Economic Survey of the United States 2008: Health Care Reform

 

Contents | Executive summary  | How to obtain this publication | Additional information

The following OECD assessment and recommendations summarise chapter 3 of the Economic survey of the United States published on 9 December 2008.

 

Contents                                                                                                                             

The health system does not perform as well as it could

Another challenge facing US policymakers is to improve the performance of the health system. Notwithstanding very high health spending (about 15% of GDP) and the use of cutting edge technology, the health status of the US population does not appear to fare well by international comparison. The United States ranks poorly in terms of life expectancy at birth, infant mortality and “amenable mortality” (i.e. mortality that can be averted by good health care). While there are factors beyond the health care system itself that contribute to this below average health outcome and/or higher health expenditures   such as the relatively high risk of death or injury from violence or accidents, the higher prevalence of obesity and of low birth weight babies, and the cost of the medical liability litigation system and the associated practice of defensive medicine,   these factors do not appear to explain all of the gap in performance between the United States and other countries.


Inadequate health insurance coverage has a negative effect on life expectancy

A particular source of concern is the large number of people who lack adequate health insurance. It is estimated that 46 million persons were not insured at all in 2007 (16% of the population), with a further large share of the population underinsured. With Mexico and Turkey, the United States is the only OECD country that does not get close to universal health care insurance. The large majority of the uninsured are people who are not offered health insurance by an employer, because they work in a small firm, work part time or are not employed. Most people without adequate insurance belong to lower–income groups, which have shorter life expectancy than average and have benefitted much less than others from improvements in life expectancy in past decades. It is therefore plausible that the significant and growing proportion of the population that is uninsured or underinsured is one of several factors that help to explain the growing gap in life expectancy between the United States and other countries. Although there are several public insurance schemes (such as Medicare for the elderly and disabled, Medicaid for the poor, and SCHIP for poor children), the number of uninsured is widely considered to be a problem that needs to be rectified. Making progress towards health insurance coverage for all Americans should be given a high priority on the policy agenda.


Replace the health tax exclusion for employer-sponsored health insurance with more efficient subsidies

The tax exclusion has played an important role in promoting employment-sponsored health insurance in the United States because it reduces its cost to the employee both by treating compensation in the form of employer contributions to health insurance as tax free income to the employee and by encouraging the formation of employer sponsored insurance pools. However, it does not reach workers not offered insurance by their employers and is more beneficial to workers in upper tax brackets, i.e. it is regressive. Moreover, it locks workers into jobs, for fear of losing coverage. Because it is uncapped, the tax exclusion encourages the purchase of more generous insurance plans, notably plans with little cost sharing, thus exacerbating moral hazard. The existing health tax exclusion should be terminated to mitigate these problems, even though ending the tax exclusion would lead to a reduction in the number of people offered employer sponsored health insurance, especially among those working for small companies. The tax revenues resulting from the elimination of the tax exclusion would be available to subsidise the purchase of insurance by individuals in a way that is independent of the choice of health plan, provided that some minimum standards of required coverage are satisfied. Such subsidies, which could take many forms, such as direct subsidies or refundable tax credits, would improve the current situation in at least two ways: they would reach those who do not now receive the benefit of the tax exclusion; and they would encourage more cost conscious purchase of health insurance plans and health care services as, in contrast to the uncapped tax exclusion, such subsidies would reduce the incentive to purchase health plans with little cost sharing. Policy makers should consider means testing these subsidies. The extent to which such subsidies reduce the number of uninsured will depend on many factors, including their level and structure.


Additional measures to promote health insurance coverage

Even so, further measures are likely to be necessary to expand coverage substantially:

  • At present, the individual health insurance market is not attractive, in part because adverse selection risks have led to high premiums compared to their actuarial value, and because administrative costs are high. These problems could be addressed by increasing the size of risk pools and reforming individual and small group insurance markets by requiring community rated and guaranteed issue policies, thus disconnecting the payments from individual health risks.
  • This approach would have a greater impact on coverage if accompanied by a requirement to be insured, as otherwise healthy people may choose to be uninsured rather than to pay community rated premiums, which are higher than experience rated premiums for healthy people. Bringing these people into the risk pool would also make insurance in the individual and small group market even more affordable on average. However, such a requirement has its own drawbacks: the complexity of defining the required coverage; the risk that this requirement will become unduly inflated; the inherent reduction in consumer choice; and difficulties in designing and implementing appropriate enforcement mechanisms.


Medicare should enforce stricter cost controls

Public insurance, notably the Medicare programme (for those aged 65 or over and for qualified disabled persons aged less than 65) is also an important insurance solution for many Americans. Medicare expenditure now accounts for approximately 3% of GDP, or about 20% of total health expenditure, and under current trends is projected to rise sharply in the years ahead. Given the scale of the programme, it is important that potential for reducing costs without harming the quality of treatments received by enrolees be exploited. Detailed analysis shows that per capita Medicare spending varies widely across the United States without associated variation in health outcomes. Some hospitals seem prone to high cost procedures without additional benefit to patients, while others seem able to provide lower cost care that proves to be effective. The authorities should consider ways to enhance the dissemination of information on the effectiveness and cost of treatments and procedures. Savings could also be made by reducing payments to Medicare Advantage (MA) plans, which provide Part A (hospital) and Part B (medical) coverage as well as medically-necessary services to individuals who choose to receive their Medicare benefits through private plans, to the level paid to providers under the traditional fee for service Medicare programme. It has been estimated that payments for Medicare Advantage Plans currently exceed the costs of Medicare Parts A and B by approximately 13% for similar beneficiaries. According to MedPac, a significant portion of these extra payments goes to fund plan administration and profits and not to services for beneficiaries. These extra payments also raise equity concerns as they are funded by all Medicare Part B beneficiaries (through their Part B premiums) and by all taxpayers (through general revenues) while only MA enrolees benefit. In addition, such payments enable MA plans to attract new clients without improving efficiency, a problem underlined by the rapid growth in fee for service plans. A start to overcoming these problems was made in recent legislation, which reduced payments to MA plans and required most fee for service MA plans to form provider networks. This process should be taken further by gradually lowering MA payments to the level for traditional fee for service Medicare plans. Savings also should be made without reducing the quality of health care by introducing more competition into the process for purchasing durable medical equipment. Currently, Medicare administrators are prohibited from harnessing competition or negotiating prices of medical equipment and supplies; instead, they must use fee schedules based on historical charges. On the basis of pilot programmes, it has been estimated that using a competitive bidding process instead of the fee schedules could reduce costs by 26% on average, based on strict criteria for product quality and security of suppliers, without significantly reducing access of beneficiaries to supplies. Generalisation of competitive bidding for medical equipment and supplies should not be delayed beyond the 18 month period stipulated in recent legislation.

 

How to obtain this publication                                                                                   

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of the United States 2008 is available from:

 

Additional information                                                                                                  

 

For further information please contact the United States Desk at the OECD Economics Department at eco.survey@oecd.org.  The OECD Secretariat's report was prepared by David Carey and Andrea de Michelis under the supervision of Patrick Lenain. Research assistance was provided by Laure Meuro and Roselyn Jamin.

 

 

 

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