GOVERNMENT AND THE

MARKET FOR HEALTH CARE

Chapter 10
Uses of Health Care Funds in the U.S.
(2010)

Source: Centers for Medicare and Medicaid Services [2012c].

10-2
Sources of Health Care Funds in the
U.S. (2010)

Source: Centers for Medicare and Medicaid Services [2012c].

10-3
 Private Health Insurance
• The Implicit Subsidy for Employer-Provided
Insurance
– World War II era price controls
– Federal tax subsidy

10-4
The Advantages of Employer-Provided
Health Insurance
• Increase the risk pool
• Reduce adverse selection
• Lower administrative costs

10-5
Employer-Provided Health Insurance
and Job Lock
• Job lock
• Health Insurance Policy Portability and
Accountability Act of 1996 (Kennedy-
Kassenbaum Act)

10-6
Cost Control and Private Insurance
• Cost-based reimbursement (fee-for-service)
• Managed care
– Capitation-based reimbursement
– Health Maintenance Organizations (HMOs)
– Preferred Provider Organizations (PPOs)
– Point-of-service (POS)

10-7
 Medicare Expenditures
(1966-2010)

Expenditures on
Medicare as a
Share of GDP

Real
expenditures
on Medicare

Source: Centers for Medicare and Medicaid Services [2012c].

10-8
 How Medicare Works
• Benefits
– Part A – Hospital insurance (HI)
– Part B – Supplementary Medical Insurance (SMI)
• Financing
– Payroll tax funds HI
– General revenues fund SMI

10-9
 Prescription Drug Benefit
• Part C – Medicare Advantage
• Part D – Prescription Drug Benefit
– Monthly premium
– Low deductible
– Donut hole
– Generous coverage for high costs

10-10
 Cost Control Under Medicare
• Medicare’s retrospective payment system
• Medicare’s prospective payment system
– Diagnosis related groups
– Resource-based relative value scale system
• Medicare Managed Care

10-11
 Medicare: Impacts on Spending and
Health
• Expenditures on health care for the elderly
• Health outcomes

10-12
 Medicaid: Overview
• Medicaid
• State Children’s Health Insurance Program

10-13
 Medicaid Expenditures
(1966-2010)

Source: Centers for Medicare and Medicaid Services [2012c].

10-14
 Financing and Administration
• Joint Federal-State financing
• State administration

10-15
 Benefits
• States obligated to offer minimum package of
benefits
• States may offer more generous benefits
• State administrative flexibility

10-16
 Medicaid: Impacts on Health
• Take-up rate
• Crowding out
• Empirical evidence: Are Medicaid expansions
effective? Crowding out and taking up

10-17
 Does Public Insurance Crowd Out
Private Insurance?

Quantity of all other goods

Quantity of all other goods

Quantity of all other goods

A. Person who places B. Person who places C. Person who is
relatively high value on relatively low value on uninsured before public
private insurance private insurance insurance

F
A F A F A

B B B

C C C
0 M Health insurance 0 M Health insurance 0 M Health insurance
Amount of publicly Amount of publicly Amount of publicly
provided insurance provided insurance provided insurance
10-18
 Health Care Reform
• Individual mandates
– The Massachusetts Plan
• Health savings accounts
– Catastrophic insurance policy
• Single payer
– International experiences
• Canada
• United Kingdom

10-19
Health Care Costs and Health Outcomes:
U.S., Canada, United Kingdom

10-20
 Final Thoughts
• Security vs. efficiency
• No free lunch
• Connection between health care expenditures
and health

10-21