($3.69 billion) in beforetax profits while spending more than beforetax profits while spending more than 31% ($4.8 billion) on marketing and 31% ($4.8 billion) on marketing and administration.administration.

- - Merck and Pfizer Merck and Pfizer spent just 11.2% of its spent just 11.2% of its revenues on R&D in 1997 on R&D. At the revenues on R&D in 1997 on R&D. At the same time, these companies pocketed 18.6% same time, these companies pocketed 18.6% in pure profit and spent 28.9% on advertising in pure profit and spent 28.9% on advertising (Sager/Socolar study, Boston University)(Sager/Socolar study, Boston University)

Federal Government does Federal Government does substantial R&Dsubstantial R&D

According to a May, 2000 congressional Joint According to a May, 2000 congressional Joint Economic Committee report, The Federal government Economic Committee report, The Federal government funds about 36% of all U.S. medical researchfunds about 36% of all U.S. medical research

Major drugs have been developed with taxpayer-Major drugs have been developed with taxpayer-funded research: Of the 21 most important drugs funded research: Of the 21 most important drugs introduced between 1965 and 1992, 15 were introduced between 1965 and 1992, 15 were developed using knowledge and techniques from developed using knowledge and techniques from federally funded research. Of these, NIH research led federally funded research. Of these, NIH research led to the development of 7 drugs to treat patients with to the development of 7 drugs to treat patients with cancer, AIDS, hypertension, depression, herpes and cancer, AIDS, hypertension, depression, herpes and anemiaanemia

A study of 32 drugs introduced before 1990 found A study of 32 drugs introduced before 1990 found that without the contributions of government that without the contributions of government laboratories and non-commercial institutions, laboratories and non-commercial institutions, approximately 60% of the drugs would not have been approximately 60% of the drugs would not have been discovered or would have been delayed. “This discovered or would have been delayed. “This suggests public sector research is becoming more suggests public sector research is becoming more important over time” (Maxwell and Eckhart – 1990)important over time” (Maxwell and Eckhart – 1990)

Profit motiveProfit motive

1% of patients incur 27% of costs1% of patients incur 27% of costs Private sector spends lots of money Private sector spends lots of money

making sure they do not insure these making sure they do not insure these peoplepeople

End up on government tab or in End up on government tab or in emergency roomemergency room

Very high profits in sectorVery high profits in sector Rent seeking activities and fraudRent seeking activities and fraud

Emergency rooms and curative Emergency rooms and curative medicinemedicine

People denied care unless it is an People denied care unless it is an emergencyemergency

Preventative medicine does not Preventative medicine does not maximize profitsmaximize profits

Potential SolutionsPotential Solutions

HMOs/Managed careHMOs/Managed care Mixed private/public (Clinton’s plan)Mixed private/public (Clinton’s plan) Medical savings accountsMedical savings accounts Prescription drug benefitPrescription drug benefit Government subsidized insuranceGovernment subsidized insurance Single payer, single risk poolSingle payer, single risk pool