Health Economics & Policy

3 rd Edition James W. Henderson

Chapter 1 U.S. Medical Care: Crisis or Conundrum

Growth in Spending

20.00

15.00

10.00

5.00

0.00

1971 -5.00

Figure 1.1 Growth in Nominal and Real Health Care Expenditures, 1971-2002

1976 1981 1986 1991 1996 2001

U.S. Spending: Summary Measures

Year

1950 1960 1965 1970 1975 1980 1985 1990 1995 2000 2001 2002

Total spending (in billions)

$ 12.7 26.7 41.1 73.1 130.7 245.8 428.7 696.0 987.0 1,309.4 1,420.7 1,553.0

Percent change

- 7.7 9.0 12.2 12.3 13.5 11.8 10.2 7.2 5.8 8.5 9.3

1 Percent of GDP

4.5 5.1 5.7 7.0 8.0 8.8 10.3 12.0 13.3 13.3 14.1 14.9

Per capita spending

$ 82 143 202 348 582 1,067 1,735 2,738 3,686 4,670 5,021 5,440 Source:

Health United States, 2000 with Adolescent Health Chartbook

, 2000, Table 114; Health Care Financing Administration web site at http://www.hcfa.gov/stats/nhe-oact/tables/ (March 15, 2002), and Levit et al. (2004). 1 Annual rate of change from the previous year listed.

Why do Americans spend so much on medical care?

 Aaron (1991) – Expansion of 3 rd party payment system – Aging of the population – Expanded medical malpractice – Increased use of medical technology  Other factors – Physician-induced demand – Entry restrictions – Predominance of not-for-profit providers

Changes in Medical Care Delivery

    Shift from private to public financing Shift to 3 rd party financing Changes in hospital usage and pricing Deregulation and growth in managed care

Shifts in Financing

Category

Private Sector Out-of-Pocket Payments

$ 1960 4 %

13.1 48.7

$ 1970

25.1

%

34.3

1980

58.2 23.7

$ 1990 4 %

145.0 20.7

$ 1995 5

146.5 Private Health Insurance Other Private Public Sector Federal State and Local Medicare 1 Medicaid 2 5.9 1.3 2.9 3.7 - - 21.9 4.8 10.8 13.8 - - 15.5 4.8 17.6 10.0 7.7 5.2 21.2 6.6 24.1 13.7 10.5 7.1 68.2 14.5 71.3 33.5 37.4 26.0 27.7 5.9 29.0 13.6 15.2 10.6 239.6 31.6 195.2 88.5 111.5 75.4 34.3 4.5 27.9 12.7 15.9 10.8 330.1 57.4 322.0 134.2 185.3 137.2 Total Health Care Spending 3 26.9 100.0 73.1 100.0 245.8 100.0 699.4 100.0 990.3 Katherine R. Levit et al., “Health Spending Rebound Continues in 2002,”

Health Affairs

23(1), January/February 2004.

%

14.8 33.3 5.8 32.5 13.6 18.7 13.9 100.0 1. Included in federal spending. 2. Included in federal and state and local spending. 3. Columns do not add to total due to double-counting for Medicare and Medicaid. 4. Katherine R. Levit et al., “National Health Spending Trends in 1996,”

Health Affairs

17(1), January/February 1998. 5. Health Care Financing Administration web site at http://www.hcfa.gov/stats/nhe-oact/tables/ (March 15, 2002).

$ 2000

192.6 449.3 72.9 416.0 178.6 225.1 203.4 1,309.4

%

14.7 34.3 5.6 31.8 13.6 17.2 15.5 100.0

$ 2001

200.5 495.6 72.3 460.3 192.0 246.5 224.2 1,420.7

%

14.1 34.9 5.1 32.4 13.5 17.4 15.8 100.0

$ 2002

212.5 549.6 77.5 504.7 208.7 267.1 250.4 1,553.0

%

13.7 35.4 5.0 32.5 13.4 17.2 16.1 100.0

Third Party Insurance

   Spread the risk Spend other people’s money Prescription for overspending

Payment Structure

 Traditional fee structure – Fee for service – Retrospective payment – Incentive to overspend  Managed care – Capitation and risk sharing – Prospective payment – Incentive to limit care

Changes in Hospital Usage and Pricing

Table 1.4 Short-Stay Community Hospital Characteristics, United States Category 1970 1980 1990 1995 1998

Beds (per 1,000 population) Admissions (per 1,000 population) Average length of stay (days) Outpatient visits (per 1,000 population) Outpatient visits per admission 4.17 144.0 7.7 657.2 4.6 Percent occupancy 78.0 Source:

Health United States,

various years

.

4.38 159.6 7.6 893.2 5.6 75.4 3.73 125.4 7.2 1,211.6 9.7 66.8 3.32 117.9 6.5 1,578.5 13.4 62.8 3.11 117.7 6.0 1,754.3 14.9 62.5

2000

2.93 117.6 5.8 15.8 63.9

2001

2.90 118.7 5.7 1,882.8 1,890.7 15.9 64.5

Growth in Managed Care

Health Maintenance Organizations, 1970-2001 Year Number Enrollment (in millions)

1970 1975 1980 1985 1 1990 1995 1996 1997 1998 1999 2000 2001 37 174 235 478 572 562 630 652 651 643 568 541 3.0 6.0 9.1 21.0 33.0 50.9 59.1 66.8 76.6 81.3 80.9 79.5 Source:

Health United States, 2002: with Chartbook on Trends in the Health of Americans,

2002. 1 Increases due in part to changes in reporting methods.

Nature of Health Care As a Commodity

     Demand is irregular Transactions characterized by information problems Widespread uncertainty prevalent Reliance on not-for-profit providers Insurance has emerged as the primary means of payment

Health System Goals

   Access to care – Who’s covered?

– What’s covered? Quality of care – Medical efficacy – Medical outcomes Cost of care – Who pays?

– How much?

The Structure of Health Economics

Key Economic Concepts

     Scarcity and choice Opportunity cost Marginal analysis Self-interest Markets and pricing

Key Economic Concepts

     Supply and demand Competition Efficiency Market failure Comparative advantage

Where the Money Comes From…

Figure 1.3 Where the Money Com es From

St at e & Local Government 13.4% Ot her Privat e 5.0% Federal Government 32.5% Out -of -Pocket 13.7% Privat e Healt h Insurance 35.4%

Where the Money’s Spent…

Figure 1.4 How the Money's Spent

Nursing Homes 6.6% Ot her M edical Product s 3.3% Administ rat ion Public Healt h 3.3% 6.8% Research & Const ruct ion 3.6% Hospit al Care 31.3% Pharmacy and Supplies 10.5% Home Healt h Care 2.3% Physicians' Services 21.9%

The Medical Care Cost Problem

Table 14A.1 National Health Care Expenditures 1980-1995 with Projections (2000, 2005, and 2008) Category

Personal Health Care (billions) National Health Expenditures (billions) Per Capita Personal Spending Per Capita National Spending National Spending as a Percent of GDP

1980

$217.0 247.3 923 1,052 8.9%

1990

$614.7 697.4 2,364 2,689 12.2%

1995

$879.3 993.7 3,220 3,638 13.7%

2000

$1,150.9 1,316.2 4,031 4,611 14.3%

2005

$1,586.4 1,799.5 5,343 6,061 15.6%

2008

$1,925.2 2,176.6 6,341 7,170 16.2% Source:

1999 Annual Reports of the OASDI and Medicare Boards of Trustees to Congress

based on data from the Office of the Actuary, Health Care Financing Administration.