Healthcare Economist

Comparative Effectiveness has been a hot topic in health services research. According to a recent article in the New England Journal of Medicine, “the American Recovery and Reinvestment Act of 2009 authorizes the expenditure of $1.1 billion to conduct research comparing ‘clinical outcomes, effectiveness, and appropriateness of items, services, and procedures that are used to prevent, diagnose, or treat diseases, disorders, and other health conditions.’”

Comparative effectiveness compares how effective various medical treatments improve health outcomes.  This sounds like the course we want to take.  Most policymakers laud the health benefits of comparative effectiveness research, but some people claim that comparative effectiveness research can also save cost.

This is most easily seen in the case where a treatment is completely ineffective.  If research can prove a treatment is ineffective, then insurers could save a lot of money by not covering this type of treatment.  This is especially true if the treatment is expensive.

However, comparative effectiveness treatment could also increase cost.  Assume that there are two treatment currently in use: Treatment A and Treatment B.  Let us say that treatment A costs $1,000 and has a 90% cure rate and Treatment B costs $10,000 and has a 95% cure rate.  According to comparative effectiveness research, we should always use Treatment B.  Yet this would significantly increase costs.

Most health economists argue that cost effectiveness research is provides a better way to improve health and decrease cost.  In the example above, should we cover Treatment B?  The answer is likely yes if this is a very serious disease (e.g., cancer) but likely not if the disease is less serious (e.g., the common cold).  Some readers may believe insurers should always cover Treatment B no matter what.  However, would you be willing to pay increased premiums that would occur if treatment B were covered?  Would you feel the same way if Treatment B cost $100,000?  or $10 million?  What if the cure rate was only 90.1%?

At some point, there must be a trade-off between cost and benefit.  Admittedly, these are very difficult decisions in practice, but because there are limited healthcare resources, we must ration care.  Yes, I said it, we must ration care.  I’ve said this before.  This rationing can take many forms: the scope of what your insurance company (or Medicare) will cover, waiting lines, or increased prices you must pay out of pocket for medical services.  The government wants to avoid making these tough choices because it is politically unpopular.  Politicians don’t want to be labelled  the sentator who “killed Grandma” or “instituted a death panel.”  But to truly decrease cost and improve quality, cost effectiveness rather than comparative effectiveness is the prescription we need.

Russell Hutchinson presents the 100th edition of the Cavalcade of Risk.

Here are some other links of interest

• German Ministry of Health considers a 20-30% cut in hospital beds.
• Best and worst health reform ideas according to a libertarian.
• The median salary change for faculty members in 2009-10 was 0 percent.
• Should nurses be able to facebook at work?
• Pharma advertising or public service announcement?
• Catchy title, but an irrelevant research question.
• Lessons of a $618,616 Death.

From the N.Y. Times:

The national Caesarean rate, 31.8 percent, has been rising steadily for the last 11 years and is fed by repeat patients. Critics say that doctors are performing too many Caesareans, needlessly exposing women and infants to surgical risks and running up several billion dollars a year in excess bills, precisely the kind of overuse that a health care overhaul is supposed to address.

In fact, the rate of vaginal birth after Caesarean (VBAC) is now below 10%.  Some doctors claim that VBACs risk tearing the mother’s scar tissue on her uterus, but others–including the profiled women on a Navajo reservation–successfully undergo multiple VBACs.  Why are the rates VBAC rates so low?

• Fears of malpractice
• Physicians make more money Caesarean rather than a vaginal birth
• Caesarean’s use fewer physician hours than vaginal births
• Fewer expected number of pregnancies
• Patient demand

Why are Caesarean rates so much lower on the Navajo reservation?  On the reservation, physicians are federally insured against malpractice, are paid a salary, and the use of midwives is much more common.  Additionally, Navajo “couples often want more than two children, but repeated Caesareans increase the risk of each pregnancy, so doctors and patients are motivated to avoid the surgery.”

To see further evidence of how different physician compensation methods can alter surgery rates, see my own study in Health Economics.

Some estimates claim that one-quarter of life-time spending on medical care occurs in the last year of an individual’s life.  Conventional wisdom says this is inefficient, but a paper by Philipson, Becker, Goldman and Murphy (2010) disagrees.  Individuals at the end of their life place very high value on terminal medical care for the following reasons:

1. If resources have no value when dead, a self-interested individual would be willing to forego his entire wealth to extend his life.
2. The preservation of hope raises the value of life.  The authors claim that if a patient is given a death sentence in 6 months, he values those 6 months less than if he knew he would live after that.
3. The social value of terminal care is often greater than the private value.  Adult children (hopefully) places a high value on extending the life of their elderly parents.
4. The value of terminal care may be the same regardless of a patient’s quality of life.  QALY estimates of the value of life underestimate the utility the elderly receive from being alive, even in a very frail state.

Source: Philipson, Becker, Goldman and Murphy (2010) Terminal Care and The Value of Life Near Its End, NBER Working Paper #15649.

Most economists rail against rent control.  Rent control distorts the real estate markets.  Individuals in rent controlled apartments are receiving ‘rents’ (in the economic sense) because they live in higher quality apartments than they are paying for.  In addition, it provides them a strong incentive to stay in their apartment even if they would prefer to move to a different apartment or location.  Rent control also limits the supply of new housing because developers know they will not be able to earn a profit for new housing if the rents are held down.

Those who support rent control argue that the program helps people who can not afford to live in their house.  But a more effective way to may housing affordable would be to give direct cash grants to poor individuals so they can afford the market rents.

On one of my days off, I was watching a Law and Order episode and found another drawback to rent control, it distorts the landlord’s incentive.  Oftentimes, rent control remains with a unit until the tenant moves out.  Typically, a landlord has an incentive to maintain an apartment quality to keep their current tenant or attract new ones.  They balance the cost of making improvements against the cost of losing their tenants.

Read the rest of this entry »

Brad Wright of Wright on Health hosts the latest edition of the Health Wonk Review.

Today, we’ll start today off with some humor:

• Graphic on drug commercials.

And then move on to more serious issues:

• How healthy is your county?
• Health reform in Bulgaria.
• 2009 Medical Weblog Awards.
• The conventional wisdom that Africa is not reducing poverty is wrong.
• The chicken and the egg: cost control or coverage?
• Nicole Kidman’s pre-existing conditions.

The health reform bills currently propose introduce health insurance subsidies for individuals who do not qualify for health insurance provided by the government.  The goal of these subsidies is to make health insurance more affordable for the lower and middle class. The subsidies gradually decrease for higher income levels.

In “Obama’s Prescription for Low-Wage Workers,” Michael Cannon notes that one also can see these subsidies as increasing the marginal tax rate.  For instance, let us John makes $16,000 and has a 25% income tax rate.  Under the new health reform bill, John would also receive a subsidy to purchase health insurance.  Let us assume the subsidy is $5000.  Thus, his after tax income is $17,000 [(1-.25)*16,000+5000].

What happens if John has the option to work at a new job that pays him $20,000?  Of course, he will earn more income but his health insurance subsidy will also decrease.  If the health insurance subsidy decreases to $3,500, then his after tax income in your new job is now $18,500 [(1-.25)*20,000+4000].  Although John’s gross income increased by $4000 when taking the new job, his after tax income only increased by $1500.  This is in a marginal tax rate of 62.5%.  In fact, Mr. Cannon’s research finds that mandates and subsidies impose effective marginal tax rates on low-wage workers “averaging between 53 and 74 percent.”  When marginal tax rates are high, extra hours worked lead to a smaller increase in after-tax income.  Thus, the labor supply decreases.

One thing Mr. Cannon ignores, however, is the current Medicaid poverty trap.  Poor individuals are eligible for Medicaid.  However, if they get a better job paying them more money, they may lose their Medicaid eligibility.  Poor individuals may refuse to take better paying jobs to keep their Medicaid coverage.

Once the subsidies are implemented, however, poor individuals will be more likely to take a better-paying job since they can receive subsidies to buy private health insurance even if they lose their Medicaid coverage.  The high marginal tax rates are more likely to affect the labor supply of the lower-middle class and middle class individuals.  These individuals are in the same scenarios as John is above.  Higher pre-tax earnings will not necessarily translate into significantly larger after-tax earnings.  I predict that the higher marginal tax rates Mr. Cannon mentions will decrease the labor supply most for individuals in the middle class.

Does a fancy hospital interior and soothing music help promote faster healing?  Sharp Hospital system certainly things so. NPR’s Marketplace even covers the story:

Dan Gross is executive vice president of Sharp Healthcare. I meet up with him in the lobby for my tour of the swanky Sharp Memorial. Its a $200-million hospital in San Diego. And it’s built with the principals of what’s known as “evidence-based design.”

GROSS: There’s a lot of research today and a lot of conversation around how the design of a hospital really promotes comfort, healing and produces better quality outcomes for patients.

Does a “nice” hospital actually improve health outcomes? That will be difficult to ascertain. Building a fancy hospital may improve outcomes, or it may be the case that nicer hospitals attractive relatively richer, relatively healthier patients.

Even if “evidenced-based design” does improve health outcomes, the change in ambience may not affect patient health directly.  For instance, Sharp talks about using the Disney concept of on-stage and off-stage work where “…nurses have private areas ‘off stage’ where they can prepare medications uninterrupted.”  Having nurses think they are “on stage” may incentivize them to work harder, smarter and more professionally. Further, a more luxurious hospital may attract higher quality staff.

From an individual hospital’s point of view, it doesn’t matter which mechanism is causing this improvement in health.  From society’s point of view, however, if fancy new hospitals simply attract the best staff and healthier, more affluent patients, then improved hospital design may be a waste of resources.

Here’s my take on President Obama’s health care plan.

• Tax credits for Health Insurance Premiums.  This will do nothing to change how much health care costs, it will just change who pays the premiums.  For middle class individuals, these subsidies will help make health insurance more affordable.  Because the wealthy won’t receive any subsidy (the maximum family income to be eligible for the credit is $88,000), they will simply pay higher taxes.
• Health Insurance Mandate.  Obama does not call this a mandate, but rather titles this section of the proposal “Improve Individual Responsibility.”  Individuals who don’t buy health insurance will be fined.  A health insurance mandate in and of itself doesn’t make much sense to me (if you don’t want it or can’t afford it, you shouldn’t be punished).  However, if laws that prohibit-pre-existing pricing insurance plans based on pre-existing conditions, a mandate may be needed so individuals can not avoid paying health insurance premiums until they fall ill and only then pay the premiums.
• Employer Mandate.  If you don’t provide health insurance for your worker, you have to pay a fine of $3,000.  This is true for firms with 50 employees or more.  The employer mandate does not make much sense.  Business could offer health insurance to attract employees, but firms should not be forced into being in the health insurance business.  It makes more sense to instead make it easier for businesses to provide insurance.  For instance, the government could allow small businesses to band together to buy health insurance product under the umbrella of a common organization.  The economies of scale should reduce insurance costs.
• Federal financing to all States for the expansion of Medicaid.  Helps the state budgets, hurts the federal budget.
• Closing the Medicare prescription drug “donut hole” coverage gap.  This will increase the cost of the program, but it makes sense to have a more standardized benefit package with a deductible and flat coinsurance rate rather than the complex product with the donut hole.
• Strengthening the provisions to fight fraud, waste, and abuse in Medicare and Medicaid.  This is a throw-away point.  Every politician tries to do this, but it is often difficult to determine what is fraud, waste and abuse and what is just expensive care for a needy patient.
• Eliminate Pay-for-Delay.  Pay-for-dealy occurs when brand-name pharmaceutical companies pay their generic competitors to keep its drug off the market for a period of time.  This generally seems like a good idea, but one economist says eliminating these payoffs may make it less likely generics will be developed in the first place.
• Increasing the threshold for the excise tax on the most expensive health plans.  I am not a supporter of this bill.  Health insurance is expensive either because 1) the health plan is very generous or 2) the person is sick and it is expensive to cover them.  The excise tax will cut down on the number of super generous plans, but it will punish sick individuals in the non-group market.  Eliminating the deductibility of group health insurance benefits makes more sense and will raise more revenue to help pay down the deficit.
• Broaden the Medicare Hospital Insurance (HI) Tax Base.  This means that unearned income (capital gains, dividends, interest) will now also be subject to Medicare taxes.
• Creating a new Health Insurance Rate Authority.  Many states already have a body that regulates insurance companies.  Having an additional body may just be a waste of taxpayer dollars.  The federal government may think health insurance rate increases are “too high” but I doubt the government will know what the “right” premiums would be more than a private insurance company.
• Invest in Community Health Centers.  Community health centers can help people who fall through the cracks: those without health insurance, immigrants.  However, a more comprehensive health reform (which would fund a majority of the health insurance cost for these disadvantaged individuals) would allow poor people to choose which health care provider they wanted rather the having to rely on community health centers.  Expanding Medicaid may be a more effective use of these dollars than investing in these centers if Medicaid could be expanded to all individuals.  If the U.S. wants to provide immigrants with poor medical care (i.e., make them ineligible for Medicaid) as a disincentive to immigrate, than community health centers may be a better option than additional Medicaid funding.
• More federal funding for SCHIP.
• Eliminating the Nebraska FMAP provision.  Eliminates one example of pork, but there are likely many others in the bill.

Other commentaries worth reading:

• The bill will increase the marginal tax rate for the poor.
• Which groups will be helped most if health reform passes?
• What will be the impact for Californians?
• BBC on Obama’s plan.