MEDICAL CARE: COSTS OUT OF CONTROL?

1
MEDICAL CARE COSTS OUT OF CONTROL?

• Chapter 7
• Presented By
• Mary Young

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National Health Expenditures, Selected Years,
1980-2011
Expenditure Per capita ()
National Health Expenditure
GDP
Expenditures as of GDP
year
1980 1990 1995 2000 2001 2005 2011
245.8 696.0 990.3 1299.5 1423.8 1902.2 2815.8
2795.6 5803.3 7400.4 9872.9 10201.5 12227.5 16589.
8
8.8 12.0 13.4 13.2 14.0 15.6 17.0
1067 2738 3698 4637 5039 6519 9216
SOURCE Centers for Medicare and Medicaid,
Office of the Actuary, January 2002
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Rising Cost of Medical Care
7.3 As GDP
4.8

• NHE

Predictions is by 2011 NHE will be 17 of GDP
Why?
4
Cost Disease of the Service Sector

• Technologically progressive, capital
  intensive
• Labor intensive sector
• Wage competition between two sectors lead to cost
  that grow faster in labor intensive sectors.
• Both sectors wages increase at near same rate but
  labor productivity in capital intensive sector
  faster.
• Labor cost will rise more slowly in capital
  intensive sectors.

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Cost Disease of the Service Sector

• Labor hours per unit wage per hour
• Labor productivity wage per hour
• Increase in hourly wage then,
• Increases labor cost per unit output
• Inversely labor productivity reduces labor cost
  per unit output.

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Cost Disease Theory

• Cost disease theory suggest reasons QHC will
  increase overtime maybe
• Aging population 2
• Relatively high income elasticity of demand for
  health care 5
• Increase in insurance coverage 13
• Technological change 49

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Cost Theory

• Income elasticity IEDHC is a measured change in
  the quantity demanded (or amount purchased) of a
  specific good or service as a result of a change
  in income expressed in percentages
• IEDHC change QHC / change I

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Income elasticity

• Disposable income (household) after taxes 5
  trillion 100 of DI
• NHE 5 billion 10 of DI
• IEDHC 1.4
• Remainder is spent on AOGS
• An increase of 140 of 500 b is 700 B.
• Increase QHC from 500 b to 1200 b, or 10 to
  12 of DI.

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Health Insurance coverage

• Increases in health insurance coverage explains
  10 growth in QHC.
• Health insurance is the passkey to accessing the
  health care system.
• People with health insurance receive more care,
  more frequently, than people without health
  insurance.

10
Technological Change

• Together demand and supply determine aggregate
  expenditures.
• A change in demand Is fueled by advertisement of
  drugs and tech development promises to improve
  life, demand for insurance provides increased
  earnings to manufacturer of new drugs and
  technologies and aggregate health expenditures
  increases.
• Increases in earnings stimulate research,
  development and production of next generations of
  products.

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Technological Change
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Technological Change Is it worth it?

• Benefits
• Reduced mortality
• Reduced morbidity
• Increased life expectancy.
• Value of life in terms of additional years of
  life.
• Additional years of life the average American
  can expect to live 4.5 additional years because
  of medical advances or behavior changes reducing
  cardiovascular disease mortality.
• Present value of life to the individual at age
  45.
• PVLY45 FVLY t /
  (1i) t-45

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Determination of PVLY frommedical advances in
cardiovascular disease

• FVLY Years Value Discount
  Factor PVLY
• Delayed
• 100,000 31 (1.02)76-45
  (1.02)31 1.848 100,000/1.848
  54,112
• 100,000 32 (1.02)77-45
  (1.02)32 1.885 100,000/1.885
  53,050
• 100,000 33 (1.02)78-45
  (1.02)33 1.922 100,000/1.922
  52,029
• 300,000
  
  159,186

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The Effect of Third Party Payments on Hospital
Care
D


S
1,228
Price per Day ()
39
249 303
Hospital Days (Millions)
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Physician Induced Demand

• Asymmetric information
• Physicians desire to increase wealth
• Physicians practice fee-for-service medicine

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Approaches to Reducing Wasteful Expenditures

• Managed care
• Eliminating the federal tax exemption for health
  insurance
• Health care vouchers