Three question final- free term papers- free downloads-, health economics, Medicare Part D, moral hazard, market failure, health insurance
- Drawing on the webinars, webcasts, class discussions, and the book chapters, describe the relationship between high deductible health plans and the concepts of consumer surplus, moral hazard, and welfare loss. (35 points)
Consumer directed health plans (or high deductable health plans) first emerged in the United States market at the end of the 1990’s. This health insurance instrument differs from traditional managed care in having higher annual deductibles, often being linked to health savings accounts, and allowing consumers to experience the costs of their heath care choices until they meet their high annual deductable. The obvious advantage to the consumer of such a high deductable plan is that it allows for lower premiums. Indeed, this is a much more attractive product for healthy individuals that are unlikely to face significant health care needs but who wish to insure against catastrophic losses- such as those that would occur from the sudden onset of a deadly disease. Proponents of high deductable plans argue that these plans incentivize more responsible consumer behavior, and that consumers/patients who face the full costs of their choices will make more intelligent, less wasteful decisions. Opponents argue that because consumers/patients face the full costs of their health care choices until their deductable is met, they may be disincentivized to seek proper preventive care, may be less compliant with prescribed medications, and may actually cost the system more because they will not seek care until their health situation requires aggressive interventions.
Understandably, these issues have significant societal welfare loss implications. Consumer surplus refers to the difference in price between the maximum price the consumer is willing to pay for a product and the actual price they pay for said product. Moral hazard refers to the change in behavior when the entity that is protected from risk by an insurance instrument behaves in a different way than they would if they did not have said policy in place to protect them from the cost affects of their behavior. Welfare loss occurs when there is an incorrect allocation of resources in which society does not reach its maximum utility. Welfare lost can be borne by consumers, society, or producers.
Theoretically, consumer driven health care plans decrease moral hazard because beneficiaries are less protected from the costs of medical care and therefore less likely to create exposure to the risk of high medical bills. By the same token, consumer driven health plans may create favorable selection as consumers with known health problems opt for higher cost, lower deductable plans. There is some possibility that consumer driven health plans could create a consumer surplus because consumers would be willing to pay higher premiums. On closer examination, this would not truly be considered a “consumer surplus” because the higher cost premiums would provide more coverage; a true consumer surplus is only created when market price is artificially less than the true market equilibrium price. Whether consumer driven health plans create a net welfare loss depends on whether they create net costs or benefits for society overall.
- Harford identifies three key considerations that are important for markets to work and uses these to comment on how to improve our health system. What are those key considerations and how does he weave them into a strategy to fix our current health care system. (35 points)
In order to function efficiently, markets must operate in a state of perfect competition. Perfect competition assumes that there are proper outputs, outputs are produced efficiently, and that the right quantities of outputs are being produced. There are a number of reasons why the market for health insurance is not competitive in the United States, the primary one being an issue of asymmetrical information. Asymmetrical information promotes adverse selection and moral hazard. There are several activities that insurers can engage in to combat asymmetrical information from their side. These include offering different benefit packages that induce beneficiaries to reveal their information. Additionally, they may establish some sort of “signal” to serve as an indicator of likely beneficiary riskiness. Passing on most of the costs of health care is a way that insurers can reduce moral hazard. However, such products may have limited marketability, since the consumer is buying the insurance to protect themselves from the possibility of unacceptable losses.
The three areas of market failure that are addressed in the text are scarcity power, externalities and imperfect information. Mr. Harford also addresses the issue of fairness, which he argues any humane society would want to address. In the United States, in most urban areas, scarcity power in not a big concern among consumers because there are a number of health care providers who may serve as substitutes for each other. Externalities are an issue in health care because if everyone else’s child has been vaccinated for whooping cough, then it is not really necessary for me to have my child vaccinated because herd immunity will probably protect my child from the possibility of contracting this illness. Inside information is the largest obstacle to achieving a more competitive health care marketplace. The suggestion is that consumers should have information readily available in order to allow them to make better decisions. Patients should have the opportunity to utilize this information by choosing providers and treatments.
The ultimate goal of a well-functioning health insurance/health care market is to give consumers the responsibility and information necessary to make choices about their care, while also incentivizing through their own payments to consume health care wisely. The system described is basically a universally mandated (to eliminate adverse selection) consumer driven health plan with obligatory health savings accounts that roll over and allow savings to accumulate during the lifespan. Health care expenses are paid by the individual out of the HSA- this eliminates the problem of moral hazard. During all phases of life, the individual would only desire to spend the funds on treatments that they are convinced would be beneficial, essentially eliminating the problem of wasteful treatment. To address the problem of social justice, catastrophe insurance would step in at a certain point and pay for the expenses for which no reasonable and responsible person could pay for over the course of a lifetime. This would ensure that less lucrative but socially necessary goods such as burn units or transplants would still be available.
- Medicare part D is the latest in a series of policy adjustments undertaken to deal with catastrophic expenses not covered under Medicare. Discuss the key economic considerations in this the historical case study of the interface between health policy and health economics.
(30 points)
Medicare parts A & B were introduced in 1965 to assist the aged- those 65 and up- in paying for their health care expenses. The benefit design of Parts A & B reflected the social values of the time which included achieving greater income equality and security in old age. Medicare part C was established in the 1980s but became more pronounced in1997 to respond to new care utilization trends in health care markets. Medicare part D was created by the Medicare Modernization Act of 2003 to cover medication expenses. As medical care has advanced since 1965, patients have been living longer and more advanced medications have improved both their quality of life and functioning. Medicare part D came into force in 2006 with premiums and benefits managed by private firms. However, the cost of the program is still heavily subsidized by federal funding. The design of the program reflects its bipartisan support and populist backing. The greater involvement of private firms allows for amore market based approach to managing benefits. Furthermore, the creation of the “doughnut hole” helped limit the expense of the program and theoretically should have incentivized seniors to manage this benefit efficiently.
In the 2003 benefit design, enrollees had to first meet a $250 deductable and they pay a 25% co-pay for expenses between $250 and $2,500. From $2,500 to $5,100 enrollees were responsible for 100% of the cost. After reaching the $5,100 annual cut-off, the government would resume cost sharing, picking up 95% of cost. However, since Medicare has some features of a wealth redistribution program, the impact of this “cost-limiting” mechanism had the biggest impact on those least able to bear the burden. In order to gain support from senior citizens (who tend to vote en masse), part of the Affordable Care Act included a voucher payment to people who “fell inside the doughnut hole” as well as phased in benefits that will help lessen the percentage of the cost of brand-name medications that is paid by the consumer.
Unfortunately, many experts agree that Medicare as it exists is unsustainable and lacks efficiency incentives. Medicare Parts A & B have reimbursed providers through a fee-for-service structure that has incentivized overtreatment and waste. The text offers several possibilities for extending the viability of Medicare. These include raising the age of eligibility, reducing the rate of increase in payments to Medicare providers, increasing the payroll tax that funds Medicare Part A, increasing Part B premiums, scaling the Part B premiums to beneficiaries incomes, transforming Medicare from a defined benefit to a defined contribution program, and changing Medicare to an income related program. Most of these options are unpopular with senior citizens who feel that they have paid into the system their entire lives and that they deserve the benefits they are receiving. Reforms are also unpopular with Baby Boomers who are approaching the age at which they will begin to benefit. Ultimately, the fate of Medicare may be decided by Generation Xers and Yers when the programs are on the brink of bankruptcy because only then might public will be strong enough to confront the gravity and complexity of the Medicare situation.