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Introductiontohealthpolicy1.pptxThe Health Policy Conundrum
ARROW’S IMPOSSIBILITY THEOREM
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Arrow’s impossibility theorem
Individuals have transitive preferences.
Prefer a to b and b to c
But societies do not have transitive preferences.
Therefore prefer a to c.
Example to follow
Three people with transitive preferences
Which option does society prefer?
No way of aggregating individual preferences into transitive societal preferences.
| Person 1 | Person 2 | Person 3 | |
| First choice | A | B | C |
| Second choice | B | C | A |
| Third choice | C | A | B |
Implications of Arrow’s theorem
Arrow’s theorem suggests it does not make sense to speak of an “optimal” health policy for a country because societies may not have preferences that can be optimized in the traditional sense.
Nevertheless, political decisions do get made and various national health policies have emerged.
We will assess these policies by analyzing how well they meet three broad goals: health, wealth, and equity.
These assessments cannot reveal which policies are “optimal,” but they allow us to study the tradeoffs inherent in health policy.
THE HEALTH POLICY TRILEMMA
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The health policy trilemma
Nations have three broad goals in mind when designing health policy
Any attempt by a nation to move closer to one of these three goals necessarily involves a tradeoff that moves that nation further away from another goal.
For example, any hypothetical policy that combats adverse selection and increases equity would either increase costs or lower health for some.
The health policy trilemma
There will always be tradeoffs, so there will never be a perfect health care system where all three goals are maximized.
The health policy trilemma
Furthermore, people disagree about how important each of these three is.
Some countries value social equity very highly and are willing to pay more in taxes to achieve it.
Others place a higher value on health, and are willing to tolerate more moral hazard or monopoly pricing to secure it.
Key health care policy choices
Every policy choice involves a tradeoff between health, wealth and equity (otherwise it would be obvious and probably implemented already).
The policy options that follow are thus presented as answers to the three broad questions that any national health care system must answer:
How should insurance markets work?
How should moral hazard be controlled in public insurance?
How should health care provider markets be regulated?
HOW SHOULD HEALTH INSURANCE MARKETS WORK?
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How should health insurance markets work? (options)
Completely private insurance markets
Universal public insurance
Compulsory insurance
Employer-sponsored insurance
Means-tested health insurance
Option 1: Private insurance markets
The adverse selection model predicts that in private markets, only the frail customers are insured fully and much of the population is underinsured.
This option minimizes government involvement, but it results in maximal adverse selection.
Taxpayers are happy with low tax bills, but many citizens cannot buy full insurance.
Option 2: Universal public insurance (1st order effects)
The government provides insurance to all citizens, and finances it with taxes.
This policy option is appealing because it side-steps adverse selection and ends uninsurance.
It also furthers the goal of equity because the poor pay little or nothing for coverage.
However, with universal public insurance, steps must be taken to control moral hazard, which can explode the government budget if left unchecked.
Option 2: Universal public insurance (2nd order effects)
Higher taxes are the main cost of public insurance.
Further, most taxes distort behavior by discouraging labor and commerce, so the entire economy may become less efficient as a result.
But some argue that universal public insurance is more efficient than private insurance markets because of low overhead costs. Higher taxes are one cost of public insurance.
Option 3: Compulsory insurance
A mandate confronts adverse selection by effectively banning it.
But a mandate is not free for governments and does not absolve them of regulating the market.
A mandate can be expensive, and many citizens cannot afford it.
A mandate must also be carefully defined or it may be completely ineffective.
Option 4: Employer-sponsored insurance
Under such a system, employers are required or encouraged to offer a private insurance contract to all of their employees.
Job-specific human capital provides a strong incentive for healthy employees with a low risk of illness to pool with high risk, unhealthy employees. This mitigated adverse selection.
Drawbacks: can create labor market inefficiencies, and not appropriate for unemployed populations (children, retirees, disabled).
Option 5: Means-tested insurance
Subsidized health care for the poor. Example: Medicaid in the U.S.
It attempts to improve equity by providing health care to those who otherwise could not afford it.
The costs of expanding subsidized insurance for the poor are basically identical to the costs of expanding public health insurance in other ways: higher tax burdens and greater moral hazard.
HOW SHOULD MORAL HAZARD BE CONTROLLED?
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How should moral hazard be controlled?
In a private market, private insurers compete to offer customers the optimal mix of insurance coverage and moral hazard control.
But when governments enter the insurance market, lawmakers and policymakers assume responsibility for these tough decisions.
How should moral hazard be controlled?
Cost effectiveness analysis
Cost sharing
Gatekeeping and queuing
Prospective payments
Option 1: Cost-effectiveness analysis
CEA entails gathering information about treatment options and determining which options produce the most additional health for the least cost.
CEA limits moral hazard by reducing spending on inefficient, costly treatments.
But CEA also makes insurance contracts less “full” for patients, because some services are no longer covered.
This tradeoff can be worthwhile because it makes the entire system cheaper.
Option 1: Cost-effectiveness analysis
But denying coverage for some treatments may be unappealing for political reasons.
While some governments have embraced CEA, others have reacted by shunning it altogether.
Example: U.S. Medicare is forbidden by law from using CEA in its coverage decisions. Medicare covers any medically effective treatment, no matter how expensive.
This strategy obviates gut-wrenching decisions about treating sick patients, but it also allows moral hazard to flourish.
Option 2: Cost sharing
Cost sharing may be accomplished through the use of deductibles, coinsurance, and copayments.
These are out-of-pocket costs that insured patients pay when they receive health care.
Cost sharing controls moral hazard in a way that is sometimes more politically palatable than CEA, but it also makes health care less affordable for patients.
This can undermine equity.
Option 2: Cost sharing
Example: the US Medicare system does not fully cover patient costs.
As of 2012, Medicare enrollees must pay the first $1,156 dollars of expenses for each hospital visit and the first $140 of outpatient clinic expenses each year.
They must also start paying $289 per day once a hospital stay lasts longer than 60 days.
This forces enrollees to either economize or purchase supplemental private insurance.
Option 3: Gatekeeping and queuing
Gate-keeping entails a tiered system of doctors that patients must visit in a specified order.
This keeps costs down by eliminating frivolous appointments and focusing limited resources on patients who truly need care.
Public insurance systems also control costs by limiting the total number of specialists available.
However, when demand for specialists’ services outstrips supply, queues result.
Option 3: Gatekeeping and queuing
Usually queues are a sign of a market inefficiency, but in the presence of moral hazard, queues might be an indication of inflated demand.
If so, limiting the number of specialist may save money without sacrificing health.
The hassle of waiting in line constitutes a non-financial cost that patients must “pay” for care.
Queue-based systems may be more equitable than a cost-sharing system if it means that rich and poor alike must wait for care.
But queuing systems risk provoking political backlash.
Option 4: Prospective payments
The traditional method for paying for health care is retrospective payments.
Such payments are made after a service is rendered, and the amount paid depends on how much health care is received.
In a fee-for-service system, doctors have no reason to deny patients a service because the costs are too high.
This system fosters trust between patients and doctors, but creates incentives for physician-induced demand.
Option 4: Prospective payments
An alternative system designed to reduce moral hazard is prospective payments.
With prospective payments, payments are made to doctors or hospitals before health care is delivered.
Charges are not based on procedures performed, but on the condition of the patient who is admitted.
Example: A prospective-payments system will pay hospitals a fixed amount for treating any heart attack patient. This gives hospitals incentives to economize in their treatment of heart attack patients, because they no longer receive extra payments for doing extra work.
Option 4: Prospective payments
Since the early 1980s, governments around the world have embraced prospective payment schemes as an effective way to reduce moral hazard and physician-induced demand.
But prospective payment systems come at a price.
Doctor-patient relationships turning adversarial
In one study conducted after the U.S. Medicare program implemented prospective payments in 1984, patient mortality increased significantly at a subset of hospitals in the months after the transition.
HOW SHOULD HEALTH CARE PROVISION BE REGULATED?
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How should health care provision be regulated?
Recall the maladies of private health care markets:
Monopoly pricing
Monopoly rents for doctors and specialists
Physician-induced demand
What sets of policies can combat these maladies without creating new inefficiencies that are even worse?
How should health care provision be regulated? (options)
Public provision
Private hospital markets
Government-set prices
Option 1: Public provision
Under this approach, hospitals are government-run and financed by taxes, and physicians are employed by the government.
This approach could reduce costs of medical care and improve quality of care by banishing oligopoly power and medical arms races.
Some also suggest that nationalized systems are less efficient than private markets.
Governments are vulnerable to agency problems, because government workers may have less incentive than private workers to ensure the success of their hospital.
Government systems also lack clear feedback mechanisms to correct them if they are not succeeding.
Option 1: Public provision
Empirically, countries with nationalized systems seem better at controlling health care costs.
However, the common charge against government-run hospitals is that they offer lower quality health care.
Example: Countries with public hospitals suffer long queues.
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Option 2: Private provision
This approach allows for competition among hospitals and preserves the incentives for hospitals to operate efficiently.
However, in private markets, too little competition leads to market power and the accompanying social loss due to high prices and underprovision.
Conversely, too much competition can exacerbate inefficient quality competition, lead to a medical arms race, and increase health care costs.
Option 2: Private provision
Another concern is that some populations – like the poor and uninsured – will lack access to care.
One solution is to give tax breaks to non-profit hospitals, which historically have attended to the poor and the vulnerable.
Most developed countries also require hospitals to provide emergency care to incoming patients regardless of their citizenship status or ability to pay.
Such “last resort” laws promote equity by ensuring a minimum level of care for everyone, but they also impose costs and deter hospitals from building emergency rooms and trauma centers.
Option 3: Government-set prices
By setting prices, governments aim to prevent private providers from exercising market power and keep health care affordable.
In theory, such price controls could contain hospital costs, but government set prices could also induce some perverse incentives.
Unless prices are set properly, treatments priced below marginal costs may not be offered, while the most profitable services may be over-prescribed.
COMPARING NATIONAL HEALTH POLICIES
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Three health policy models
Beveridge model
Bismarck model
American model
Beveridge model
Single-payer insurance
Public provision of health care
Very little cost sharing at point of service
Emphasis on equity
Examples: UK, Scandinavia, Canada, Australia, NZ
Bismarck model
Compulsory private insurance
Private hospitals and doctors
Strict price controls set by government
Balances equity and wealth
Examples: Germany, Japan, Switzerland, Netherlands
American model
Private markets in a central role
No mandate for universal insurance*
No price controls
Public insurance for select groups: elderly and poor
Emphasis on wealth
Examples: unique to the US
Comparing national health policies
Comparing a health outcome (like life expectancy) and expenditures can serve as a kind of report card for a nation’s health care system.
How much health is achieved at how much cost to wealth?
Does not provide a meaningful assessment of equity.
Comparing national health policies
But what if:
different countries have different inherent levels of health?
people in different countries value health differently?
countries differ in how much health inequality exists?
If countries differ in any of these ways, then the preceding graph is insufficient to render judgment on the effectiveness of health systems in different countries.
Differing inherent levels of health
It is not clear whether all countries share the same health production frontier (with some countries like the U.S. inefficiently below the frontier) or whether the U.S. is on a completely different HPF than the European countries.
One possibility is that the U.S. and other countries have different populations with different inherent health states. If so, the U.S. would be on a different HPF than the other countries.
Differing inherent levels of health
In the first figure, the US shares the same HPF as the UK and Switzerland, so its health economy is operating inefficiently.
In Figure B, the US sits on a different HPF. Here, the U.S. is doing as well as it can given its inherent unhealthiness.
Differing preferences for health
Even if a country is productively efficient, and hence on its own health production frontier, this does not imply that the country is spending the optimal amount of money on health care.
Example: It is possible that the marginal dollar spent on education or parks produces more utility than the marginal dollar spent on health care.
Such a country is allocatively inefficient since it spends too much on health care relative to other activities.
In such cases, shifting money to other activities will reduce health, but increase the overall welfare of the population.
Conclusion
While government policy can address some of the problems created by information asymmetries, as we have seen, it is impossible to solve them all simultaneously.
Countries that have adopted policies that solve the adverse selection problem face a significant challenge in controlling moral hazard.
By contrast, in the U.S. a large segment of the population is without health insurance coverage, in part because its health policies do not fully solve the adverse selection problem.
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