WEBVTT

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<v Instructor>Hey, everyone,</v>

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and welcome back to Module Two.

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In this lecture, I'll be presenting an overview

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of healthcare systems, financing, and payments.

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In this lecture, we're going to be discussing global

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and national health expenditures, health system financing,

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healthcare delivery models, and provider payment mechanisms.

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One reason why it is important

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to discuss health systems financing

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is that there is a wide variation

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in the amount of gross domestic product, or GDP,

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spent on health systems on average between countries.

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And there's also variation between the structure

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of these expenditures between countries.

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So to begin with, health system financing

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is defined as the process of collecting, allocating,

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and distributing revenues to cover health services

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for a designated population.

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Every country is different, and moreover,

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experiences demographic changes

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in epidemiological transitions

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that influence the population's healthcare needs

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and the demand for specific healthcare services.

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Consequently, health financing policy

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cannot be imported from one com country to another.

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Healthcare systems raise revenues for the health system

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from a variety of sources.

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It is important to ensure that the flow of these funds

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is stable and predictable.

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Examples of strategies for raising revenue

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include direct taxation of businesses or households,

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indirect taxation with excise or consumption taxes,

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and indirect taxes can often be used

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to target health related behavioral choices,

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like lowering costs of healthy dietary options

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to encourage healthy choices,

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or conversely, by increasing costs

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of participating in health risk factors,

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like cigarette smoking or drinking alcoholic beverages.

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Next, fund pooling is another important aspect

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of healthcare financing.

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Fund pooling involves the accumulation of health revenues

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on behalf of a defined population

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for eventual transfer to providers.

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When funds are pooled, individuals are exchanging

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uncertain health related expenses

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that will occur at some point in the future

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for budgetable and predictable expenses.

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The main factors that should be considered

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when analyzing pooling arrangements are as follows.

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Number one, the size of the pool.

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Does the system have one large pool

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to cover the entire population, or separate small pools?

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Number two, the risk mix.

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What is the underlying health of the people,

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or the population whose healthcare costs are being covered?

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Does the pool, for example, include individuals

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with preexisting conditions?

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What are the demographics of the population?

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And number three, participation.

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Is participation in the pool voluntary or compulsory?

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If it's compulsory, you'll know the size of the pool.

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If it's voluntary, the size of the pool

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might not be consistent.

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You might have people joining or leaving at certain times,

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depending on personal financial situations.

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So it might be harder to predict

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financial capital that is available to the pool.

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Finally, purchasing or distribution

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involves the allocation of funds to providers

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that deliver healthcare goods or services.

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There are two primary types of purchasing:

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passive, and strategic.

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Passive purchasing transfers funds to providers

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without using information about either performance or need.

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Strategic purchasing, on the other hand, uses incentives

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and administrative mechanisms to allocate funds

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in a way that promotes quality improvement

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and efficiency of healthcare services.

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This graph displays the national healthcare expenditures

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of some major countries.

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Note that the darker shade indicates private spending,

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and the lighter shade indicates

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public or governmental spending.

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You'll also notice that some countries,

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like the United States, Canada to some extent,

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and Switzerland, have larger degrees of private spending

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on healthcare expenditures than other countries.

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You'll also notice that some countries,

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like the Czech Republic and Turkey,

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have the vast majority of their healthcare expenditures

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covered by the public sector.

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We'll be discussing this more

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as the lecturing course goes on.

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As we've discussed, there is significant variation

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in the total amount and structuring

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of healthcare expenditures between countries.

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Health expenditures are a function

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of quality of goods or services provided

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and the price of those goods and services.

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The quantity of a good or service

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is a function of the intensity,

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or how frequently an individual or group accesses

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or uses a good or service,

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and the total population size and structure.

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For example, given two countries, Country A and Country B,

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if they're both providing the same amount of services,

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for example, 1000 rapid diagnostic tests from malaria,

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but the cost in Country B

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is more than the cost in Country A,

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the health expenditures in B will be higher than A.

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Conversely, if the cost in both countries is the same,

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but Country A is providing 2000 tests

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and B is providing 1000 tests,

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then the expenditure in A will be greater than that in B.

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Variation in price and utilization intensity

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is anchored in the unique sociocultural values of nations

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and their related approaches to organizing

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and paying for healthcare.

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Governments also play a role in predicting expenditures.

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Three key metrics that they use to predict expenditures

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are health status risk, medical care risk,

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and loading factors.

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Health status risk is also sometimes called

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the "population health risk."

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That process calculating expected medical costs

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is often called the "underwriting methodology."

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Next, we turn to this graph,

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which displays government spending

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by category at 2014 levels.

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Note the differences in percentage of GDP spent on health.

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So again, health is going to be the color on the far left

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in all of these different lines,

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where the number on the far left

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is discussing the total government spending

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as a percentage of gross domestic product, or GDP.

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We see that some countries, like Denmark,

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Finland, France, Greece,

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spend more than half of their total GDP

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as government expenditure,

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whereas other countries don't spend nearly that much.

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Note too that these are all percentages, not raw numbers.

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So while one country might spend

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a lower percentage of its GDP on governmental spending

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than another country, if that country's GDP is larger,

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they may very well be spending more actual dollars

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and cents on governmental spending.

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There are two main approaches that governments take

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in regard to controlling healthcare expenditures.

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The first, the Keynesian approach, is based on the writings

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of 20th century English economist, John Maynard Keynes,

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in his School of Economics.

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This approach advocates for government intervention

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in markets to optimize outcomes

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and arrive at levels of price and intensity

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that reflect national desires.

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In contrast, the second main approach

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utilizes laissez-faire economics,

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in which markets are allowed to reach equilibrium

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in an environment with limited government intervention.

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France is an example of the Keynesian approach,

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while the United States tends to use

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the laissez-faire approach.

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Of course, most countries use a combination of the two.

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It is not an either/or choice.

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Can anyone think of an example of a Keynesian approach

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to healthcare expenditures in the US?

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For me, one of the first things that comes to mind

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is the capping of insulin costs

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at $35 per month for Medicare enrollees

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in the recently passed 2022 Inflation Reduction Act.

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This figure at first looks a little complicated.

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Hopefully will become clear.

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It's displaying a classical supply and demand curve

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to illustrate the effects of Keynesian interventions.

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Where we have price on the Y axis,

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we see that quantity is increasing on the X axis.

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So we see a line for supply and a line for demand.

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As quantity increases and the price increases,

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the supply is going to increase.

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Similarly, as demand increases,

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the price is going to increase,

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or the quantity of available goods

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is going to decrease.

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When governments implement Keynesian interventions,

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the intersection of the supply and demand curves

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can change from points D, E and F throughout the graph here.

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So for example, a government might limit the supply

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of healthcare providers, so supply would shift

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from point G on the X axis, to point H on the X axis.

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When that happens, the price of good increases,

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say for example, from B to C on the Y axis.

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The restricted supply is going to lead

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to the possibility of unmet demand.

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Individuals in situations of unmet demand

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might then be willing to pay more for services

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to have their healthcare needs or demands met.

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However, governments can also limit the price

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of healthcare services through the use of a fixed

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and centrally planned budget.

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In this case, a second constraint is introduced

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and prices are limited from drifting upward

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because the total expenses,

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the product of goods and quantity of goods,

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is set beforehand.

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In countries that use this method,

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resources can be allocated in a manner and price

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that's acceptable to most constituents.

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At point E, for example.

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Next, we'll discuss some primary healthcare models.

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Again, some of you may have heard about some of these

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in other public health courses you've taken,

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but we'll review them anyway here.

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There are four primary healthcare models we'll talk about.

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The first, universal coverage, is paid for

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through general tax revenue and covers all citizens.

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Within this model, central and regional governments

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are tasked with estimating health status

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and medical care risk for their populations,

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while simultaneously keeping costs in check.

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Most universal systems have little to no cost sharing,

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so they must employ supply side tools

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to more heavily influence healthcare infrastructure

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and overall expenses.

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Examples of countries with this model

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include the United Kingdom, Italy,

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New Zealand, and Greece.

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The second main model is social insurance,

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or the Bismarck model.

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These are also referred to as tax-based systems.

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They're heavily influenced

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by Prussian Chancellor Otto von Bismarck,

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who started a social welfare program in the 19th century

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to cover accidents, disability, and retirement

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for the Prussian working population.

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In this system, the factors of production

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can be privately or publicly owned.

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Much of Latin America, Germany,

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and Japan utilize this model,

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and their costs are mostly funded

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through employment related taxes.

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Third, national health insurance

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is a blend of the previous two models.

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Providers are independent from government,

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but receive payment from a government run insurance plan

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into which everyone is required to pay.

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Canada, South Korea, and Taiwan

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all have versions of this model.

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Fourth, private insurance, or out-of-pocket systems,

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are financed through individual or employer contributions,

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and are built upon the same foundation

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of health and medical care risk prediction.

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Private systems oftentimes exist alongside universal

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or social coverage systems to cover services

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that may not be covered by the national system.

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One version of this is the high deductible health plan,

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or the HDHP, which covers catastrophic

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or very high cost medical services,

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and are often paired with health savings accounts.

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These plans have high co-payments or deductibles,

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and expose the healthcare consumer

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to the financial consequences of behavioral choices.

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For health insurance to succeed,

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the people seeking coverage must be risk adverse,

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meaning that the insured population

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has declining marginal utility.

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The graph on the following slide

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is going to help to depict this.

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The curve in the center of this image

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is a declining marginal utility curve.

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The vertical access represents the measure

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of written individual satisfaction, or economic utility,

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and the horizontal access represents income or wealth.

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So as income increases, so does utility,

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but it does so at a declining rate.

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The relationship is nonlinear.

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More income creates more utility,

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but the impact of adding additional income

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declines in the population as it makes more money.

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In this graph, imagine that individuals

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have a 50% chance of being healthy

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and having no medical expenses,

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and a 50% chance of being sick.

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If individuals are healthy,

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they have the full $40,000 in discretionary funds.

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If sick, they incur $20,000

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in healthcare expenses and lost wages.

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Because medical expenses

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reduce discretionary income to $20,000,

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incomes who are healthy and have more discretionary income

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have a higher utility, 8,000 units,

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than those who are sick and have less income.

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Or in this chart, irons graph 4,727 units.

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As individuals cannot determine in which state of health

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they will find themselves, they cannot predict

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where they will end up on this graph.

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Insurance companies use underwriting techniques

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to estimate average medical expenses

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by calculating the probability of a person falling ill

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and the cost associated with medical care.

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Thus, by multiplying the two,

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we get an expected cost of $10,000,

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and an expected income of $30,000.

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There are two primary provider payment mechanisms.

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In the first, FFS or fee for service model,

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providers are paid on a per occurrence basis,

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and the profit incentives function are shown in this graph.

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Fixed expenses are flat,

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and variable expenses increase as services are rendered.

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At the same time, revenue depends on volume of services.

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If no services are rendered, there is no revenue.

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At low volumes, revenue is being generated,

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but does not offset the fixed and variable expenses.

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When total revenues equal total expenses,

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we reach the breakeven point.

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Finally, the pay for performance

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and value-based contracting models

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reward or penalize providers,

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based on their adherence to performance standards.

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These models are similar to the fee for service model,

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but can help to mitigate

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the potential underprovision of cases of care

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associated with fixed payment models,

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while also encouraging providers

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to deliver high quality care.

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Finally, this is a summary of what we discussed.