Why Haven ’ t Private Choices Eliminated Uninsurance ?

One out of six Americans under age sixty-five lacks health insurance, a situation that imposes sizable hidden costs upon society. The poorer health and shorter lives of those without coverage account for most of these costs. Other impacts are manifested by Medicare and disability support payments, demands on the public health infrastructure, and losses of local health service capacity. We conclude that the estimated value of health forgone each year because of uninsurance ($65–$130 billion) constitutes a lower-bound estimate of economic losses resulting from the present level of uninsurance nationally. D ur ing the past quartercentury the rate of uninsurance for the U.S. population under age sixty-five has remained relatively constant, fluctuating between 15 and 18 percent. Our voluntary and predominantly employment-based approach to coverage for the nonelderly population contributes to the persistence of this large pool of uninsured people. One reason policymakers have not acted to ensure universal coverage is that they have not appreciated the costs of the status quo. In a series of six reports, the Institute of Medicine’s (IOM’s) Committee on the Consequences of Uninsurance weighed evidence about the adverse impacts of uninsurance and, when possible, estimated the monetary value of these costs for individuals, families, communities, and society overall. This paper presents the economic cost analysis of the committee’s June 2003 report, Hidden Costs, Value Lost: Uninsurance in America. The Cost Of Uninsurance Simply put, economic costs are the value of resources devoted to one purpose that are not then available for alternative uses—the resources’ opportunity cost. The IOM committee examined the resource costs that stem from the nation’s high V a l u e O f C o v e r a g e H E A LT H A F F A I R S ~ W e b E x c l u s i v e W 4 1 5 7 DOI 10.1377/hlthaff.W4. 157 ©2004 Project HOPE–The People-to-People Health Foundation, Inc. Wilhelmine Miller (wmiller@nas.edu) is a senior program officer at the Institute of Medicine in Washington, D.C. Elizabeth Vigdor is an assistant professor of public policy studies at the Terry Sanford Institute of Public Policy, Duke University, in Durham, North Carolina. Willard Manning is a professor in the Harris School of Public Policy Studies, University of Chicago. rate of uninsurance from the most comprehensive perspective, that of society overall. The societal perspective theoretically includes costs borne by all members of society, including individuals, families, health care facilities, communities, and other organizations. The societal perspective includes collective losses, such as diminished health services capacity in communities with relatively high rates of uninsurance. Societal costs thus are much broader than governmental program costs or private individual and institutional expenditures. Probably the greatest cost of the lack of health insurance is the poorer health and shorter lives of people without coverage. Conversely, the greatest benefit of universal coverage would likely be the improvements in health and longevity among those who otherwise would be uninsured. Throughout this paper, unless otherwise defined, “cost” refers to resource losses that follow from the current level of uninsurance in the United States. Worse health among the uninsured, however, is only one of several adverse outcomes of the lack of health insurance within a population. Lack of coverage also exposes people to financial risk and uncertainty. Also, it can have deleterious spillover effects across a community, contributing to the loss of certain kinds of health services, less effective control of communicable disease, and losses to the local economic base. The consequences of uninsurance can be categorized as costs to private entities—including individuals, families, and firms—or as spillover costs that affect society more generally (Exhibit 1). Some of these are true economic costs (such as the worse health of those lacking coverage). Others, such as higher taxes or diversion of public resources, are partially transfers among actors in the economy (for example, some of the value of uncompensated care that hospitals and physicians W 4 1 5 8 3 1 M a r c h 2 0 0 4 T h e U n i n s u r e d EXHIBIT 1 Costs Consequent To Uninsurance Internal or private costs (for individuals, families, and firms) External or spillover costs Greater morbidity and premature mortality Developmental losses for children Family financial uncertainty and stress, depletion of assets (resource and transfer costs) Lost income of uninsured breadwinner in ill health Workplace productivity losses (absenteeism, reduced efficiency on the job) Diminished sense of social equality and self-respect Diminished quality and availability of personal health services Diminished public health system capacity Diminished population health (such as higher rates of vaccine-preventable disease) Higher taxes, budget cuts, loss of other uses for public revenues diverted to uncompensated care (primarily transfer costs, except for administrative costs) Higher public program costs connected with worse health (Medicare, disability payments) (primarily transfer costs) Diminished workforce productivity Diminished social capital; unfulfilled social norms of caring, equal opportunity, and mutual respect SOURCE: Adapted from Institute of Medicine Committee on the Consequences of Uninsurance, Hidden Costs, Value Lost: Uninsurance in America (Washington: National Academies Press, 2003), 31, Figure 2.2. provide to the uninsured) and are thus a matter of distribution rather than a cost. In this paper we present our estimate of the value of health lost due to uninsurance; contrast that value with an estimate of the additional investment in health services that would remedy the worse health outcomes of those now uninsured; and then discuss other, mostly unquantified, economic costs. We conclude by offering some reasons for the failure of private actions to achieve the societally superior outcome of universal coverage, identifying limitations of the analysis, and drawing some policy implications. Valuing Health Outcomes Perhaps the greatest cost to society of a large uninsured population is the increased mortality and worse health of the uninsured. Because the value of health is not easily derived from market prices, estimating this cost is challenging. Furthermore, health is multidimensional and thus difficult to define and measure. In addition to mortality, which is easy to measure, health encompasses physical and mental well-being and functioning. We use the concept of health capital to capture these aspects of health. Health capital is analogous to human capital, a concept used in labor economics. Human capital is “cashed out” as the present value of the income one can expect to receive over the course of one’s life as a function of one’s stock of knowledge. Having a better education allows a person to earn more in the future. Similarly, having more health makes a person happier and longer lived. Health capital is the present value of the utility resulting from a person’s expected lifetime stock of health. Estimating health capital. Health capital accounts for the value that people have for their lives and health beyond their future earnings. Estimating this value involves collapsing the elements of health into a quality-adjusted life expectancy and assigning this estimate a dollar value. To do this, we rate a person’s health-related quality of life (HRQL) on a scale ranging from 0 (for death) to 1 (for perfect health). Any diseases or impairments reduce this HRQL weight so it falls somewhere in the 0–1 range. A year in a health state with a particular HRQL weight is referred to as a quality-adjusted life year (QALY). For any given year in the future, the expected QALY is the sum of each probability that a person will have a particular disease profile that year multiplied by the expected HRQL from having that set of diseases. These expected QALYs are then discounted at a rate of 3 percent to their present values and summed to yield a quality-adjusted life expectancy. If there are only two possible health states, perfect health (HRQL = 1) and death (HRQL = 0), then the expected QALY for a given year in the future is simply the probability that a person is alive in that year. Summing these QALYs over all future years without discounting yields remaining life expectancy. The measure of health capital we use starts with this approach and incorporates discounting and health states other than perfect health. To incorporate morbidity into the measure of health capital, we used data on fifV a l u e O f C o v e r a g e H E A LT H A F F A I R S ~ W e b E x c l u s i v e W 4 1 5 9 teen chronic conditions from the National Health Interview Survey (NHIS) and the Surveillance, Epidemiology, and End Results (SEER) database. We calculated the prevalence of these conditions by age and sex. Using an ordered probit model with self-reported health as the dependent variable, we estimated QALY weights for each condition. The coefficient on the variable indicating that a person has a particular condition tells us how the presence of that condition moves one along the scale of self-reported health, holding constant demographic characteristics and other reported health conditions. These coefficients were then scaled to 0–1 to yield the QALY weights. Life expectancy, disease prevalence, and QALY weights were then combined as described above into a measure of discounted, qualityadjusted life expectancy. For the analysis in Hidden Costs, Value Lost, we monetized this estimate by multiplying the quality-adjusted life expectancy by the value of a year in perfect health. A vast literature on the value of a statistical life (VSL) has developed in response to government agencies’ need to evaluate the relative costs and benefits of health, safety, and environmental regulation. The value of an