Abstract
In this chapter we investigate the economic rationales for the design of health care financing schemes. We make an explicit distinction between the arguments for governments to implement a system of mandatory cross-subsidies to achieve affordability in the financial access to basic services for high-risk or low-income individuals, and the arguments to mandate the coverage for predefined health care services. We argue that the most important economic arguments to enforce a system of cross-subsidies are related to: the presence of externalities in health care services consumption; the individuals’ risk of becoming bad risks; and the moral hazard effects induced by cross-subsidisation. The rationale for mandatory coverage is based on considerations of free riding behaviour, individuals’ lack of foresight and too high transaction costs of alternative ways to organise cross-subsidies. Finally, we discuss the implications of our analysis for the design of health care financing arrangements. We argue that imposing a universal mandate to obtain uniform coverage for predefined services is not a necessary and proportionate measure to increase the affordability of health care for vulnerable groups. To achieve affordability it is sufficient if governments impose mandatory cross-subsidies. By allowing variations over income groups in the composition of the mandatory benefits packages and/or on the level of deductibles moral hazard can be reduced as compared to a universal mandate for a uniform coverage.
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Notes
- 1.
- 2.
Cross-subsidisation may apply to both services and insurance coverage. There are several intervention strategies to increase the financial accessibility to care or to health insurance. For a more in depth analysis of two of the strategies (i.e. explicit premium-subsidies and implicit premium-subsidies) we refer to Chap. 5in this book.
- 3.
- 4.
Basic services are the totality of cross-subsidised services.
- 5.
- 6.
In this chapter, we do not deal with the question: what determines altruism? This question has given rise to an entire field of study of social capital, the value of altruistic and communal behaviour in society. A central finding of this field is that individuals are likely to be more altruistic when they are more “trusting” others. Anderson et al. (2003) found that most of the attitudinal and behavioural measures of trust were positively correlated with high contributions to merit or public goods.
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- 8.
Van den Berg et al. (1986) found evidence of the presence of strong altruistic preferences for medical care consumption in the Netherlands. From data of the 1985 Health Interview Survey by the Netherlands Central Bureau of Statistics (CBS) they conclude that 78% of the representative sample population fully disagreed with the statement that “people with a less favourable health status should pay more for health care than people in good health” (9% partially agreed, only 3% fully agreed and 10% had no opinion).
- 9.
An extensive literature review about CEA methodology may be found elsewhere (Hauck et al. 2003). Key problems include choice of a summary measure to capture other benefits important to patients and the public; non-comparability of the values elicited with different health state value elicitation instruments; generalisability of studies beyond the study setting or country; choice of target population receiving the intervention; accounting for uncertainty in measuring costs and outcomes; inability to account for the opportunity costs of the cost-increasing element of new interventions; and the requirement to consider portfolios of programmes, rather than individual technologies.
- 10.
Let the subscripts 1 and 0 denote the intervention under study and the alternative to which it is compared, respectively. If C 1 and C 0 are the net present values of costs that result when the intervention and alternatives are used, and E 1 and E 0 their respective health outcomes, the incremental CE ratio is simply: CE ratio = (C 1 − C 0)/(E 1 − E 0). This ratio, which is a cost per unit incremental health effect, is often used as a measure of value.
- 11.
In many respects QALYs are analogous to life expectancy, but include interventions that improve quality of life even when they do not affect survival. Each year that an individual lives longer contributes an additional year to the life expectancy calculation. The amount that each additional year of life adds to QALYs, in contrast, is a preference weight or utility that takes a value between 0 (death) and 1 (best health imaginable).
- 12.
Although related to the argument of individuals’ initial health status, the concepts of severity of illness (Nord et al. 1999), fair inning (Williams 1997) and proportional shortfall (Stolk et al. 2004; Johannesson 2001) will not be discussed, since they do not explicitly refer to the variation in an individual’s utility of supporting a system of cross-subsidies generated by an improvement in others’ health status or quality of life.
- 13.
Note that in specific patient groups such as patients with erectile dysfunction due to spinal cord injuries, this argument does not hold, since these patients’ initial health status is low. Therefore, a rational altruistic individual may be willing to cross-subsidise the low cost per QALY of Viagra to patients with a diagnosed erectile dysfunction due to spinal cord injuries.
- 14.
Similarly, effective preventive care may generate positive externalities. The consumption of effective preventive care may constitute a net gain for society as a whole, since it may reduce the chance of using more costly curative services in the future. This holds true if society pays for the future costs of curative services.
- 15.
The demand for preventive care is likely to be less than socially optimal because of the fact that moral hazard results in a substitution away from preventive care toward curative care (Pauly 1974). The gains from preventive care are uncertain and occur in the future, while the costs (in terms of money and time) have to be made in advance. By contrast, curative care often offers a short-term and more certain gain. Therefore, the stronger the individual’s asymmetry with respect to uncertainty surrounding gains and losses, the less likely the person will demand preventive care (Fuchs 1982).
- 16.
For instance, governments may enforce a system of earmarked income-related (from high to low income groups) cross-subsidies, or subsidise the provision of immunisations, even providing them free of charge.
- 17.
The term “positional” has not been applied uniformly in the literature. For instance, positional goods were initially defined by Hirsch (1976) as those that are in fixed supply or subject to congestion with increased use. Solnick and Hemenway (1998) attempt to identify what things create positional externalities and when people may find themselves on a positional treadmill. In other words, they try to answer the question: to what extent are positional externalities imposed when I have e.g. cosmetic surgery? They found that positional concerns are extremely important for physical attractiveness and stronger for goods than for bads.
- 18.
In theory, markets might develop to deal with the problem posed by lifetime insurance. For a careful review of the main reasons suggesting that market solutions (e.g. long-term insurance, time-consistent insurance contracts) may be poor vehicles for insuring long-term health risks, we refer to Cutler and Zeckhauser (2000).
- 19.
After all, the traditional function of insurance is to protect against an adverse event that has not yet occurred (Arrow 1963).
- 20.
Moral hazard problems are particularly relevant to the health care sector as contrasted with other sectors, because they emerge from the unequal distribution of information between the parties involved. Insurers and governments have highly imperfect information about the appropriateness of medical diagnoses and treatments. Hence, it is very difficult for them to value the damage caused by a disease and to appraise the costs of treatment. Moreover, they cannot judge whether or not subscribers have taken action to prevent diseases from occurring, which make it hard to relate premiums and subsidies to subscribers’ preventive activities (Schut 1995).
- 21.
Moreover, individuals may reduce preventive activities to protect health status if they are (to some extent) financially protected against adverse events.
- 22.
In particular, subsidies-induced overconsumption by increasing the costs of a specific service may negatively affect the cost-effectiveness ratio of that service. In many countries (e.g. France, The Netherlands, Norway, United Kingdom, etc.), policy-makers have in some circumstances taken into account the ex-post cost-effectiveness ratio in deciding whether or not to subsidise a service. For instance, cost-effective treatments with a high ex-post cost-effective ratio (e.g. selective serotonin reuptake (SSRIs), sildenafil (Viagra) etc.) were (partially) removed from the basic basket. On the other hand, treatments not considered cost-effective ex-ante (e.g. ultra-orphan drugs) were subsidised because of their low ex-post impact on the budget available for cross-subsidies (Hughes et al. 2005; Kooijman 2003; Harris et al. 2001).
- 23.
In the literature, adverse selection is often advocated as another argument for governments to introduce mandatory coverage (Nyman 2003). The government can avoid the adverse selection induced welfare loss from inadequate protection by making coverage compulsory. In the presence of mandatory coverage low-risk individuals are prevented from opting out of a pooling equilibrium. But MC may generate other welfare losses, i.e. moral hazard. Alternative and less invasive measures can deal with adverse selection while maintaining adequate risk protection for all risk groups. The central idea is to require insurers to offer adequate coverage to all applicants, irrespective of risk, while keeping premiums affordable by means of some system to redistribute purchasing power for medical care (Schut 1995). For instance, governments may introduce a system of (risk-related) cross-subsidies financed via mandatory solidarity contributions that may increase the affordability and sustainability of coverage for high risks.
- 24.
See Rosen (2005) for a comprehensive analysis of the consequences for efficiency of free riding, and for a review of the literature that investigates the empirical relevance of the free rider problem.
- 25.
Contours of the Basic Health Care Benefit Package, Publication no. 2003/021; downloadable from: http://www.gezondheidsraad.nl/.
- 26.
Although in theory the arguments for mandatory coverage differ from the arguments for mandatory cross-subsidies, in most countries the package of cross-subsidised services coincides with, or contains, the package of services for which a mandatory coverage provision is enforced. For example, there are packages of cross-subsidised services for which there is no mandate to purchase coverage (e.g. GP care for the high-income people in Ireland) but not vice versa. This is true for health care but not for other types of insurance (e.g. car). In car insurance often the purchase of insurance is compulsory but not subsidised. Therefore, we plausibly assume that high-option plans coincide with the package of cross-subsidised services.
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Paolucci, F. (2011). Economic Rationales for the Design of Health Care Financing Schemes. In: Health Care Financing and Insurance. Developments in Health Economics and Public Policy, vol 10. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-10794-8_2
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