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PROFESSOR: So to review, what
we've been doing in the last

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two lectures, we talked about
equity versus efficiency, and

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the equity efficiency
trade off.

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00:00:31,070 --> 00:00:34,280
We then talked about
redistribution and the leaky

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bucket, and basically how both
taxation and distortions and

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welfare programs lead to
leaks in the bucket.

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And we talked about
we do in the US to

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try to transfer income.

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00:00:44,330 --> 00:00:46,480
The last lecture, we focused on
the fact that most of the

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US government transfers are not
about just the rich to the

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poor, they're about fixing
problems with our insurance

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markets in the form of
social insurance.

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And we ended last time by
talking about the nation's

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00:00:56,920 --> 00:00:59,910
largest social insurance
program, social security.

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What I want to talk about today
is a particularly timely

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00:01:04,180 --> 00:01:07,790
topic, which is the biggest
single issue in social

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00:01:07,790 --> 00:01:11,500
insurance, indeed the biggest
single fiscal issue facing the

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US government over
your lifetimes,

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00:01:14,480 --> 00:01:17,820
which is health care.

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00:01:17,820 --> 00:01:22,410
Health care in the US today
consumes about 17% of our

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nation's income, so that
one in every $6

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goes to health care.

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By 2075, so when you guys are
elders, when I'm no longer

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with you and you guys are
elders, health care will

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consume about 40% of our
nation's product, so $4 in

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every $10 will go
to health care.

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By 100 years later, when your
grandkids are elders, health

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will consume 100% of our
nation's product.

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That is literally if nothing's
done, every single dollar we

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earn will go to health care.

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00:01:54,350 --> 00:01:56,590
Now, obviously that is
not sustainable.

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That's not a legitimate
outcome to envision.

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So something must be done, and
that has led to an enormous

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discussion about this area.

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00:02:06,350 --> 00:02:09,300
Another way to think about this
is, if you think about

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the US, we haven't talked about
budgetary issues in this

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course, think about US
government having a budget,

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money it collects through taxes
and money it spends

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through revenues.

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00:02:20,020 --> 00:02:22,250
We all know the US government
has a big budget deficit right

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00:02:22,250 --> 00:02:23,500
now, about $1.3 trillion.

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Another way to think about that
is if you look at the US

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00:02:28,590 --> 00:02:31,710
government and all the promises
it's made to pay for

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health care alone, forget
everything else, just for

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health care, we've promised to
pay, above and beyond any

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taxes we're planning to collect,
$100 trillion in

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health care promises to the
Medicare and Medicaid program,

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above and beyond any taxes
we'll collect.

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So if we do nothing, we're
facing a $100 trillion long

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term deficit in health care.

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Now, a year ago, that would
have sounded more stunning

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because a year ago, we didn't
use to talk in trillions.

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We only talked in billions.

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Now, we're all talking
trillions, so it doesn't sound

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that impressive, but believe
me that's a big number.

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So basically, we've got enormous
problem facing our

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country with health care, both
in terms of the country's

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devotion of resources, and in
terms of the government's

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devotion of its budget.

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Now, you might say, well, the
government should just get out

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of this activity, but that goes
back to the last lecture,

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which is why is government
in this activity?

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Because there's a market failure
for health insurance.

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We talked last time about
adverse selection, and the

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problem that, if the government
doesn't get

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involved, health insurance
markets might fail, and in

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practice we've seen that
in the United States.

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We've see a failure of health
insurance markets.

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Now, most people get
their health

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insurance through big companies.

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So I get mine through MIT.

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You get yours through MIT or
through your parents and the

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big companies where they work.

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And in those markets, health
insurance works well.

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And health insurance works
well through a simple

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statistical fact many of us
learned about in high school,

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which is the Law of
Large Numbers.

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The Law of Large Numbers simply
says that for most

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distributions we know, certainly
normal distribution,

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as the sample gets large
enough, the mean is

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predictable, and basically,
that's the principle under

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which insurers operate.

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So I talked about you, last
time, starting your MIT

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insurance company, where
you would go

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and insure MIT graduates.

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Well, as long as you have a
large sample of MIT graduates,

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00:04:29,300 --> 00:04:31,870
and you knew they were all going
to buy health insurance,

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00:04:31,870 --> 00:04:34,820
then you could clearly predict
what you'd have to spend,

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00:04:34,820 --> 00:04:38,030
through the Law of Large
Numbers, and you could have a

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00:04:38,030 --> 00:04:40,060
functioning insurance market
where you charge that plus a

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00:04:40,060 --> 00:04:43,530
little money to make, to
pay for your profits.

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And that's how large
business works.

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So MIT has insurers, the MIT
insurers know MIT has about

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10,000 employees altogether,
12,000 maybe.

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The insurers say, look, that's
a large enough sample that we

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00:04:54,400 --> 00:04:56,410
can basically predict what MIT
is going to cost, and we can

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00:04:56,410 --> 00:04:58,750
basically figure out what to
charge them for premiums. MIT

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00:04:58,750 --> 00:05:01,110
says, well gee, we wish it was
less, but that's fair.

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We understand what health care
costs, and we're done.

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00:05:04,200 --> 00:05:06,030
That's not true if you don't
work for a large firm,

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00:05:06,030 --> 00:05:07,930
particularly for
an individual.

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So let's say you've got your MIT
health insurance company.

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You've graduated, you're
successful, you set up a

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00:05:12,300 --> 00:05:14,230
program insuring all
MIT graduates.

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Let's say, MIT forces everyone
to buy health insurance, so

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you've got a nice, predictable
distribution of risks, and

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you're making your money.

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And then I walk in the door, and
I don't have to buy health

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00:05:24,430 --> 00:05:24,990
insurance from you.

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00:05:24,990 --> 00:05:26,730
I'm just a regular guy
off the street.

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00:05:26,730 --> 00:05:28,100
I say, hey, I hear you've
got this great

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00:05:28,100 --> 00:05:28,890
health insurance product.

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I want in.

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00:05:30,290 --> 00:05:32,900
And you look at me say, wait a
second, why do you want in?

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You probably only want in
because you're sick, and you

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know that you're going to need
health care, and that's why

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you want to buy from me.

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So no I'm not going
to sell to you.

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And that's the problem
individuals face who want to

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buy health insurance on their
own, is the problem of

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00:05:44,520 --> 00:05:47,610
asymmetric information goes away
when you've got a large

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pool of people who are all
buying health insurance.

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For any one individual trying to
walk in off the street, the

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00:05:52,790 --> 00:05:54,420
problem of asymmetric
information means that

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insurers will be unwilling to
sell to them, and if insurers

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are unwilling to sell to
them, those individuals

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might end up uninsured.

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Currently in the US, we have
about 50 million uninsured

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people, so that about 18%
of our non-elderly

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population is uninsured.

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00:06:11,080 --> 00:06:13,400
Remember, the elderly, as I
discussed last time, get

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universal health coverage
through the Medicare program.

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00:06:16,290 --> 00:06:18,690
But about 18% of our non-elderly
population, around

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00:06:18,690 --> 00:06:22,400
50 million people, are
uninsured, and one of the

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reasons they're uninsured is
because of this insurance

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market failure.

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And to see that insurance market
failure, you can just

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look at what happens when
people try to get health

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00:06:30,430 --> 00:06:33,060
insurance outside of large
employers, through what we

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call the non-group
insurance market.

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00:06:36,470 --> 00:06:39,090
In the non-group insurance
market, when people try to get

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health insurance, it's typically
incredibly expensive

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00:06:42,770 --> 00:06:44,680
because insurers are worried
you're sick, so they charge

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00:06:44,680 --> 00:06:45,280
you a high price.

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I talked about that last time.

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That the lemons problem.

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Insurers also, in trying
to deal with asymmetric

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information, the way they
deal with it is by being

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00:06:54,020 --> 00:06:55,520
discriminatory.

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00:06:55,520 --> 00:06:58,340
So if you're an insurer who's
allowed to, what you can do is

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to say, fine, I'm going to
insure you, but I'm not going

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to insure you for any sickness
you previously had because I

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know that's something that
might flare up again.

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That's called a pre-existing
condition.

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I'm not going to insure
you for any

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pre-existing condition.

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Moreover, I'm going to
go even further.

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If you get sick, I'm
going to drop you.

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You might say, wait a second,
the whole idea of insurance is

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00:07:18,310 --> 00:07:21,120
you cover me if I get sick, but
in fact, in most states'

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00:07:21,120 --> 00:07:23,080
insurers, it's totally
legal to do.

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Insurers can simply say we're
not renewing you.

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You got sick.

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00:07:27,100 --> 00:07:28,900
Well, that clearly
is a problem.

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00:07:28,900 --> 00:07:30,800
That clearly means that adverse
selection's led to

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00:07:30,800 --> 00:07:33,500
market failure because of
what we discussed in the

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00:07:33,500 --> 00:07:34,340
uncertainty lectures.

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00:07:34,340 --> 00:07:35,730
You should go back and review
that, in the uncertainty

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00:07:35,730 --> 00:07:38,190
lecture, we talked about why
individuals would value

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00:07:38,190 --> 00:07:41,050
insurance, why they pay a risk
premium for insurance, well,

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00:07:41,050 --> 00:07:43,220
if insurers simply won't sell
to them once they get sick,

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00:07:43,220 --> 00:07:45,050
the individuals aren't getting
something they value, and the

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00:07:45,050 --> 00:07:46,900
market's failed.

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00:07:46,900 --> 00:07:48,870
So we've got a situation in
the US where we've got

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insurance that works for many,
many people, those that work

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for large firms. But insurance
markets that are failed for

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00:07:54,280 --> 00:07:57,920
individuals, and small firms
are sort of in between, and

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00:07:57,920 --> 00:07:59,910
that leads to 50 million
uninsured people.

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00:07:59,910 --> 00:08:00,710
So we got this problem.

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00:08:00,710 --> 00:08:04,690
We got all these uninsured
people on the one hand.

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00:08:04,690 --> 00:08:08,090
On the other hand, we have
incredibly rapidly rising

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00:08:08,090 --> 00:08:11,170
health care costs.

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00:08:11,170 --> 00:08:12,720
We, by far, devote the
largest share of our

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00:08:12,720 --> 00:08:13,570
economy to health care.

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We're about twice the average
of industrialized countries,

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00:08:16,610 --> 00:08:18,695
and our costs are rising
incredibly rapidly, although

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that's true around the
world, as well.

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So that's the sort of situation
we face ourselves

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00:08:22,710 --> 00:08:26,460
in, and that's thte motivation
that underlies the discussion

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00:08:26,460 --> 00:08:28,320
you're hearing now about
health care reform.

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And in particular, you're
hearing a lot of discussion

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00:08:30,900 --> 00:08:33,530
now about the Patient Protection
and Affordable Care

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00:08:33,530 --> 00:08:37,650
Act, which passed
last March 23.

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00:08:37,650 --> 00:08:40,870
This was the single most
important piece of government

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00:08:40,870 --> 00:08:45,330
legislation, perhaps,
since World War II.

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00:08:45,330 --> 00:08:47,530
Certainly, the most significant
piece of domestic

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00:08:47,530 --> 00:08:50,760
social policy legislation
since Medicare was

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00:08:50,760 --> 00:08:53,280
introduced in 1965.

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00:08:53,280 --> 00:08:54,530
What does this bill do?

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00:08:57,710 --> 00:08:59,960
Full disclaimer, I'm going to
describe objectively, but I

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00:08:59,960 --> 00:09:02,370
helped write it.

208
00:09:02,370 --> 00:09:04,320
I'll try to be objective, but
just full disclaimer, I was

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00:09:04,320 --> 00:09:05,640
involved with writing
the legislation.

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00:09:05,640 --> 00:09:09,620
So there is some bias
involved here.

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00:09:09,620 --> 00:09:12,090
But what does this piece of
legislation try to do?

212
00:09:12,090 --> 00:09:16,620
What it tries to do is deal
with the second of the

213
00:09:16,620 --> 00:09:19,610
problems I discussed, which is
the insurance market failure,

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00:09:19,610 --> 00:09:22,560
and it makes a vague stab at the
first, which is the fact

215
00:09:22,560 --> 00:09:25,870
that health costs are getting
very, very expensive.

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00:09:25,870 --> 00:09:28,296
Since more economics is involved
in that second, in

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00:09:28,296 --> 00:09:30,230
the insurance market failure,
let's talk about that.

218
00:09:30,230 --> 00:09:33,120
So how do you solve insurance
market failure?

219
00:09:33,120 --> 00:09:35,770
You've got this problem that
there are 50 million people

220
00:09:35,770 --> 00:09:40,550
without health insurance, often
because this asymmetric

221
00:09:40,550 --> 00:09:42,550
information problem.

222
00:09:42,550 --> 00:09:45,350
50 million people without
health insurance.

223
00:09:45,350 --> 00:09:47,980
Many more are in this market
that sort of can drop you when

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00:09:47,980 --> 00:09:50,140
you get sick.

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00:09:50,140 --> 00:09:52,420
We discussed the reasons last
time, so what are the two

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00:09:52,420 --> 00:09:54,620
options we discussed last time
for what the government might

227
00:09:54,620 --> 00:09:57,030
do if they want to solve
this problem?

228
00:09:57,030 --> 00:09:57,530
Yeah.

229
00:09:57,530 --> 00:10:01,180
AUDIENCE: Subsidizing the
insurance companies--

230
00:10:01,180 --> 00:10:02,120
PROFESSOR: Subsidizing
the people and

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00:10:02,120 --> 00:10:02,760
the insurance companies.

232
00:10:02,760 --> 00:10:06,490
So one thing I could do is I
could say, look, let's just

233
00:10:06,490 --> 00:10:08,980
make insurance free
for everyone.

234
00:10:08,980 --> 00:10:12,120
That way everyone will sign
up, and then insurance

235
00:10:12,120 --> 00:10:14,810
companies can offer
fair prices.

236
00:10:14,810 --> 00:10:17,830
And that's a solution that's
pursued by Canada.

237
00:10:17,830 --> 00:10:21,310
Canada has free universal
health care coverage.

238
00:10:21,310 --> 00:10:24,440
Everyone in the country is
covered by birth for their

239
00:10:24,440 --> 00:10:27,260
health insurance expenditures
under one, single government

240
00:10:27,260 --> 00:10:28,530
insurance company.

241
00:10:28,530 --> 00:10:29,940
But it wouldn't have to be
one, single government

242
00:10:29,940 --> 00:10:30,100
insurance company.

243
00:10:30,100 --> 00:10:31,680
That part's distinct.

244
00:10:31,680 --> 00:10:33,780
We could separate who provides
insurance versus

245
00:10:33,780 --> 00:10:35,320
who pays for it.

246
00:10:35,320 --> 00:10:37,340
OK, so let's just focus on
the who pays for it part.

247
00:10:37,340 --> 00:10:39,790
If we make health insurance
free, sign up everyone from

248
00:10:39,790 --> 00:10:44,780
birth, then we've solved the
adverse selection problem, but

249
00:10:44,780 --> 00:10:46,080
that costs a lot of money.

250
00:10:49,880 --> 00:10:54,310
To sign up everyone from birth
and cover them with insurance

251
00:10:54,310 --> 00:10:56,750
at the full government cost,
would cost on the order of $2

252
00:10:56,750 --> 00:10:59,520
trillion a year.

253
00:10:59,520 --> 00:11:02,210
That's a lot of money.

254
00:11:02,210 --> 00:11:06,210
That's pretty hard to imagine
the US government raising

255
00:11:06,210 --> 00:11:10,070
taxes enough to cover that
kind of new program.

256
00:11:10,070 --> 00:11:14,160
So the second solution we talked
about was a mandate,

257
00:11:14,160 --> 00:11:17,860
was to say, OK fine,
we can't make

258
00:11:17,860 --> 00:11:19,350
insurance free for everyone.

259
00:11:19,350 --> 00:11:23,230
What we can do is we make sure
everyone buys, so that we

260
00:11:23,230 --> 00:11:24,850
fixed this adverse selection
problem.

261
00:11:24,850 --> 00:11:28,060
So that insurers can know they
are getting everyone, so they

262
00:11:28,060 --> 00:11:30,420
can price insurance fairly.

263
00:11:30,420 --> 00:11:33,200
And basically, that's
what PPACA does.

264
00:11:33,200 --> 00:11:35,070
It does three things.

265
00:11:35,070 --> 00:11:39,000
The first thing is it says to
insurance companies, we're

266
00:11:39,000 --> 00:11:41,530
going to give you an
individual mandate.

267
00:11:41,530 --> 00:11:44,930
So starting 2014, every person
in the US will have to buy

268
00:11:44,930 --> 00:11:47,001
health insurance.

269
00:11:47,001 --> 00:11:48,710
Now, it's not quite
every person.

270
00:11:48,710 --> 00:11:50,220
There's exemptions.

271
00:11:50,220 --> 00:11:53,780
For example, it doesn't apply
to illegal immigrants, it

272
00:11:53,780 --> 00:11:55,420
doesn't apply to people for
whom health insurance is

273
00:11:55,420 --> 00:11:58,840
particularly expensive,
et cetera.

274
00:11:58,840 --> 00:12:03,150
But the estimate is this mandate
would cause about 60%

275
00:12:03,150 --> 00:12:04,530
of the uninsured get coverage.

276
00:12:04,530 --> 00:12:06,800
So about 47% of the uninsured
will slip through the cracks,

277
00:12:06,800 --> 00:12:08,280
but about 60% will
get coverage.

278
00:12:11,080 --> 00:12:14,090
The second thing it does, it
says, OK, insurance companies,

279
00:12:14,090 --> 00:12:16,700
since we're giving you the
mandate, we're going to say

280
00:12:16,700 --> 00:12:24,890
you can no longer discriminate
in health insurance.

281
00:12:24,890 --> 00:12:26,760
OK, no more discrimination in
health insurance, so what

282
00:12:26,760 --> 00:12:30,570
that's saying is, now, you can
no longer, for example, drop

283
00:12:30,570 --> 00:12:32,260
people when they get sick.

284
00:12:32,260 --> 00:12:35,500
You can no longer exclude people
for their pre-existing

285
00:12:35,500 --> 00:12:36,450
conditions.

286
00:12:36,450 --> 00:12:38,430
You have to basically offer
insurance the way we described

287
00:12:38,430 --> 00:12:39,372
it when we talked about
insurance in

288
00:12:39,372 --> 00:12:40,620
the uncertainty lecture.

289
00:12:40,620 --> 00:12:43,060
Once you get sick, you're
covered, and anyone can get

290
00:12:43,060 --> 00:12:46,010
it, and it's priced fairly.

291
00:12:46,010 --> 00:12:48,530
So basically, the trade-off
is we're saying, insurance

292
00:12:48,530 --> 00:12:50,950
companies, we'll give you a
broad distribution of risks.

293
00:12:50,950 --> 00:12:52,480
On the other hand, you
can't discriminate

294
00:12:52,480 --> 00:12:53,700
anymore in health insurance.

295
00:12:53,700 --> 00:12:55,530
Let's give everyone the same
kind of health insurance that

296
00:12:55,530 --> 00:12:59,020
MIT gives people, that large
companies give people.

297
00:13:01,880 --> 00:13:05,330
But then finally, the final
thing the bill does is, to

298
00:13:05,330 --> 00:13:08,150
make that work, we have to
recognize that you can't

299
00:13:08,150 --> 00:13:09,540
mandate people to buy health
insurance if they

300
00:13:09,540 --> 00:13:11,220
can't afford it.

301
00:13:11,220 --> 00:13:12,800
Health insurance is
pretty expensive.

302
00:13:12,800 --> 00:13:15,310
My MIT health insurance policy
for my family cost about

303
00:13:15,310 --> 00:13:17,995
$14,000 a year.

304
00:13:17,995 --> 00:13:19,970
MIT pays about 10,
I pay about four.

305
00:13:24,700 --> 00:13:26,440
Remember we talked
about poverty.

306
00:13:26,440 --> 00:13:30,650
The poverty line now for a
family is about $22,000.

307
00:13:30,650 --> 00:13:32,900
You can't take a family earning
$22,000 and say I'm

308
00:13:32,900 --> 00:13:35,890
going to mandate you to spend
$14,000 on health insurance.

309
00:13:35,890 --> 00:13:37,090
That's just impossible.

310
00:13:37,090 --> 00:13:38,440
They couldn't live.

311
00:13:38,440 --> 00:13:41,170
So the third thing the bill does
is it introduces a whole

312
00:13:41,170 --> 00:13:44,530
bunch of subsidies, so in some
sense, it uses both the

313
00:13:44,530 --> 00:13:46,490
solutions we talked
about last time.

314
00:13:46,490 --> 00:13:49,140
Both making insurance cheap for
people, so they can afford

315
00:13:49,140 --> 00:13:53,550
it, but instead of spending $2
trillion a year, it spends

316
00:13:53,550 --> 00:13:57,620
like $120 billion
a year on this.

317
00:13:57,620 --> 00:14:01,260
So it just subsidizes the very
poorest people, and mandates

318
00:14:01,260 --> 00:14:01,980
the other people to buy.

319
00:14:01,980 --> 00:14:03,550
So it's sort of a
mixed solution.

320
00:14:03,550 --> 00:14:06,300
We talked about two solutions
you could do to solve the

321
00:14:06,300 --> 00:14:07,960
asymmetric information
problem.

322
00:14:07,960 --> 00:14:10,220
You could subsidize insurance
and make it cheap, or you

323
00:14:10,220 --> 00:14:11,930
could mandate people to buy.

324
00:14:11,930 --> 00:14:13,340
This bill does both.

325
00:14:13,340 --> 00:14:15,850
It subsidizes it for the very
lowest income people and

326
00:14:15,850 --> 00:14:17,590
mandates it for people
who can afford it.

327
00:14:20,460 --> 00:14:26,250
So that's essentially what the
bill does to try to solve this

328
00:14:26,250 --> 00:14:32,650
problem, and we don't know
whether that will work.

329
00:14:32,650 --> 00:14:35,740
We have our best estimates,
but this is a radical new

330
00:14:35,740 --> 00:14:37,410
intervention.

331
00:14:37,410 --> 00:14:40,480
The best estimates suggest it'll
cover about 60% of the

332
00:14:40,480 --> 00:14:44,310
uninsured, but this is a pretty
brand new intervention,

333
00:14:44,310 --> 00:14:47,250
so we'll have to see, actually,
how that shakes out.

334
00:14:47,250 --> 00:14:50,540
But that's the basic structure
of what the bill's trying to

335
00:14:50,540 --> 00:14:52,020
do to try to solve this

336
00:14:52,020 --> 00:14:53,940
asymmetric information problem.

337
00:14:53,940 --> 00:14:55,610
Are there questions about that,
how it relates to what

338
00:14:55,610 --> 00:14:56,860
we learned in the last
couple lectures?

339
00:15:00,780 --> 00:15:04,290
So that's one problem that we're
trying to address with

340
00:15:04,290 --> 00:15:06,530
this legislation, is solving
that asymmetric information

341
00:15:06,530 --> 00:15:09,335
problem using both the mandate
and subsidy tools.

342
00:15:09,335 --> 00:15:11,230
And as I said, if you want to
learn more, I talk a lot more

343
00:15:11,230 --> 00:15:14,490
about stuff like this
in my course 14.41.

344
00:15:14,490 --> 00:15:17,170
This is sort of an example of
how government can use its

345
00:15:17,170 --> 00:15:19,910
tools to address the kind of
fundamental information

346
00:15:19,910 --> 00:15:23,020
failures that we talked
about last time.

347
00:15:23,020 --> 00:15:27,000
But we don't get into, in this
course, politics, but of

348
00:15:27,000 --> 00:15:29,940
course, we can't talk about a
government intervention this

349
00:15:29,940 --> 00:15:32,510
massive without talking about
politics for a minute, and

350
00:15:32,510 --> 00:15:38,130
recognize that this is going
to involve some sacrifice.

351
00:15:38,130 --> 00:15:39,130
I made it sound pretty easy.

352
00:15:39,130 --> 00:15:40,490
Well, we've got this asymmetric
information

353
00:15:40,490 --> 00:15:42,610
problem, we put in the
solution, we're done.

354
00:15:42,610 --> 00:15:45,560
But there's two problems
with the solution.

355
00:15:45,560 --> 00:15:47,160
The first problem
is you've got to

356
00:15:47,160 --> 00:15:48,410
pay for these subsidies.

357
00:15:51,950 --> 00:15:53,690
And this comes back to our
discussion of equity

358
00:15:53,690 --> 00:15:56,660
efficiency, the bill features
an enormous tax increase on

359
00:15:56,660 --> 00:15:58,690
the wealthiest Americans.

360
00:15:58,690 --> 00:16:02,610
The bill raises about $450
billion over the next decade

361
00:16:02,610 --> 00:16:06,600
from the richest, about 5%
of American families.

362
00:16:06,600 --> 00:16:09,160
So going back to our equity
efficiency discussion, is that

363
00:16:09,160 --> 00:16:10,060
a good thing or bad thing?

364
00:16:10,060 --> 00:16:13,460
That depends on our social
welfare function.

365
00:16:13,460 --> 00:16:17,250
If our social welfare function
is very progressive, Rawlsian

366
00:16:17,250 --> 00:16:20,920
or some forms of utilitarian,
that's probably OK.

367
00:16:20,920 --> 00:16:23,020
If it's not, if it's a Nozickian
world, where we just

368
00:16:23,020 --> 00:16:26,970
think that people should just
be left alone and not taking

369
00:16:26,970 --> 00:16:28,500
money away from the rich just
because they're rich, then

370
00:16:28,500 --> 00:16:29,920
that's not OK.

371
00:16:29,920 --> 00:16:32,180
So that ties into our other
discussion of equity

372
00:16:32,180 --> 00:16:33,040
efficiency.

373
00:16:33,040 --> 00:16:35,670
So we have to pay for this, but
obviously, politically,

374
00:16:35,670 --> 00:16:38,080
that raises problems. That's
going to upset a large set of

375
00:16:38,080 --> 00:16:39,490
people who are going to have
to pay those taxes.

376
00:16:42,580 --> 00:16:45,610
The other issue of course this
is with the mandate, we talked

377
00:16:45,610 --> 00:16:47,820
about, well gee, you can't do it
by subsidies alone, that's

378
00:16:47,820 --> 00:16:48,290
too expense.

379
00:16:48,290 --> 00:16:48,940
You have to mandate.

380
00:16:48,940 --> 00:16:50,970
Well, the mandate isn't
free either.

381
00:16:50,970 --> 00:16:54,990
The mandate basically amounts
to a tax on people who don't

382
00:16:54,990 --> 00:16:56,970
want to buy health insurance.

383
00:16:56,970 --> 00:16:58,310
What's the mandate?

384
00:16:58,310 --> 00:17:00,900
A mandate is saying you didn't
want to buy health insurance,

385
00:17:00,900 --> 00:17:02,350
and now you have to.

386
00:17:02,350 --> 00:17:04,640
That's going to upset a lot
of people, as well.

387
00:17:04,640 --> 00:17:06,200
A lot of people out there
don't want to buy health

388
00:17:06,200 --> 00:17:10,765
insurance, and you're telling
them they have to.

389
00:17:10,765 --> 00:17:13,930
You don't make a change this
big without causing some

390
00:17:13,930 --> 00:17:16,780
problems, and these are the
problems that arise.

391
00:17:16,780 --> 00:17:21,140
This isn't a painless solution,
and so that's, once

392
00:17:21,140 --> 00:17:22,790
again, why they call this
the dismal science.

393
00:17:22,790 --> 00:17:25,319
We're all about the trade-offs,
and the trade-offs

394
00:17:25,319 --> 00:17:28,650
here are, you fix the market
failure that we learned about

395
00:17:28,650 --> 00:17:32,840
last lecture, but at, well,
the potential cost of the

396
00:17:32,840 --> 00:17:35,960
inefficiency of taxing people.

397
00:17:35,960 --> 00:17:37,620
Whether that's a good thing or
not depends on our social

398
00:17:37,620 --> 00:17:38,680
welfare function.

399
00:17:38,680 --> 00:17:41,520
And also the inequity,
potentially, of forcing people

400
00:17:41,520 --> 00:17:44,270
to buy health insurance
who didn't want it.

401
00:17:44,270 --> 00:17:44,660
Yeah.

402
00:17:44,660 --> 00:17:49,880
AUDIENCE: How do they suggest
that you enforce the mandate?

403
00:17:49,880 --> 00:17:50,950
PROFESSOR: The mandate
is enforced

404
00:17:50,950 --> 00:17:54,280
through a tax penalty.

405
00:17:54,280 --> 00:17:55,700
We actually have
Massachusetts.

406
00:17:55,700 --> 00:17:57,430
We put in this system in
Massachusetts a few years ago.

407
00:17:57,430 --> 00:17:59,200
We pioneered it, basically.

408
00:17:59,200 --> 00:18:03,630
And the way it works in
Massachusetts is, every year,

409
00:18:03,630 --> 00:18:06,680
I get something called the
1099-HC from my insurance

410
00:18:06,680 --> 00:18:07,946
company, which says
here's proof that

411
00:18:07,946 --> 00:18:08,650
you have health insurance.

412
00:18:08,650 --> 00:18:11,050
I attach that to my tax
form, and I'm done.

413
00:18:11,050 --> 00:18:13,870
If you don't attach a 1099-HC,
you have to pay a tax penalty.

414
00:18:13,870 --> 00:18:16,195
In Massachusetts, it's about
$1,000 a year if you don't

415
00:18:16,195 --> 00:18:17,510
have health insurance.

416
00:18:17,510 --> 00:18:20,510
The federal tax penalty will
be about $700 a year.

417
00:18:20,510 --> 00:18:22,010
So it's going to be enforced
through a penalty if you don't

418
00:18:22,010 --> 00:18:25,970
show, on your taxes, that you
have health insurance.

419
00:18:25,970 --> 00:18:29,760
Other questions about this?

420
00:18:29,760 --> 00:18:33,820
Now, of course, I haven't
talked about the bigger

421
00:18:33,820 --> 00:18:39,720
problem, which is what about the
fact that we have enormous

422
00:18:39,720 --> 00:18:41,270
cost control problem.

423
00:18:41,270 --> 00:18:43,800
Now, last time I talked about
two kinds of asymmetric

424
00:18:43,800 --> 00:18:45,140
information, two
problems in the

425
00:18:45,140 --> 00:18:46,800
social insurance trade-off.

426
00:18:46,800 --> 00:18:49,082
On the one hand, there's adverse
selection, that fact

427
00:18:49,082 --> 00:18:51,870
that insurance markets might
not fail, but I also talked

428
00:18:51,870 --> 00:18:53,120
about moral hazard.

429
00:18:56,730 --> 00:18:59,880
I also talk about moral hazard,
and the fact that, if

430
00:18:59,880 --> 00:19:03,550
you insure individuals
for adverse events,

431
00:19:03,550 --> 00:19:06,840
they will act adversely.

432
00:19:06,840 --> 00:19:11,600
Now, there's several kinds of
moral hazard, and health care

433
00:19:11,600 --> 00:19:13,040
is rife with them.

434
00:19:13,040 --> 00:19:15,890
One kind of moral hazard is a
type we talked about, which is

435
00:19:15,890 --> 00:19:21,240
the classic moral hazard, which
is sort of individual

436
00:19:21,240 --> 00:19:23,160
precaution.

437
00:19:23,160 --> 00:19:26,400
So the story here is, if I have
fire insurance for my

438
00:19:26,400 --> 00:19:28,890
house, I don't bother buying
a fire extinguisher.

439
00:19:28,890 --> 00:19:31,480
Or if I have health insurance,
I don't bother wearing a

440
00:19:31,480 --> 00:19:34,130
helmet when I bicycle.

441
00:19:34,130 --> 00:19:37,150
So these are basically
individuals not taking caution

442
00:19:37,150 --> 00:19:39,760
because they're insured for
this adverse event.

443
00:19:39,760 --> 00:19:41,260
We don't think that's
that big a deal.

444
00:19:41,260 --> 00:19:43,370
I mean, we don't think that your
decision about whether to

445
00:19:43,370 --> 00:19:45,080
wear a helmet or not is much
affected by whether you have

446
00:19:45,080 --> 00:19:46,260
health insurance.

447
00:19:46,260 --> 00:19:47,930
It's probably not
that big a deal.

448
00:19:47,930 --> 00:19:51,740
The bigger type of moral
hazard is resource

449
00:19:51,740 --> 00:20:02,480
over-utilization, which is
that, basically, because

450
00:20:02,480 --> 00:20:08,270
people are insured, they will
overuse medical care.

451
00:20:08,270 --> 00:20:12,310
So basically, here's the way
we think about that.

452
00:20:12,310 --> 00:20:16,740
It's a standard dead weight
loss kind of argument.

453
00:20:16,740 --> 00:20:19,940
So think about the market
for medical care.

454
00:20:19,940 --> 00:20:22,760
Think about the market
for doctors visits.

455
00:20:22,760 --> 00:20:24,870
There's some quantity of
doctor's visits and some price

456
00:20:24,870 --> 00:20:27,520
of doctor's visits.

457
00:20:27,520 --> 00:20:29,680
And let's say that there's
a flat marginal

458
00:20:29,680 --> 00:20:30,880
cost of doctor's visit.

459
00:20:30,880 --> 00:20:35,240
Let's say delivering a doctor's
visit costs $100.

460
00:20:35,240 --> 00:20:40,420
So delivering a doctor's
visit costs $100.

461
00:20:40,420 --> 00:20:44,930
And let's say there's some
demand for doctor's visits.

462
00:20:44,930 --> 00:20:47,910
And importantly, I'm going to
make this downward sloping.

463
00:20:47,910 --> 00:20:48,850
Now, this is important.

464
00:20:48,850 --> 00:20:50,760
You might say, gee, wait a
second, shouldn't the demand

465
00:20:50,760 --> 00:20:52,920
for doctor's visits
be inelastic?

466
00:20:52,920 --> 00:20:54,510
Shouldn't people just go to the
doctor when they're sick,

467
00:20:54,510 --> 00:20:55,180
and not when they're not?

468
00:20:55,180 --> 00:20:56,430
And why would the
price matter?

469
00:21:00,510 --> 00:21:05,400
In fact, it's uncertain, from
theory, whether this should be

470
00:21:05,400 --> 00:21:06,310
inelastic or elastic.

471
00:21:06,310 --> 00:21:08,430
It's uncertain how elastic
demand should be, if people

472
00:21:08,430 --> 00:21:10,590
only go to the doctor
when they're sick.

473
00:21:10,590 --> 00:21:12,400
I hope you understand, the thing
about elasticity, it's a

474
00:21:12,400 --> 00:21:14,815
good thing to understand for
basic principles, if people

475
00:21:14,815 --> 00:21:16,400
only go to the doctor when
they're sick, that curve

476
00:21:16,400 --> 00:21:19,770
should be vertical because it
shouldn't depend on price.

477
00:21:19,770 --> 00:21:22,130
But if people care about the
price, and they decide to go

478
00:21:22,130 --> 00:21:24,840
to the doctor, then it could
be downwards sloping.

479
00:21:24,840 --> 00:21:29,000
In fact, there's excellent
evidence from a actual

480
00:21:29,000 --> 00:21:31,090
experiment that was
run in the US.

481
00:21:31,090 --> 00:21:34,000
In the 1970s, there was
something called the Rand

482
00:21:34,000 --> 00:21:35,250
Health Insurance Experiment.

483
00:21:39,870 --> 00:21:41,225
Rand is a company out
in California,

484
00:21:41,225 --> 00:21:42,710
a consulting company.

485
00:21:42,710 --> 00:21:43,970
They ran a health insurance
experiment where they

486
00:21:43,970 --> 00:21:46,800
literally, experimentally, gave
people health insurance

487
00:21:46,800 --> 00:21:48,530
of different generosity.

488
00:21:48,530 --> 00:21:49,880
You've got to plan the coverage,
everything, you've

489
00:21:49,880 --> 00:21:51,780
got to plan with a
big deductible.

490
00:21:51,780 --> 00:21:53,560
So they gave people plans of
different generosity and asked

491
00:21:53,560 --> 00:21:55,770
how much different medical
care did they us.

492
00:21:55,770 --> 00:21:57,840
Remember when we talked about,
when doing empirical work,

493
00:21:57,840 --> 00:22:01,210
what you'd like to do is think
about a randomized trial.

494
00:22:01,210 --> 00:22:03,150
They essentially ran a
randomized trial, where

495
00:22:03,150 --> 00:22:04,930
different people had different
prices, and they found demand

496
00:22:04,930 --> 00:22:06,360
was downward sloping.

497
00:22:06,360 --> 00:22:07,870
People who were charged
more for health care

498
00:22:07,870 --> 00:22:10,720
used less of it.

499
00:22:10,720 --> 00:22:13,410
So there is a downward-sloping
demand.

500
00:22:13,410 --> 00:22:18,200
And so what that says is, if
this is the marginal cost, and

501
00:22:18,200 --> 00:22:21,080
this is the marginal benefit of
getting health care, then

502
00:22:21,080 --> 00:22:25,990
the optimal amount of doctors
is just Q*, that basically,

503
00:22:25,990 --> 00:22:30,160
the socially efficient level
of doctors is Q*.

504
00:22:30,160 --> 00:22:34,770
However, when they're insured,
people don't face this $100.

505
00:22:34,770 --> 00:22:37,980
When you go to doctor, you
just pay $10, typically.

506
00:22:37,980 --> 00:22:41,830
Well now, this is the social
marginal cost, but your

507
00:22:41,830 --> 00:22:47,620
private marginal cost, what
it costs you, is only $10.

508
00:22:47,620 --> 00:22:49,280
So what do you do?

509
00:22:49,280 --> 00:22:54,760
You use a level of health care,
Q super p, for private.

510
00:22:54,760 --> 00:22:56,700
You use too much health care.

511
00:22:56,700 --> 00:22:59,450
You overuse the doctor's
office.

512
00:22:59,450 --> 00:23:02,090
Now when you think of this
intuitively, forgetting the

513
00:23:02,090 --> 00:23:04,830
graph, you just say intuitively,
if a doctor's

514
00:23:04,830 --> 00:23:07,370
visit is going to cost $10
instead of the $100 it should,

515
00:23:07,370 --> 00:23:09,340
you use too many of them.

516
00:23:09,340 --> 00:23:12,005
But graphically, the point is
that the underlying cost of

517
00:23:12,005 --> 00:23:16,040
the doctor's visit is $100, but
because you're insured,

518
00:23:16,040 --> 00:23:20,300
and the marginal cost to you is
only $10, you overuse the

519
00:23:20,300 --> 00:23:20,860
doctor's office.

520
00:23:20,860 --> 00:23:22,990
You use too many doctor's
visits.

521
00:23:22,990 --> 00:23:27,110
This leads to a dead
weight loss.

522
00:23:27,110 --> 00:23:30,680
This leads to a dead weight loss
from people over using

523
00:23:30,680 --> 00:23:32,080
the doctor's office.

524
00:23:32,080 --> 00:23:34,430
OK And that the second kind
of moral hazard, which is

525
00:23:34,430 --> 00:23:35,680
resource over-utilization.

526
00:23:39,280 --> 00:23:41,880
Questions about that?

527
00:23:41,880 --> 00:23:42,977
Yeah.

528
00:23:42,977 --> 00:23:45,959
AUDIENCE: How do you
define too much?

529
00:23:45,959 --> 00:23:47,209
If everybody else--

530
00:23:50,929 --> 00:23:55,235
you said Qp is just right, and
Q* is like people go to the

531
00:23:55,235 --> 00:23:58,250
doctor too few times?

532
00:23:58,250 --> 00:23:59,540
PROFESSOR: That that's
a great question.

533
00:24:03,690 --> 00:24:08,430
If everything is working
perfectly, then Q* is, by

534
00:24:08,430 --> 00:24:09,680
definition, right.

535
00:24:12,780 --> 00:24:14,550
We talked about, earlier in
this course, about how the

536
00:24:14,550 --> 00:24:18,060
private market competitive
outcome is welfare maximizing.

537
00:24:18,060 --> 00:24:20,290
The private market competitive
outcome is where marginal cost

538
00:24:20,290 --> 00:24:23,070
equals marginal benefit,
supply equals demand.

539
00:24:23,070 --> 00:24:25,900
That's the optimal outcome
if there's no

540
00:24:25,900 --> 00:24:28,960
other market failures.

541
00:24:28,960 --> 00:24:31,900
So in this course up to a few
lectures ago, you shouldn't

542
00:24:31,900 --> 00:24:35,210
have even asked that question,
we know Q* is optimal because

543
00:24:35,210 --> 00:24:37,290
we know the private market
outcome's optimal.

544
00:24:37,290 --> 00:24:39,630
Now, you might say, OK well,
there's lots of reasons to

545
00:24:39,630 --> 00:24:41,510
think Q* might not be optimal.

546
00:24:41,510 --> 00:24:43,590
For example, many people aren't
fully informed about

547
00:24:43,590 --> 00:24:46,460
the right level of medical
care to use.

548
00:24:46,460 --> 00:24:51,660
Then you're right, then it might
be that Qp is optimal,

549
00:24:51,660 --> 00:24:56,750
but the point is, absent
other market failures--

550
00:24:56,750 --> 00:24:59,330
We know Q* is the socially
maximizing point where

551
00:24:59,330 --> 00:25:01,170
marginal cost equals
marginal benefits.

552
00:25:01,170 --> 00:25:02,430
We developed that earlier.

553
00:25:02,430 --> 00:25:04,410
So if people use more than
that, that's inefficient.

554
00:25:07,750 --> 00:25:09,420
So you might say, well
gee, how do we know?

555
00:25:09,420 --> 00:25:11,870
Well, actually it turns
out we can tell.

556
00:25:11,870 --> 00:25:14,090
Let's go back the Rand Health
Insurance experiment.

557
00:25:14,090 --> 00:25:15,520
Same person, see if you
can figure it out.

558
00:25:15,520 --> 00:25:18,600
How could we use that same
experiment to tell whether it

559
00:25:18,600 --> 00:25:23,340
was optimal that people used
fewer or more doctor's visits?

560
00:25:23,340 --> 00:25:25,630
What could you do?

561
00:25:25,630 --> 00:25:26,590
Or anyone?

562
00:25:26,590 --> 00:25:30,740
What could you do using that
same experiment to see whether

563
00:25:30,740 --> 00:25:33,230
Q* was optimal or
Qp was optimal?

564
00:25:33,230 --> 00:25:33,585
Yeah.

565
00:25:33,585 --> 00:25:35,570
AUDIENCE: Take a look at
who gets sick less.

566
00:25:35,570 --> 00:25:36,365
PROFESSOR: Look at
their health.

567
00:25:36,365 --> 00:25:37,890
You've got a randomized
experiment.

568
00:25:37,890 --> 00:25:39,650
Some people are at Q*.

569
00:25:39,650 --> 00:25:43,130
Some people randomly
are moving to Qp.

570
00:25:43,130 --> 00:25:44,830
Look at their health.

571
00:25:44,830 --> 00:25:49,930
Well, it turns out, health is
totally unaffected, that the

572
00:25:49,930 --> 00:25:52,295
health of people at Q* was
the same as the health

573
00:25:52,295 --> 00:25:53,490
as people at Qp.

574
00:25:53,490 --> 00:25:55,780
People who had big deductibles
and used health care a lot

575
00:25:55,780 --> 00:25:59,410
less were no sicker than
people who used

576
00:25:59,410 --> 00:26:02,250
health care a lot.

577
00:26:02,250 --> 00:26:04,210
The answer is because
in America, we

578
00:26:04,210 --> 00:26:05,590
overuse health care.

579
00:26:09,150 --> 00:26:11,300
We do know Qp is too much.

580
00:26:11,300 --> 00:26:15,730
In America, we overuse health
care because it's so cheap,

581
00:26:15,730 --> 00:26:18,800
and so the way we can prove
that, this experiment showed

582
00:26:18,800 --> 00:26:21,710
it, that we caused people
to say stop overusing.

583
00:26:21,710 --> 00:26:24,110
I'll make you actually
bear the full price.

584
00:26:24,110 --> 00:26:27,970
Do the Q*, people were no
sicker, and they used less

585
00:26:27,970 --> 00:26:29,120
health care.

586
00:26:29,120 --> 00:26:30,640
And that was a striking
finding out of this

587
00:26:30,640 --> 00:26:33,730
experiment, that in fact, we
were overusing health care.

588
00:26:33,730 --> 00:26:36,650
There was a real problem
of Qp being too big.

589
00:26:40,160 --> 00:26:41,570
That's not the only form
of moral hazard.

590
00:26:41,570 --> 00:26:44,750
There's another one we even
talked about, which is

591
00:26:44,750 --> 00:26:48,430
provider moral hazard.

592
00:26:48,430 --> 00:26:50,980
We've blamed everything so far
on people, but doctors are

593
00:26:50,980 --> 00:26:52,420
people, too.

594
00:26:52,420 --> 00:26:54,890
And in fact, much of what's done
to you was determined,

595
00:26:54,890 --> 00:26:59,230
not by your decision, but by
your doctor's decision.

596
00:26:59,230 --> 00:27:01,095
So now we have to think
about the doctors and

597
00:27:01,095 --> 00:27:02,345
how they make decisions.

598
00:27:04,840 --> 00:27:08,750
We can teach a whole course on
that, but basically, if we

599
00:27:08,750 --> 00:27:11,820
think about doctors, we're going
to recognize that what

600
00:27:11,820 --> 00:27:14,080
doctors primarily care
about is making

601
00:27:14,080 --> 00:27:15,390
their patients better.

602
00:27:15,390 --> 00:27:17,480
But at the same time, doctors
are people, too, and they also

603
00:27:17,480 --> 00:27:18,730
care about how much
money they make.

604
00:27:22,350 --> 00:27:24,240
Let's say for example, doctors
didn't care about how much

605
00:27:24,240 --> 00:27:24,750
money they make.

606
00:27:24,750 --> 00:27:27,780
All they care about is making
their patients better.

607
00:27:27,780 --> 00:27:31,280
And let's say, I come into my
doctor's office, and I've got

608
00:27:31,280 --> 00:27:32,900
a headache.

609
00:27:32,900 --> 00:27:34,390
I say, Doc, I've had a headache
for like four days

610
00:27:34,390 --> 00:27:36,340
that's not going away.

611
00:27:36,340 --> 00:27:38,700
Well, the doctor says,
well, there's a point

612
00:27:38,700 --> 00:27:42,290
0.0000000000001 chance you've
got a brain tumor.

613
00:27:42,290 --> 00:27:45,710
I can find that with
a CAT scan.

614
00:27:45,710 --> 00:27:49,830
Now, it's really so small, it's
not worth it, but the

615
00:27:49,830 --> 00:27:51,370
same time, why not?

616
00:27:51,370 --> 00:27:52,300
It doesn't cost you anything.

617
00:27:52,300 --> 00:27:54,310
It just costs you Qp,
which is $10.

618
00:27:54,310 --> 00:27:57,390
Just costs you $10, so you don't
care about getting it,

619
00:27:57,390 --> 00:27:58,620
and I'll just order it.

620
00:27:58,620 --> 00:28:00,930
It's fine, why not?

621
00:28:00,930 --> 00:28:05,070
So because I'm over insured,
that doesn't just cause me to

622
00:28:05,070 --> 00:28:07,950
demand more medical care, it
causes my doctor to give me

623
00:28:07,950 --> 00:28:09,690
more medical care.

624
00:28:09,690 --> 00:28:12,400
Now, add on top of that the fact
the doctor makes money

625
00:28:12,400 --> 00:28:13,710
off the MRI.

626
00:28:13,710 --> 00:28:17,010
The doctor makes money
off the CAT scan.

627
00:28:17,010 --> 00:28:19,235
Now, he might say, gee, if it
doesn't do you any good at

628
00:28:19,235 --> 00:28:20,485
all, I still might
give it to you.

629
00:28:23,260 --> 00:28:24,910
If you're interested at all in
health care, the first thing

630
00:28:24,910 --> 00:28:28,440
you have to read is a terrific
article in the June 9, 2009,

631
00:28:28,440 --> 00:28:31,280
New Yorker by a guy name Atul
Gawande, who's a practicing

632
00:28:31,280 --> 00:28:33,810
physician and excellent author,
who wrote about a

633
00:28:33,810 --> 00:28:37,030
place called McAllen, Texas.

634
00:28:37,030 --> 00:28:40,200
McAllen, Texas, is the place in
America that where people

635
00:28:40,200 --> 00:28:43,160
spend the single largest amount
per person on health

636
00:28:43,160 --> 00:28:44,970
care in the Medicare program.

637
00:28:44,970 --> 00:28:48,520
He compared McAllen, Texas, to a
nearby town, El Paso, Texas.

638
00:28:48,520 --> 00:28:52,090
Very similar demographically,
very similar towns, but in

639
00:28:52,090 --> 00:28:54,410
McAllen, they spend twice
as much on health care.

640
00:28:54,410 --> 00:28:55,420
Why?

641
00:28:55,420 --> 00:28:58,460
Because they get six times as
many CAT scans, they have

642
00:28:58,460 --> 00:29:00,120
three times as many surgeries.

643
00:29:00,120 --> 00:29:02,330
Basically, doctors go nuts
treating people in McAllen,

644
00:29:02,330 --> 00:29:04,750
Texas, and the doctors are
really, really rich.

645
00:29:09,340 --> 00:29:10,660
They're not hurting people.

646
00:29:10,660 --> 00:29:11,550
There's no evidence
that the over

647
00:29:11,550 --> 00:29:12,340
treatment is hurting people.

648
00:29:12,340 --> 00:29:14,070
There's just no evidence
that it's helping them.

649
00:29:14,070 --> 00:29:15,770
So doctors are like why not?

650
00:29:15,770 --> 00:29:16,930
Doesn't cost the people
anything, and I

651
00:29:16,930 --> 00:29:19,250
make money off it.

652
00:29:19,250 --> 00:29:21,180
So that's another kind
of moral hazard.

653
00:29:21,180 --> 00:29:24,450
By providing insurance for
medical care, we've induced

654
00:29:24,450 --> 00:29:27,610
this over provision of medical
care, both because people want

655
00:29:27,610 --> 00:29:29,830
it because it's cheap, and
because doctors want it

656
00:29:29,830 --> 00:29:32,110
because they get paid for it.

657
00:29:32,110 --> 00:29:34,780
And that's a lot of the problem
in our health care

658
00:29:34,780 --> 00:29:38,180
system in the US.

659
00:29:38,180 --> 00:29:39,870
And once again, going back to
the question back there, if

660
00:29:39,870 --> 00:29:42,580
you look at McAllen, Texas,
where they spend twice as much

661
00:29:42,580 --> 00:29:46,350
on health care as El Paso,
people are no healthier.

662
00:29:46,350 --> 00:29:47,520
They're no healthier despite
the fact the

663
00:29:47,520 --> 00:29:50,680
spend twice as much.

664
00:29:50,680 --> 00:29:53,710
And indeed, based on facts
such as this, the best

665
00:29:53,710 --> 00:29:57,630
estimates are that the US wastes
about 1/3 of all of our

666
00:29:57,630 --> 00:30:00,020
medical spending, that
we could literally

667
00:30:00,020 --> 00:30:03,130
spent 2/3 as much.

668
00:30:03,130 --> 00:30:05,190
Or literally, at this point, we
could say we spend almost

669
00:30:05,190 --> 00:30:08,670
$1 trillion less per
year on health care

670
00:30:08,670 --> 00:30:09,920
and be no less healthy.

671
00:30:12,570 --> 00:30:15,170
And that is the thing we have
to grapple with now.

672
00:30:15,170 --> 00:30:17,880
It's the fact that if we can
deal with that problem, we

673
00:30:17,880 --> 00:30:19,850
could solve this long-running
cost growth problem, and our

674
00:30:19,850 --> 00:30:22,110
long-running fiscal problem, if
we just stop doing health

675
00:30:22,110 --> 00:30:24,400
care that didn't make
us any healthier.

676
00:30:24,400 --> 00:30:28,800
The problem is that's a lot
easier said than done.

677
00:30:28,800 --> 00:30:32,620
It's easier said than done
for two reasons.

678
00:30:32,620 --> 00:30:36,040
First reason is because people
make money off that health

679
00:30:36,040 --> 00:30:38,790
care we don't need, so the
first thing's political.

680
00:30:38,790 --> 00:30:40,630
The only way we're going to do
that is to tell some people

681
00:30:40,630 --> 00:30:42,220
they can't make money
they've been making.

682
00:30:42,220 --> 00:30:43,470
That's a hard thing
to do politically.

683
00:30:45,830 --> 00:30:49,560
The second problem is
scientific, which is we don't

684
00:30:49,560 --> 00:30:52,380
exactly know which is the 1/3rd
of health care that's

685
00:30:52,380 --> 00:30:56,340
being wasted and which is
the 1/3rd that's not.

686
00:30:56,340 --> 00:30:58,460
So let's put it another way.

687
00:30:58,460 --> 00:31:02,880
Since 1950, the share of our
economy we spend on health

688
00:31:02,880 --> 00:31:04,580
care has more than tripled.

689
00:31:04,580 --> 00:31:05,670
But you know what?

690
00:31:05,670 --> 00:31:07,670
Health care is a ton
better than 1950.

691
00:31:07,670 --> 00:31:09,910
Health care sucked in 1950.

692
00:31:09,910 --> 00:31:14,620
In 1950, the typical baby born
had more than twice as high a

693
00:31:14,620 --> 00:31:17,230
chance of dying in the first
year of life as today.

694
00:31:17,230 --> 00:31:20,190
Someone had a heart attack,
lived 1/3rd as long after a

695
00:31:20,190 --> 00:31:21,690
heart attack as they do today.

696
00:31:21,690 --> 00:31:23,570
Or to put in terms young healthy
people might care

697
00:31:23,570 --> 00:31:26,440
about, in 1950, if you hurt your
knee skiing, if you tore

698
00:31:26,440 --> 00:31:30,020
your ACL skiing, you went into
the hospital for a week, had

699
00:31:30,020 --> 00:31:33,080
major surgery, were on crutches
for six weeks,

700
00:31:33,080 --> 00:31:35,720
couldn't really do sports or
anything effective for about

701
00:31:35,720 --> 00:31:38,560
six months, and arthritis for
the rest of your life.

702
00:31:38,560 --> 00:31:40,900
Today, if you hurt your knee
skiing, you go to outpatient

703
00:31:40,900 --> 00:31:42,640
surgery for an hour and a half,
you get it scoped, a

704
00:31:42,640 --> 00:31:44,950
little camera, they fix it, and
then you're back skiing

705
00:31:44,950 --> 00:31:46,510
two weeks later.

706
00:31:46,510 --> 00:31:48,450
No permanent long run damage.

707
00:31:48,450 --> 00:31:51,050
Health care is just
better today.

708
00:31:51,050 --> 00:31:51,770
It just is.

709
00:31:51,770 --> 00:31:54,110
That's why we don't see any
health insurance plan saying

710
00:31:54,110 --> 00:31:58,160
we offer 1950s health care at
1950s prices because no one

711
00:31:58,160 --> 00:31:58,710
would want it.

712
00:31:58,710 --> 00:32:01,720
Even though it would be 1/10th
as cheap, no one would want

713
00:32:01,720 --> 00:32:03,800
because it would suck.

714
00:32:03,800 --> 00:32:07,850
So basically the problem is
health care's better over all,

715
00:32:07,850 --> 00:32:10,360
but at the same time, we're
wasting a lot of money, and

716
00:32:10,360 --> 00:32:12,560
that's why health care cost
control is really hard.

717
00:32:12,560 --> 00:32:15,930
That's because moral hazard
is hard to deal with.

718
00:32:15,930 --> 00:32:18,380
Moral hazard is hard to deal
with because it's hard to find

719
00:32:18,380 --> 00:32:22,030
because it's an information
asymmetry.

720
00:32:22,030 --> 00:32:24,470
If every procedure had attached
to it a magic

721
00:32:24,470 --> 00:32:27,270
identifier, which said this is
a waste and this is not, we'd

722
00:32:27,270 --> 00:32:30,170
have no moral hazard.

723
00:32:30,170 --> 00:32:33,090
Imagine every procedure
hospitals did had a magic

724
00:32:33,090 --> 00:32:35,630
identifier, which said this is
worth it, this is not, then

725
00:32:35,630 --> 00:32:37,760
you could set up the optimal
insurance company.

726
00:32:37,760 --> 00:32:40,310
You could simply say, for those
that are worth it, we'll

727
00:32:40,310 --> 00:32:41,990
insure you.

728
00:32:41,990 --> 00:32:44,320
For those that aren't worth it,
we won't, and you'd solve

729
00:32:44,320 --> 00:32:45,440
moral hazard.

730
00:32:45,440 --> 00:32:45,920
Then we could be fine.

731
00:32:45,920 --> 00:32:48,860
We could insure people, we'd
solve both information

732
00:32:48,860 --> 00:32:49,230
problems.

733
00:32:49,230 --> 00:32:52,050
But of course, we
don't know that.

734
00:32:52,050 --> 00:32:56,570
And so as we solve the first
information problem, which is

735
00:32:56,570 --> 00:32:59,450
adverse selection, by getting
more people health insurance,

736
00:32:59,450 --> 00:33:02,590
we're making the second problem
worse, moral hazard,

737
00:33:02,590 --> 00:33:05,210
by putting more people into a
system which wastes a lot of

738
00:33:05,210 --> 00:33:07,350
money because of these problems.
And that's the

739
00:33:07,350 --> 00:33:10,040
difficult part about
health care.

740
00:33:10,040 --> 00:33:11,310
So what do we do about that?

741
00:33:11,310 --> 00:33:13,580
Well, I told you what we do to
solve the first problem.

742
00:33:13,580 --> 00:33:15,430
What to do to solve the second
problem is a lot harder, and

743
00:33:15,430 --> 00:33:17,450
we don't really know.

744
00:33:17,450 --> 00:33:19,890
But we have some ideas about
what might work.

745
00:33:22,410 --> 00:33:25,340
The first thing we know might
work is a lot more work on

746
00:33:25,340 --> 00:33:27,930
what's call comparative
effectiveness, which is a

747
00:33:27,930 --> 00:33:29,680
fancy way of saying
understanding what works and

748
00:33:29,680 --> 00:33:31,670
what doesn't, and in particular,
what works better

749
00:33:31,670 --> 00:33:32,770
than what else.

750
00:33:32,770 --> 00:33:34,810
Many of you know about the
FDA, the Food and Drug

751
00:33:34,810 --> 00:33:36,110
Administration.

752
00:33:36,110 --> 00:33:39,970
They approve medical devices, so
if you want to introduce a

753
00:33:39,970 --> 00:33:42,890
new drug or a new medical
device, it has to be approved

754
00:33:42,890 --> 00:33:44,560
by the FDA.

755
00:33:44,560 --> 00:33:49,090
The way their approval runs is
they say, is it effective in

756
00:33:49,090 --> 00:33:52,390
curing what it's supposed to
cure, and if it is they

757
00:33:52,390 --> 00:33:53,580
approve it.

758
00:33:53,580 --> 00:33:56,290
They never say is it any more
effective than something that

759
00:33:56,290 --> 00:34:02,040
already exists, or even more is
it actually cost effective.

760
00:34:02,040 --> 00:34:06,000
So for example, in the treatment
of prostate cancer

761
00:34:06,000 --> 00:34:08,750
over the last decade, we've
moved to more and more

762
00:34:08,750 --> 00:34:11,500
expensive radioactive
laser-based treatments for

763
00:34:11,500 --> 00:34:12,690
prostate cancer.

764
00:34:12,690 --> 00:34:14,739
We used to treat prostate cancer
about a 10th the cost

765
00:34:14,739 --> 00:34:17,460
of treating it now with no
evidence that we're actually

766
00:34:17,460 --> 00:34:19,980
doing men any good through
these treatments.

767
00:34:19,980 --> 00:34:22,699
But they don't do harm, they
work, they do what they're

768
00:34:22,699 --> 00:34:25,469
supposed to do, so the FDA
keeps approving them.

769
00:34:25,469 --> 00:34:27,669
So comparative effectiveness
will be to actually say we're

770
00:34:27,669 --> 00:34:29,510
only going to pay for what works
better than something

771
00:34:29,510 --> 00:34:33,889
that exists already
more effectively.

772
00:34:33,889 --> 00:34:36,920
That's one direction
we can go in.

773
00:34:36,920 --> 00:34:40,750
The other direction we can go in
is we can start working to

774
00:34:40,750 --> 00:34:43,150
change the financial incentives
for both patients

775
00:34:43,150 --> 00:34:44,510
and providers.

776
00:34:44,510 --> 00:34:46,940
For patients, we can make them
pay more of the cost of health

777
00:34:46,940 --> 00:34:50,679
care, so that they move back
up this curve a little bit.

778
00:34:50,679 --> 00:34:53,460
Still insuring them, but
making them pay more.

779
00:34:53,460 --> 00:34:56,739
So for example, we could move
to systems where poor people

780
00:34:56,739 --> 00:34:58,340
are fully insured because
they can't afford it.

781
00:34:58,340 --> 00:35:00,370
But someone who's higher income,
they should have a

782
00:35:00,370 --> 00:35:02,090
high deductible, they should
bear the cost some of their

783
00:35:02,090 --> 00:35:04,610
health care because they can
afford it, and that will make

784
00:35:04,610 --> 00:35:08,050
them make their health care
decisions more wisely.

785
00:35:08,050 --> 00:35:10,520
We can work on the individual
moral hazard by making people

786
00:35:10,520 --> 00:35:12,440
pay more for their
health care.

787
00:35:12,440 --> 00:35:15,370
We can work on the provider
moral hazard by removing the

788
00:35:15,370 --> 00:35:18,180
financial incentives to
providers to provide excessive

789
00:35:18,180 --> 00:35:25,700
care, and the way we do this
is by something called

790
00:35:25,700 --> 00:35:27,175
prospective reimbursement.

791
00:35:37,580 --> 00:35:40,550
Prospective reimbursement is
basically saying to providers,

792
00:35:40,550 --> 00:35:43,690
look, the way things work now
is you do a CAT scan on the

793
00:35:43,690 --> 00:35:45,610
guy we pay you for the
CAT scan on the guy.

794
00:35:45,610 --> 00:35:47,010
You do a surgery on the
guy, we pay for your

795
00:35:47,010 --> 00:35:47,590
surgery on the guy.

796
00:35:47,590 --> 00:35:49,230
How about a different
way to approach it?

797
00:35:49,230 --> 00:35:52,090
How about we say this
guy is your patient?

798
00:35:52,090 --> 00:35:55,000
A guy like him, a 25 year old
healthy guy costs, on average,

799
00:35:55,000 --> 00:35:56,780
$1,500 a year.

800
00:35:56,780 --> 00:35:59,720
We will give you, at the end the
year, a check for $1,500.

801
00:35:59,720 --> 00:36:01,410
You do what you want.

802
00:36:01,410 --> 00:36:04,190
You do nothing, you
keep the $1,500.

803
00:36:04,190 --> 00:36:06,770
You go crazy and you make 1,000
CAT scans and it costs

804
00:36:06,770 --> 00:36:09,210
$100,000, you eat
the difference.

805
00:36:09,210 --> 00:36:12,140
You doctors bear the risk.

806
00:36:12,140 --> 00:36:15,190
Pros, instead of we, the public
and the insurance

807
00:36:15,190 --> 00:36:18,120
companies and the individuals,
bearing the costs when you

808
00:36:18,120 --> 00:36:21,430
give me an extra CAT scan, you,
the doctor, bear the cost

809
00:36:21,430 --> 00:36:23,520
when you get the
extra CAT scan.

810
00:36:23,520 --> 00:36:26,260
We've turned the financial
incentives on their head.

811
00:36:26,260 --> 00:36:29,360
Now, instead of making money by
giving CAT scans, you lose

812
00:36:29,360 --> 00:36:30,460
money by giving CAT scans.

813
00:36:30,460 --> 00:36:30,710
Yeah.

814
00:36:30,710 --> 00:36:34,302
AUDIENCE: But might that have
some negative side effects on

815
00:36:34,302 --> 00:36:35,500
the health care of patients?

816
00:36:35,500 --> 00:36:37,654
Doctors are going to want to
check how much they are going

817
00:36:37,654 --> 00:36:39,820
to make [INAUDIBLE]

818
00:36:39,820 --> 00:36:41,900
PROFESSOR: Great question,
like the question before.

819
00:36:41,900 --> 00:36:43,480
How do we know that doesn't
go too far?

820
00:36:46,860 --> 00:36:49,740
Right now, you could think about
it, we're in a place for

821
00:36:49,740 --> 00:36:52,850
both patients and doctors
where there is

822
00:36:52,850 --> 00:36:54,150
clearly over treatment.

823
00:36:57,190 --> 00:37:02,240
There, of course, exists under
treatment as a problem, and we

824
00:37:02,240 --> 00:37:07,300
know that both making patients
pay more and putting risk on

825
00:37:07,300 --> 00:37:10,286
providers, through making them
bear the cost of CAT scans out

826
00:37:10,286 --> 00:37:12,430
of their pocket, will move
us in this direction.

827
00:37:12,430 --> 00:37:15,680
The question is, does it move
us past the happy medium, or

828
00:37:15,680 --> 00:37:18,070
does it just move us towards
the happy medium?

829
00:37:18,070 --> 00:37:19,810
In the back was asked a
question about patient

830
00:37:19,810 --> 00:37:21,990
payments, and here we know the
answer, which is making

831
00:37:21,990 --> 00:37:24,670
patients pay more reduces
utilization but still leaves

832
00:37:24,670 --> 00:37:26,950
us on the right side of a
laughter curve if we come to

833
00:37:26,950 --> 00:37:28,120
our tax analysis.

834
00:37:28,120 --> 00:37:32,440
It still leaves us in the place
where we're still, on

835
00:37:32,440 --> 00:37:35,050
average, still probably doing
too much care, but

836
00:37:35,050 --> 00:37:36,450
less too much care.

837
00:37:36,450 --> 00:37:37,660
What about providers?

838
00:37:37,660 --> 00:37:40,440
Well, we have evidence on that,
which is we've put in

839
00:37:40,440 --> 00:37:42,960
prospective payment systems
in a number of different

840
00:37:42,960 --> 00:37:46,790
contexts, and typically we also
find it does not hurt

841
00:37:46,790 --> 00:37:52,410
health, that providers still
provide, if anything, too much

842
00:37:52,410 --> 00:37:54,500
care and not too little.

843
00:37:54,500 --> 00:37:56,060
Now, we've never put
in a pure system of

844
00:37:56,060 --> 00:37:57,380
the kind I've described.

845
00:37:57,380 --> 00:37:59,220
We've always put in sort of
mixed systems, where you get a

846
00:37:59,220 --> 00:38:01,690
$1,500 check, but if you do a
lot of stuff, we'll also pay

847
00:38:01,690 --> 00:38:03,140
you extra, a little bit.

848
00:38:03,140 --> 00:38:04,735
So we've never put in a pure
prospective system.

849
00:38:07,240 --> 00:38:10,440
So for example, we put in a
system like this for Medicare,

850
00:38:10,440 --> 00:38:12,300
the way Medicare
pays hospitals.

851
00:38:12,300 --> 00:38:14,550
Medicare use to pay hospitals,
that when you went to the

852
00:38:14,550 --> 00:38:16,920
hospital, and the hospital
billed Medicare,

853
00:38:16,920 --> 00:38:18,150
they just paid it.

854
00:38:18,150 --> 00:38:20,860
Medicare then put in something
which said, look, if someone

855
00:38:20,860 --> 00:38:23,620
goes in the hospital with this
given diagnosis, we'll pay you

856
00:38:23,620 --> 00:38:26,870
this fixed amount, so it's
more prospective.

857
00:38:26,870 --> 00:38:29,660
What they found was an amazing
reduction in how intensely

858
00:38:29,660 --> 00:38:30,980
elders were being treated.

859
00:38:30,980 --> 00:38:32,930
The average length of stay for
an elderly person in the

860
00:38:32,930 --> 00:38:35,430
hospital fell 20% in one year.

861
00:38:35,430 --> 00:38:37,590
There's an enormous reduction
in how long elders were kept

862
00:38:37,590 --> 00:38:40,090
in hospital and how intensely
they were treated, yet elders

863
00:38:40,090 --> 00:38:42,110
were no worse off.

864
00:38:42,110 --> 00:38:45,290
So we moved in this direction,
but we clearly haven't moved

865
00:38:45,290 --> 00:38:48,250
passed the middle.

866
00:38:48,250 --> 00:38:50,760
Questions about that?

867
00:38:50,760 --> 00:38:53,120
So basically, what the bill
does is it tries to set up

868
00:38:53,120 --> 00:38:57,390
incentives, on both patients and
providers, to behave more

869
00:38:57,390 --> 00:39:00,640
economically, but the answer
is it's still very small.

870
00:39:00,640 --> 00:39:02,260
We're still years away from
really putting those

871
00:39:02,260 --> 00:39:04,420
incentives in place in a major
way, and that's sort of the

872
00:39:04,420 --> 00:39:08,600
next round of health care reform
that has to go on.

873
00:39:08,600 --> 00:39:09,890
And that's all.

874
00:39:09,890 --> 00:39:11,520
I don't want to go
on too long.

875
00:39:11,520 --> 00:39:15,190
I just wanted to give you an
overview of one example of how

876
00:39:15,190 --> 00:39:18,120
we take a public policy tool and
deal with these problems

877
00:39:18,120 --> 00:39:19,370
that we've raised earlier
in the course.