Healthcare Issues

I. Positive vs Normative
In any heated debate, pay attention to whether the statement being made is POSITIVE or
NORMATIVE.

Positive Statements/Analysis = objective, value free

- describe the world as it was, is, or will be
- can be found to be false or inaccurate … but still remains a positive statement/analysis

Normative Statements/Analysis = subjective, value judgment

- describes how the world ought to be
- cannot be found to be false or inaccurate… because it is a matter of opinion

The line between the two may be fuzzy…context matters.

Examples:
It is time for healthcare reform. --- normative
In order to reduce government spending on Medicare, healthcare reform is needed. --- positive
The public option for health insurance would not cover abortion. --- positive
The public option for health insurance should not cover abortion. --- normative
Healthcare needs to be made more affordable. --- normative
Many people believe healthcare needs to be made more affordable. --- positive
Estimates suggest that the current healthcare bill will reduce the deficit. --- positive

A good economist always starts with positive analysis.

When it comes to policy changes, people often give normative reasons.

It’s the right thing to do to provide health insurance to children of poor families.

Good economists give positive reasons.

When poor children don’t have access to medical care, they are less successful in school, which
can be a contributing factor to perpetuating the cycle of poverty. Providing health insurance to
children of poor families is an option for combating this problem.

II. Overview

It is important to note that we aren’t starting from scratch. We don’t get to design a new healthcare
system from the ground up. The current goal of reform can’t be to obtain the ideal healthcare system –
the goal would to be to improve the system we have now. There are benefits to doing so and also costs,
and “improve” means different things to different people.

Let’s start with the hot issues of today: coverage and cost. Then let’s briefly look at government
intervention in the healthcare sector so far.

All of this is going to be positive analysis. You get to decide for yourself the normative prescription you
favor. And remember – this is just a crash course in the current hot button issues. We could devote an
entire semester to the economics of healthcare.
III. Hot Issues: Coverage and Cost

No doubt you have heard about the urgent need to extend health care coverage to the uninsured and also
to contain the rising cost of healthcare. Before we can proceed, we need to take a step back and see
where we’ve come from.

A Brief History of Health Insurance in the US

~ The first insurance plans were introduced during the Civil War. You could buy coverage against
accidents while traveling by rail or steam.
~ The first group policy was written in Boston in 1847.
~ The first individual policies emerged around 1890.
~ Up through the early 1900s, if you were sick you called a doctor to your home and paid them for their
services. Even surgery was still done at home.
~ In 1929 the first “modern” group health policy was written in Dallas.
~ In 1932 Blue Cross and Blue Shield (nonprofit) negotiated discounts with doctors and hospitals in
exchange for increased volume and prompt payment.
~ Stabilization Act (1942): allowed large corporations to offer fringe benefits without violating the
freeze on wages. This act stimulated the rise of employer-provided health benefits.
~ IRS tax code (1954): Makes employer contributions to employee health insurance tax deductible for
employees.
~ In 1965 Medicare and Medicaid were created.
~ Employee Retirement Income Security Act (1974): exempted health care benefits from many state
taxes and regulations.

A. Healthcare is getting more expensive

As it is now, the US healthcare system is a “Third Party Payer” system.

- first party: patients who consume care
- second party: doctors/hospitals providing care
- third party: party who actually pays for the care

Most Americans are covered by health insurance. (remember – these are estimates!)
In 2008: US Population 304 million
255.1 million had health insurance

With insurance, the demand for healthcare services increases. This pushes prices up. When
someone else is writing the check, consumer behavior is not constrained by higher prices. But
rising prices due to rising demand do translate into higher insurance costs.

Insurers negotiate the rates that they will pay for particular services. Different insurers pay different
amounts. A person paying out-of-pocket will be charged a different rate than an insurance company –
for the same procedure. It is nearly impossible to figure out how much something actually costs.

The lack of transparency in pricing means prices are no longer reliable signals in this market.
B. The Uninsured

In 2008, 46.3 million Americans did not have health insurance.

~ about 8 million were under 18

Four States Account for around 40% of uninsured: Texas, Florida, California and New York1

2
The Percent Uninsured Differs Widely by State (Ages 18-64)
% uninsured in % Involuntarily % voluntarily
the state uninsured uninsured
Texas 30.1 18.4 11.7
Louisiana 28.8 16.4 12.3
Florida 27.3 15.8 11.5
Arkansas 26.4 17.7 8.8
California 24 12.7 11.3
New York 18.9 10.2 8.7
New Jersey 18.9 9.3 9.7
Illinois 18.1 9.5 8.6
Massachusetts 13.6 6.4 7.3
Pennsylvania 12.9 6.9 5.9
Connecticut 12.5 5.9 6.6
Minnesota 11.2 5.6 5.6

The Characteristics of the Insured and Uninsured Are Very Different 3

Privately Uninsured
insured Total Voluntary Involuntary
% Female 51 45.2 38.6 50.2
% ages 18-34 32.7 50.4 48.7 51.7
% HS dropout 7.1 27.4 20.4 32.7
% White 74.2 47.2 53.7 42.4
% Black 9.7 14.9 12.7 16.6
% Hispanic 9.5 31.1 26.3 34.7
% Foreign born, non-citizen 6.4 24 19.2 27.7
% Not married, no children 29.6 48.8 53.5 45.2
% never worked last year 13.5 29.9 19.5 37.8

The “problem” of people being uninsured varies by state. Also, the uninsured are uninsured for
various reasons and differ in their characteristics.

1
WHO ARE THE UNINSURED? An Analysis of America’s Uninsured Population, their Characteristics and Their Health
June E. O’Neill and Dave M. O’Neill, Baruch College, CUNY For the Employment Policies Institute
2
Ibid.
3
Ibid.
C. Insurance and Jobs

The majority of Americans 64 and younger get their health insurance through an employer (just over
60%). When you change jobs, you change insurance plans. If you lose your job, you lose your
insurance (laws will let you continue on your plan but you pay for all of it - COBRA). This is a real
consideration for many people.

The fact that health insurance is not portable can lead to “job lock” or people losing benefits when
their employment status changes.

IV. Government Intervention

Let’s look at some of the key ways that the government has gotten involved with the healthcare industry.
A. Tax treatment of employment-based health insurance
B. Medicare, Medicaid, and SCHIP
C. Regulations

Question to ponder: What might happen if policies were changed?

A. Tax treatment of employment-based health insurance

As we just learned, the Stabilization Act (1942) and the IRS Tax Code (1954) set in motion something
big. Most people get their health insurance through their jobs and third party payer systems encourage
utilization of healthcare services [we are not saying that utilization is inherently “good” or “bad” – we
are just describing].

Tax code may be boring to read but it has a HUGE impact on people’s behavior. Here is what happens
when suddenly health insurance is tax exempt.
Suppose you are taxed at 20%.
$1 can buy you $1 worth of health benefits pre-tax.
$1 can buy you 80 cents worth of goods and services post-tax.
The price of health care has decreased relative to other goods and services.

People purchase more coverage and consume more health care than they otherwise would. [again,
we are simply describing]

Question for you to ponder: Do we want to treat health care differently than other goods and services
when it comes to taxes? Why or why not?

Then again, as is often the case, the answer to that question is a moot point when we look at what would
happen if we undid that policy.
- People would face an estimated $189 billion in extra tax burden (2004).

YIKES! That isn’t likely to be politically feasible to accomplish.

So, we will likely continue to have the tax exemption.

Given the current system, are there any changes that could be beneficial?

An option to consider: Health Savings Accounts with catastrophic policies

How it would work
~ people (or employers) could put away money for healthcare, tax free
~ buy a catastrophic policy (high deductable, policy kicks in for a big, unforeseen event)
~ pay for all healthcare out-of-pocket
~ allow money to roll over for future use

Benefits
~ people are more careful consumers when they spend their own money
~ portable
~ small businesses that can’t afford to buy policies for employees could still contribute

Costs
~ additional administrative burden of approving eligible purchases
~ reduction of tax revenue

B. Medicare, Medicaid, and SCHIP

1. What are they?

Medicare is the health insurance that all Americans 65 and older are eligible for through the Federal
government. Some disabled people under age 65, and people of all ages with End-Stage Renal Disease
(permanent kidney failure treated with dialysis or a transplant) are eligible.

In general, Medicaid covers low-income people, children, the disabled, the elderly, pregnant women
living under the federal poverty level, and those who are eligible to receive federal income assistance.
Medicaid is a state administered program and each state has its own eligibility guidelines.

The State Children's Health Insurance Program, or SCHIP, was established in 1997 by the federal
government to provide health insurance to children in families at or below 200 percent of the federal
poverty line.

2. What are the issues?

Medicare
~ one-size-fits all package of benefits for ALL senior citizens
~ Congress decides on benefits and payments
~ only pay premium on Part B (physicians) and Part D (prescription drugs), not on Part A (hospitals)
~ if you want to opt out, you lose your past and future Social Security benefits
~ not fiscally sustainable
~ if Medicare covers a service, you can’t get it on a “private” basis
~ was supposed to reduce administrative cost … hasn’t done so

Medicaid and SCHIP

~ “Samaritan’s Dilemma” – any effort to help the needy will induce others to take advantage of that
assistance (hard for government programs to be discerning)
~ the more a state spends, the more money they get from the Federal Government
~ perverse incentives (ex: if a state spends all its SCHIP money it just asks for more… and gets it)
 ~ estimated 20% of people who are eligible opt for private insurance instead

3. Any options?

Medicare

Question for you to ponder: What are the pros and cons to having the Federal Government pick up the
tab on healthcare for everyone 65 and older? Is this a system we want to keep?

Whether or not you want to keep Medicare, it is not fiscally sustainable if something doesn’t change.
~ cut benefits, raise taxes (not too popular)
~ allow seniors to opt out and still keep their Social Security
~ premiums can be “means tested” -- seniors with higher lifetime earnings would pay more (couldn’t
spring this on current seniors… would have to be phased in)
~ move to a voucher system for buying insurance (complicated… but can work but … however the
devil is in the details of course)

Medicaid and SCHIP

Question for you to ponder: How much of a “safety net” is ideal? How does your answer change if you
are talking specifically about people under 18? Given the existence of the Samaritan’s Dilemma, would
you err on the side of helping too many people or not enough?

~ reform similar to 1996 welfare reform? block grants to the states?

~ do we need two separate programs?

C. Regulations

The government regulates many aspects of the healthcare industry:

Medical Professionals
Facilities
Insurance
Pharmaceuticals and medical devices
Medical Liability

The healthcare industry has a large amount of information asymmetries. That is, in any given situation,
one party has more information than another.

Sometimes it is argued that regulation is needed to balance the asymmetry.

However, often the producers are the ones pushing for the regulations.
~ limits on “scope-of-practice”
~ Certificate of Need laws
~ can’t buy insurance across state lines