MEDICAL CARE: COSTS OUT OF CONTROL?

Chapter 7

Presented By

Mary Young

National Health Expenditures, Selected Years, 1980-2011

year National HealthExpenditure

GDP Expenditures as% of GDP

ExpenditurePer capita ($)

1980199019952000200120052011

245.8696.0990.3

1299.51423.81902.22815.8

2795.65803.37400.49872.9

10201.512227.516589.8

8.812.013.413.214.015.617.0

1067273836984637503965199216

SOURCE: Centers for Medicare and Medicaid, Office of the Actuary, January 2002

Rising Cost of Medical Care

• NHE 7.3 % As GDP 4.8%

Predictions is by 2011 NHE will be 17 % of GDP

Why?

Cost Disease of the Service Sector

• Technologically – progressive, capital – intensive• Labor – intensive sector

1. Wage competition between two sectors lead to cost that grow faster in labor – intensive sectors.

2. Both sectors wages increase at near same rate but labor productivity in capital – intensive sector faster.

3. Labor cost will rise more slowly in capital – intensive sectors.

Cost Disease of the Service Sector

• Labor hours per unit * wage per hour• Labor productivity * wage per hour• Increase in hourly wage then, • Increases labor cost per unit output• Inversely labor productivity reduces labor

cost per unit output.

Cost Disease Theory

• Cost disease theory suggest reasons QHC will increase overtime maybe:

1. Aging population 2%

2. Relatively high income elasticity of demand for health care 5%

3. Increase in insurance coverage 13%

4. Technological change 49%

Cost Theory

1. Income elasticity = IEDHC is a measured change in the quantity demanded (or amount purchased) of a specific good or service as a result of a change in income expressed in percentages

2. IEDHC = % change QHC / % change I

Income elasticity

• Disposable income (household) after taxes = $5 trillion 100% of DI

• NHE = $5 billion 10% of DI

• IEDHC = 1.4

• Remainder is spent on AOGS

• An increase of 140% of $500 b is $700 B.

• Increase QHC from $500 b to $1200 b, or 10% to 12% of DI.

Health Insurance coverage

• Increases in health insurance coverage explains 10% growth in QHC.

• Health insurance is the passkey to accessing the health care system.

• People with health insurance receive more care, more frequently, than people without health insurance.

Technological Change

• Together demand and supply determine aggregate expenditures.

• A change in demand Is fueled by advertisement of drugs and tech development promises to improve life, demand for insurance provides increased earnings to manufacturer of new drugs and technologies and aggregate health expenditures increases.

• Increases in earnings stimulate research, development and production of next generations of products.

Expenditures=

Earnings

DemandingPatients

Supply of

MedicalCare

New DrugsTechnologyResearch

InsuranceCoverage

Technological Change

Technological Change Is it worth it?

• Benefits1. Reduced mortality2. Reduced morbidity3. Increased life expectancy.

• Value of life – in terms of additional years of life. • Additional years of life = the average American can expect to live

4.5 additional years because of medical advances or behavior changes reducing cardiovascular disease mortality.

• Present value of life to the individual at age 45.

PVLY45 = FVLY t / (1+i) t-45

Determination of PVLY frommedical advances in cardiovascular

diseaseFVLY Years Value Discount Factor PVLY

Delayed

$100,000 31 (1.02)76-45 = (1.02)31 = 1.848 $100,000/1.848 = $54,112

$100,000 32 (1.02)77-45 = (1.02)32 = 1.885 $100,000/1.885 = $53,050

$100,000 33 (1.02)78-45 = (1.02)33 = 1.922 $100,000/1.922 = $52,029

$300,000 $159,186

The Effect of Third – Party Payments on Hospital Care

Hospital Days (Millions)

Pric

e pe

r D

ay (

$)

39

249 303

$1,228

D

S

Physician – Induced Demand

• Asymmetric information

• Physicians’ desire to increase wealth

• Physicians practice fee-for-service medicine

Approaches to Reducing Wasteful Expenditures

• Managed care

• Eliminating the federal tax exemption for health insurance

• Health care vouchers