The Economics of US Health Reform

A Global Perspective

Diane M. Dewar

• Publisher: Routledge
• Year: 2018
• ISBN:
  9781317212065
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The health care field is currently experiencing a great deal of change, including advances in medical technology, the development of new health care financing mechanisms, and the transformation of organizational arrangements.

This text studies the health care system in the US, and selected other countries, through the lens of economics and policy. It presents numerous real-world examples and biographies of key figures in order to help students to grasp the importance and relevance of health reform and health policy issues. The book conveys the essence of current reform issues in the US, and places them in a global comparative context.

This accessible book will be key reading for advanced undergraduates in public health and students in health-related graduate courses, including those that come to the subject without much prior knowledge of health economics or other policy methods.

PART I

What Is Health Care?

1

Overview of US Health Care System Issues

System Issues

The health system in the United States is subject to complicated relationships between providers, consumers and financers of care. The concerns of the system revolve around three issues: cost, quality and access. Reform efforts have increased exponentially at the national and state levels, as fewer Americans have financial access to care, with increased system-level expenditures resulting in nonoptimal health outcomes. These reform efforts attempt to correct for the issues that lead to poor access, higher costs for technologically driven care, and variable quality in the most advanced health care system in the world.

Surveys of American health care consumers have found that the majority of consumers rate their health care as “excellent” or “very good.” Those with poorer ratings had, among other indicators, no health insurance and no regular health care providers (Asch et al., 2006; Chou et al., 2010). These survey results are consistent between telephone and online surveys of Americans (Bethell et al., 2004). However, this high level of satisfaction can be a double-edged sword, in that increased consumer satisfaction with care is associated with increased inpatient health care utilization and pharmaceutical expenditures, and increased mortality (Blendon et al., 2004; Blendon et al., 2006; Fenton et al., 2012). This implies that the perceived improvements in health care can lead to associated increased health care expenditures in the system at the expense of other sectors and needs in the economy.

On the provider side, US physicians note that they are enjoying higher quality health care and increased autonomy in many settings but lower job satisfaction due to the primarily profit-driven health care in this system (Tyssen et al., 2013; Scheurer et al., 2009). As the system becomes more strained, providers spend more time and effort, not on individual patient needs, but on more organizationally driven incentives.

Health Care

Experts themselves are quite divided on the cause of rising health care expenditures. Of the many drivers of costs, many believe that the push occurs from technologically driven care, while others point to the broader role of insurance and health care in areas previously considered to be social or lifestyle problems (Blumenthal et al., 2013). However, since 2000, price – not the demand for services – produced 91% of cost increases and chronic illnesses in general – not among the elderly – have increased expenditures in the health economy (Moses et al., 2013). Three factors that have produced the most change in the system are the consolidations of hospitals and other entities, the growth of information technology where value is elusive and the patient as consumer where social media drive demands for newer and more expensive care (Moses et al., 2013). Regardless of the causes of rising health care expenditures, the United States trails behind many countries in health status measures.

In the USA, the health sector is a leading employer. As seen in 2011, 15.7% of the domestic workforce is in health care related occupations, and spending passed the US$ 2.7 trillion mark which is over 17.9% of the US gross domestic product (GDP) (Moses et al., 2013). Much of the expenditures, 31% across all spending in health care, are a result of administrative waste (Evans, 2013). While growth in spending has slowed since 2002 to a rate of 3% per year, the growth of this sector exceeds any other sector of the economy (Moses et al., 2013). This stabilization is due to the very slow growth in use and intensity of care since 2010 (Martin et al., 2012; Doherty, 2011; Heffler et al., 2004; Longo and Daugird, 1994; McGlynn et al., 2003; Shaller, 2004).

Financial barriers to health care exist in the US. Prepayment and voluntary health insurance, largely a result of employer-based insurance, have reduced the financial burdens for many but not all Americans. Medicare, a federal insurance program for the elderly and those with specific conditions such as end stage renal disease, and Medicaid, a coordinated federal and state-level insurance program for the poor, have also helped. Yet, even with these public programs, financial problems remain. There are two kinds of barriers: the ability to pay for care, and the impact of payment on family income.

In some cases, the lack of money to pay for care given required expenditures on housing, clothing and food, will prevent citizens from seeking care. In other cases, the monetary conditions result in a psychological barrier: individuals will postpone seeking care in the hope of avoiding an expenditure that would be large in relation to disposable income. In yet another case, people may seek care and pay for care with a significant impact on disposable income.

It is necessary to distinguish between these different situations if a public policy were developed to meet various financial problems. The public is concerned not only about the impact of the income distribution on the utilization of health care, but also about the impact of the utilization of and expenditures on health care on the income distribution itself. It is the second problem that calls for specific financing programs for health care rather than the provision of money to achieve a more equal distribution of pre-illness income (Fein, 2005). There are reasons for the view that targeted dollars are required: 1. There is evidence that taxpayers prefer to support programs not people. The categorical, targeted legislation to the “deserving group” fares better than does the broad and all inclusive. Taxpayers want to retain a measure of control over the uses to which their dollars are put. 2. Unless funds are channelled through a single payment mechanism, it is difficult to achieve important changes in the health care delivery system. 3. In the absence of government intervention, private expenditures on health care may be sub-optimal because of externalities (i.e, my well-being is affected by the next person’s state of health and the next person does not consider that when he or she determines their own health care expenditures).

Currently, the individual’s health care costs are often met both by out-of-pocket expenditures and private voluntary health insurance benefits. Out-of-pocket expenditures occur because voluntary health insurance coverage usually involves deductibles and copayments, is not comprehensive in its scope, and sets upper limits on benefits. This approach has a long tradition, and has found its way into public programs such as Medicare. Deductibles and copayments are supported on two rationales. The first is that the larger the amount the person must pay on an out-of-pocket basis the smaller the premium charge (or tax) may be. The second rationale is based on long established economic principles. It is assumed that if the person is required to share in the costs of care at the time that the care is sought then the utilization of health care will be reduced. In the absence of deductibles and copayments the consumer considers the care to be free. At that zero price, the person will seek more care than if required to pay a small share of the costs, which is sufficient to deter the person from seeking unnecessary care but insufficient to deter the person from seeking care when required. This second rationale is closely associated with another that is put forward, which is that if the consumer is required to pay a share of the costs, then the person will be more cost conscious than would otherwise be the case. This cost-consciousness in turn will induce providers of care, including hospitals, to exercise price restraint and compete on a price basis. There is little information concerning the degree that utilization would be affected by different copayments and deductibles (Phelps and Newhouse, 1972). There is also a lack of information that would enable the assessment as to whether an increase in utilization is warranted. Costs of travel and waiting time, possible loss of work income, fear, concern and other factors associated with the visit to a provider, may lead people to underutilize health care. If utilization should be higher – even if it was at a zero price – one would not want to erect a financial deterrent.

There is also some doubt concerning the effectiveness of deductibles and copayments as cost-control mechanisms. Even in spite of financial barriers, the health economy has not had an enviable cost-control record. The largest savings on the expenditure side are likely to come as ways are found to affect utilization rather than price. This is because we know little about how prices are determined in the marketplace. Since utilization is largely provider driven rather than consumer determined, efforts to contain the total costs of a program require that the programs be structured to provide incentives to change provider behavior. The problem is compounded by the fact that the provider and consumer help to determine whether the insured service is utilized. If some services are insured and others are not then there are distortions in utilization. In the health economy of the US, the system is called upon to insure expensive procedures, which leads to creating financial incentives for the use of higher cost interventions. Therefore, the health economy is almost inevitably led to comprehensiveness of coverage, in part to prevent unfavorable impacts on the allocation of resources within the medical system and in part to achieve equity in the allocation of resources.

Another element of health care that is paid for by the consumer on an out-of-pocket basis are those costs that occur after the insurance has reached the upper limits on the number of days of hospital care or on the total costs that will be covered. In many ways this is the anomaly in the insurance field. Had health insurance not originally been developed by the hospital sector as a way of protecting itself from bad debts, we would have larger deductibles and greater coverage for more expensive services. Insurance, in general, tries to protect against high expenses that occur infrequently and in situations that are out of the control of the consumer. However, catastrophic coverage is often lacking. The costs associated with exceeding the upper limits of insurance coverage may not significantly affect the distribution of health care costs by income class since upper limits of coverage are rarely reached. However, the costs are high for those who must bear them and require relief.

Due to the increasing size and importance of the health care sector, more scrutiny is being placed on the costs, quality of and access to health care and the resulting health outcomes than ever before.

Health Status

In public health terms, the World Health Organization has defined health as “a complete state of physical, mental and social well-being, and not merely the absence of illness or disease.” Population health is a focus of public health but has a very general connotation. Kindig and Stoddart (2003) have defined it as “the health outcomes of a group of individuals, including the distribution of such outcomes within the group.” This is an emerging area, with some debate as to whether there is a difference between population health and public health (Kindig, 2007). Regardless of how population health is defined or measured, the concept is essential for determining and reducing health disparities. Regardless of disparities, according to the Centers for Disease Control and Prevention (CDC) (2014), indications show that there is a slow but steady progress in many of the priority health issues in the United States. The age adjusted rates of death for most causes are declining, but in some cases there are increases due to the growth and diversity of the US population. However, protective factors such as cholesterol level control are only practised in a minority of the population.

Individual health and population health can be viewed as independent concepts but are really more related than previously thought. For example, individual health status is a function of lifestyle choices, sociodemographics, environmental factors, biology and medical care. Many of these determinants are shaped by the communities and environment in which a person lives (Arah, 2009). In 2012, based on the National Health Survey, 61% of adults over the age of 18 were in excellent or very good health, with the largest prevalence of morbidity due to heart disease or hypertension (Blackwell et al., 2014; NCHS, 2015).

Individual health status can be measured by a physical examination of the person along any of several dimensions, such as the presence of illness, risk factors for mortality or morbidity and overall health as determined through visual and biological testing. Individual health status may also be measured through individual perceptions on a variety of dimensions, such as physical disability, emotional status, pain assessment and overall perception of wellness.

On both the population and individual perspectives, the health status of the US population is mediocre, with increasing incidence and prevalence of chronic disease across the lifespan and relatively high infant mortality rates. These issues also drive the increased interest in reforming the American health care system.

The analyst is likely to examine the issues such as the impact of health care on health in terms of group phenomena. The analyst is interested in the rate of return in what happens on average. The provider and consumer of care are far more concerned with the individual case. The individual’s behavior is responsive to the fact that an intervention can make a difference in one case rather than to the fact that it makes a difference in only one percent of the cases. If each individual believes or hopes that he or she may be the one who will benefit and if it is not known who the one who benefits will be in the end, people will require that the health care service be available to all who might benefit. The provider who is trained to advocate for the patient, and the consumer will focus on the fact that in one percent of the cases there will be a benefit. Neither will want to be denied services needed for the particular case at hand. That case may be one in one hundred.

This is one of the basic difficulties in formulating and administering public policy in the field of health care. Market mechanisms are rejected that might allocate resources to and within the health economy, in part because market results do not reflect societal values. As a society it is thought that health care is a right, because of the belief that health care should not be rationed in terms of income. As a consequence, as a society we need to develop other allocative and rationing mechanisms.

Further, when the consumer hears the analyst state that in light of the rate of return, the society need not devote additional resources to the health economy, the consumer recognizes the constraint on resources to imply rationing. Existing US health care financing mechanisms provide little assurance that the rationing mechanism will not be income related. Health care in other countries is rationed, such as in cases where a central government allocates given amounts of resources to the health economy, and when this amount is less than what the consumer or provider would like to utilize some rationing takes place. The issue is not rationing but the nature of the rationing process. The rationing process can be related to income or medical need.

The issues raised here are important in considering public policy. It is questioned whether the government should allocate resources as the public might prefer, even if those resources will not accomplish that which the public desires. What, for example, is the right mix for a public insurance program: that which the analyst will deem to improve health or that which the poor value highly? The two goals are not always the same.

Summary

The goal of this book is to demonstrate how economics can provide insights into the study of human behavior as it is impacted by constraints and financial incentives. As concerns rise over the increasing size of the health economy relative to other sectors, as well as the relatively poor health of the population, economic analysis becomes an increasingly important tool in the study of factors that affect the health and health care of the American public.

References

Arah, A.O. (2009) On the relationship between individual and population health. Medical Health Care Philosophy 12(3): 235–244.

Asch, S.M., Kerr, E.A., Keesey, J., Adams, J.L., Setodji, C.M., Malik, S. and McGlynn, E.A. (2006) Who is at greatest risk for receiving poor-quality health care? New England Journal of Medicine 354(11): 1147–1156.

Bethell, C., Fiorillo, J., Lansky, D., Hendryx, M. and Knickman, J. (2004) Online consumer surveys as a methodology for assessing the qu...