Lecture 14: Health Care II

Quick Overview

The optimal health insurance plan involves a trade-off between consumption smoothing and moral hazard, suggesting cost-sharing should relate to patient resources and care value, yet current employer-sponsored insurance is overly generous due to the untaxed nature of health benefits, which causes overconsumption and inequity favoring higher-income earners.

Key Points: Optimal health insurance design faces a trade-off between consumption smoothing and moral hazard, suggesting patient co-payments are necessary unless patients are very resource-constrained. The tax subsidy to employer-sponsored health insurance makes health insurance relatively cheap compared to taxed wages, inducing overconsumption of overly generous plans and costing the government $350 billion annually in lost revenue. The employer health insurance subsidy is inequitable because higher-income individuals, who have higher tax rates, receive a larger tax break; this subsidy acts as a 'bribe' for employers to offer insurance that grows larger with employee income. A popular alternative to eliminating the subsidy is capping the tax exclusion, taxing insurance costs above the average level to raise money and discourage excessively generous coverage. The traditional fee-for-service medical system incentivizes providers to over-prescribe care because their utility functions include income alongside patient health, pushing utilization past optimal levels. Managed care systems like HMOs shifted reimbursement from fee-for-service to prospective reimbursement (like salary or capitation), which reduced utilization, saved significant money (around 20-25%) compared to fee-for-service, while maintaining comparable patient health quality. Medicaid, insurance for the poor, is characterized by excellent coverage but severe access problems, as providers are often paid as little as 10% of private rates, leading many doctors to refuse Medicaid patients.

Context: This lecture, 'Health Care II,' continues a discussion on the economics of social insurance applied to health care, specifically examining the optimal design of health insurance plans for patients and the optimal design of provider reimbursement systems. The speaker contrasts theoretical optimal structures with the reality of employer-sponsored insurance and then delves into the institutional structure and economic effects of Medicaid, the primary health insurance program for the poor.