January 2006

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Is Britain’s goal to reduce hospital size beneficial to consumers?

January 31, 2006 in Current Events, International Health Care Systems | Permalink

A 31 January 2006 Times article (“Smaller is better, says minister in hospitals shake-up“) states that the National Health Service (NHS) hopes to increase the number of small in the UK to counter the trend of recent hospital closings. Is this a good policy? Let’s look at the Pros and Cons:

Pros:

  1. Smaller, more numerous hospitals mean that travel time will be decreased. Patients will waste less time missing work during hospital visits.
  2. Generally, the health care profession’s conventional wisdom is that there should be many primary care centers, fewer secondary care centers, and only a couple of regional tertiary care hospitals for rare diseases. Since most diseases can be treated–or at least diagnosed–by General Practitioners (GP), these would seem to be a more efficient use of resources. The NHS claims that treatment in the primary care hospital will be less costly.
  3. With more hospital options nearby, this proposal should increase consumer choice.
  4. It has been documented in the United States that building expensive secondary care hospitals leads to an increase in treatments that are preformed there. This phenomenon is known as supplier induced demand. Some of this is of course filling a need, but some of the increased demand may be that physicians want to cover the cost of the hospital. With fewer secondary care facilities, there should be less supplier induced demand. This may not be a problem in the UK where there is a single payer system.

Cons:

  1. If there are significant overhead costs to running a hospital, decreasing the size of each hospital will eliminate efficiencies due to economies of scale.
  2. As more secondary hospitals close in favor the primary care hospitals, it is possible that consumers will have fewer choices in the secondary care market.

Overall what is my conclusion? Since there is a single-payer system in the UK, it is difficult to gage consumer demand for primary, secondary and tertiary care. If there is currently an excess amount of patients treated at acute care hospitals, this proposal may be welfare improving. Further, as technology improves, primary care facilities may have the capabilities to do procedures which previously were only preformed at acute care facilities. As long as costs are not prohibitive, this looks to be a successful strategy.

Trends in Health Care Spending

January 30, 2006 in HC Statistics | Permalink

A recent Health Affairs article by Cynthia Smith, Cathy Cowan, Stephen Heffler and Aaron Catlin details the trends in health care spending over the last 25 years. I have compiled their results into a handy graph.

Total Health Expenditures - 1970-2004

In addition the the general overall increase, there are other significant findings. Between 1970 and 2004, out-of-pocket payments decreased from 33.2% to 12.6% of total expenditures. This means that consumers are not going to be as price sensitive in regards to their election of medical treatment since they pay less then 15% of the total cost. It is no wonder that people are demanding more and more medical procedures.

Private Insurance has picked up much of the slack. In 1970 private insurers payed for 20.6% of all expenditures but currently they foot 35.1% of the bill.

Further, government payment for health care has increased from 37.7% of all U.S. expenditures in 1970 to 45.1% in 2004. The Medicare and Medicaid programs have made up between 60 and 70 percent of the total government expenditures in health care between 1980 and the present.

What is the the significance of these percentages? In general, end consumers are paying less and less for medical care out of their pocket. When third parties pay a larger percentage of the cost, we have the problem of moral hazard. President Bush is trying to make consumers more price sensitive by introducing Health Savings Accounts (HSA). Will this work? Look at my 26 January and 29 January posts to see some of what I think.

Cynthia Smith, Cathy Cowan, Stephen Heffler, Aaron Catlin;
“National Health Spending In 2004: Recent Slowdown Led By Prescription Drug Spending”
Health Affairs, January/February 2006; 25(1): 186-196.

Why are people enrolled in HSAs not contributing to their accounts?

January 29, 2006 in Current Events, Health Insurance | Permalink

A January 26th New York Times article (“Prognosis is Mixed for Health Savings“) gives a brief summary of the results of the Health Savings Account (HSA) legislation enacted in 2003. The HSA allows individuals to contribute to a health care savings account using pre-tax dollars; a mechanism for savings is similar to a 401(k). In order to qualify for the HSA, however, individuals must have a high-deductible insurance plan provided either by the individual or through one’s employer.The NYT article states that only about two million people have signed up for HSAs, but only half of those enrolled have contributed any money towards their account. This is certainly a puzzling finding. In essence, it seems that these individuals are missing out on an opportunity to lower their taxes and acting irrationally. Below are a few of my explanations which may possibly explain this phenomenon:

  1. Liquidity Constraints. Those who save little, may not be able finance the contribution to the HSA. Since financial institutions typically won’t give low-income borrowers a loan simply to contribute to the HSA, zero contributions will be the rational choice.

  2. Adverse Selection. Who are the people who enroll in the HSA? One would guess these would be mostly a) wealthier and b) healthier individuals for whom a large payment below the deductible limit is either a) affordable or b) unlikely. On the other hand, high deductible plans are generally the least expensive. Poorer individuals may also decide to open an HSA because of the low cost of the insurance plan, but may not have the financial resources to contribute to their tax-free account.

  3. Savings Substitutes. Individuals who save have a variety of options: stocks, bonds, savings accounts, etc. Those who wish to save with pre-tax dollars, also have a variety of options. If an employee has a 401(k) at work, they may elect to do all of their saving through that mechanism rather than the HSA. Since both offer pre-tax savings, as long as the individual does not wish to contribute more than the allowable annual upper limit of the 401(k), not contributing the HSA is rational.

  4. No tax savings. Using pre-tax dollars to save for health insurance is not a benefit for the 32.4% of Americans who do not owe any income tax at the end of the year (see January 26 post).
  5. Unfamiliarity. Another plausible explanation is that citizens are simply not familiar enough with the intricacies of HSAs. If this is the case, one would expect that percent of people with HSAs who contribute to their account will rise over time as individuals gather more knowledge.

When can you get ‘Something for Nothing’ in health care?

January 28, 2006 in Current Events | Permalink

Today’s health care debate in the popular press can be boiled down to the following few points:

  1. Health Care is too expensive and we need to make it more ‘affordable,’
  2. While reducing the price, we must maintain individual choice of which physicians they wish to see and which procedures they desire.
  3. Switching from a fee-for-service system to capitation or managed care system is undesirable.
  4. All people are entitled to the procedures using the latest medical technology.

Basically, we want the best health care in the world for cheap. Unfortunately, this is impossible. Robert Samuelson’s article in Thursday’s Washington Post (“The Fix-It Myth“) does a great job of detailing the tradeoffs inherent in treating the ill :

Here’s the paradox: A health care system that satisfies most of us as individuals may hurt us as a society. Let me offer myself as an example. All my doctors are in small practices. I like it that way. It seems to make for closer personal connections. But I’m always stunned by how many people they employ for nonmedical chores — appointments, recordkeeping, insurance collections. A bigger practice, though more impersonal, might be more efficient. Because insurance covers most of my medical bills, though, I don’t have any stake in switching.

On a grander scale, that’s our predicament. Americans generally want their health care system to do three things: (1) provide needed care to all people, regardless of income; (2) maintain our freedom to pick doctors and their freedom to recommend the best care for us; and (3) control costs. The trouble is that these laudable goals aren’t compatible. We can have any two of them, but not all three. Everyone can get care with complete choice — but costs will explode, because patients and doctors have no reason to control them. We can control costs but only by denying care or limiting choices.

Even in health care, you can’t get something for nothing.

“Going into Labor: Earnings vs. Infant Survival in Rural Africa” – Elsa V. Artadi

January 27, 2006 in Academic Articles, Health Care in Developing Nations | Permalink

Today I attended a seminar where Elsa Artadi presented her paper on: “Going into Labor: Earnings vs. Infant Survival in Rural Africa.” Artadi asked the question ‘why do families not optimize childbearing to coincide with months of minimal infant mortality?’ Artadi demonstrated that infant mortality rates vary significantly from month to month in Sub-Saharan Africa due to 1) the variation in disease incidence mostly from changes in rainfall and 2) agricultural cycles. Often mothers are faced with a trade-off between earning more income by working during the harvest season versus having a child during the low infant mortality months which may coincide with the harvest season. This is a serious tradeoff since giving birth in a low infant mortality month may not be optimal if the loss of income jeopardizes the health and well being of the entire family. For some countries, the low infant mortality months coincide with non-harvest months. Thus, these countries do not face this tradeoff and Artadi expects these individuals to concentrate births in the low infant mortality months.

Methodology

Artadi constructs a ‘probability of survival’ variable for each country and month based on 1) whether that month was part of the rainy season, 2) whether that month was a high risk month for famine, 3) a fixed effects dummy for each mother, and 4) demographic characteristics. After calculating the fitted values of the expected survival rate (E[Surv]) for each month in each country, she creates another variable which measure the loss of infant health due to being born in a poor month (LossE[Surv]_m,c=max(Surv)_c-E(Surv)m,c). She then constructs a ‘Tradeoff_c’ variable which measures the difference between the expected survival rate during the high labor demand season (harvest) and the expected survival rate during the low labor demand season (non-harvest). Artadi runs a regession of ‘LossE[Surv]_m,c’ on ‘Tradeoff_c’, and demographic variables to see if citizens in countries whose low infant mortality months coincide with the harvest season choose poor survival months more frequently.

Artadi presents persuasive evidence that the sacrifice of potential income is the major reason why births would be concentrated in high infant mortality months. Although she had some technical problems (incorrect standard errors), her specifications of the model to check for robustness were convincing.

Significance of the Paper

While this paper provides a good description of the tradeoffs Sub-Saharan African women face in childbirth decisions, it does not offer any policy options for improving the welfare of these societies. Changing agricultural cycles is infeasible; most families already have some access to family planning (whether modern contraceptives or more traditional methods). In my opinion, the best means to decrease infant mortality in developing countries is to improve overall GDP/capita (easier said than done). Increasing incomes above subsistence levels will: 1) allow families to save so they will not go hungry if they decide to have a baby during harvest time 2) increase the available amount of money in a country to be spent on education and literacy which will help women become more knowledgeable about their health and 3) facilitate a demographic transition where more resources are devoted to each child. As an example India’s GDP has been growing steadily since 2000 and its infant mortality rate has decreased from 64.9 deaths/1000 live births in 2000 to 56.3 deaths/1000 live births in 2005. Further, the most famous micro-credit organization, Grameen Bank, claims that its small loans have lifted 50% of its members above the poverty line. In a report by H. I. Latifee in 2003, infant mortality decreased by 34% among Grameen Bank members. While part of this effect may be due to the educational programs Grameen offers, much is certainly attributable to the increase in income.

Money Trail May Mark Path of New Pandemics

January 27, 2006 in Current Events, International Health Care Systems | Permalink

A recent article in Nature (“The Scaling Laws of Human Travel“) claims that the flow of money may provide a good model of how diseases spread in modern society. Previous models of how pandemics generally thought that the dispersion would occur slowly over a contiguous geographic region. As air travel becomes more and more common (and inexpensive), we may see contagious illnesses jump between countries or even continents. The MedPage Today blog offers a nice summary of how tracking dollar bills on the Internet became feasible means to model the spread of disease.

The model is based on an analysis of data collected by a popular Internet game — found on the Web site www.wheresgeorge.com — in which participants enter the serial numbers of bills in their possession.

Over time, as different people enter the same bill, the game builds up a picture of how the money is moving, said Dirk Brockmann, Ph.D., of the Max Planck Institute for Dynamics and Self-Organization here.

But since paper money — like viruses — travels with people, the game also allowed the researchers to model how humans move through the world, without actually tracking them, Dr. Brockmann said

“The enormous amount of data, as well as the geographical and temporal resolution of bill-tracking, allows us to draw conclusions about the statistical characteristics of human travel,” he said.

Historically, pandemics have moved relatively slowly, because human travel was limited. The 14th century pandemic of bubonic plague – the Black Death — took three years to hit the entirety of Europe, moving from south to north with an average rate of spread of slightly more than a mile a day.

“But today people move great distances in short time periods, as well as short distances, and they use variable means of transportation,” said co-author Lars Hufnagel, Ph.D., of the Kavli Institute for Theoretical Physics at the University of California in Santa Barbara.

“We can expect that future pandemics will spread according to other rules, and more quickly,” he said.

Bush will propose “New Tax Breaks for Medical Expenses” in his 2006 State of the Union

January 26, 2006 in Current Events | Permalink

The Washington Post reports that President George W. Bush will offer “New Tax Breaks for Medical Expensesâ€? in his State of the Union speech on January 31 at 9pm ET. Part of this proposal is to make personal expenditures on health expenditures tax deductible and to expand health savings accounts.

When examining the health insurance market, policymakers often face a paradox. If the government hopes to make insurance cheaper—though measures such as making employer provision of health insurance tax deductible—individuals will desire more insurance. With this generous amount of insurance, an individual will only pay a negligible amount of their total health costs, and they may seek too much treatment (either in terms of the cost or number of procedures, additional prescription drugs, etc). This phenomenon is known as moral hazard.

President Bush is trying to correct for moral hazard by making it more attractive for individuals to either pay for medical costs out of their own pocket or to purchase high deductible insurance plans. As a given insurance plan becomes less generous, however, a risk-adverse individual becomes worse off. A debilitating illness will cost more for a person with the high deductible plan than for someone with the low deductible, ‘more generous’ plan. Further, the principles of adverse selection would indicate that the people who will purchase the high deductible plans will be healthier, younger, more affluent and less risk-averse than the average citizen. Employer provided group insurance will be left will a sicker, older, poorer and more risk-averse pool to insure. One could certainly expect group insurance rates to increase.

Another problem with the the proposal is that any policy which offers tax deductions will in essence not aid the vast majority of the poor. According a Tax Foundation report (“Fiscal Facts: Number of Americans Outside the Income Tax System Continues to Grow“, June 9, 2005), an estimated 42.5 million tax returns had zero tax liability in 2004. This represents approximately 32.4% of all tax returns filed. For the poorest and oldest, health care is provided either through Medicare or Medicaid. However, for most of the working poor who do not qualify for Medicaid, the tax break will not improve their welfare at all—since they do not owe taxes—and will likely make them worse off as their group insurance rates at work increase.

Does drinking wine truly increase longevity?

January 25, 2006 in Current Events, Medical Studies | Permalink

A handful of studies have shown that people who drink one or two glasses of wine per day generally live longer than people who do not drink or who drink beer. Does wine really increase longevity? An article on the Medpage Today website suggests that Eating Well May Explain Wine Drinkers’ Better Health.

Prior studies most likely suffered from a phenomenon with which economists know intimately: Selection Bias.

Wine is generally an “upper class” drink while beer is thought to be a “lower class” drink. Thus, people who drink wine are on average better educated, have more income, and eat healthier food. These three factors have been shown to be highly correlated with longevity. From the prior studies we conclude that well-educated, affluent individuals who eat healthy live longer and also happen to drink more wine; wine is not the cause of their added longevity.

As for me, I’ll stick with a good Belgian beer such as Chimay or Leffe over a glass of Merlot any day.

“Health Care Tax Policy” paper by Health Care Economist

January 24, 2006 in Health Insurance, My Papers, Taxes | Permalink

In the United States today, many employees receive compensation in the form of health insurance in addition to pecuniary remuneration. Health insurance, however, is tax deductible when it is received from an individual’s employer while wages are not. A Health Affairs report shows that this tax expenditure from excluding health insurance from the federal income tax cost the government over $100 billion in 2004.

Is this tax expenditure worth the cost? My “Health Care Tax Policy” paper examines the pros and cons of this policy. On one hand, the tax may encourage over-insurance; on the other the tax subsidy may eliminate some problems of adverse select. The conclusion of the paper is that the tax subsidy is efficient only if adverse selection is a significant problem, and if the cost savings from group policies outweigh any fixed costs firms incur from administering health care plans.

Please, feel free to take the time to read the paper and give me some feedback.

Is the Massachusetts Payroll Tax to Encourage Employer-Provided Health Insurance worth the cost?

January 23, 2006 in Current Events, Taxes | Permalink

Massachusetts has proposed a health care bill which four major components:

  1. Mandatory insurance for all Massachusetts residents

  2. Firms who do not offer insurance to their employees are subject to a payroll tax of: 5% for firms having between 11 and 100 employees and 7% for firms having over 100 employees. Firms employing 10 employees or less are exempt from this measure.

  3. Repeal of the surcharge employers who provide insurance pay for the “Free Care Pool”, a fund which helps finance health insurance for the poor.

  4. Employers with 50 or fewer employees could purchase insurance through Connector, a Massachusetts health insurance plan for small businesses.

  5. Increase funding for Medicaid and increase reimbursements to physicians and hospitals.

Let’s look at the Pros and Cons…

Pros:

This bill will certainly increase health coverage. The first reason is of course because health coverage will be mandatory. This will force the uninsured, who are generally younger, into the insurance pool. This will reduce the problem of adverse selection where only the sick want insurance. Old sick people will certainly benefit, but young healthy people may or may not benefit from mandatory insurance.

While the payroll tax at first seems onerous on business, according to a Families USA Report currently only 5% of businesses with 25 or more employees do not offer health insurance and 16.3% of employers with 10-24 employee do not offer insurance. The repeal of the surcharge for the “Free Care Pool” will reduce the cost to firms that provide health insurance for their employees, and after the implementation of the payroll tax, we would expect few firms to not offer group insurance. Connector fund should be of great assistance to help small businesses to reduce their insurance cost. When risks are pooled over many small businesses, insurance costs per employee are lower due to reduced administrative costs and a reduced risk for adverse selection.

Cons:

Mandatory health insurance may be efficient in the sense that it eliminates adverse selection, however, libertarians would object to the government compelling an individual to purchase thousands of dollars worth of insurance. Does the government know better than you that spending money on food, electricity or your children’s school is less worthwhile then health insurance? Libertarians believe individuals should be able to make that decision for themselves.

In a closed economy, we would expect firms to adopt health insurance to avoid the payroll tax; however firms may also take other actions to avoid the tax. The Massachusetts Taxpayer Foundation perceptively notes that with the increased cost of labor in Massachusetts, many business would set up shop in adjoining states with lower labor costs. In the short run firms would likely simply reduce the cash wages employees earn so that their total compensation (wages + health insurance) is at the same equilibrium amount as before the legislation. If wages were sticky and did not decrease, this could lead to increased unemployment to levels that we see in European countries. Further, firms could substitute capital for labor leading to inefficient production.

Conclusion

Overall, I think this is a good bill, provided that the revenues raised from the payroll tax are used to reduce taxes in other areas. Many of the provisions of the bill address the problems of adverse selection inherent in the health insurance market. Allowing small firms to pool their insurance pools through the Connector fund is a great idea, where no one loses. One question that has not been addressed in any of the reports I saw was ‘how much insurance are employers required to provide in order to be exempt from the payroll tax?’ Forcing employers to provide comprehensive insurance will lead to ‘over-insurance’ for many individuals. On the other hand, allowing employers to only offer ‘catastrophic’ insurance with the option for the purchase of more insurance by employees will give rise to adverse selection again. In the short run, I would expect to see unemployment jump as firms reduce employment since wages are sticky. In the long run, I would expect to see real wages drop slightly in order to compensate for the additional compensation workers receive in the form of health insurance.

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