Insurance. The presence of insurance also affects demand for health care. Because health insurance reduces people’s out-of-pocket costs of care, people with health insurance will generally use more health care than people who lack insurance. The RAND Health Insurance Experiment, which took place in the 1970s and 1980s, found that those with a health insurance plan that covered all costs would seek nearly twice as much care as those with a health insurance plan that covered only 5% of the costs, with total spending directly related to the level of cost-sharing individuals faced.34 The phenomenon of people seeking more (or any) health care because they face lower out-of-pocket costs from insurance is referred to in health economics as “moral hazard.”35 If the vast majority of Americans had health insurance that substantially lowered their out-of-pocket costs for health care, compared with people in other OECD countries, then the resulting increased utilization might arguably be attributed to moral hazard. However, this is not the picture that emerges.
First, the United States has the lowest percentage of its population enrolled in health insurance among those countries reporting. “The U.S. health care system is unique in the OECD area. The United States does not have a national insurance program and 14 percent of the population has no insurance coverage.”36 Twenty-two OECD countries provided 98% to 100% of their residents with public health
insurance covering at least hospital and inpatient care in 2004.
The percentage of residents covered by public insurance in the other three countries reporting data for 2004 were as follows: 90% in Germany, 70% in the Netherlands, and 27% in the United States. Besides the United States, only the Netherlands’ public health insurance coverage was below 90% among the 25 countries reporting. Including the Netherlands’ private health insurance, “a very negligible portion of the population (less than 1%) remains uninsured.”37 Private health insurance increases U.S. coverage to 86% overall, still yielding the highest uninsured rate among the OECD countries reporting.38 The OECD has noted that among its members only the United States, Mexico, and Turkey have not established “universal or near-universal coverage.” “Mandatory/compulsory element (is) key to universality,” according to the OECD.39
At first glance, with 45 million uninsured, moral hazard might appear not to contribute to high health spending in the United States. However, there is another factor affecting moral hazard besides simply coverage: Americans pay less out of pocket for care on average than the populations of most other OECD countries, which one might expect to lead to greater health care spending.
Specifically, as shown in Figure 21, 13.2% of U.S. health care costs were paid by individuals out of their own pockets in 2004.40 This is the fifth-lowest average rate of cost-sharing in the OECD, even including the effect of the uninsured. However, this is based on the average amount paid out of pocket, which obscures the variation in individuals’ cost-sharing (e.g., some people who might be uninsured and face 100% cost-sharing, versus those with generous coverage who face little or no cost-sharing). More analyses are needed on the distribution of cost-sharing among countries’ populations to more fully appreciate the impact of cost-sharing on overall health care spending.41
Tax Treatment. Health insurance increases health care spending to the extent that it reduces the cost of services to individuals. The same is true for the tax treatment of health care costs and health insurance premiums. In the United States, wages set aside by employers to pay for health insurance are not subject to personal income tax. As a result, more money is available to pay for health insurance compared with the amount if it were paid out to workers, taxed, and then used to purchase coverage. When payments for health insurance premiums receive tax advantages, individuals tend to purchase richer health insurance benefits than they would in the absence of those tax benefits.42
In addition to tax preferences for employer-sponsored health insurance premiums, out-of-pocket health care costs are tax deductible once they exceed 7.5% of adjusted gross income (AGI) for those who itemize their tax returns. However, tax-advantaged accounts (for example, Health Savings Accounts) may enable some individuals to exempt all of their out-of-pocket health care costs from income tax — regardless of the amount of those expenses or whether or not individuals’ tax returns are itemized. Premiums for non-group health insurance coverage (as opposed to employer-sponsored group coverage) are not tax deductible, except for the self-employed (and except to the extent that nongroup premiums contribute to exceeding 7.5% of AGI for individuals who itemize).43
In the United States, the forgone tax revenues resulting from federal tax policy are called tax expenditures. The cost of all health care-related tax expenditures was $141.5 billion in 2006, or $473 per person.44 Some of these tax expenditures include tax exemption of employers’ contributions for employee health insurance ($90.6 billion), deducting out-of-pocket medical expenses ($7.3 billion), and deducting health insurance premiums for the self-employed ($3.8 billion).45 Unfortunately, a comparison of health-related tax expenditures across OECD countries is not available.
Tastes. People’s tastes can also affect demand for health care. Tastes for health care may be influenced by a variety of factors. A person’s peers, or even culture, may encourage or discourage certain types of health care.46 For example, one poll found that 34% of Americans thought that modern medicine could cure almost any illness, whereas only 27% of Canadians and 11% of Germans thought this.47 It is possible that these attitudes may translate into greater reliance on advanced medical procedures by Americans.
Variation in attitudes toward health care also exist within the United States. In the Miami area, the average spending per Medicare beneficiary was $11,352 in 2003, compared with the national average of $6,611.48 Some have suggested that this difference in spending is due to local expectations and patterns that are not attributable to local differences in population age, illness, or prices.49
Other external factors, such as advertising, may also affect tastes. Between 1996 and 2003, direct-to-consumer (DTC) advertising for prescription drugs more than quadrupled in the United States. A study by a pharmaceutical consulting firm found that 90% of the brands that were advertised DTC experienced a positive return on that investment. Seventy percent of the brands experienced returns in excess of $1.50 for every DTC dollar spent.50 Other research suggests even higher returns.51 Despite the fact that the United States is one of only two industrialized countries that allows direct-to-consumer advertising, whether U.S. health care spending overall is significantly affected by DTC advertising is debatable, let alone the extent to which its use and impact varies across the OECD.52
Weak Bargaining Power. Entities or individuals who purchase a relatively large amount of a good or service generally try to use that market power to obtain lower prices. As buying power becomes more diffuse, purchasers have reduced ability to obtain lower prices. Health care is no different. Insurers, representing thousands of people, are able to obtain lower prices for health care services; the uninsured, facing the market as individuals, often pay the highest prices. For example, one researcher found that uninsured individuals who were hospitalized for a heart attack were charged more than $30,000 on average, whereas the charge to insurance plans was less than $10,000.53
However, most Americans are covered by private health insurance and ostensibly receive care at lower prices than if they were uninsured. In addition, the publicly financed health insurance systems of Medicare and Medicaid do exert some buying power. However, some researchers note the potential impact of bargaining power:
(T)he highly fragmented buy side of the U.S. health system is relatively weak by international standards. It is one factor, among others, that could explain the relatively high prices paid for health care and for health professionals in the United States. In comparison, the government-controlled health systems of Canada, Europe, and Japan allocate considerably more market power to the buy side. In each of the Canadian provinces, for example, the health insurance plans operated by the provincial governments constitute pure monopsonies: They purchase (pay for) all of the health services that are covered by the provincial health plan and used by the province’s residents.54
Several years ago, U.S. insurers attempted to rein in costs with managed care.
In the era that has followed, with the easing of managed care restrictions, plans have sought to rein in costs by other means. Since the late 1990s, “(p)lans’ strategies centered on consolidation and geographic expansion, aggressive pricing to expand market share, and development of less restrictive managed care products.”55 Through acquisitions, there are now “megaplans” such as United Healthcare, which covers 65 million enrollees.56 As of 2002-2003, the top three insurers in each state covered more than two-thirds of commercial insurance enrollees. In only three state markets did the top three insurers cover less than half of commercial insurance enrollees. However, the price effects of these consolidations have apparently been more than counterbalanced by consolidations on the supply side, as discussed in another section below.57
Having multiple health insurance plans creates increased administrative costs. As noted in Table 4 and Figure 21, the United States is the second-highest spender on health and insurance administration costs (at $465 per person), behind Luxembourg. However, this amount fails to capture spending by health care providers for their billing and insurance-related administration. These costs are discussed in the following section on the supply of health care.