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Paying for Health Care

There Is No Such Thing As a Free Meal

Yaseen Hayajneh, PhD

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Buying a Flat Screen 42” TV

Need vs. Luxury Luxury goods or services are not necessary – can

do without them.

Predictability of need Predictability of Cost Informed Decision by buyer

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Health Care: Need vs. Luxury

Health Care is not a luxury service (like a cruise trip). Health Care is a basic human need.

Health Care is a “right” Someone has to pay for those who can’t afford to

purchase health care.

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Health Care: Unpredictability

People don’t know when they need health care.

People don’t usually know the cost of health care.

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Information Asymmetry

Information Symmetry: Condition in which all relevant information is known

to all parties involved. Opposite of information asymmetry.

Information Asymmetry Condition in which at least some relevant

information is known to some but not all parties involved.

Information asymmetry causes markets to become inefficient.

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Health Care: Patient Ignorance

Ignorance = Lack of information or Knowledge = Asymmetry of information.

Health care consumers are ignorant in what they need and must rely on provider’s recommendations to make decisions.

Demand for Health Care is partially involuntary and often provider-driven rather than consumer driven.

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Modes of Paying for Health Care

Out-of-pocket payments Individual private insurance Employment-based private insurance Government financing

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1) Out-of-Pocket Payments

Simplest form of financing. One Transaction (consumer – client) Direct purchase of services by client

(consumer). Out-of-Pocket payments did not satisfy the

needs of consumers and providers – giving impetus for the evolution of health insurance.

In the US, 2002, out-of-pocket payments provided funds for 16% of the total health care payments.

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Health insurance

A type of insurance whereby the insurer pays the expenses of health care services of the insured if the insured becomes sick due to covered causes, or due to accidents.

The insurer may be a private organization or a government agency.

Health Insurance can be privately managed or can be part of a government run scheme.

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Health Insurance Terms

Premium the regular periodic payment (monthly payment) to the insurer

to maintain health insurance. Deductible

the amount of covered expenses that must be incurred and paid by the insured before benefits become payable by the insurer.

Coinsurance The percentage of covered medical expenses a subscriber

must pay (in excess of the individual or family deductible) in conjunction with the percentage paid by the subscriber’s insurance plan for covered expenses.

These amounts are called coinsurance because the subscriber and the insurance plan share the cost of health care expenses.

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2) Individual Private Insurance

Individual – Insurer – Provider Individual pays premium to the insurer Insurer reimburses the provider for services.

In 2002, individual private insurance policies provided for 3% of total payments toward health services.

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Voluntary Benefit Funds

Early form of health insurance In Europe 19th century In return for paying a monthly sum, people

received assistance in case of illness.

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Early Twentieth Century USA

Benevolent Societies Provided sickness benefits for members.

Metropolitan Life and Prudential Two commercial companies 10-25 cents weekly premium Provided life insurance and expenses of final

illness. Collected premiums on weekly basis High administrative costs

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Great Depression

Worldwide economic downturn. Started in 1929 and lasted through most of the 1930s. Had damaging economic effects around the world,

mostly the US & Europe. The most industrialized countries were the nations that

were affected the worst Cities around the world were hit hard, especially those

based on heavy industry. People became unable to afford health services.

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3) Employment-Based Private Insurance

During the 20th Century Hospital became more effective in treatments and became

places to get well. Many patients were unable to pay for hospital care.

Blue Cross Insurance plans Controlled by hospital industry

Blue Shield Insurance plans Controlled by state medical societies.

Employee and Employer pays insurer who reimburses providers.

In USA, 2002, Employment-Based Private Insurance provided for 33% of total health care payments.

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The Blues

Blue cross was controlled by hospitals. Blue shield was controlled by physicians. The blues ensured a steady generous income

for providers

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Growth of EBPI

During WWII – Labor Shortage Employers competed for labor by on the basis

of fringe benefits providing health insurance. This trend continued after the war. In USA, 2002, Employment-Based Private

Insurance provided for 33% of total health care payments.

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Commercial Insurer

Competed with the Blues. Commercial insurers changed entirely the

dynamic of health insurance. Experience rating Premium are set according to the experience of

each group in using health services (risk of illness). Community Rating

Used by the blues Same premium for community members, despite

risk of illness.

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Distributive Function of Health Insurance

Health insurance distributes health services according to human need rather than ability to pay.

Experience rating mechanism is less distributive than community rating.

Commercial insurers target low risk groups by lower premium available at the blues.

The blues was forced to switch to experience rating to be able to compete.

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Health Insurance and Cost

Health insurance was originally an attempt by society to solve the problem of unaffordable health care under out-of-pocket system.

Insurance environment --> increase in cost of health care.

As private insurance became experience rated and employment based, people who had low income, chronically ill and elderly found it difficult to afford private insurance.

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4) Government Financing

In the late 1950s, less than 15% of the elderly had any health insurance Experience rating

Poor also didn’t have HI Unemployed Employed in jobs without HI Can’t afford private insurance.

As a result the government took the responsibility to provide these groups with health insurance coverage

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Medicare

A federal health insurance program for people age 65 and older, individuals with disabilities and people with end-stage renal disease, regardless of income.

Medicare was enacted July 30, 1965 Medicare covers acute care services. Medicare has three parts:

Medicare Part A (Hospitalization Insurance): hospital insurance (HI) program is compulsory and covers inpatient hospitalization costs.

Medicare Part B (Supplemental Medical Insurance): supplementary medical insurance program is voluntary and covers medically necessary physicians’ services, outpatient hospital services, and a number of other medical services and supplies not covered by part A.

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Medicaid

A federal public assistance program enacted into law in 1966,

Provide medical benefits to eligible low income persons needing health care regardless of age.

Federally aided, state- administered All states but Arizona have Medicaid programs. The program is administered and operated by the

states which receive federal matching funds to cover the costs of the program.

States are required to include certain minimal services as mandated by the federal government but may include any additional services at their own expense.

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Government Involvement

Redistribution function of HI Redistribution of funds from healthy to the sick. Redistribution of funds from wealthy to the poor.

Improved financial access to health services Aggravated the problem of rising costs.

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The Burden of Health care

The goal of health care system is… Who should carry the burden Payments are classified as

Progressive: taking rising percentage of income as income increases.

Regressive: taking falling percentage of income as increases.

Proportional: taking fixed percentage of income regardless of income level.

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Who should carry the burden?

Regressive type is “unhealthy” Out-of-pocket payments are regressive.

In 2002, individual policies provide health insurance for only 16% of the total health care payments.

Experience rated health insurance is another regressive method of financing. Increased risk of illness correlates with low income.

Community rating health insurance is regressive but less than experience rated.

EBHI is also regressive way of financing.

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Government Financing

Government financing is progressive, regressive and proportional ? Progressive – when funds are from income tax. Regressive – when funds from SST & Sales Tax. Proportional – combined funds from all taxes.