Health Care Reform: An Economic Perspective

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Health Care ReformAn Economic Perspective

• Bill Evans
• Department of Economics and Econometrics

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Motivation for talk

• No Federal reform effort since 1994
• Re-emergence as a political issue
• Reform packages from nearly all presidential
  candidates
• States are forcing the issue

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Kaiser Family FoundationTracking Survey June
2007

• What two issues you would most like to hear the
  presidential candidates talk about?
• Iraq 43
• Health care 21
• Immigration 18
• Economy 13
• Gas price/Energy 12
• Terrorism/Nat. Sec. 7

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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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Talk may be premature

• Uncertain who the Democratic nominee will be
• one plan will become irrelevant
• Plan of the presumptive Republican nominee
  somewhat ill-formed at this point

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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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90 more than Canada
145 more than 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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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
• 19954, 19961, 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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But. not getting the bang per buck

• Overhead costs are high (NEJM, 2003)
• 31 in US
• lt 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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4.3 years less than Japan
2.4 years Less than Canada
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If you want to cut costs, where do you look?

• Administrative/overhead
• Unnecessary procedures
• Chronic conditions
• 20 of people responsible for 80 spending

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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
• 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 gt 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 System Equity

• EPHI health insurance is a tax-free fringe
  benefit
• Greatly reduces the cost to consumers of
  purchasing insurance
• Has encouraged the growth of EPHI
• Now, most people w/ private insurance get is
  through their employers

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Tax Benefit of EPHI

• A family w/ 70,000 in income
• 36.4 marginal tax rate
• 25 federal
• 3.4 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 36.4 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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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
• lt18 11.7
• 18-24 29.3
• 25-34 26.9
• 35-64 16.0
• 65 1.5

• Family Income
• lt25K 24.9
• 25-50K 21.1
• 50-75K 14.4
• gt75K 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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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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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
• Both loosely based on the MA reform
• Clintons is nearly identical to Edwards
• 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 Obamas 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 (MDs)
• 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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• Its a nice thing to think, and it seems like it
  should be true, but I dont 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