Health Policy Issues: An Economic Perspective / Edition 5

by Paul J. Feldstein

Overview

This fifth edition of Health Policy Issues tackles these questions and provides short discussions on many other topics related to financing and delivery of health services. This book will help readers understand the economics underlying the issues and politics of healthcare. It stimulates critical thinking about issues involving physicians, nurses, health insurance, Medicare and Medicaid, competition, the increase of medical expenditures, prescription drugs and the pharmaceutical industry, and more.

This edition includes thoroughly updated chapters, figures, and tables as well as a new chapter on comparative effectiveness research and much new information on healthcare reform. A summary of the Patient Protection and Affordable Care Act of 2010 is included in the appendix.

Product Details

ISBN-13:	9781567934182
Publisher:	Health Administration Press
Publication date:	08/01/2011
Edition description:	Older Edition
Pages:	500
Product dimensions:	7.20(w) x 10.20(h) x 1.40(d)

About the Author

Paul J. Feldstein, PhD,, has been a professor and the Robert Gumbiner Chair in Health Care Management in the Paul Merage School of Business at the University of California, Irvine, since 1987. Prior to Irvine, he was a professor at the University of Michigan in both the Department of Economics and the School of Public Health. In addition, he served as the director of the Division of Research at the American Hospital Association. Dr. Feldstein has written seven books, used widely in classrooms across the country, and more than 70 articles on healthcare, health economics, and health policy. He received his PhD from the University of Chicago.

Books published by Health Administration Press:

Health Policy Issues: An Economic Perspective, Seventh Edition

Read an Excerpt

CHAPTER 1

THE RISE OF MEDICAL EXPENDITURES

The rapid growth of medical expenditures since 1965 is as familiar as the increasing percentage of US gross domestic product (GDP) devoted to medical care. Less known are the reasons for this continual increase. The purpose of this introductory chapter is threefold: (1) to provide a historical perspective on the medical sector; (2) to explain the rise of medical expenditures in an economic context; and (3) to set forth criteria for evaluating the Patient Protection and Affordable Care Act (ACA), which has been the most significant healthcare legislation since Medicare and Medicaid.

Before Medicare and Medicaid

Until 1965, spending in the medical sector was predominantly private — 80 percent of all expenditures were paid by individuals out of pocket or by private health insurance on their behalf. The remaining expenditures (20 percent) were paid by the federal government (8 percent) and the states (12 percent) (see exhibit 1.1). Personal medical expenditures totaled $35 billion and accounted for approximately 6 percent of GDP — that is, six cents of every dollar spent went to medical services.

Two important trends are the increasing role of government in financing medical services and the declining portion of expenditures paid out of pocket by the public. As shown in exhibit 1.1, the government paid 47.8 percent of total medical expenditures in 2016; the federal share was 38.6 percent and the states contributed 9.2 percent. Meanwhile, the private share dropped to 52.2 percent (from 79.5 percent in 1965); of that amount, 12.4 percent was paid out of pocket (from 52.4 percent in 1965).

The Greater Role of Government in Healthcare

Medicare and Medicaid were enacted in 1965, dramatically expanding the role of government in financing medical care. Medicare, which covers the aged, initially consisted of two of its current four parts — Part A and Part B. Part A is for hospital care and is financed by a separate (Medicare) payroll tax on the working population. Part B covers physicians' services and is financed by federal taxes (currently 75 percent) and by a premium paid by the aged (25 percent). Medicare Part C and Part D have since been added. Part C is a managed care option, and Part D is a prescription drug benefit — financed 75 percent by the federal government and 25 percent by the aged. Parts B, C, and D are all voluntary programs.

Medicaid is for the categorically or medically needy, including the indigent aged and families with dependent children who receive cash assistance. Each state administers its own program, and the federal government pays, on average, more than half of the costs. The ACA, enacted in 2010 and implemented in 2014, expanded Medicaid eligibility from 100 to 138 percent of the federal poverty level (FPL). The federal government reimburses states that choose to expand Medicaid for up to 90 percent of their costs for the newly eligible enrollees.

The rapid increase in total national health expenditures (NHE) is illustrated in exhibit 1.2, which shows spending on the different components of medical services over time. Since 2000, NHE per capita has risen from $4,884 to $10,365. During this time frame, hospital care and physician and clinical services — the two largest components of medical expenditures — surged from $416 billion to $1.083 trillion and from $291 billion to $665 billion, respectively. These data indicate the enormous amount of US resources flowing into healthcare.

In 2016, $3.338 trillion (or 17.9 percent of GDP) was spent on medical care in the United States. From 2000 to 2016, these expenditures climbed by about 9 percent per year. Since peaking in the early part of the decade, the annual rate of increase in NHE has been declining, although it remains above the rate of inflation. These expenditures continue to rise as a percentage of GDP.

The Relationship Between NHE and GDP

The growth in medical expenditures over time can be illustrated by comparing the rate of increase in NHE per capita to the rate of change in GDP per capita. (To show the relationship between the two series more clearly, a five-year moving average of the rates of change is used.) If NHE per capita is rising faster than GDP per capita, the former is becoming a larger share of GDP. If the two series are moving together, then changes in the economy and health spending are closely related. Exhibit 1.3 shows the relationship between the two series from 1965 to 2016.

The only major divergence between NHE per capita and GDP per capita began in the mid-1990s. Medical expenditures increased at a slower rate because of the growth of managed care (which emphasized utilization management) and price competition among providers participating in managed care provider networks. By the end of the 1990s, managed care's cost-containment approaches lost support because of public dissatisfaction with managed care's restrictions on access to specialists, lawsuits against managed care organizations (MCOs) for denial of care, government legislation, and a tight labor market that led employers to offer their employees more health plan choices. As a result, medical expenditures rose at a more rapid rate.

The decline in the annual NHE rate increase from about 2008 to 2013 (exhibit 1.3) can be attributed to the Great Recession, slow economic recovery, high unemployment levels, a large number of uninsured, a decrease in the number of employers paying for employee health insurance, and the rapid spread of high-deductible health plans (Fuchs 2013).

NHE is likely to rise at a slightly faster rate in the coming years as the economy continues to recover; more baby boomers become eligible for Medicare; new technology and specialty drugs that improve the quality of life (but are higher in cost) are developed; and increased demand occurs as a result of the ACA's Medicaid eligibility expansion and subsidies for low-income enrollees on health insurance exchanges.

By 2025, federal, state, and local governments are expected to increase their share of total NHE, which is expected to reach $2.6 trillion (almost doubling from $1.5 trillion in 2016) and to consume an even greater portion of GDP (19.9 percent) (Centers for Medicare & Medicaid Services 2017c, table 16). Exhibit 1.4 shows where healthcare dollars come from and how they are distributed among different types of healthcare providers.

Changing Patient and Provider Incentives

Medical expenditures equal the prices of services provided multiplied by the quantity of services provided. The rise of expenditures can be explained by looking at the factors that prompt medical prices and quantities to change. In a market system, the prices and output of goods and services are determined by the interaction of buyers (the demand side) and sellers (the supply side). We can analyze price and output changes by examining how various interventions change the behavior of buyers and sellers. One such intervention was Medicare, which lowered the out-of-pocket price the aged had to pay for medical care. The demand for hospital and physician services went up dramatically after Medicare was enacted, spurring rapid price increases. Similarly, government payments on behalf of the poor under Medicaid stimulated demand for medical services among this population. Greater demand for services multiplied by higher prices for those services equals greater total expenditures.

Prices also go up when the costs of providing services increase. For example, to attract more nurses to care for the higher number of aged patients, hospitals raised nurses' wages and then passed this increase on to payers in the form of more expensive services. Increased demand for care multiplied by higher costs of care equals greater expenditures.

While the government was subsidizing the demands of the aged and the poor, the demand for medical services by the employed population also was increasing. The growth of private health insurance during the late 1960s and 1970s was stimulated by income growth, high marginal (federal) income tax rates (up to 70 percent), and the high inflation rate in the economy. The high inflation rate threatened to push many people into higher marginal tax brackets. If an employee were pushed into a 50 percent marginal income tax bracket, half of his salary in that bracket would go to taxes. Instead of having that additional income taxed at 50 percent, employees often chose to have the employer spend those same dollars, before tax, on more comprehensive health insurance. Thus, employees could receive the full value of their raise, albeit in healthcare benefits. This tax subsidy for employer-paid health insurance stimulated the demand for medical services in the private sector and further boosted medical prices.

Demand increased most rapidly for medical services covered by government and private health insurance. As of 2016, only 3 percent of hospital care and 8.9 percent of physician services were paid out of pocket by the patient; the remainder was paid by a third party (Centers for Medicare & Medicaid Services 2017b). Patients had little incentive to be concerned about the price of a service when they were not responsible for paying a significant portion of the price. As the out-of-pocket price declined, the use of services increased.

The aged — who represent almost 16 percent of the population and use more medical services than any other age group — accounted for 35.4 percent of all hospital stays as of 2015 (Agency for Healthcare Research and Quality 2017). Use of physician services by the aged (Medicare), the poor (Medicaid), and those covered by tax-exempt employer-paid insurance also increased as patients became less concerned about the cost of their care. Historically, advances in medical technology have been another factor stimulating the demand for medical treatment. New methods of diagnosis and treatment were developed; those with previously untreatable diseases gained access to technology that offered the hope of recovery. New medical devices (e.g., imaging equipment) were introduced, and new treatments (e.g., organ transplantations) became available. New diseases (e.g., AIDS) also increased demand on the medical system. Reduced out-of-pocket costs and increased third-party payments (both public and private) — in addition to an aging population, new technologies, and new diseases — drove up prices and the quantity of medical services provided.

Providers (hospitals and physicians) responded to the increased demand for care, but the way they responded unnecessarily increased the cost of providing medical services. After Medicare was enacted, hospitals had few incentives to be efficient because Medicare reimbursed hospitals their costs plus 2 percent for serving Medicare patients. Hospitals, predominantly not-for-profit, consequently expanded their capacity, invested in the latest technology, and duplicated facilities and services offered by nearby hospitals. Hospital prices rose faster than the prices of any other medical service.

Similarly, physicians had little cause for concern over hospital costs. Physicians, who were paid on a fee-for-service basis, wanted their hospitals to have the latest equipment so they would not have to refer patients elsewhere (and possibly lose them). They would hospitalize patients for diagnostic workups and keep them in the hospital longer than necessary because it was less costly for patients covered by hospital insurance, and physicians would be sure to receive reimbursement. Outpatient services, which were less costly than hospital care, initially were not covered by third-party payers.

In addition to the lack of incentives for patients to be concerned with the cost of their care and the similar lack of incentives for providers to supply that care efficiently, the federal government imposed restrictions on the delivery of services that increased enrollees' medical costs. Under Medicare and Medicaid, the government ruled that insurers must give enrollees free choice of provider. Insurers such as health maintenance organizations (HMOs) that precluded enrollees from choosing any physician in the community were violating the free choice of provider rule and, thus, were ineligible to receive capitation payments from the government. Instead, HMOs were paid fee-for-service, reducing their incentive to reduce the total costs of treating a patient. Numerous state restrictions on HMOs, such as prohibiting them from advertising, requiring HMOs to be not-for-profit (thereby limiting their access to capital), and requiring HMOs to be controlled by physicians, further inhibited their development. By imposing these restrictions on alternative delivery systems, however, the government reduced competition for Medicare and Medicaid patients, forgoing an opportunity to reduce government payments for Medicare and Medicaid services.

The effects of higher demand, limited patient and provider incentives to search for lower-cost approaches, and restrictions on the delivery of medical services were escalating prices, increasing use of services, and resulting in greater medical expenditures.

Government Response to Rising Costs

As expenditures under Medicare and Medicaid increased, the federal government faced limited options: (1) raise the Medicare payroll tax and income taxes on the working population to continue funding these programs; (2) require the aged to pay higher premiums for Medicare, and increase their deductibles and copayments; or (3) reduce payments to hospitals and physicians. Each of these approaches would cost successive administrations and Congress political support from some constituents, such as employees, the aged, and healthcare providers. The least politically costly options appeared to be number 1 (increase taxes on employees) and number 3 (reduce payments to hospitals and physicians). The aged have the highest voting participation rate of any age group, as well as the political support of their children, who are relieved of the financial responsibility to pay their parents' medical expenses.

Federal and state governments used additional regulatory approaches to control these rapidly rising expenditures. Medicare utilization review programs were instituted, and controls were placed on hospital investments in new facilities and equipment. These government controls proved ineffective as hospital expenditures continued to escalate through the 1970s. The federal government then limited physician fee increases under Medicare and Medicaid; as a consequence, many physicians refused to participate in these programs, reducing access to care for the aged and the poor. As a result of providers' refusal to participate in Medicare, many Medicare patients had to pay higher out-of-pocket fees to be seen by physicians.

In 1979, President Carter's highest domestic priority was to enact limits on Medicare hospital cost increases; a Congress controlled by his own political party defeated him.

The 1980s

By the beginning of the 1980s, political consensus was lacking on what should be done to control Medicare hospital and physician expenditures, and private health expenditures also continued to rise. By the mid-1980s, however, legislative changes and other events imposed heavy cost-containment pressures on Medicare, Medicaid, and the private sector.

Legislative and Government Changes

President Nixon wanted a health program that would not increase federal expenditures. The result was the Health Maintenance Organization Act of 1973, which legitimized HMOs and removed restrictive state laws impeding the development of federally approved HMOs. However, many HMOs decided not to seek federal qualification because imposed restrictions, such as having to offer more costly benefits, would have caused their premiums to be too high to be competitive with traditional health insurers' premiums. These restrictions were removed by the late 1970s, and the growth of HMOs began in the early 1980s.

To achieve savings in Medicaid, the Reagan Administration removed the free-choice-of-provider rule in 1981, enabling states to enroll their Medicaid populations in closed provider panels. As a result, states were permitted to negotiate capitation payments with HMOs for care of Medicaid patients. The free choice rule continued for the aged; however, in the mid-1980s, Medicare patients were permitted to voluntarily join HMOs. The federal government agreed to pay HMOs a capitated amount for enrolling Medicare patients, but less than 10 percent of the aged voluntarily participated. (As of 2016, 34 percent of the 48 million aged were enrolled in Medicare HMOs, referred to as Medicare Advantage plans [Centers for Medicare & Medicaid Services 2017a].)

(Continues…)

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Table of Contents

List of Exhibits xv

Preface xxi

1 The Rise of Medical Expenditures 1

Before Medicare and Medicaid 1

The Increasing Role of Government 1

Changing Patient and Provider Incentives 4

Government Response to Rising Costs 7

A Look Ahead 12

2 How Much Should We Spend on Medical Care? 15

Consumer Sovereignty 15

Economic Efficiency 17

Government and Employer Concerns over Rising Medical Expenditures 19

Approaches to Limiting Increases in Medical Expenditures 22

3 Do More Medical Expenditures Produce Better Health? 27

Medical Services Versus Health 27

Health Production Function 28

Improving Health Status Cost Effectively 30

Relationship of Medical Care to Health over Time 33

4 In Whose Interest Does the Physician Act? 39

The Physician as a Perfect Agent for the Patient 39

Supplier-Induced Demand 40

Increase in Physician Supply 43

Insurers' Response to Demand Inducement 43

HMOs 44

Informed Purchasers 45

5 Rationing Medical Services 49

Government Rationing 49

Rationing by Ability to Pay 50

Decision Making by Consumers of Medical Services 51

Marginal Benefit Curve 52

Price Sensitivity 54

6 How Much Health Insurance Should Everyone Have? 59

Definitions of Insurance Terms 59

Insurance-Purchase Decision Making 61

Tax-Free, Employer-Paid Health Insurance 62

7 Why Are Those Who Most Need Health Insurance Least Able to Buy It? 71

Medical Loss Ratios 73

How Health Insurance Markets Work 75

Additional Legislative Changes Affecting the Health Insurance Market 80

8 Medicare 85

The Current State of Medicare 85

Part A (HI) 85

Part B (SMI) 87

Part C Medicare Advantage Plans 88

Part D Outpatient Prescription Drugs 88

Medigap Supplementary insurance 90

Concerns About the Current Medicare System 90

The Impending Bankruptcy of Medicare 95

Proposals for Medicare Reform 99

Politics of Medicare Reform 102

9 Medicaid 105

An Illustration of Medicaid Eligibility 106

State Children's Health Insurance Program (SCHIP) 107

Medicaid Beneficiaries and Medicaid Expenditures 108

The Patient Protection and Affordable Care Act (PPACA) 111

Medicaid Policy Issues 112

Medicaid Managed Care 114

Reforming Medicaid 115

10 How Does Medicare Pay Physicians? 121

Previous Medicare Physician Payment System 121

Reasons for Adopting the New Payment System 122

Components of the New Payment System 123

Effects of Medicare's Payment System 128

11 Is There an Impending Shortage of Physicians? 135

Definitions of a Physician Shortage or Surplus 136

Consequences of an Imbalance in the Supply and Demand for Physicians 138

Economic Evidence on Trends in Physician Demand and Supply 141

Longer-Term Outlook for Physicians 147

12 The Changing Practice of Medicine 151

Types of Medical Groups 151

Changes in the Size of Medical Groups 152

Reversal of Fortunes of Large Multispecialty Groups 157

Outlook for Medical Group Practices 159

13 Recurrent Malpractice Crises 167

Explanations for the Rise in Malpractice Premiums 167

Objectives of the Malpractice System 171

Proposed Changes to the Malpractice System 175

Enterprise Liability 178

The Effects of Various Tort Reforms 179

14 Do Nonprofit Hospitals Behave Differently than For-Profit Hospitals? 183

Why Are Hospitals Predominately Nonprofit? 185

Performance of Nonprofit and For-Profit Hospitals .186

The Question of Tax-Exempt Status 190

15 Competition Among Hospitals: Does It Raise or Lower Costs? 195

Origins of Non-price Competition 195

Transition to Price Competition 199

Price Competition in Theory 200

Price Competition in Practice 201

16 The Future Role of Hospitals 207

From Medicare to the Present 207

The Hospital Outlook 212

Hospital Revenues 213

Potential Hospital Threats 217

Alternative Hospital Scenarios 220

17 Cost Shifting 225

Setting Prices to Maximize Profits 226

Origins of Claims of Cost Shifting 231

Price Discrimination 232

Conditions Under Which Cost Shifting Can Occur 233

The Direction of Causality 234

18 Can Price Controls Limit Medical Expenditure Increases? 239

Effect of Price Controls in Theory 239

Effect of Price Controls in Practice 242

Global Budgets 245

19 The Evolution of Managed Care 249

Why Managed Care Came About 249

What Is Managed Care? 250

Types of Managed Care Plans 251

How Has Managed Care Performed? 254

One-Time Versus Continual Cost Savings 256

The Change in Managed Care 260

Recent Developments in Managed Care 262

Consumer-Driven Health Care 264

Accountable Care Organizations 265

20 Has Competition Been Tried-and Has It Failed-to Improve the US Healthcare System? 269

Criteria for Judging Performance of a Country's Medical Sector 269

How Medical Markets Differ from Competitive Markets 271

Demand-Side Market Failures 274

Supply-Side Market Failures 277

How Can Medical Markets Be More Competitive? 279

What Might Competitive Medical Markets Look Like? 280

Are the Poor Disadvantaged in a Competitive Market? 281

21 Comparative Effectiveness Research 285

CER and the Role of Government 285

Concerns over How CER Will Be Used 287

Cost-Effectiveness Analysis 290

Quality-Adjusted Life Years 291

The National Institute for Health and Clinical Excellence 294

22 US Competitiveness and Rising Health Costs 297

Who Pays for Higher Employee Medical Costs? 297

Who Pays for Retiree Medical Costs? 301

Possible Adverse Effects of Rising Medical Costs on the US Economy 303

23 Why Is Getting into Medical School So Difficult? 307

The Market for Medical Education in Theory 309

The Market for Medical Education in Practice 309

Accreditation for Medical Schools 310

Recommended Changes 311

24 The Shortage of Nurses 317

Measuring Nursing Shortages 317

Nursing Shortages in Theory 317

Nursing Shortages in Practice 319

Federal Subsidies to Nursing Schools and Students 326

25 The High Price of Prescription Drugs 331

Reasons for the Increase in Pharmaceutical Expenditures 331

Pricing Practices of US Pharmaceutical Companies 339

26 Ensuring Safety and Efficacy of New Drugs: Too Much of a Good Thing? 347

History of Regulation of Prescription Drugs 347

FDA's Stringent Guidelines for Safety and Efficacy 351

27 Why Are Prescription Drugs Less Expensive Overseas? 363

Accuracy of Studies on International Variations in Drug Prices 363

Why Prescription Drugs Are Expected to Be Priced Lower Overseas 366

Public Policy Issues 369

28 The Pharmaceutical Industry: A Public Policy Dilemma 377

Public Policy Dilemma 378

Structure of the Pharmaceutical Industry 378

Development of New Drugs by the US Pharmaceutical Industry 381

The Political Attractiveness of Price Controls on Prescription Drugs 382

Consequences of Price Controls on Prescription Drugs 385

29 Should Kidneys and Other Organs Be Bought and Sold? 393

Sources of Organs for Transplant 393

Donor Compensation Proposals 396

Opposition to Financial Incentives to Organ Donation 398

Additional Considerations 400

30 The Role of Government in Medical Care 403

Public-Interest View of Government 404

Economic Theory of Regulation 406

31 Medical Research, Medical Education, Alcohol Consumption, and Pollution: Who Should Pay? 415

External Costs and Benefits 416

Government Policies When Externalities Exist 419

Divergence between Theoretical and Actual Government Policy 421

32 The Canadian Healthcare System 425

Higher Life Expectancy and Lower Infant Mortality Rate 425

Universal Coverage 427

Controlling Healthcare Costs in Canada 427

Consequences of Strict Limits on Per Capita Costs 432

Is Canada Abandoning its Single-Payer System? 438

Should the United States Adopt the Canadian System? 439

33 Employer-Mandated National Health Insurance 443

The Uninsured 443

Why the Uninsured Do Not Have Health Insurance 447

Consequences of Employer-Mandated Health Insurance 447

Political Consequences of Employer-Mandated Health Insurance 451

34 National Health Insurance: Which Approach and Why? 455

Criteria for National Health Insurance 456

National Health Insurance Proposals 458

Refundable Tax Credits: An Income-Related Proposal 461

35 Financing Long-Term Care 471

The Nature of Long-Term Care 471

Current State of Long-Term Care Financing 473

Why Do So Few Aged Buy Long-Term Care Insurance? 476

Approaches to Financing Long-Term Care 480

36 The Politics of Healthcare Reform 487

Differing Goals of Healthcare Reform 487

The Need for Visible Benefits to the Middle Class and Aged 489

Groups with a Concentrated Interest in Healthcare Reform 492

The Legislative Process 498

The Administration's Objective for Healthcare Reform: A Hypothesis 503

The Years Ahead 506

Appendix A Brief Summary of the Patient Protection and Affordable Care Act (PPACA) of 2010 509

Glossary 517

References 527

Index 543

About the Author 561

Editorial Reviews

3 Stars from Doody

Helps non-specialists understand issues related to the politics and economics of health services. Chapters on 25 key issues contain short discussions on each subject from an economic perspective emphasizing markets, plus discussion questions. Subjects include managed care competition and legislation, barriers to and benefits of integration, financing long-term care, the role of government in medical care, and national health insurance. This second edition is updated to reflect current research findings and analysis. It contains two new chapters on the trend toward group practice, and physician surplus. The author is a professor of health care management at Graduate School of Management at UC-Irvine. Annotation c. Book News, Inc., Portland, OR (booknews.com)

Booknews

Reviewer: Robert McLean, PhD (Creighton Univ School of Pharmacy & Allied Health Professions)
Description: This book is a discussion of 30 topics in health policy from the standpoint of economics. The author's approach to the solution of policy problems is that market forces should be allowed free rein, and that economically efficient outcomes are best. The book is accessible to the student of health policy or health administration who understands economics at an introductory or intermediate level.
Purpose: The principal purpose is to provide supplemental reading on the economic approach to health policy to students in health policy, health administration, and health economics courses. A secondary purpose is to demonstrate the power of economic analysis. The author is very successful in achieving both of these purposes.
Audience: The principal audience is the student of health policy or health administration. Only a modest background in economics is necessary to read the book. Advanced students and professionals will not find it to be of much use. It is not a useful guide to the research literature, and the most frequent reference is to the author's own textbook on health economics.
Features: The author coves 30 topics, each in a separate chapter. Among the topics covered are, How Much Should Be Spent on Medical Care? How Much Health Insurance Should Everyone Have? and Can Price Controls Limit Expenditure Increases? Current health policy discussions are quite thorough. The level of exposition is appropriate to someone with limited background in health policy and only an introductory understanding of economics.
Assessment: This would be an excellent source of supplemental reading for a beginning course in health policy or health economics. No comparable volume is available.

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