HEALTH CARE SPENDING

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OUTLINE
Growth of US health care spending
Other countries
Spending growth and spending level
Factors influence the spending
Model of spending growth
Empirical evidence

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 WHY GROWTH IN HEALTH
SPENDING IS AN ISSUE?
Observed from relationship among spending, income and
GDP is a easy way to understand the importance of the issue.
Spending growth>income growth
Spending growth>GDP growth
Gap is expanding, and estimated spending will accounting for
approximately 19.6% US GDP by 2019
Spending bring health benefit, however, the economic
burden accompany by it is also worrisome.

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GROWTH OF US HEALTH CARE
SPENDING

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 MORE RECENT DATA
2010 2011 2012 2013 2014 2015

National Health
Expenditure (billion) $2,596.4 $2,687.9 $2,795.4 $2,877.6 $3,029.3 $3,205.6
NHE per person $8,404 $8,638 $8,915 $9,110 $9,515 $9,990
Accounted for GDP (%) 17.4% 17.3% 17.3% 17.2% 17.4% 17.8%
NHE grew rate (%) 4.1% 3.5% 4.0% 2.9% 5.3% 5.8%

2015: Medicare spending 20% of total NHE.

Medicaid spending 17% of total NHE.
Private health insurance spending 33% of total NHE.
Source: CMS https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/nationalhealthexpenddata/nhe-fact-sheet.html

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IMPACT ON FISCAL BUDGET &
INSURANCE
Pressure on fiscal policy is large
Future balance will depend on health spending
Income-health spending=1%, if not cut down the other public
spending
By 2050, increased in tax of more than 70%.
If financed entirely by income tax rates, would bring the highest marginal tax rate 60%.

Affect private and public insurance

Gap between growth in health care spending and income has
associated with a decline in insurance coverage.
Subsidies may alleviate the impact only when subsidies keep pace
with the growth, and subsidies come from tax may also bring burden.

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RELATIONSHIP BETWEEN
INSURANCE COVERAGE AND
SPENDING

Insurance Tax Health care

coverage (Subsidies) spending

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16 OTHER COUNTRIES
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Taiwan: 6.2%

Source: OECD Health Statistics 8

OTHER COUNTRIES

US is not the country with the

overspending problem
However, US face escalating growth
recent years, comparing with the past.

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SPENDING GROWTH AND
SPENDING LEVEL
St=Pt*Qt
St=level of spending at time t
Pt=vector of a unit price
Qt=associated quantity

Assumed all the endogenous factor not change

Endogenous factor include patient, provider, payer and government.
At any time t, equilibrium exists.
Only when exogenous factor change may result new equilibrium, and the pace of
new equilibrium depend on switching cost and information lag.
Persistent spending growth
Usually the variable triggered the new equilibrium is technology.

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 SPENDING GROWTH AND
SPENDING LEVEL
Distinction
Level of spending is the change at a
point of time.
Spending growth is the over the long
run.
Example
Primary care physician number
Early low consume followed by the
highest spending growth rate

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 FACTORS INFLUENCE THE
SPENDING
Usually the development, adoption, and diffusion of new medical technology.
Utilization of medical services Utilization of innovation
Should be distinct from other factors
Three types of innovation:
Innovation of new product or equipment
Innovation of new application of existing product (New knowledge)
Process Innovation
New knowledge: results from learning-by-doing
Process innovation may lower health spending, while the influence of product
and knowledge innovation are ambiguous.
However, product and knowledge innovation dominate the process innovation.

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PATHWAY OF HOW INNOVATION
AFFECT SPENDING
Complementary & Substitution
Complementary
Those use increases with new technology
Changing the threshold of medical intervention
Extend life expectancy
Substitution
Those quantity falls because of introduction of new technology
But may not necessarily decrease cost (offset may not be occurred)
Quantity change
Relative cost

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MODEL OF SPENDING GROWTH
Two kinds of models
All assumed change happened in a steady-state
How equilibrium affected by new technology introduction (Exogenous)
What affect new technology introduction (Endogenous)
Exogenous
Managed care v.s. FFS (Insurance plan/Payment system)
Income effect
Endogenous
Demand and supply
Price and quantity

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MANAGED CARE AND SPENDING
GROWTH
Technology boundary
Limit of medical technology
Capability and price parameter of then insurance plan
Not all new technology will introduced to consumer
Two kind of insurance plan
HMO: Condition-specific limit
FFS: Co-insurance rate
HMO is more capable in controlling spending growth, however if
there is a non-pecuniary cost in not using, then the controlling power
of HMO is decreased since there is no entry barrier.
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EXAMPLE
HMO=coverage $5000 each accepted (decrease your
own quota)
FFS=Coinsurance rate 10% accepted (No offset & use
others quota)
New tech
FFS
A new tech cost $500 HMO

HMO
HMO

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INCOME EFFECT
Increase consume by
Elevate value of medical services(quality)
Affect Cost of production(price)
The ultimate impact on quantity depends on the
magnitude of demand curve and cost curve shift and
demand elasticity
Budget share*Price elasticity
Whether paid at site or by premium is not important, however,
government usually affect income elasticity through subsidies
Depend on income effect across taxpayer and beneficiaries
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 TECHNOLOGY CHANGE IN
MEDICAL CARE

Price Price

D S D S

P2

P* P1

Q* Quantity Q1 Q2 Quantity

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PARAMETER OF DEMAND FOR HEALTH
CARE
Technology increase spending through high unit of price and
greater utilization
Insurance is an important factor that affect health care demand.
Subsidizing at margin
Encourage new innovation
Transfer cost to the point of insurance purchase
May increase usage and minimize the utility when population expanded,
however can also improve welfare.
Assumed exogenous factor not change, and spending growth may
only affected by price and quantity of new technology

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 EMPIRICAL EVIDENCE-
CAUSES OF HEALTH CARE SPENDING 1

Residual Model
Continuing changing variable(inflation,income,aging,income)
Most attribute to technology innovation
Model usually control a lot non-technology innovation factor
Assumption test of spending growth
Increasing income and health insurance
Increasing cost from technology innovation
Inefficiency of health care market
Increasing cost from technology innovation
Outpatient, from drug
Quantity>price
Rising wages is not a major contributor of spending growth
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CAUSES OF HEALTH CARE SPENDING 2

Insurance
Weisbrod and Goddeeris: More generous insurance induce technology
innovation
RAND: Improved insurance did not induce technological change
Finkelstein:health insurance may account for approximately half of six-fold
increase in real per capita health care medical spending
Income effect
Results of elasticities research are differ in different level of research
National:>1
Household:<1

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 CAUSES OF HEALTH CARE SPENDING 3

Affirmative approach
Specific technologies attribute to rising spending
For practical purpose and cannot put all innovation into consideration
Outcome
Increased use of little ticket technologies, but not AMI treatment in
1964 to 1971
Spending concentrate on some diseases and also concentrate on
specific medical services
Ex: In childbirth the cost-increasing technology was the increase in the cesarean
section rate
Method of selecting patients diagnosed with specific diseases
underestimates the fiscal impact of technological change
Methods complementary with the technology expand
The number of individuals diagnosed with the specific disease expands 22
 SPENDING GROWTH BY INSURANCE
TYPE
Result of Managed Care
Premium growth rate is lower
Market with more managed care grow less(penetration rate), and more
competitive market is more effective
Short-time evaluation and may be a once-for-all change, and also hospital
based research cannot capture macro perspective factors contain payer and
patients influence, besides non-hospital based services is also not included
In most studies the estimated reduction in health care spending growth was
insufficient to bring that growth in line with the general rate of inflation
Managed care may lower growth rate, or have spillover
effect , however, can not stabilize or reduce the share of GDP
devoted to health care. 23
GROWTH BY DISEASE AND HEALTH
STATUS
Thorpe decomposed spending growth into 3 parts:
Population growth
1/5-2/5 for top 15 condition
An increase in disease prevalence
More than 5 condition
Obesity
An increase in spending per case
The relationship between disease burden and spending growth is
not concentrated among the sickest, low health status/high cost beneficiaries has
in fact decreased over time

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CONCLUSION
Because technology has been identified as a primary driver of long-
run spending growth, it is reasonable to expect that we would
receive clinical benefits associated with the higher spending
Growth may offset by benefit of treatment, so on average
increased health care spending is likely valuable, but at the margin
higher spending is not.
Since the rate of health care spending growth cannot exceed
income growth indefinitely, we should built a more efficient and
sustainable system

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