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Lecture 10

EC248 Lecture 10: EC-248-Lesson-10

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Wilfrid Laurier University
Logan Mc Leod

EC 248 Lesson 10 – The Flow of Funds within a Health Care System Financing: Raising funds required to pay for the operation of the health care system Funding: Allocation of revenue to alternative activities within the health care sector Remuneration: Compensation to individuals employed in the health care sector Systems of Health Care Finance Efficiency and Equity in Pure Private and Pure Public Systems of Finance Three caveats to mention about the analysis: 1) Can each include a tremendous variety of possible designs, (Ex. Private finance systems can rely on private insurance our out of pocket payments, varying with respect to the calculation of premiums, regulations etc.  Public finance systems can use taxes or social insurance contributions, varying with respect to types of taxes, structure of tax schedules, regulation, etc. 2) Judgements of efficiency and equity on aspects of financing depend on the chosen normative framework (standard welfare economic framework where benefit is assessed by WTP will differ in conclusions than extra-welfares framework where benefit is based on health benefits 3) Will also be helpful to familiarize yourself with alternative sources of finance (TABLE 11.1 TB) Efficiency in the System of Finance Itself - Think in terms of technical and cost-effectiveness efficiency in collecting revenue, and allocative efficiency in responding to the risk preferences of members of society - Technical efficiency and cost effectiveness requires the finance method minimize administrative costs per dollar of revenue raised (tax system more cost effective than private finance) - Allocative efficiency requires consumption of health care insurance conform to people’s preferences (risk and income transfers associated with insurance) - Preferences that vary across individuals, a voluntary, multi-payer private insurance system is more allocatively efficient than a mandatory public insurance system - Thus, public and private systems of finance suffer from allocative inefficiency in risk pooling Efficiency in the Market for Health Care Services - How health care is financed also affects allocative efficiency within the market for health care services since financing influences the: 1) Prices of health care services 2) Provider options concerning delivery of services 3) Patterns of health care consumptions - Looking at pure private finance, through private health insurance with cost-sharing, may be judged to be more efficient if we think health markets as closely approximating perfectly competitive markets and the individual WTP is appropriate metric for assigning social value - Alternatively, public finance may be judged more efficient if we view externalities, imperfect competition, income effects, and if we think health gain is the appropriate metric - Under a single-payer public approach (Canada) it is argued to be better to control moral hazard by removing plan choice from individuals and insurance companies, arguably better to target resources in line with health care needs, but inefficiencies with wait-times are apparent - Wait-times allocate care on time basis, much like price would allocate care in monetary terms - Focusing on wait-times alone misses fundamental issue for allocative efficiency: are individuals able to obtain services for which the social benefit is greater than social cost? (Ex. In US there are no wait-lists but lack of access to health care for uninsured which is allocative inefficiency Efficiency in the Broader Economy - How health care is financed also affects the broader economy, two effects are: 1) Efficiency in the labour market 2) General welfare losses associated with taxation - Private health care finance can affect efficiency in labour market (Ex. Coupling of health care insurance coverage to employment can influence a number of labour market outcomes such as:  Job mobility among workers (job lock)  Decisions to enter or exit the labour force  Wages  Hours Worked  Retirement Decisions - Public health care finance can lead to general welfare losses associated with taxation (Ex. Systems where revenues are generated through taxation are likely to introduce welfare reducing price distortions, creating allocative inefficiency) - Consumption taxes create inefficiency by distorting choice between consumption and saving - Payroll taxes and income taxes create a welfare loss in the labour market, implying government should use tax revenue in ways to generate benefit for society Equity of Health Care Finance - Emphasize the impact of alternative approaches on distributional equity with respect to: 1) The burden of payment 2) Health care utilization - Distributional equity normally draws on two general principles of finance: 1) Benefit Principle – Amount individuals contribute should be proportional to the benefit they receive from the goods financed 2) Ability-to-Pay Principle – Amount individuals contribute should depend on their ability to pay (income flow/wealth) not their need/ability to benefit from goods financed - Economists Describe how payments vary with income in three ways: 1) Regressive Financing: Proportion of income a person pays falls as income increases 2) Proportional Financing: Proportion of income paid stays constant as income increases 3) Progressive Financing: Proportion of income paid increases as income increases Figure 1: Progressive, Proportional, and Regressive Systems of Finance (TABLE 11.2 in the text) - Country One has proportional tax system, Country Two has progressive tax system, Country Three/Four have regressive systems Equity of Health Care Utilization - Empirical evidence documents more equitable utilization under public finance - Finance system determines the extent individuals face financial barriers when seeking care, greater the breadth and depth of health care insurance, more equitable patterns of utilization Net Incidence - Refers to distribution of the difference between tax benefits and burdens - Examines how society’s resources are redistributed through both the system of finance and patterns of service utilization - General results from net incidence analyses: 1) Observed utilization of health care services is highly regressive where low-income individuals tend to use more services than high-income individuals 2) Tax contributions are proportional 3) Highly regressive for low-income groups in Canada as the value of publicly financed services received far exceeds groups’ contributions - Generally, health care system redistributes economic resources from high-income groups to low-income Public and Private Roles in Mixed Systems - There are three fundamental configurations of public and private roles in a mixed system of health care finance: 1) Joint Financing – Service is partly paid for through public sources and private sources, two sectors do not compete with each other, nor are they seen as alternatives 2) Alternatives – Either public or private financing is chosen, configurations in which public and private finance are alternatives can take two primary forms: a) Supplementary (parallel) Private Finance: Exists when a service that is included within the public plan can also be obtained privately if desired b) Substitutive Private Finance: Exists when an individual is permitte
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