Who are our hypothetical patients?

1
HEALTH ECONOMICS AND POLITICS A Historical
Prospective
2
Health Economics and Politics

• Politics
• Some history
• Private Health Insurance
• Medicare
• Medicaid

3
The Politics of Health Policy
4
Past Attempts to ReformHealth Policy

• President Truman and National Health Insurance
• President Nixons offer
• The Reagan era
• President Clintons
• Health Security Act

5
Two DemocraticProposals

• Clinton
• Universal coverage through a mix of private and
  public insurance
• Individual mandate
• Employer mandate for large employers
• Refundable small business tax credits
• Refundable tax credit for lower income
• New Health Choices Menu thru FEHBP and state
  plans
• Expand Medicaid and SCHIP
• Health plan regulations
• Estimated costs 110 B/Yr.

• Obama
• Universal coverage through a mix of private and
  expanded public insurance
• Individual mandate for children
• Employer pay-or-play mandate
• Create a National Health Insurance Exchange where
  individuals and employers could buy coverage
• Federal income-related subsidies
• Expand Medicaid and SCHIP
• Price controls for health insurance
• Health plan regulations
• Estimated costs 50-65 B/Yr.

6
One RepublicanProposal

• McCain
• Reform the tax code
• Tax credits to all
• Individuals 2,500
• Families 5,000
• State risk-based adjustment for low income/high
  costs
• Allow interstate sales of health insurance
• Allow individual purchase from association health
  plans
• Payment to providers based on quality
• No estimate of costs

7
Health Econ 101

• Prices matter
• To buyers
• To sellers
• Insurance (Public or Private)
• Lowers the perceived price to the consumer
• Increases the volume demanded (moral hazard)
• Supply of health care
• Mostly services -- Is very labor intensive
  (income to people)
• Medical products innovation constantly changing
• Facilities long-term capital investments make
  adjustments difficult
• Open-ended payment policies create strong
  incentives to increase spending
• With weak incentives to seek value
• Result is inefficient, flat-of-the-curve health
  care delivery

8
National Health Expenditures Projected to be
2.3T in 2007
12
12
15
34
20
7
Source CMS, NHE
9
The Private Sector Projected to be 1042 B in
2007
Source CMS, NHE
10
Major Medical Innovations

• 1929 Fleming publishes discovery of penicillin
• 1935 Sulfa drugs
• 1939 Prontosil
• 1940-41 Penicillin developed and tested
• 1944 Streptomycin developed
• 1946 Large scale production of penicillin
• 1950 Terramycin
• 1952 Isoniazid cardiac pacemaker
• 1953 Open heart surgery polio vaccine

Jonas E. Salk, MD
11
Early History of Health Insurance

• Early prepayment plans by hospitals
• AHA organized these into Blue Cross plans
• To assure hospital payment
• free choice to reduce hospital competition
• Physician prepayment plans developed into Blue
  Shield plans (AMA)
• Commercial health insurance came later

12
WWII Wage and Price Controls

• Two programs to control wartime inflation
• Office of Price Administration (OPA)
• Price controls and rationing of consumer
  commodities (e.g., sugar, coffee, butter, tires)
• National War Labor Board (WLB)
• Control of wartime wages
• Settlement of labor disputes to assure wartime
  production

13
National War Labor Board

• 1943 War Labor Board ruling that employer
  fringe benefits did not count as wages subject to
  controls
• But could not exceed 5 of wages

14
The Post-War Period

• 1954 Exclusion of health insurance from taxable
  income confirmed by the Congress
• Post-war period
• Medical advances increased cost of medical care
  and the demand for health insurance
• Rapid growth in health insurance coverage

15
Growth in the Post-War Period
Women in the Workplace
Per Capita Disp. Income
Population
Up 69
Up 122
Up 54
16
Private Hospital Insurance CoverageGroup versus
Individual, 1940-1975
Note Employer group is the total of persons
covered by Blue Cross/Blue Shield plus insurance
company group
policies. Source Historical Statistics of the
United States Millennial Edition, Series
Bd294-305.
17
Growth in Third-party Payments, 1960-2000
Percent of NHE
18
Tax Expenditures from the Exclusion of Health
Insurance from Taxes, 1969-2009
Sheils Total Tax Expenditures from the
Exclusion of Health Insurance from Federal and
State Income and Payroll Taxes
Treasury Tax Expenditures from the Exclusion
of Health Insurance from Federal Income Taxes
Sources OMB Special Analyses John Sheils, The
Lewin Group
19
Federal Tax Expenditures as a Percent of GDP,
NHE, and Federal Entitlement Expenditures,
1968-2007
Federal Tax Exp As a of Entitlement Exp
Federal Tax Exp as a of NHE
Federal Tax Exp as a of GDP
20
Effects of Tax Policy

• Higher prices
• Lack of access
• Winners Losers

P
S
Higher Prices
Increase In Demand
D
D
Medical Technology
Income Growth
Tax Policy
Q
Higher Output
21
Effects of Tax Policy on Health Insurance

• Intensified the effects of increases in income,
  population, and medical technology
• Expanded employer-based group insurance relative
  to individual insurance coverage
• Expanded insurance benefits hospital,
  outpatient, mental health, dental, drugs
• Reduced cost sharing
• Induced a higher level of costs, prices, and
  expenditures created winners and losers

22
MedicareProjected to be 448 B in 2007
Source CMS, NHE
23
Medicare Expenditures 2007
Other 12
Hospital 46
Rx Drugs 11
Enrollment FFS 82.4 MA 17.6
Home Health 5
Other Prof Care 3
Physician Services 23
24
The 1965 Medicare Act

• PROHIBITION AGAINST ANY FEDERAL INTERFERENCE
• Sec. 1801. 42 U.S.C. 1395  Nothing in this
  title shall be construed to authorize any Federal
  officer or employee to exercise any supervision
  or control over the practice of medicine or the
  manner in which medical services are provided, or
  over the selection, tenure, or compensation of
  any officer or employee of any institution,
  agency, or person providing health services

http//www.ssa.gov/OP_Home/ssact/title18/1801.htm
25
Medicare Income and Expenditures
Source 2008 Medicare Trustees Report, Figure
II.D2
26
Medicaid - Projected to be 191 B Federal 146
B State in 2007
Source CMS, NHE
27
FMAP Formula
FMAP 100 -
(State Per Capita Income)2 (Federal Per
Capita Income)2
x 0.45

• A lower income state will have a lower state
  share and a higher matching rate
• Designed to
• Give the average state a 55 matching rate
• Give lower income states higher matching rates
• Give higher income states lower matching rates
• Year-to-year changes a function of
• Relative changes in per capita income
• Relative changes in a states population

State Share
28
Medicaid State Matching Rates, FY 2006

• 12 States with 50 FMAPs
• California
• Colorado
• Connecticut
• Illinois
• Maryland
• Massachusetts
• Minnesota
• New Hampshire
• New Jersey
• New York
• Virginia
• Washington

• 10 States with highest FMAPs
• Mississippi 76.0
• Montana 75.4
• Arkansas 73.8
• West Virginia 73.0
• New Mexico 71.2
• District of Columbia 70.0 (set by law, not by
  formula)
• Idaho 69.9
• Louisiana 69.8
• Alabama 69.5
• South Carolina 69.3
• Kentucky 69.3

Source KFF State Health Facts
29
Federal Medicaid Spending and PovertyAll States
DC, 2005
Northeastern States
Katrina States
Source Calculations based on CMS Medicaid and
Census Bureau data, 2005
30
Per Capita Federal Medicaid Expenditures to the
States, FY2006
NE States
CT
MA
NH
AL
31
Cost of Entitlement Programs
By 2050
19 of GDP
66 of federal spending
Source CBO Long Term Budget Outlook, 2007
32
The Politics of Health Policy
33
Assessments of Health Proposals

• The lesson of Clinton in 1993 and Kerry in 2003
  is clear--slogans win campaigns, not policy
  specifics.
• Joe Antos, AEI, January 2008
• . . .instead of running, we hit the ground
  thinking. And then rethinking. . . . that was
  our gravest mistake. We tried to do too much. .
  . . the proposal took on so much that it was too
  easy for opponents to find things that would make
  one constituency or another uneasy.
• Walter Zelman, Clinton health advisor, 1993-94,
  from Health Affairs interview, 1998.
• . . . the health insurance proposals were weak
  on practical details and generated considerable
  confusion, even among their supporters.
• Rosemary Stevens, health policy historian,
  referring to the reform effort in 1917-1919
  following WWI.

34
Politicians dont want to face the political
hard choices.

• Expanding coverage is very costly
• Federal and state budget issue
• Mandates impose costs on individuals or employers
• Could have substantial employment effects,
  especially on small businesses
• Medicare and Medicaid face substantial unfunded
  liabilities
• Will require large tax increases to maintain
  current benefits
• Price controls are difficult to enforce and cause
  shortages
• Tax reform and tax credits reallocate income from
  higher income people (voters, party
  contributors) to lower income people (non-voters)
• More competitive health markets threaten the
  income of established providers
• Achieving reform through quality initiatives, IT,
  and comparative effectiveness is very difficult
  (but is good campaign rhetoric)

35
Looking Ahead What Happens Without Health Reform?

• Public programs Short term budget cuts to
  balance state and federal budgets
• Reduction in some benefits, but not likely
  explicit
• Reduction in reimbursement rates
• Access problems, especially for specialists
• Reductions in quality and services (subtle
  changes)
• Private sector Reductions in extent of coverage
• Some reductions in covered services
• More restrictions on choice of providers
• More emphasis on care management
• Increase in premium payments from employees
• Demand for quality care will not diminish

36
Advice from the Clinton Veterans

• Are there any lessons here for the next debate
  on health care reform?
• Incoming presidents know that they have only a
  brief window of opportunity during which to enact
  their legislative agendas.
• . . . the tendency is for experts to
  overestimate the willingness of middle-class
  Americans to sacrifice and risk the uncertain
  consequences of major changes in their lives.
• If substantial reform is to be achieved during
  these windows of opportunity, the legislation
  must be more modest in its reach than many
  reformers may see as desirable.
• Blendon, Brodie, and Benson, Health Affairs,
  1995.

37
The Politics of Health Reform
All the players in health care reform . . . came
to the political process with strong convictions
in support of their first-choice proposal. For
each of these groups, their second-favorite
choice was the status quo. Stuart Altman, as
quoted in Health Affairs, 2001.
38
What Kind of Health Reform?
More Market Competition
More of Both
Status Quo (not an option)
More Direct Regulation