The Contributions of Health Economics to Health Care

ReformSherry Glied

Columbia University

Six Lessons for President Obama from President Lyndon Johnson

• Speed • Master the Congressional Process • Give Congress the Credit • Go Public and Build Momentum • Passion

• Keep the Economists Quiet

Morone, NY Times, September 2009

Rubinow, JPE, 1904

Fisher, AER, 1919

Walton Hamilton, CCMC, 1932

Hayek, Road to Serfdom, 1944Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance …the case for the state’s helping to organize a comprehensive system of social insurance is very strong.

…Those wishing to preserve the competitive system and those wishing to supercede it…will disagree on the details of such schemes…

Three Features

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1900 1910 1920 1930 1940 1950

Life Expectancy0%3%5%8%

1929 1935 1940 1948

% Paid by Insurance

Nearly two million families in the United States, whose incomes are less than $1,200 a year, "receive no professional medical or dental attention of any kind, curative or preventive” – CCMC, 1929

Growth in Insurance Coverage 1945-1980

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100120140160180200220

1945 1950 1955 1960 1965 1970 1975 1980

Ricardo-Campbell &Campbell, QJE, 1952

The health of the United States population ..is not the best of any country in the world; but only a few countries with relatively small and homogeneous populations have better records

10.5

11.0

11.5

12.0

12.5

13.0

13.5

14.0

14.5

Year

s

Male Life Expectancy at 65 -- 1965

Ricardo-Campbell &Campbell, QJE, 1952

At present, those who want health insurance can buy it as they buy any other good or service…

The major arguments against compulsory health insurance are: (a) that the government should not compel people to spend money on any particular service unless that service cannot be obtained in any other way…

Data!

Kenneth Arrow, AER, 1963We may briefly note that, at any rate to date, insurances against the cost of medical care are far from universal. Certain groups-the unemployed, the institutionalized, and the aged-are almost completely uncovered. …it must be assumed that the insurance mechanism is still very far from achieving the full coverage of which it is capable.

Lyndon Johnson

A health program yesterday runs $300 million, but the fools had to go projecting it down the road five or six years. And when you project it, the first year it runs $900 million... But the first thing, Dick Russell [a Democrat senator from Georgia] comes running in saying, ‘My God, you’ve got a one billion-dollar program for next year on health; therefore I’m against any of it now.’

Can the Private Market do it?

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100120140160180200220

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Number Privately Insured

Health Reform was Not Inevitable(1) Some people have said that it would be a miracle if we

passed health care reform. But I believe we live in a time of great change when miracles do happen.

(2) The cost of our health care has weighed down our economy and the conscience of our nation long enough.  So let there be no doubt: health care reform cannot wait, it must not wait, and it will not wait another year

(3) I believe that comprehensive health insurance is an idea whose time has come. I believe that some kind of program will be enacted this year.

Keynes“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

Health Economics Big Three

• Moral hazard• Adverse selection• Externalities of healthy behavior• (and one more)

Moral Hazard

• Moral hazard in health insurance (Arrow)• Policy implications – 1970s

– Coverage for catastrophic risks– Cost-sharing related to income– Effects on health – preventive care

• Benefit design

PPACA and Benefit Design

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100

Actuarial Value

Bronze PlanSilver PlanHSA - $1500/3000FEHBP-BC-StandardESI-HMO

Actuarial values from Peterson 2009

Adverse Selection

• Public strongly favors limits on ratings• Health economist consensus 1995, 2007

– 86-91% favor no rating on genetic risks• Impossibility of community rating absent a

mandate – 1970s• Policy – rating and coverage requirements

PPACA and Community Rating

• Insurance reform and market regulation occur in 2014

• Mandate is concurrent with these reforms

Externalities of Health Behavior

• Taxation as strategy for addressing health externalities

• Increased premium charges as incentive for changing behavior– Health economist consensus 1995, 2007 –

71-74% favor higher premiums• Policy – treatment of unhealthy behavior

PPACA and Unhealthy Behaviors

• Tobacco users can be assessed a $200 annual surcharge on their premiums

• Soda tax

One extra: Tax Treatment of ESI

• Friedman and Savage, fn. 32:On the other hand, if the premium is deductible (as a health-insurance premium may be), while an uninsured loss is not (as the excess of medical bills over $2,500 for a family is not), the net premium to the consumer unit is less than the premium received by the insurance company.

• Nobody except economists cares about this!

PPACA High cost plan excise tax – 40%

CBO

• Return of Johnson’s dreaded bean counters

• Key Issues in Analyzing Major Health Reform Proposals December 2008

• Health Insurance Simulation Model October 2007

• Generously larded with citations to the empirical health economics literature

Impact of Health Economics

THEORY POLICY DESIGN+

ESTIMATES SCORING=

POLICY POTENCY

Looking Forward

• Assume 30-40 year germination• What will health economics contribute to

health policy reform in 2040-2050?

Health as an Outcome of the Health System

Quality – Male LE at 65, 1985/2005

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AustraliaCanada

FranceGermany

Netherlands

New ZealandSweden

Switzerland

United Kingdom

United States

Delivery System

Committee on the Costs of Medical Care, 1932

HMO Enrollment, by Model Type, 1984-2006

Note: HMO enrollment includes enrollees in both traditional HMOs and point-of-service (POS) plans through: group/commercial plans, Medicare, Medicaid, the Federal Employees Health Benefits Program, direct pay plans, and unidentified HMO products. Enrollment by model type may not equal total enrollment because some plans did not report these characteristics. Data are as of June 30 or July 1 of respective year.Source: Kaiser Family Foundation, Trends and Indicators in the Changing Health Care Marketplace, 2002, May 2002, Exhibit 2.5, p.20, at http://www.kff.org/insurance/3161-index.cfm, based on July 1 data from InterStudy Publications, updated most recently with data from HealthLeaders-InterStudy, The Competitive Edge, Part II: Managed Care Industry Report, March 2007, Table 10, p.25.

6.7

23.132.1 31.8 28.5 29.3 28.9 24.0 24.8

2.913.5

16.2

27.5

33.5 31.929.9 25.4 21.5 26.6

18.1

5.6

3.9

3.3

7.1 6.98.3

7.88.3 11.3

11.3

6.6

8.0

9.7

8.7

7.0 7.27.4

7.37.2

7.48.2

3.5

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0.20.20.2

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1984 1988 1992 1996 2000 2001 2002 2003 2004 2005 2006

Mixed IPA Network Group Staff

15.1

31.438.8

63.3

80.1 78.0 74.270.0

66.1 71.4

Enrollees (in millions)

72.7

Competition vs. Integration

• Vertical integration and quality improvement vs. price competition

• Accountable care organizations• Hospital consolidation

Health Reform and Beyond

• New era for research– Evaluating health reform– Much left to regulations – room for input

• Future oriented agenda – 30 year payoff!

Thank you