Healthcare Economics: Market Failures and Resource Allocation

Financing the Health Care System

• Health care differs substantially from other economic sectors due to uncertainty, information asymmetry, and non-marketable risks inherent in medicine.
• Information asymmetry exists between physicians, who have more medical knowledge, and patients, who know more about their own history.
• The "moral hazard" describes situations where individuals alter their behavior to shift decision risks to others.
• Tension exists between the ethical and value aspects society places on human life, information asymmetries, and uncertainty around care.
• Health care competes for resources against other sectors like food production and housing construction, requiring trade-offs within the health sector.
• Financing healthcare in the U.S. is complex due to workarounds, redundancies, and contradictions, due, in part, to the lack of a single national health care payment system

Health Care Financing Basics Described in Chapter

• How much money is spent
• What the money is spent on
• How the money is paid to health care providers
• Where the money comes from

National Health Expenditure Accounts (NHEA):

• The U.S. Department of Health and Human Services (DHHS) publishes annual data on total health expenditure.
• The NHEA, official estimates of U.S. health care spending, measure spending on health care consumption and investment in the medical sector.
• The NHEA is comprehensive, mutually exclusive, exhaustive and multidimensional.
  • This encompasses medical goods, services, and the payers responsible for their expenditures.
• The NHEAs are consistent and allow for comparisons among categories, and over time, using a common set of definitions.

Commonly Discussed Terms for Health Care Financing

• National Health Expenditures (NHE), health consumption expenditures (HCE), and personal health care expenditures (PHCE).
• NHE includes all health care consumption and investment in medical structures, equipment, noncommercial services, and biomedical research, including HCE.
• The difference between NHE and HCE represents the investment costs in the medical sector.
• HCE encompasses personal health care spending, government administration, the net cost of private health insurance, and public health activities
• PHC includes medical goods and services aimed at diagnosing, treating, and/or preventing health problems for specific individuals.

How Much Is Spent?

• Health care spending has increased in the United States every year since 1960 in absolute and per capita terms and as a percentage of GDP.
  • In 2021, National Health expenditure reached an approximately US$4,255 billion, 18.3% of GDP, and US$12,914 per capita.
  • Per capita spending on health care was US$146 in 1960 (equivalent to about US$1,207 in 2021 when adjusted by CPI)
• The typical household expense and NHE allocation is uneven across people and households.
  • In 2022, per capita income was US$41,261, median household income was US$75,149.
  • Median rent or owner costs for housing are US$15,216 and US$21,936, respectively.
  • With per capita spending on health at US$12,914, health care expenditures are nearly one-third of per capita income.
  • Per-household health expenditures are about US$33,189 (based on 2.57 persons/household) which equates to 44% of the median household income.
• The spending increases are not uniform.
  • Between 1960 and 1990, the average annual percent changes were double-digit increases.
  • Beginning in the 1990s, the annual rate of increase in health care spending began to decline into the single digits.
  • From 2010 to 2021, the annual rate of increase each year was below 6%, except for a double-digit increase in 2020.
  • In 2021, spending grew only 3.2% from the previous year.
• Using the economists' model to analyze costs
  • Cost = Price × Quantity
  • Costs in the NHE are the sum of expenditures on billions of services and products consumed.
  • Costs can be grouped and analyzed across limited categories.
  • Maxim: "you get what you pay for"

Where Does the Money Go?

• Economists separate expenses into current consumption and investment, with NHE representing investments.
• A small portion of expenditures, 5-10% over the decades, is allocated to investments such as Research, Structures, and Equipment.
• The vast majority of NHE are HCE which are predominantly for PHC, hospitalization, physician services, prescription drugs, and other health care goods and services.
• What has increased as a share of NHE is:
  • Other health, residential, and personal care
  • Government administration
  • Net cost of private health insurance
  • Government public health activities

Expenditures by Condition

• Hospital care accounted for the largest share of NHE, at about 31% in 2021, remaining relatively stable since 2000.
• Professional services had the second highest share of NHE at about 27%. Most of this amount was for physician services, whose share of the total has also remained relatively constant.
• Retail prescription drugs have accounted for the third highest share, and it is also a relatively stable expenditure.
• The CDC notes that an estimated 90% of the NHE are for chronic and mental health diseases, which are considered some of the most preventable.

Insurance, Intermediaries, and Other Third Parties

• Most people want insurance to protect against wild swings in health care costs.
• Health insurers are termed “third-party payers:"
  • They are neither patients nor providers.
  • Historically, health insurance was intended to cover major medical events.
• Another role or motivation for establishing third party payers is to "bridge the gap" between how people are willing to pay vs how doctors and medical providers want to get paid.

Maintaining a Network of Providers

• Third parties typically maintain a network of providers.
• Contracts between providers and payers detail payment models, rates, and other commercial terms.
• From their network of providers, payers develop databases of patient experiences over time, which provide:
  • Longitudinal studies
  • Under understanding of treatment options
  • Knowledge of rates for procedures and consultations
    • Enable quantitative quality studies.
• Payers highlight cost and quality experiences with providers through ratings, which influence patients searching for "in-network" options.

Provider Payment Approaches

• There are six common payment modes: -Cost/cost-plus based. The organization provides the services tracks all costs associated with each customer and is paid the amount. Similar to indemnity plan -Hourly or "time and materials." The provider bills a fixed hourly agreed to rate covering costs besides materials, which are additional. -Fee-for-service used when the scope of work is clear, common with smaller providers, and the customer assumes more risk. -Fixed price is a known quantity that the customer will pay for a known productized service, focusing payment on the condition presented by the patient rather than a service for the service render. -Capitation, the medical provider gets a fixed prepayment per every patient they serve. -Value is where organizations and health providers are rewarded for the value delivered and the quality of care, as it is easy to measure

Risk Transfer and Good Intentions

• Payment models can be arranged along a continuum representing financial risk borne by the buyer and provider.
• Even with matching payment methods, either side may desire an intermediary.
• The system of payment affects current principal actions and also influences who and where principals will be in the future.

Where The Money Comes From Within The System

• All spending on the health system in any country comes from private households' budgets.
• Funds' paths from people to providers can be complicated. Depending on a person's situation, the provider and third-party payers vary.
• With the ACA, patients typically don't incur direct costs at the point-of-care for preventive care services.

Private Health Insurance (or Managed Care)

• Most people get private insurance, such as by or through a third party employer.
• Less than 2% of employers in 2017 offered indemnity health insurance plans. There are many different managed care plans that include: health maintenance organizations (HMO), preferred provider organizations (PPO), “point-of-service” (POS),exclusive provider organizations (EPO), and other permutation
• Managed care manages in the network of providers that they administer with the implied ability to steer (or limit) members to preferred providers, negotiate rates, and manage utilization
• Firms that provide these services are often referred to as managed care organizations (MCOs).
• Insurance in the United States is generally governed by the states. Health insurance where the MCO takes on the risk of the contract must be approved for sale in each state and is along with relevant regulatory requirements
• Larger employers "self-insure," paying actual health care costs incurred by employees; the employer contracts with an MCO to administer the plan, controlling plan design and contracts.
  • All the while gaining benefits from how a third-party intermediary could provide assistance

Government Spending on Health care

• Since 1960 government spending has accounted for an increasing proportion of the health care.
• This largely started by Medicaid and Medicare programs in the 1970s.
• By 2021, local, state, and federal programs covered about 50% of NHE, where the majority is through Medicaid and Medicare programs.

Medicare

• The government established the first national social insurance program to finance medical care in the United States in the 1960s, and it is called Medicare.
• The program provides payment for some health services for those 65+ who are eligible for Social Security or Railroad Retirement benefits.
  • Its coverage was broadened in 1973 to include those permanently disabled workers and their dependents who were eligible for old age, as well as persons with end-stage renal disease.
• Medicare: -Hospital Insurance (Part A) also covers skilled nursing, hospice, and home health care -Medical Insurance (Part B) covers physician / health professional services and hospital outpatient care -Medicare Advantage (Part C) are those who enroll with an MCO instead of Part A and B and, optionally, Part D
  • Medicare Prescription Drug Coverage (Part D), lowers the costs of prescription medication for Medicare beneficiaries
• Medicare Part A is funded from Social Security taxes, and Part B is funded from general revenues and enrollee premiums.
• Medicare average cost per enrollee was just over US$14,405 in 2021

Medicaid

• The Medicaid program was created alongside Medicare in 1965.
  • Medicaid is a needs-based program, and unlike Medicare, one has to apply to receive it and its coverage.
  • The program applies a series of income-level determinations to each applicant, "testing their means." Only those persons can receive it based on their income and assets falling below standard.
• The Medicaid program covers all ages.
• Medicaid is also supported by federal and state tax levy funds and administered by the states. Each state has its own unique set of services.
• Low Medicaid fees lead many providers not to participate, thereby limiting coverage. The US$8,666 estimated average insurance cost (i.e., excluding out-of-pocket expenses) per enrollee in Medicaid.

Children’s Health Insurance Program

• CHIP provides federal funds to states for providing health coverage to uninsured children in families with incomes too high to qualify for Medicaid, but who cannot afford private coverage.
• CHIP coverage provides a capped match for funds to states annually CHIP average cost per enrollee was under US$3,034 in the 2020 year.

Other Government Programs

• Other government health programs at the federal level are offered through the Department of Defense (DOD) and the Veterans Affairs (VA).
• Paid primarily with broad-based tax levy funds.
• Average costs within these government programs vary

GoFundMe Campaigns

• Rising GoFundMe campaigns for health care needs is symptomatic of a broken system".

Self-Pay and Out-of-Pocket Expenditures

• Providers refer to uninsured patients as "self-pay" or "self-insured." They often bear the full cost of care, potentially leading to severe risk.
• Uninsured patients are often charged the full “list price" instead of negotiated rates.
• About 11% of people under 65 were uninsured in 2022.
• Whether insured or not, most are responsible for at least some level of out-of-pocket expense -Direct payments to providers for noncovered services.
  • Extra payments to providers for covered services that bill at a cost higher than what the insurance company pays -Deductibles and coinsurance required under the health insurance plan.
• All are forms of cost-sharing to incentivize patient and to manage the cost of care.

Explore the unique challenges of the healthcare market, like market failures and resource allocation. Understand the concept of moral hazard and the impact of information asymmetry. Learn about the goals of the National Health Expenditure Accounts (NHEA).