Instructor: Hey, everyone,
and welcome back to Module Two.
In this lecture, I'll be presenting an overview
of healthcare systems, financing, and payments.
In this lecture, we're going to be discussing global
and national health expenditures, health system financing,
healthcare delivery models, and provider payment mechanisms.
One reason why it is important
to discuss health systems financing
is that there is a wide variation
in the amount of gross domestic product, or GDP,
spent on health systems on average between countries.
And there's also variation between the structure
of these expenditures between countries.
So to begin with, health system financing
is defined as the process of collecting, allocating,
and distributing revenues to cover health services
for a designated population.
Every country is different, and moreover,
experiences demographic changes
in epidemiological transitions
that influence the population's healthcare needs
and the demand for specific healthcare services.
Consequently, health financing policy
cannot be imported from one com country to another.
Healthcare systems raise revenues for the health system
from a variety of sources.
It is important to ensure that the flow of these funds
is stable and predictable.
Examples of strategies for raising revenue
include direct taxation of businesses or households,
indirect taxation with excise or consumption taxes,
and indirect taxes can often be used
to target health related behavioral choices,
like lowering costs of healthy dietary options
to encourage healthy choices,
or conversely, by increasing costs
of participating in health risk factors,
like cigarette smoking or drinking alcoholic beverages.
Next, fund pooling is another important aspect
of healthcare financing.
Fund pooling involves the accumulation of health revenues
on behalf of a defined population
for eventual transfer to providers.
When funds are pooled, individuals are exchanging
uncertain health related expenses
that will occur at some point in the future
for budgetable and predictable expenses.
The main factors that should be considered
when analyzing pooling arrangements are as follows.
Number one, the size of the pool.
Does the system have one large pool
to cover the entire population, or separate small pools?
Number two, the risk mix.
What is the underlying health of the people,
or the population whose healthcare costs are being covered?
Does the pool, for example, include individuals
with preexisting conditions?
What are the demographics of the population?
And number three, participation.
Is participation in the pool voluntary or compulsory?
If it's compulsory, you'll know the size of the pool.
If it's voluntary, the size of the pool
might not be consistent.
You might have people joining or leaving at certain times,
depending on personal financial situations.
So it might be harder to predict
financial capital that is available to the pool.
Finally, purchasing or distribution
involves the allocation of funds to providers
that deliver healthcare goods or services.
There are two primary types of purchasing:
passive, and strategic.
Passive purchasing transfers funds to providers
without using information about either performance or need.
Strategic purchasing, on the other hand, uses incentives
and administrative mechanisms to allocate funds
in a way that promotes quality improvement
and efficiency of healthcare services.
This graph displays the national healthcare expenditures
of some major countries.
Note that the darker shade indicates private spending,
and the lighter shade indicates
public or governmental spending.
You'll also notice that some countries,
like the United States, Canada to some extent,
and Switzerland, have larger degrees of private spending
on healthcare expenditures than other countries.
You'll also notice that some countries,
like the Czech Republic and Turkey,
have the vast majority of their healthcare expenditures
covered by the public sector.
We'll be discussing this more
as the lecturing course goes on.
As we've discussed, there is significant variation
in the total amount and structuring
of healthcare expenditures between countries.
Health expenditures are a function
of quality of goods or services provided
and the price of those goods and services.
The quantity of a good or service
is a function of the intensity,
or how frequently an individual or group accesses
or uses a good or service,
and the total population size and structure.
For example, given two countries, Country A and Country B,
if they're both providing the same amount of services,
for example, 1000 rapid diagnostic tests from malaria,
but the cost in Country B
is more than the cost in Country A,
the health expenditures in B will be higher than A.
Conversely, if the cost in both countries is the same,
but Country A is providing 2000 tests
and B is providing 1000 tests,
then the expenditure in A will be greater than that in B.
Variation in price and utilization intensity
is anchored in the unique sociocultural values of nations
and their related approaches to organizing
and paying for healthcare.
Governments also play a role in predicting expenditures.
Three key metrics that they use to predict expenditures
are health status risk, medical care risk,
and loading factors.
Health status risk is also sometimes called
the "population health risk."
That process calculating expected medical costs
is often called the "underwriting methodology."
Next, we turn to this graph,
which displays government spending
by category at 2014 levels.
Note the differences in percentage of GDP spent on health.
So again, health is going to be the color on the far left
in all of these different lines,
where the number on the far left
is discussing the total government spending
as a percentage of gross domestic product, or GDP.
We see that some countries, like Denmark,
Finland, France, Greece,
spend more than half of their total GDP
as government expenditure,
whereas other countries don't spend nearly that much.
Note too that these are all percentages, not raw numbers.
So while one country might spend
a lower percentage of its GDP on governmental spending
than another country, if that country's GDP is larger,
they may very well be spending more actual dollars
and cents on governmental spending.
There are two main approaches that governments take
in regard to controlling healthcare expenditures.
The first, the Keynesian approach, is based on the writings
of 20th century English economist, John Maynard Keynes,
in his School of Economics.
This approach advocates for government intervention
in markets to optimize outcomes
and arrive at levels of price and intensity
that reflect national desires.
In contrast, the second main approach
utilizes laissez-faire economics,
in which markets are allowed to reach equilibrium
in an environment with limited government intervention.
France is an example of the Keynesian approach,
while the United States tends to use
the laissez-faire approach.
Of course, most countries use a combination of the two.
It is not an either/or choice.
Can anyone think of an example of a Keynesian approach
to healthcare expenditures in the US?
For me, one of the first things that comes to mind
is the capping of insulin costs
at $35 per month for Medicare enrollees
in the recently passed 2022 Inflation Reduction Act.
This figure at first looks a little complicated.
Hopefully will become clear.
It's displaying a classical supply and demand curve
to illustrate the effects of Keynesian interventions.
Where we have price on the Y axis,
we see that quantity is increasing on the X axis.
So we see a line for supply and a line for demand.
As quantity increases and the price increases,
the supply is going to increase.
Similarly, as demand increases,
the price is going to increase,
or the quantity of available goods
is going to decrease.
When governments implement Keynesian interventions,
the intersection of the supply and demand curves
can change from points D, E and F throughout the graph here.
So for example, a government might limit the supply
of healthcare providers, so supply would shift
from point G on the X axis, to point H on the X axis.
When that happens, the price of good increases,
say for example, from B to C on the Y axis.
The restricted supply is going to lead
to the possibility of unmet demand.
Individuals in situations of unmet demand
might then be willing to pay more for services
to have their healthcare needs or demands met.
However, governments can also limit the price
of healthcare services through the use of a fixed
and centrally planned budget.
In this case, a second constraint is introduced
and prices are limited from drifting upward
because the total expenses,
the product of goods and quantity of goods,
is set beforehand.
In countries that use this method,
resources can be allocated in a manner and price
that's acceptable to most constituents.
At point E, for example.
Next, we'll discuss some primary healthcare models.
Again, some of you may have heard about some of these
in other public health courses you've taken,
but we'll review them anyway here.
There are four primary healthcare models we'll talk about.
The first, universal coverage, is paid for
through general tax revenue and covers all citizens.
Within this model, central and regional governments
are tasked with estimating health status
and medical care risk for their populations,
while simultaneously keeping costs in check.
Most universal systems have little to no cost sharing,
so they must employ supply side tools
to more heavily influence healthcare infrastructure
and overall expenses.
Examples of countries with this model
include the United Kingdom, Italy,
New Zealand, and Greece.
The second main model is social insurance,
or the Bismarck model.
These are also referred to as tax-based systems.
They're heavily influenced
by Prussian Chancellor Otto von Bismarck,
who started a social welfare program in the 19th century
to cover accidents, disability, and retirement
for the Prussian working population.
In this system, the factors of production
can be privately or publicly owned.
Much of Latin America, Germany,
and Japan utilize this model,
and their costs are mostly funded
through employment related taxes.
Third, national health insurance
is a blend of the previous two models.
Providers are independent from government,
but receive payment from a government run insurance plan
into which everyone is required to pay.
Canada, South Korea, and Taiwan
all have versions of this model.
Fourth, private insurance, or out-of-pocket systems,
are financed through individual or employer contributions,
and are built upon the same foundation
of health and medical care risk prediction.
Private systems oftentimes exist alongside universal
or social coverage systems to cover services
that may not be covered by the national system.
One version of this is the high deductible health plan,
or the HDHP, which covers catastrophic
or very high cost medical services,
and are often paired with health savings accounts.
These plans have high co-payments or deductibles,
and expose the healthcare consumer
to the financial consequences of behavioral choices.
For health insurance to succeed,
the people seeking coverage must be risk adverse,
meaning that the insured population
has declining marginal utility.
The graph on the following slide
is going to help to depict this.
The curve in the center of this image
is a declining marginal utility curve.
The vertical access represents the measure
of written individual satisfaction, or economic utility,
and the horizontal access represents income or wealth.
So as income increases, so does utility,
but it does so at a declining rate.
The relationship is nonlinear.
More income creates more utility,
but the impact of adding additional income
declines in the population as it makes more money.
In this graph, imagine that individuals
have a 50% chance of being healthy
and having no medical expenses,
and a 50% chance of being sick.
If individuals are healthy,
they have the full $40,000 in discretionary funds.
If sick, they incur $20,000
in healthcare expenses and lost wages.
Because medical expenses
reduce discretionary income to $20,000,
incomes who are healthy and have more discretionary income
have a higher utility, 8,000 units,
than those who are sick and have less income.
Or in this chart, irons graph 4,727 units.
As individuals cannot determine in which state of health
they will find themselves, they cannot predict
where they will end up on this graph.
Insurance companies use underwriting techniques
to estimate average medical expenses
by calculating the probability of a person falling ill
and the cost associated with medical care.
Thus, by multiplying the two,
we get an expected cost of $10,000,
and an expected income of $30,000.
There are two primary provider payment mechanisms.
In the first, FFS or fee for service model,
providers are paid on a per occurrence basis,
and the profit incentives function are shown in this graph.
Fixed expenses are flat,
and variable expenses increase as services are rendered.
At the same time, revenue depends on volume of services.
If no services are rendered, there is no revenue.
At low volumes, revenue is being generated,
but does not offset the fixed and variable expenses.
When total revenues equal total expenses,
we reach the breakeven point.
Finally, the pay for performance
and value-based contracting models
reward or penalize providers,
based on their adherence to performance standards.
These models are similar to the fee for service model,
but can help to mitigate
the potential underprovision of cases of care
associated with fixed payment models,
while also encouraging providers
to deliver high quality care.
Finally, this is a summary of what we discussed.