– Tax provisions subsidize employer contributions
– Group market is less expensive than individual market
8
The U.S. Health Care Market: Private Insurance
9
The U.S. Health Care Market: Private Insurance
• Group market
– Possible that workers within a firm are fairly heterogeneous, so adverse selection is less of a concern – On the other hand, employees not randomly assigned
• Uncapped, totals 2.9% sቤተ መጻሕፍቲ ባይዱlit evenly between employer and employee
18
The Role of Government: Medicare
• Medicare financing paid for by payroll tax on current workers
• Deadweight loss equals abh.
5
What’s Special About Health Care?
• Assumed that demand for health care downward sloping (e.g., health care use is elastic with respect to the price). • Assumed coinsurance rate of 20% -- the amount the insured person pays out of pocket. • Social experiments find that the elasticity of demand for health care is -0.20.
3
Figure 10.1
What’s Special About Health Care?
• Without insurance, consume M0 of health care services.
• Insurance in this example lowers the price of services to 20% of actual price. With insurance, consume M1 of health care services.
12
The U.S. Health Care Market: Private Insurance
• Managed Care, continued
– Health Maintenance Organizations (HMOs) – a group of physicians work only for a particular plan and patients can only see doctors within that plan – Preferred Provider Organizations (PPOs) – a group of physicians accept lower fees for access to patient network; patients can go out of the network at greater cost.
• Link to employment potentially leads to “job lock”
– When you leave your job, you also lose your health insurance – May be difficult to get new insurance if you have a “pre-existing” condition – Kennedy-Kassenbaum Act mandated that employers must include a new employee who previously had health insurance, even if they have pre-existing condition.
• An employer may shift-compensation toward wages, or shift employee’s onto spouse’s plan by offering a less generous package of benefits. • More problematic at smaller firms.
11
The U.S. Health Care Market: Private Insurance
• Managed Care
– Focus on supply-side (health care provider-side) of market rather than on the demand size. – Often patients face very little cost sharing (prices close to zero) – Quantity constraints (such as seeing a “gatekeeper” primary care physician before seeing a specialist). – Capitation based reimbursement – providers received fixed, lump sum per patient, regardless of actual utilization.
19
Table 10.1
The Role of Government: Controlling the costs of Medicare
7
The U.S. Health Care Market: Private Insurance
• Virtually all (93%) of private insurance for the non-elderly is provided through the employer.
– By-product of wage & price controls during World War II
• Uncapped, totals 2.9% split evenly between employer and employee • Medicare outlays have grown dramatically over time – raises concerns about its solvency
10
The U.S. Health Care Market: Private Insurance
• Cost-based reimbursement / Fee-forservice
– Insurance policies that provide payments to health care providers based on actual costs of treating patient – Little incentive to economize on methods for delivering health care since fully reimbursed
• Program divided into three parts:
– Part A: Hospital insurance (HI) – Part B: Supplementary medical insurance (SMI) – optional, but 99% of elderly take it up – Part C: Medicare+Choice – optional, a managed care arrangement where elderly get certain additional benefits like prescription drug coverage and have restricted choice of providers
• Adverse selection problems likely to be largest for the elderly
15
The Role of Government: Medicare
• Approximately 40 million enrollees • Not means-tested
13
The Role of Government
• Medicare • Implicit subsidy for employer health insurance • Medicaid
14
The Role of Government: Medicare
• Enacted in 1965, provides health insurance coverage to virtually all elderly individuals and some disabled. • $254 billion in 2002
16
The Role of Government: Medicare
• Medicare does not cover:
– Long-term institutional services like nursing homes – Prescription drugs, though new legislation was passed in 2003 that will phase-in coverage