Long-Run Growth and Welfare Effects of Rising US Public Health Expenditure, by Elwin Tobing and Jau-Lian Jeng, is a theoretical examination of the impact of public health spending on the long-run growth path in a theoretical economy. This paper represents a thoroughly mathematical framework for analysis of the economic impact of public health spending.
Bending the Health Cost Curve: The Promise and Peril of the Independent Payment Advisory Board, by Ann Marie Marciarille and J. Bradford DeLong, is an analysis of potential positive and negative impacts of the Independent Payment and Advisory Board, which will attempt to manage Medicare cost growth. This paper delves into the political economy of public finance.
Laurence Seidman, in Medicare for All: An Economist’s Case, argues for the replacement of the current private-public health care financing scheme with a single-payer health care financing plan, in the style of the current Medicare system. This article provides a persuasive argument, based on theory and empirics, for completely rebuilding the health care financing system, and, by extension, the health care system broadly.
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In Long-Run Growth and Welfare Effects of Rising US Public Health Expenditure, Elwin Tobing and Jau-Lian Jeng argue that a continuing rise in US public health spending will lead to higher taxes and a reduction in what they term “productive government spending.” (470). Tobing and Jeng construct an endogenous growth model to analyze the effects of public health spending on economic growth and welfare. The implications of their analysis are dependent upon the treatment of health spending as a joint consumption-investment good, or as a pure consumption good. If health spending is treated as a joint consumption-investment good, Tobing and Jeng find that it decreases long-run growth “modestly.” If, on the other hand, such spending is treated as a pure consumption good, the long-run growth rate is 0.7 points lower, and welfare is 14% lower. (470)
The utility function Tobing and Jeng used for their representative consumer is given as:
... [For equation, see PDF version of this paper.]
In a representative-consumer model, the values of the parameters in the utility function are the chief determinants, along with the values of the parameters in the effective budget constraints, of the resultant allocations and prices. Similarly, the functional form of the utility function, and, to a lesser degree, that of the budget constraint, determine the manner in which prices and allocations are determined.
The utility function constructed by Tobing and Jeng treats health status (using public health expenditure as a measurable proxy) as a component of sorts of consumption. While this may have an intuitively logical foundation, Tobing and Jeng offer no reason to treat the relationship between health status and consumption as fundamentally different from the relationship between health status and leisure, the other major component of their utility function. Since their conclusions are reliant upon the consumption-investment balance of public health spending, their failure to explain this choice explicitly likely has a material impact on the robustness of their conclusions.
Tobing and Jeng’s “Proposition 1” shows that the economy’s balanced growth path is monotonically increasing in SH (public health spending) (479). The transmission mechanism for this rise in γ is the increase in labor productivity due to better health status. They also show that such spending comes at the expense of private education spending and physical capital investment.
What Tobing and Jeng do not show is whether the rise in γ due to increases in public health spending has a larger or smaller absolute value than the resultant decrease in γ due to lower private education spending, lower physical capital investment, and higher tax revenues (to pay for the higher public health spending). That the decrease in γ from these factors is greater than the rise in γ from higher labor productivity is a central thesis of the paper, but Tobing and Jeng fail to show this explicitly.
In their “Corollary to Proposition 2,” Tobing and Jeng assert that, “when health status is a pure consumption good, the growth effect of public health spending is zero” (480). They show this mathematically, but it is clear intuitively. If public health spending is consumption, then it does not increase workers’ productivity, and therefore does not increase the ability to earn more in the future.
It follows that the best way to evaluate this claim is empirically. Many studies have shown a positive correlation between health status and labor productivity (Green and Baker; Muysken, Ziesemer, and Yetkiner; and Schwartz and Riedel). Thus, this conclusion of Tobing and Jeng is spurious at best.
Tobing and Jeng’s third proposition is that γ is decreasing in the tax rate. This is a relatively uncontroversial assertion. No tax scheme that is widely used is free of distortionary effects. They do show that “the growth effect of labor income tax is higher than that of capital income tax” (481).
Tobing and Jeng purport to show that public health spending represents a net loss to an economy across several measures. Their rigorous treatment of the subject provides a compelling framework, but their analysis is undermined by their assumptions, chiefly that public health care spending represents a consumption good. Their model is, however, an excellent starting point for a more complete analysis of the macroeconomic impact of public health care spending.
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Bending the Health Cost Curve: The Promise and Peril of the Independent Payment Advisory Board, by Ann Marie Marciarille and J. Bradford DeLong, is an analysis of potential positive and negative impacts of the Independent Payment and Advisory Board (IPAB), an agency created by the Patient Protection and Affordable Care Act (PPACA) in 2010 with the sole purpose of uncovering and implementing cost savings for the Medicare program, in order to bring healthcare cost growth in line with general price inflation (93). The problem that IPAB is meant to solve is the unmooring of costs from outcomes in US health care, in comparison with other developed economies.
Marciarille and DeLong provide as background to their analysis a comprehensive, yet concise, history of the run-up to the passage of PPACA. They discuss the debates over the role of government in “healthcare financing and delivery systems” (79) and the proper scope and magnitude of state social insurance.
The “debate” that Marciarille and DeLong chiefly address is a third one: how much healthcare spending can the economy afford, and how can we construct a financing mechanism such that we do not conclude that we cannot afford the healthcare we as a society desire (79). These questions are so important, say Marciarille and DeLong, precisely because of the “unmooring” described above. If health care is inefficiently expensive due to factors unique to the US, then health outcomes typically expected in the developed world will be prohibitively expensive in the US.
The IPAB is forbidden from raising taxes, Medicare premiums, copayments, and deductibles, or from rationing (a term left undefined in the PPACA (Aaron 2011)) health care in any way (79). It will rely, initially, upon Medicare outpatient reimbursement rates as an avenue for cost reduction (Aaron 2011).
Whether IPAB is able to achieve this substantial goal will certainly depend on several factors. The political volatility of the issues at stake, such as physician’s fees and the custom of Congressional oversight over Medicare matters do not bode well for an effective IPAB (Aaron 2011). Marciarille and DeLong also point out that regulatory capture is always a concern with Boards of this nature. The risk that cost reductions will introduce quantity and qulity reductions is also present.
According to Marciarille and DeLong, the IPAB would represent a significant upgrade to the current “specialist-driven” price-setting mechanism (81), in which committees of medical specialists set prices in their respective subfields. Since many private insurers peg their own pricing decisions to values set by Medicare, IPAB success could reduce price growth industry-wide.
Marciarille and DeLong identify the source of the titular “promise” as the fact that, though private and public medical costs are rising “in tandem,” that “the public side, if anything, [is] better at achieving efficiencies and evading cost-shifting in health-care provision.” (88) (Congressional Budget Office 2008). Much of this advantage, they note, is due to the elimination of adverse-selection inefficiencies endemic to private insurers.
Marciarille and DeLong identify avenues within PPACA for reducing the growth rate of costs beyond the IPAB. New excise taxes, for example, will disincentivize insurance providers from offering plans subject to the taxes, which will nudge insurers toward cost-cutting measures, and (potentially) away from lavish marketing efforts (91-92).
Marciarille and DeLong believe that the differences between IPAB and its predecessor, Medicare Payment Advisory Commission (MedPAC), namely IPAB’s independence from the legislative branch, bode well for its success. Their optimism is rightly mitigated by the titular “perils” of technocratic agencies, chiefly ineffectiveness and regulatory capture. Like any policy innovation, IPAB must be given a fair trial before it can be truly condemned.
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In Medicare for All, Laurence Seidman makes “an economist’s case for extending Medicare to all Americans” (88). Seidman’s argument involves four concepts: universality and portability, coverage uncertainty, cost reduction, and political feasibility.
According to Seidman, “Medicare for all” would have the chief benefit of universal coverage. This would eliminate cost-sharing, and, by extension, the need for private Medigap coverage. This would allow also the consolidation of administrative tasks, which have proven to be an aspect of healthcare provision that Medicare has shown particular efficiency. (89)
Universal coverage would also eliminate adverse selection and free-riding, the twin market failures that plague the hybrid private-public health coverage system in the US today. Adverse selection is at the root of much of the inefficiency of private health insurance administration, as private insurers spend vast resources sorting potential customers by risk (Cutler and Zeckhouser 1997). Free-riding in the form of government mandates that require caregivers to treat the indigent is another major inefficiency in US healthcare. These problems are eliminated with universal coverage.
Universal coverage also means that coverage would be portable. According to Seidman, this would eliminate the “distraction” of health insurance uncertainty for workers, potential workers, managers, and small-business owners. Seidman argues that this will lead to a material productivity gain for the US economy as a whole. (90)
Seidman proposes replacing premiums with a set of taxes, rather than with a single high-rate tax. This is intended to mitigate the efficiency loss of high-rate taxation (efficiency loss rising at the square of the tax rate), as well as to ensure that the burden of the tax is evenly spread. He also calls for a value-added-tax that would spread burden to all groups (92). Seidman would continue and expand existing “health taxes” on tobacco, alcohol, and pollution, both for revenue and incentive purposes.
The most compelling argument Seidman makes in favor of “Medicare for All” is that the growth path of health care costs can be lowered through single-payer bargaining power. He cites empirical studies of health care spending in OECD countries that find prices in the US higher than those in other OECD countries, while quantities are lower. This refutes the notion that the US is near the quantity-axis intercept on the health care demand curve because of low visible costs to demanders.
Seidman’s proposal is an example of out-of-the-box thinking on the future of the long-run growth path of public healthcare spending. There are some for whom Seidman’s plan must seem preposterous, but that is merely a representation of the entrenchment of state minimalism in the US. The future of health care finance in the US will more closely resemble Seidman’s vision than it will the private-public hybrid of today. The only question will be whether or not we design an fair and effective financing infrastructure.
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This literature review was intended to showcase three approaches to the analysis of public health care finance. Tobing and Jeng applied a mathematical and theoretical framework to identify tradeoffs. Marciarille and DeLong examined the institutions, past, present, and future, established by the federal government to regulate costs. And Seidman made a persuasive case for abrogating the current system in favor of an approach that, while new to the United States, has proven effective in other OECD countries at providing high-quality medical care without exponentially rising costs. These three papers are representative of the styles, methods, and perspectives of the current literature on public health care spending in the US today.
Works Cited
Aaron, Henry J. "The Independent Payment Advisory Board -- Congress's "Good Deed"." The New England Journal of Medicine 364, no. 25 (Jun 2011): 2377-2379.
Congressional Budget Office. "Key Issues in Analyzing Major Health Insurance Proposals." Congressional Budget Office. 12 18, 2008. http://cbo.gov/sites/default/files/cbofiles/ftpdocs/99xx/doc9924/12-18-keyissues.pdf (accessed Apr 14, 2013).
Green, Gareth, and Frank Baker, . Work, Health, and Productivity. New York: Oxford University Press, 1991.
Muysken, Joan, Thomas Ziesemer, and Hakan Yetkiner. "Health, Labor Productivity, and Growth." Arno. 1999. http://arno.unimaas.nl/show.cgi?fid=300 (accessed April 10, 2013).
Marciarille, Ann Marie, and J. Bradford DeLong. "Bending the Health Cost Curve: The Promise and Peril of the Independent Payment Advisory Board." Health Matrix (Case Western Reserve University) 22, no. 1 (Winter 2012): 75-121.
Schwartz, Steven, and John Riedel. "Productivity and Health: Best Practices for Better Measures of Productivity." Journal of Occupational and Environmental Medicine (The American College of Occupational and Environmental Medicine) 52, no. 9 (September 2010): 865-871.
Seidman, Laurence. "Medicare for All: An Economist's Case." Challenge (M. E. Sharpe, Inc.) 56, no. 1 (Jan/Feb 2013): 88-115.
Tobing, Elwin, and Jau-Lian Jeng. "Long-Run Growth and Welfare Effects of Rising US Public Health Expenditure." Public Finance Review (Sage) 40, no. 4 (May 2012): 470-496.
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