Module 3: Who pays for healthcare? Flashcards
Economic Goods
- A good or service that
has a benefit to society
and for which there is
some degree of scarcity - Scarcity (demand)
creates willingness to
pay - Markets balance supply
and demand using price
and competition
Healthcare is not a normal economic
good
*Need not a want
◦Inelasticity of demand
◦ Price does not influence demand
◦ People generally will not have treatment if they don’t need it
*Asymmetry of information
◦May not be easily understood by patients
◦ Health care providers act as agents in patients’ best interest
Moral Hazard
*If something is free (or subsidized) you are more likely to consume
it than if you had to pay for it yourself
◦ Pro: encourages use of services by the people who need it, regardless of
ability to pay (and thereby improves health)
◦ Pro: encourages use of prevention by all (and thereby improves health)
◦ Con: encourages use of unnecessary services (and thereby increases costs)
◦ Con: encourages use of expensive/inappropriate services (and thereby
increases costs)
What is insurance?
Specific definition: guarantee of compensation for specified risk in
exchange for payment of premium
More generally, a mechanism for “risk pooling”
◦ Insurance programs pool resources together
◦ Insurance offers protection against risk (in most cases financial risk)
◦ Risk is usually unequal across the population
◦ Risk is not perfectly predictable
◦ Because of their role, insurers have an interest in reducing risk
Health insurance refers to programs that pool resources to provide
protection against the cost of medical services
◦ This includes both contributory insurance and health care provided through general
taxation (“public” health insurance)
Why not just pay for the health care we need out of pocket, like we do for other goods and services?
*Because health care is not a normal economic good!
*Same reasons we purchase insurance for other catastrophic events
that are hard to predict
*Also, as we have discussion
◦ Information asymmetry
◦ Moral hazard
◦ Lack of competition – limited number of providers (or insurers) in most places,
limited ability to shop around
Four major models of financing
*General taxation: patients do not pay when they receive services;
revenue is collected through various forms of taxation (e.g. sales tax)
*Social insurance: typically employment-based insurance that is
mandatory and not-for-profit
*Private insurance: the policy holder chooses a policy; not mandatory
*Out-of-pocket payment
*May combinations of these mechanisms are possible
The pros and cons of financing models
*General taxation
* Pros: best at pooling risks, low admin costs, progressive
* Cons: no natural incentive to limit demand
*Social insurance
* Pros: politically feasible (in Europe), more information to consumers about care costs
* Cons: less risk pooling, administratively complex, no coverage for unemployed
*Private insurance and out-of-pocket payment
* Pros: consumer choice
* Cons: regressive, high admin costs
Types of insurance
Private insurance may be
o supplementary: covers services that are excluded from public
plans
o complementary: pays for “extras” in the public system
o Most controversial: duplicative/parallel, pays for services that
are also covered under the public system
So where is Canada?
General taxation:
◦ Provincial public health insurance plans that cover hospital and physician
services
Supplementary private insurance:
◦ Dental care, vision care, pharmaceuticals
Out-of-pocket payment:
◦ Over-the-counter pharmaceuticals and whatever you don’t have private
insurance to cover
Relationships between public and private
financing
*Parallel private systems: Privately-financed system is a duplicate,
alterative to public sector
*Co-payment: financing for services is partially subsidized through public
payment with the remainder coming from out-of-pocket or private
insurance
*Group-based: Certain population groups are eligible for public coverage;
others rely on private
*Sectoral: Certain health care sectors are entirely publicly financed; others
rely heavily on private
Parallel private systems
*Effects of parallel private system on public system wait times
* Waits could be shorter if the private system is a “Safety valve”, picking up the slack
when waits are long in the public system
* Waits could be longer if
* Providers are drawn into the private system, which is more lucrative
* Providers have an incentive to keep waits long in the public system to increase demand for private services
* Private financing increases overall demand (through complications, follow-up care)
* Balance of evidence suggest: parallel private systems DO NOT shorten waits in the
public system. They:
* Attract healthiest patients and perform less complex procedures, increasing complexity and of cases in
public system
* Lengthen wait times in public system
Copayments
*Research from the US suggests that introducing even small copayments deters health services use –> negative health outcomes
*Private financing (insurance) create an increase in public
expenditure; conversely, people without private insurance are
deterred from using publicly insured services due to bundling effect
◦ E.g. the cost of a prescription may deter someone from a physician visit
Impact on overall health system funding
Do public and private finance represent independent sources of
funding or do they substitute or crowd each other out
◦ Private spending is negatively correlated with public spending on health as a
share of total public spending
◦ Crowding out effect
On balance, “a resort to private finance is more likely to harm than
help publicly financed systems, although the effects will vary
depending on the form of private finance.”
Sector/Funding Source
