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Health Care Reform

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Kaiser FF Tracking SurveyWhat two issues you would most like to hear the

presidential candidates talk about?

Issue June 07 Dec 07 March 08

Iraq 43% 35% 32%

Health care 21% 30% 28%

Immigration 18% 17% 14%

Economy 12% 21% 45%

Gas Prices 12% 7% ----

Terrorism 7% 6% 6%

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Outline of talk

• What problems must reforms address?

• What have we learned from reform?

• Outline some current alternatives

• Examine some likely economic consequences

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What we will not talk about?

Single payer

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• Many countries have single-payer system

• Generates low administrative costs but (arguably) poorer quality care

• US companies process $700 billion in HC claims each year

• The US is not about to get rid of a $700 billion industry

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What are the issues?

• Cost/Expenditures

• Fiscal (taxes and expenditures)

• Equity

• Coverage

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Expenditures on Medical Care

• $2 trillion annually

• 16% GDP

• $6000/person

• Twice as much as the median OECD country

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$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000

FinlandJapan

ItalyUK

IrelandDenmarkSweden

AustraliaNetherlands

AustriaCanada

BelgiumFranceIcelandNorway

SwitzerlandLuxembourg

US

Per capita spending on health care

90% more thanCanada

145% morethan the UK

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Average Annual PremiumsCovered Workers, 2006 (KFF)

• Individual plan

– $4,242 total

• Family plan

– $11,480

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Change in Prices, 2000-2006

18% 20%

85%

0%

20%

40%

60%

80%

100%

All goods Earnings Healthinsurancepremiums

% C

han

ge

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Are high expenditures a bad thing?

• A key driver of health care costs is technology

• MRIs/CT scans, angioplasty, anti-psychotropic drugs, hip/knee replacements, neo-natal intensive care, treatments for AIDS, statin drugs (Lipitor)

• All not available 20 years ago. Now, commonplace

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HIV/AIDS Drugs

• Early 1990s, 8% quarterly mortality rates for patients w/ AIDS

• 1995:4, 1996:1, three new drug introduced to fight virus– Work by preventing the virus from replicating

in the host

• Usage rates increase immediately and aggregate mortality falls 70% in 18 months

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• AIDS drugs are expensive, $12K/year in some cases

• AIDS patients are expensive, $20K/year

• This medical advance by construction increases lifetime spending by a considerably amount

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• ARVs increase lifespan after diagnosis with AIDS by almost 8 years

• Lifetime cost of treating an AIDS patient increases by about $250K

• This is expensive, but compared to many other programs, it is relatively cheap on a cost-per-life-year saved amount

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NICU

• Specialty wards of hospitals that provide “constant nursing and continuous cardiopulmonary and other support for severely ill infants”

• Developed in late 1950 early 1970s

• Growth has been rapid– NICU beds increased by 150% 1980-1995

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Costs, 2001 CA

• NICU discharge $50,000

• Non-NICU, $4,500

• In CA, 10% of births are for a NICU

• Therefore, more than half the hospital cost of childbirth are attributable to NICUs

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Fetal Death Rate Among VLBW Infants in CA

0%

5%

10%

15%

20%

25%

30%

35%

40%

Level 1,1-10

Level 1,>10

Level 2,1-10

Level 2,11-15

Level 2,>25

Level3a, <26

Level3a, 26-

50

Level3a, >50

Level3b/c,<26

Level3b/c,26-50

Level3bcd,51-100

Level3bcd,>100

Type of NICU Unit

% D

ied

wit

hin

1 Y

ear

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But…. not getting the bang per buck

• Overhead costs are high (NEJM, 2003)– 31% in US– < 2% in Canada

• Unnecessary care (Dartmouth Atlas)– 30% of care has little medical benefit

• US performs poorly in comparison– Higher infant mortality– Lower life expectancy

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65.0 70.0 75.0 80.0 85.0

TurkeyHungary

Slovak RepublicPolandMexico

Czech RepublicKorea

PortugalDenmark

United StatesLuxembourg

IrelandFinlandUnited

GermanyNetherlands

AustriaBelgiumGreeceFrance

New ZealandNorway

ItalyCanadaSweden

AustraliaSpain

SwitzerlandIcelandJapan

Life Expectancy in Years

4.3 yearsless thanJapan

2.4 yearsLess thanCanada

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If you want to cut costs, where do you look?

• Administrative/overhead

• Unnecessary procedures

• Chronic conditions

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1/3 of expenses from 5 chronic conditions

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What are the issues?

• Cost/Expenditures

• Fiscal (taxes and expenditures)

• Equity

• Coverage

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Government Insurance

• Federal government – largest health insurance provider – 25% of the population is insured through the Fed gov’t

• Medicaid and Medicare– 95 million covered in 2006– $540 billion– 21 percent of the federal budget

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Medicare

• 42.4 million recipients in 2006• Costs in 2006

– $342 billion– 14% of Federal expenditures

• Financing– Part A financed by payroll tax (2.9%)– Part B/D financed by premiums (25%) and

general revenues (75%)

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Future problems

• Costs of program are expected to escalate between now and 2030

• At the same time, fewer workers to tax

• Medicare Trustees predict – Costs > revenues by 2011– Trust fund exhausted by 2019

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What are the issues?

• Cost/Expenditures

• Fiscal (taxes and expenditures)

• Equity

• Coverage

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Tax Treatment of Employer-Provided Health Insurance

• Income from your employer is taxable

• You take the income and spend it on goods– Cars, house, food, etc.

• Under the tax laws, your employer cannot provide you these items directly to avoid taxes.– ‘Company cars’ used to be popular fringe

benefit, now they are severely restricted

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• However, the Federal government has established some ‘tax preferred’ methods of compensation.– When you receive certain items, they are not

taxed as income

• Two largest categories– Pension contributions– Health insurance

• Has been the case since 1954

– If college employee, tuition remission for your dependents

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• Taxes then reduce the cost of health insurance

• Because you do not have to purchase insurance in after tax dollars

• Ignores other important advantages of group coverage– Lower administrative costs– less adverse selection

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History of tax preferred status

• Modern health insurance began in 1930s– Blue Cross/Blue Shield – non-profit firms,

began offering pre-paid plans for hosp and MD visits

– Offered to groups of employees– The blues were a success so commercial

forms began offering HI – <9% of population was covered by HI in 1940

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• Why offered through employee groups?– Reduce adverse selection– Lower admin costs– Wage and price controls in effect

• Restricted wage hikes• To keep workers, started to offer fringes in lieu of

wages• 1942 stabilization act codified• 1943 administrative tax court decision that firm

payments for life insurance were not taxable as income

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• 1943 decision generated lots of uncertainty– Decision based on analysis from life

insurance provided to employees– Some question about applicability to health

insurance

• Certainty resolved in 1954 by IRS ruling stating explicitly that employer-sponsored HI was indeed tax preferred

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Fraction of Population Covered by Private Insurance

• Year Percent w/ Pvt Insurance

• 1950 6.7%• 1960 50.6%• 1970 68.3%• 1980 78.1%• 1990 73.1%• 2000 72.3%

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Example: Impact of Tax preferred status

• $1500 weekly earnings• Tax at 30% marginal rate

(state+federal+FICA+medicare)• Suppose you can get insurance for

$100/week• Implications of tax preferred status• Key assumption: firm does not care how

they compensate you. They only care about the total cost of employment

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• Firm is indifferent between paying you– $1500/week in wages or – $100/week in insurance, or $1400 in

compensation

• Both of these are expenses for the firm and treated equally as costs

• What is the net after-tax income when health insurance is tax preferred and provided by the employer?

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• Without tax preferred status

• Receive $1500• Minus taxes $450• After tax $1050• Insurance $100• Net income $ 950

• With tax preferred status:

• firm gives you $100 worth of insurance and $1400 in income

• Receive $1400• Minus taxes $420• Net income $980

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• You make $30/week on the deal• If the firm gives you money to buy insurance,

the govt takes 30% away before you can spend it.

• To get you $100 cash to buy an insurance policy, a firm would have to pay you $142.85– Pay you $142.85– After tax, $142.85(.7) = $100– Notice that $42.85*.7 = $30

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Tax Benefit of EPHI

• A family w/ $70,000 in income

• 36.5% marginal tax rate– 25% federal– 3.5% state (Indiana)– ~8% Social Security and Medicare

• Want to purchase $12,000 policy in AFTER TAX DOLLARS

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Without tax advantage:

• Receive $18,897 in income

• Pay 36.5% or $6,897 in taxes

• $12,000 left over for health insurance

• Net benefit of tax deduction is $6,897

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Inequalities

• Tax break only available to people who receive insurance from their firm

• Higher income families have higher tax rates so the tax benefit to them is greater

• Costs over $210 billion/year

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Average Tax Benefit -- EPHI

$102$292

$725

$1,231$1,448

$2,134

$2,640$2,780

$0

$1,000

$2,000

$3,000

>$10K $10-$20K

$20-$30K

$30-$40K

$40-$50K

$50-$75K

$75-$100K

>$100K

Family Income

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What are the issues?

• Cost/Expenditures

• Fiscal (taxes and expenditures)

• Equity

• Coverage

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Coverage

• Uninsurance is a persistent problem in US

• Dimensions of the problem– 47 million people– 16% of population– 9 million children

• Uninsurance rates have increased steadily over time

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Who are the uninsured?

• Race– White 10.8%– Black 20.5%– Hispanic 34.1%

• Age– <18 11.7%– 18-24 29.3%– 25-34 26.9%– 35-64 16.0%– 65+ 1.5%

• Family Income– <$25K 24.9%– $25-$50K 21.1%– $50-$75K 14.4%– >$75K 8.5%

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Time Series

• Number uninsured– 31 million in 1987– 47 million in 2006

• Percent uninsured– 12.6 in 1987– 15.8 in 2006

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Asymmetric Information

• Parties on the opposite side of a transaction have different amounts of information

• Example: when you get your car fixed, the mechanic knows what is wrong and how to fix it, you do not

• Health care ripe w/ problems of asymmetric information

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Problem of individual insurance

• Consider situation where people can purchase individual health insurance policy

• Problem for insurance companies – They do not know who has the highest risk of

expenditures– People themselves have an idea whether they

are a high risk person

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• Can lead to poor performance in the private insurance market

• Demonstrate in simple numeric example the problem of ‘adverse selection’

• Result: those purchasing individual insurance are a non-representative portion of the population

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Market for Lemons

• Nice simple mathematical example of how asymmetric information (AI) can force markets to unravel

• Attributed to George Akeloff, Nobel Prize a few years ago

• Good starting point for this analysis, although it does not deal with insurance

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Problem Setup

• Market for used cars

• Sellers know exact quality of the cars they sell

• Buyers can only identify the quality by purchasing the good

• Buyer beware: cannot get your $ back if you buy a bad car

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• Two types of cars: high and low quality

• High quality cars are worth $20,000, low are worth $2000

• Suppose that people know that in the population of used cars that ½ are high quality– Already a strong (unrealistic) assumption– One that is not likely satisfied

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• Buyers do not know the quality of the product until they purchase

• How much are they willing to pay?• Suppose you purchase a car at this price

and get a “good” car, what do you do?• Suppose you get a lemon?• What are some solutions to the market for

lemons?• Extend this example to health insurance?

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What have we been doing the past 13 years?

• Two major efforts aimed at coverage– Medicare Part D– SCHIP program

• Movement to managed care

• BUT….Most of the ‘action’ has been with states– unsuccessful but informative

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Small Group Reform

• People without EPHI or small firms must purchase insurance in the ‘Small Group’ Market

• Small groups tend to have– Higher prices– Higher administrative fees– Prices that are volatile

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• Prices are a function of the demographics

• Concern: prices for some groups too high

• Lower prices for some by “community rating”

• Nearly all states have adopted some version of small group reform in 1990s

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Difference in Difference

Before

Change

After

Change Difference

Small firm in reform state (T)

Yt1 Yt2 ΔYt

= Yt2-Yt1

Small firm no reform state (C)

Yc1 Yc2 ΔYc

=Yc2-Yc1

Difference ΔΔY

ΔYt – ΔYc

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Effect of full reform on Employer-provided ins. rates, CPS

State

Firm

Size Before After Δ

Reform Small 39.36 37.39 -1.97

No ref. Small 47.18 47.04 -0.14

ΔΔ -1.83

Reform Large 75.79 73.71 -2.08

No ref. Large 79.61 77.36 -2.25

ΔΔ 0.17

ΔΔΔ -2.00

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What happened?

• Increased the price for low risk customers– Healthy 30 year old pays $180/month in PA– $420/month in NJ with community ratings

• Low risks promptly left the market

• Which raised prices

• Policy did everything wrong

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Lesson

• Idea was correct: – Use low risk to subsidize the high risk

• But you cannot allow the low risk to exit the market

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Massachusetts Reform

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MA Reform: Romney

• Most ambitious state reform to date

• Many features but…..

• Most striking component: Individual mandate– Required by law to carry insurance

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MA Reform

• If you require insurance, you need to make it affordable

• State subsidizes purchases for poor

• Firms must establish Section 125 plans

• Established the “Connector”

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Connector

• Merge of individual and small group market

• Market maker in insurance

• Community rating

• Requirements on what plans must have

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Connector

• Cheapest individual plans cost about $200/month

• 40-60% lower than average plan

• Was achieved primarily by higher cost sharing

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Results from MA

• It was estimated that 500K were uninsured and 300K have been added to insurance rolls

• State underestimated – Number uninsured– Uninsured eligible for subsidized care

• Cost of the program are exceeding expectations

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Exporting MA Plan?

• Plan is being studied extensively by – Other states– Presidential candidates

• MA is very unique so it might not travel– Lower uninsurance rate (9%)– Unique fiscal situation that was used to

finance the law

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Other reform plans

• Obama and Clinton have offered detailed plans

• Clinton loosely based on the MA reform• Clinton’s is nearly identical to Edward’s• Maintain EPHI as basis of system• Try to lower costs to those without EPHI

so they can afford insurance• Plans vary in detail but contain many

similarities

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Democratic plans

Edwards Obama Clinton

Pay or Play Yes Yes Yes

‘Connector’

Type plan

Yes Yes Yes

Subsidize/

Tax credits

Yes Yes Yes

Individual

mandates

Yes No Yes

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Clinton

• Those without insurance can purchase through same insurance members of Congress have

• Insurance subsidies for low income

• Reliance on preventive care/disease management to reduce costs to make affordable

• Individual mandates

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Obama

• Mandates for children

• Employer mandates

• Expansion of SCHIP/Medicaid

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Cost savings proposals in Obama’s Plan

• Health IT systems– $10 billion/year for 5 years

• Heavy emphasis on disease management– Effort to standardize care for chronically ill

• Performance based rewards (MD’s)

• Rx reform (generics, importation, negot.)

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Pay or Play

• Firms must pay 5% wage bill to health insurance or pay that as a fine

• Proposed in 26 states in 2006

• Language -- firms must pay ‘their fair share’

• Problem: ignores the realities of the labor market

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• Insurance is one component of a compensation package

• Increased costs in one area will be paid for by reducing on costs in another (wages)

• In long run, costs will be borne by workers

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Will firms pay or play?

• In March 2007, Private industry– Average hourly comp. $27.61– Wages/salaries $18.34 (71%)– Health insurance $ 1.83 (7.1%)

• Wal-Mart pays 5-7%– Only 40% Wal-Mart workers receive their care

through the firm

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Cost reduction

• Variety of ways to reduce costs– Computer investments (medical records)– Preventive services– Disease management– ‘Best practices’

• Way to ‘self finance’ plans• Problem

– Returns are years away– Preventive/DM not really cost saving

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Example: Cervical Cancer Screening

• 11,500 cases in 2007, approx. 4000 deaths

• 4th leading cause of cancer death in women

• Cheap test available – Pap smear $40

• Expensive to treat ($30,000/case)

• Consider universal testing every three years for women 45-64

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• 37 million in this group• Cancer incidence rate of 16/100,000• Approx 6000 new cases per year• Suppose test every three years prevents

ALL cervical cancers for 3 years• Costs $1.1 billion• Save: $540 million• Net – program cost $560 million

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Result

• Universal testing is a good idea – saves lives – it is a COST EFFECTIVE

• However, in most cases, mass screening is not COST SAVING

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• “It’s a nice thing to think, and it seems like it should be true, but I don’t know of any evidence that preventive care actually saves money,”

• Jon Gruber, MIT Economics professor and architect of the Massachusetts Connector plan

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What is different now?

• Leaves current system intact, builds out

• Individual mandates

• Pay or play

• Belief we can generate more uniformity in practice patterns to save costs

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What is missing?

• Little discussion of Medicare

• Attacks costs by spending more money

• Little discussion about the need for more cost sharing

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McCain

• Uninsurance is a problem of cost

• Attack costs, reduce premiums, increase coverage ,

• Offers variety of proposals designed to drive down costs– Increase competition in insurance– Malpractice reform– Increase accountability

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Highlights

• Purchase insurance from nationwide pools

• Obtain insurance through any group, not just employers

• Encourage retail medical outlets

• Base pay on performance

• Establish national standards for treatment

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Tax Credits

• Eliminate tax deductibility of EPHI

• Replace with tax credit for people with health insurance– $2500 for individuals– $5000 for families

• Tax benefit the same for everyone, regardless of income

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Concerns

• The subsidy rate is not high enough for low income people

• What will happen to employer-provided health insurance?

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Summary

• Clinton– Primarily attacks uninsurance problem

• Individual mandates • Pay or play

– Imposes lots of (potentially costly) programs like preventive medicine

– Individual mandates make the plan politically challenging

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• Obama– Attacks costs first– Most aggressive cost-saving but, benefits are

years away from being realized– Some impact on uninsurance through

expansions of SCHIP/Medicaid, pay-or-play– Benefits to working uninsured will be long in

the future when/if costs have been reduced

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• McCain– Riskiest program because it blows up EPHI

• Replaces with a tax credit

– Estimates suggest it will have minimal impact on uninsurance

– Questionable impact on costs -- any benefits are long in the future