Economic Considerations of Equality, Efficiency, and Effectiveness in Health care

Antonio BuenoAhmed

Overview

• Types of health care financing• The Case for Progressive systems• Determinants of health• Health care and health status• Highlight the weak correlation between health

care expenditure and health status• Possible Reasons for discrepancy b/w

spending and health status

MONEY!

MONEY

• Who pays• Who receives

• Money is Limited• How much Is enough?

“The Dismal Science”

• Unlimited Wants• Limited Resources

Who Pays?

• Payment Systems– Tax Financed – based primarily on income tax– Social Health Insurance – payroll tax

• taxes paid by the employer based on the employee's wages

– Private Health Insurance– Out of Pocket

• Various levels of progressivity/regressivity• What is “fair” is decided by your beliefs (and

votes)

Who Receives?

• Whoever can afford it?– Willingness to pay (economic concept)– Ability to pay

• Whoever requires it?– The unhealthy (and unwealthy)

• Lowest occupational class mortality 100-200% higher than the highest occupational class

• 120% higher for circulatory diseases,• 100% higher for cancers • 200% for resp disease• 150% for injuries and poisoning

Equality

• Wealthy pay more– Is this ‘fair’?

• Why are unwealthy affected more by taxes, even if they are taxed at the same rate?– Will Discuss MPC + Lorenz Curve

Rich vs. Poor

• Regressive Policies– imposes a greater burden (relative to their

resources) on the poor than on the rich• Sales tax

• Progressive Policies– people with more income pay a higher percentage

of that income in tax than do those with less income

– Redistribute tax burden to wealthy

Financing Systems• Out Of Pocket (Direct Payment)

– Regressive– Who pays: those who are willing/able to pay (when they are sick)– Who are the sick: the unhealthy, and unwealthy– Cost Containment by ‘market forces’

• Private Health Insurance– Regressive– But… Reduces uncertainty (of health care costs)– Profit driven

• Responsibility to share-holders– Incentive to insure healthy and exclude unhealthy

• SHI and TF– Progressive– Who pays: employers, or tax payers– reduces uncertainty– Social Health Insurance– Tax Finance

Arguments for TFHS

• Gatekeeper system to see specialists to control costs

• In a single-payer system…– Stronger negotiation– Efficiency gains (less redundancy)

• Finance collected through an already existing tax system

• Built-in progressive financing in most countries (income tax)

Arguments for/against SHI

• France: highest ranked medical care system– SHI system

• Purchaser provider/split drives competition and lower provision costs

• Cons – Reduces demand for formal labour (increased

employer costs)– Systematic Variations in benefits packages and

thus quality of care in different sub-populations

Evidence from the OECD

• Comparing changes within countries that have switched from – SHI to TF– TF to SHI

• Health Outcomes– Deaths amenable to care

Ideal Financing System?

• Social Health Insurance and Tax-Financed Health Systems: Evidence from the OECD (Wagstaff)

• tax-financed systems seem capable of attaining similar health outcomes as SHI systems without the negative effects on the labour market. – In fact, amenable mortality in breast cancer among

women, – PYLL are reduced in a TF system by 5-6

• SHI reduces formal sector share of employment by 8-10%, and overall employment by as much as 6%

Irish Health Financing

• Out Of Pocket• Private Health Insurance• Tax Financed

• Cons:• No primary health care coverage for the majority of

population– Underutilization of services by those not covered by Category I

• Two-tier health care, queue jumping• “Privatize the profits, socialize the losses”• Administrative redundancies

The Case for Progressively Financed Health Care…

Shifting the Burden– Income Tax:– Tax brackets, % tax, increasing by income– In Ireland, two brackets… 20%, then 40%– Canada: 16%, 22%, 26%, 29% + (provincial: varies from 0% - 24%)

• Gossen's First Law– Decreasing marginal utility of money– Wealthy won’t have as much use/utility with those extra dollars, so let’s give it to people who

need it more• Maximizing total utility• Slices of dessert

Why Finance Health Care Progressively? (Why Shift The Burden)• The wealthy are healthy • The unwealthy are unhealthy

• Insurance subsidizes the unhealthy through the healthy, and minimizes uncertainty

Progressive Argument – Consumption, MPC

• Autonomous Consumption• Consumption Function

– Consumption & income• Marginal Propensity to

Consume (MPC)– Relationship between spending

and income– The more money you have, the

more you will spend• Law of Decreasing Marginal

Utility– The more money you have, the

smaller proportion of your money you’ll spend

• John Maynard Keynes• Keynesian Macroeconomics• The more money you have,

the more you will spend• But you spend a lower

proportion of it• i.e. MPC decreases

The Consumption Curve

• Autonomous Consumption: people have a minimum baseline of consumption

– people will beg, borrow or steal to consume– E.g. Food, Clothing, Shelter

• C = 40 + .80 (DI)

Disposable Income

Consumption [C] Savings [S]

0 40 -40

100 120 -20

200 200 0

300 280 20

400 360 40

Autonomous Consumption

Marginal Propensity Consume DI $100

=> C $80

Rate of Consumption Decreases

MPC decreases• Diminishing

marginal utility of money– You spend a

smaller proportion of the next $1000 you make

Measures of Equality

• Measure of distribution of wealth• Gini coefficient

• 0 = perfect equality• 1 = 1 person has amassed all the wealth of a

population; everyone else has nothing• Ireland: 0.293• Canada: 0.324• US: 0.378

Equality – the Lorenz Curve

• G = A / (A + B).– X: % of people from lowest to highest incomes– Y: Total Income of population

• Smaller A = More equality– G: 0

• Larger A = Less equality– G ~ 1

• A = 0 perfect equality• A >>>> B

– greater inequality

Inefficiency - Allocative Distortion?

• An inefficient outcome• If people/consumers have access to a commodity

below its opportunity cost…– They will use too much of it– Resources are withdrawn from more valued uses– More health care being provided than optimal

• Applicable to health care?• Will people use health care services inappropriately?• In the US, spending seems to be largely physician driven

rather than patient driven (will get back to this later)

How much health care?

• How much health care should be provided?• How much money should be spent on health

care?– US 17.6%– Canada 11.4%– Ireland 9.2%– Japan 9.5%– OECD Average 9.5%– OECD Data 2010 (or nearest year)

How much health care?

• Medial Graduates per capita– Canada 7.2– Japan 6.0– United States 6.6– Ireland 17.5– Austria 22.8

How much healthcare?

• Physicians - density per 1,000– Canada 2.4– US 2.4– Ireland 3.1– OECD Average: 3.1

Determinants of Health

Risk Factors Affecting Health Status

• Obesity (self-reported)– US 28.1– Canada 17.5– Ireland 15.0 (females: 13%, males 16%)– Switzerland 8.1– Korea 2.0

• Measured and Weighed– Ireland 23.0

Risk Factors Affecting Health Status

• Alcohol Consumption (litres per capita)– Ireland 11.9– US 8.7– Canada 8.2– Japan 7.3

Measures of Health Status

• Mortality (Life Expectancy)– Japan 83– Ireland 81– Canada 80.8– Austria 80.7– US 78.7

Potential Years of Life Lost (PYLL)

• Average years a person would’ve lived if they didn’t die prematurely– Lower is Better– Caveat: this study doesn’t exclude life years lost in

conditions not amenable to health care– Country: m/f– Iceland: 3178/1616– Ireland: 3743/2197– Canada: 3926/2505– US: 6152/3592

Higher Spending != Better Health

• Weak correlation between health expenditure and health status

• Japan spends less, gets more ($4,065 per capita)

• US spends a lot, gets less ($8,362 per capita)– Based on Life Expectancy, PYLL

• Commoditization of Health Care?– “Ask your doctor if x drug is right for you”

↑ Health Care != ↑ Health Status

• Gains constant• Flatten out• Never ending

Cost Reduction

The US: Highest Spenders

• Effective Care: evidence based services– E.g. acute revascularization for AMI

• Preference-sensitive: treatment that entails significant risks and benefits. – E.g. CABG

• Supply-sensitive services: utilization strongly linked to supply of health care resources– E.g. inappropriate/un-necessary(?) diagnostics

Specialist Compensation and GDP/capita

“Underfunding” – British Columbia

High Spending: Issue of Agency• Fewer # of doctors in US (per capita)

– Greater % of GDP spending (17.6% GDP)– Potential Greater Income per physician

• Expenditure = Quantity * Prices• Can Increase expenditure by increasing Q• Can increase expenditure without increasing Q

– Higher fees for service• Self-regulated profession:

– In BC, RADs were primarily a protest not of Q but P• If resource use is primarily physician driven, in a FFS environment (MRIs owned

by doctor), economic incentives– Incentive to increase Q to increase Income

• Perhaps externally confounded by the increasing prevalence of the commoditization of health care– Drug ads

More Money

• Huge Regional variations in spending• Higher compensation• Higher use of supply sensitive resources

– Imaging– Diagnostic tests

• Health Outcomes worse than OECD average– Caveat: health determinants other than health

care

Agency: Two-Tier Health Care & Economic Incentives

• Without those deplorably long NHS waits, however, who would accept the private option, and how would the surgeon collect the extra income? This extra income is not trivial, it can amount to tens of thousands of pounds in ophthalmology (cataracts) and orthopaedics (joint replacement). But the surgeon who profits from the private care can also choose how to allocate his or her time and effort between public and private care.

• There are contractual obligations in the NHS, but they are not well monitored or enforced (Light, 1996). And most importantly, they are obligations in term of time, not productivity. Surgeon productivity is reported to be very low in the public system, much higher in the private, for the same surgeon. Standard economic interpretations of human behaviour would predict that surgeons would allocate their time and effort where they receive the highest return. If in the process they contribute to long waiting lists in the public system, so much the better; that serves to ensure a good supply of private patients.

Expenditures = IncomeUnderfunding != Underprovision

• One person’s cost containment is another person’s loss of revenue/income

• Health care rationing? Or salary rationing?• “I spent x years of hard work studying medicine; I

could’ve been a lawyer or banker instead”• “I have x amount of dollars of debt”• “I work 100 hours a week!” (poor working conditions)• “I’ll be forced to emigrate”• Whether these are valid arguments and what sort of

compensation is morally right is decided by votes

Considerations

• Increases in productivity through increased efficiency

• Increased cuts in funding have diminishing marginal return– E.g. increase hours, no overtime

• Overworked, increased mistakes

• Eventually health outcomes will be affected• Emigration?• What is the optimum level of funding?

Inefficiencies In Ireland

• Wrong buildings in wrong places• Wrong mix of skills• Too little management• Poor IT• Could spend to save (investment)

– Full medical cards for all the population would cost just over €3 billion per year. However, government is already paying just under €2.1 billion on PHC and households a further €692 million. This leaves a funding gap of only €217 million.

From The Health Care System in Ireland: Controlling Growth in Expenditure and Making the Best Use of Resources. Charles Normand

Determinants of Health

Optimizing Health

• Gains to be made in increase efficiency– Evidence-based practices– Increase in technology– ?Outsourcing of labour

• Intervention: Prevention or Treatment?– Resources better spent elsewhere?

• “The ambulance waiting at the bottom of the cliff”

Time Permitting…

Quotables – It’s All About the Money

• The question of Universal Health Care was featured on RTE 1’s Primetime programme on Tuesday 29th of March. Both Prof. Seán Tierney, IMO President and Dr Ronan Boland, Vice-President were interviewed for this feature which showed the experience in the Netherlands where a Universal Healthcare system has been in place since 2006. Prof Tierney said that while the Irish Medical Organisation supports universal healthcare, there are concerns about who is controlling the money.

• “I think the danger with having the whole thing around money is that it then drives activity, you know, so you get procedures being done on patients because money will come with the new procedures, there’s a fundamental conflict between profit based insurance companies and delivering care that’s patient-centred.”

• Dr Ronan Boland said the IMO welcomed plans to complete the primary care programme and the move to universal healthcare.

• “The day that I have a patient sitting in front of me who needs to access services in the hospital sector that I don’t have to ask the awkward question “do you have health insurance or not”, for example that I have an elderly patient who requires a hip replacement, if that patient has private health insurance she can probably have her operation from a range of providers within a couple of months, if she’s a public patient she’ll wait at least two years even to see an orthopaedic surgeon.”

The Current Debate – Consultant Pay Cuts

Dr. James Reilly

Random Comments

Indecon Analysis

• Dependency on non-EU students

Subsidy

• “But it’s important to keep in mind, the report notes, that health care professionals in other O.E.C.D. countries pay much less (if anything) for their medical educations than do their American counterparts. In other words, doctors and nurses in the rest of the industrialized world start their medical careers with much less student loan debt compared to medical graduates in the United States”

Gini coefficient & Lorenz CurveThe Gini coefficient is usually defined mathematically based on the Lorenz curve, which plots the proportion of the

total % income of the population (y axis) that is cumulatively earned by the bottom x% of the population

45 degrees thus represents perfect equality of incomes. The Gini coefficient can then be thought of as the ratio of the area that lies between the line of equality and the Lorenz curve (marked A in the diagram) over the total area under the line of equality (marked A and B in the diagram); i.e., G = A / (A + B).

Savings; but at what cost?