Public-Sector Health Care Financing

CHLRWORKINGPAPERSERIES中国人力资本与劳动经济研究中心工作论文系列Public-SectorHealthCareFinancingAkeBlomqvistWorkingPaper5December2009CHINACENTERFORHUMANCAPITALANDLABORMARKETRESEARCHCENTRALUNIVERSITYOFFINANCEANDECONOMICS中央财经大学中国人力资本与劳动经济研究中心39XueyuanSouthRoad,HaidianDistrict,Beijing,China100081Web::86-010-62288298©2009byAkeBlomqvist.Allrightsreserved.1PUBLIC-SECTORHEALTHCAREFINANCINGÅkeBlomqvist*DepartmentofEconomics,NationalUniversityofSingaporeandChinaCenterforHumanCapitalandLaborMarketResearch,CentralUniversityofFinanceandEconomics,Beijing0.IntroductionSeriousillnessrequiringcostlytreatmentcanhavedevastatingfinancialconsequencesforindividualsandfamilies.Becauseillnessstrikesrandomly,risk-poolingthroughvariouskindsofinsurancearrangementscanreducetheimpactofillness-relatedfinancialshocks:Throughrisk-pooling,thepotentiallydevastatingfinancialimpactonthefewunluckyenoughtobestrickenbyillnessisconvertedintoapredictablesmallercostsharedbothbythosewhofallillandthosewhodon’t.Economicanalysiscanbeusedtoshowthat,underreasonablecircumstances,sucharrangementsareefficientinthesensethatonaverage,membersofacommunityinwhichthereisriskpoolingarebetteroffthanifthereisnone.Inprinciple,riskpoolingforthispurposecanbeaccomplishedviathemarketmechanism,throughprivatehealthinsurance.However,ashaslongbeenrecognizedintheliterature,relianceonprivatemarketsinthiscontextmayproduceoutcomesthatarebothinefficient(inamicro-economicsense)andinequitable.This,ofcourse,isthereasonwhythepublicsectorhasbecomeheavilyinvolvedinfinancinghealthcareinmostcountriesintheworld.Withrespecttoefficiency,aparticularlyintractableproblemisthatofadverseselection(furtherdiscussedinChapters14,17,and18inthisvolume).Adverseselectionariseswhendifferentconsumersaresubjecttodifferentrisksofillness,especiallyinsituationswhenitisimpossibleorcostlyforinsurerstoidentifythosewhoareathighrisk.Thereisthenatendencyforthoseatlowriskofillnesstowanttoescapefrominsuranceplansthattheysharewithindividualswhoareathigherrisk(sincethepresenceoflatterincreasestheexpectedpayoutsperpersonforsuchinsuranceplans,andthereforetendstoincreasetheirpremiumcost).Ifinsurancemarketsareallowedtoletindividualssortthemselvesinthismanner,theresultmaybethatthoseatlowriskforegoinsuranceorendupin*IwouldliketothankSherryGliedandPeterSmithforhelpfulcommentsonanearlierdraft.2plansthatonlyofferlimitedprotection,whilethoseathighriskendupinplanswithveryhighpremiums;alternatively,theonlyplansthatsurviveinthemarketmaybelow-qualityplansthatonlyofferlimitedprotection.1Neitherkindofoutcomeiseconomicallyefficient.Anoutcomeunderwhichthoseathighriskofillnesshavetopayveryhighpremiums,orcannotgetinsuranceatall,canalsonotbeconsideredequitable,atleastnotifthoseathighriskareinthiscategorythroughnofaultoftheirown(becauseofinheritedriskfactors,pastillness,andsoon).Notethat,contrarytotheadverseselectionproblem,theequityissueariseswhetherornottheinsurerscanidentifythoseathighriskonthebasisofobservablefactors.2Whileitispossibleforsocietytoaddresstheproblemsofinefficiencyandinequityofprivateinsurancemarketsthroughvariousformsofregulation,theexperienceinthecountriesthathavetriedtodosohasnotbeenparticularlyencouraging.Inmostadvancedcountries,therefore,theroutethathasbeentakeninsteadhasbeentoreduceoreliminatetheproblemswithprivateinsurancebyoffering,orrequiring,membershipinpubliclyfunded(orpubliclyorganized)insuranceplans.Thequestionsthatwillbeconsideredinthischapterare:Howshouldsuchpublicplansbedesignedandfunded?Thechapterisdividedintothreemainsections,eachdealingwithafundamentalquestionthatmustbeaddressedinasystemwheregovernmenttakesamajorroleinhealthcarefinancing.Thefirstoneiswhattherelativeimportanceofthepublicplanandprivatepaymentsassourcesoffundingshouldbe(whereprivatesourcesareunderstoodtoincludebothout-of-pocketpaymentsbypatientsandprivateinsurance).Thesecondquestionishowtherevenuetopayforpublicspendingonhealthcareshouldberaised.Howdoesfinancingthroughgeneralrevenuecomparewithvariousformsofsocialinsurance?Iffinancingisthroughgeneralrevenue,howshouldresponsibilitybedividedbetweendifferentlevelsofgovernment?Ifitisthroughsocialinsurance,shouldtherebeseveralfundsamongwhichindividualscanchoose,orasinglefundforall?Arelated1TheclassicanalysisofadverseselectionisRothschildandStiglitz(1976).TwopapersthatdemonstrateitsempiricalsignificanceindifferentwaysareMarquis(1992)andCutlerandReber(1998).CutlerandZeckhauser(2000)providesausefulsummary.2AnearlypaperthatstressestheequitymotiveforgovernmentprovisionofhealthinsuranceisBlomqvistandHorn(1984).3issueishowhealthcarefortheelderlyshouldbefinancedinasocialinsurancesystem.Thethirdfundamentalquestion,finally,concernsthewaythemoneyshouldbespent.Shouldthepublicinsuranceplanalsobetheserviceprovider(asinthenationalhealthinsurancemodel)orshouldhealthservicesbesuppliedbyindependentproviders?Inthelattercase,whatshouldbethenatureofthecontractsbetweenprovidersandthepublicplan?Inparticular,whatmethodsshouldbeusedtopayproviders(doctorsandhospitals)?I.Whatshareofhealthexpendituresshou