IJC H1 ECON CASE STUDY Q1

2011 JC2 H1 Economics Prelim 2: Case Study Question 1 Source: US Bureau of Labor Statistics Source: Kleiner Perkins Caufield & Byers Figure 1 Figure 2 Extract 1: Challenge to control rising healthcare costs Touching on the hot topic of healthcare reform in his keynote speech at the Economist Conferences, Health Minister Khaw Boon Wan said politicians bore part of the blame for rising costs. In Singapore, patients have to shoulder part of the cost for healthcare services, and thus look for value for money and do no t over-consume. But when politicians promise free healthcare, they distort th e market, causing over-consumption and heavier burden for government amidst slower economic growth globally. Singapore is not immune to risi ng costs, especially with it s rapidly aging population. However, the government has been keeping its healthcare expenditure at below 4% of its gross domestic product (GDP), or under US$8 billion. This is a figure that many find "amazing" – compared to 16% of GDP (US$ 2.4 trillion) for the United States. When designing the healthcare system, t he Singapore government tries to allow the market to function, such as promoting comp etition among providers, publicising their performance and making sure consumers seek value for money. There is also universal coverage for all our citizens th rough multiple levels: heavy government subsidy, compulsory health savings a ccount and a low-cost national insurance scheme with deductibles and co-paymen t. The result is a high standard of healthcare, accessible to all citizens, and among the most cost-effective in the world. Adapted from The Straits Times, 3 Apr 2010

Extract 2: Globalisation of Healthcare Cost is a major driver of the rapidly gr owing medical tourism in Asia, catering to patients who travel across national borders to receive medical treatment, integrated with leisure activities as a package. The pr ice of a medical procedure in Asia is sometimes only 20 to 30% of that in the United States. Besides this cost benefit, other considerations include productivity loss due to untreated medical conditions and long wait times due to t he lack of access in constrained healthcare systems in the West. This, together with a sophistic ated travel industry ensuring ease and affordability of travel, provides the backbone for Asia medical tourism. Another critical reason for the growth of Asia medical tourism is the improvement in the healthcare standards. Many hospitals have invested in expensive developmental research on medical technol ogy and prescription drugs. Wealthy individuals in Asia who prefer first-world quality treatment within the region tend to visit Singapore and their inelastic demand represents a more lucrative revenue stream. The tiny island nation of Singapore has em erged as an Asian medical tourism hub in the past decade. With an average of 200,000 patients a rriving for treatment annually, it is estimated medical tourism will contribute 1.1% value to Singapore GDP by 2012. Although cost and quality is prompting increased medical tourists from the West, many factors may temper growth, including supply capacity constraints in Asia, as well as the lack of coverage for offshore medical services by American health plans. This prompted many private hospitals in Asia to expand beyond national borders to tap directly into the pool of forei gn patients and balance patient loads against medical resources domestically. Governm ents should work closely with the private sector to ensure that healthcare costs w ould not escalate further due to resource constraints, as there is significant outflow of healthcare professionals from the public sector as the private sector grows exponentially with the rise of medical tourism. The current pace of the growth of the medi cal tourism industry is reflective of the pace of globalization in general. The issues of outsourcing, infrastructure, talent and global standards play an integral role, for instance hospitals in the United States using more cost effective services prov ided by medical firms based on India or governments taking steps to attract foreign trained medical professionals. Adapted from Medical Tourism: The Asian Chapter by Deloitte, 2008 Extract 3: What is driving healthcare costs? American healthcare system is in trouble today because we have consistently ignored market-oriented solutions and inst ead sought out policies based on public finance and top-down regulation. Some anal ysts say an increasing number of U.S. businesses are less competitive globally because of ballooning healthcare costs. On May 7, the Obama administration revealed that it seeks to set aside more than US$630 billion for the landmark healthcare reform, which includes the extension of health insurance to 32 million Americans who currently have none. It will also bar insurers to exclude coverage for individuals based on pre-existing medical conditions and expand the Medicaid government health insurance for the poor.

The White House claims that this sum will be raised without increasing the already titanic US$7 trillion in cumulative budget deficits over the same time period. How will it do so? It is by rebalancing the tax co de so that the wealthiest pay more, specifically, raising taxes on households with incomes over US$250,000. The Obama plan fails to recognize that t he current healthcare system epitomizes the overuse or misuse of insur ance, and instead seeks to ex pand the size and scope of this distorted system. The drivers of hi gh healthcare costs are manifold; however most significantly is the perverse incent ives associated with an insurance-based payment system. The United States relies on a third-party payment system whereby individuals and employers purchase insur ance that allows patients to receive healthcare services that are in turn paid fo r by insurance providers. For the elderly and disabled, the government a ssumes the role of the insurer, using funds from payroll taxes (rather than insurance premiums) from current working force. With the spread catastrophic risks over a la rge pool of individu als, most patients would simply select the most convenient hospital and cease to be concerned with the price or the necessity of recommended treatm ents, because after all, it is being billed to the insurance company. With time , insurers would significantly increase premiums to cover these high medical costs, and soon, poorer Americans would find it difficult to afford the premiums and would become uninsured. Adapted from The Journal of the American Enterprise Institute, 18 May 2009

Questions (a) (i) Compare the change in the price level of medical care with the change in the price level of all items from 1990-2010. General trend (similar) [1m] Both price level of medical care and that of all items are generally increasing from 1990 to 2010. Refinement (difference) [1m] However, price level of medical care increased at a faster rate than that of all items. [2] (ii) Identify one factor that would affect the impact of the change in the price level of medical care upon the overall cost of living in USA. Possible answers [1m] 1. Weightage of medical care based on the basket of consumer goods and services used to compute the CPI for all items 2. Extent of price changes of medical care [1] (iii) Consider whether the information in Figure 2 suggests that higher health spending per capita results in longer life expectancy. Suggested answer: Generally, there is a direct relationship between health spending per capita and life expectancy i.e. higher health spending per capital on average does result in longer life expectancy as reflected by the upwards sloping best fit line or regression line. [1m for general d