February 2006

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How are German Smokers and American Savers related?

February 28, 2006 in Academic Articles, Medical Studies | 1 comment

Medpage Today recently released some statistics regarding the prevalence of smoking cessation among Germans with serious health diseases (“Smokers Can’t Say No in the Face of Serious Circulatory Disease“).

“…the investigators found that among those with a single disorder, the proportion of current smokers among ever-smokers ranged from 29% for myocardial infarction to 44.4% for hypertension.

In addition, unlike smokers with central disease, those with a single peripheral disease ailment were unlikely to quit [point estimate 99%]“

It has been been shown overwhelmingly that smoking is a major cause of many diseases. Why do people continue to smoke in the face of these potential dangers? Dr. Ulrich John, the director of the study, stated that many smokers are uninformed about the relationship between smoking and their disease.

Economists would find this claim dubious. The health dangers of smoking are well known and economists generally assume that individuals are rational. One explanation for this behavior could be hyperbolic discounting of the variety proposed by Laibson (1997) (“Golden Eggs and Hyperbolic Discounting“).

In hyperbolic discounting, individuals rationally choose the amount of smoking they want to have each period using their typical discount rate *. Hyperbolic discounting, however, values the future less than the present. This results in time inconsistent choices. Today I may say that I want to smoke, but will stop in the future. Nevertheless, once I reach the future date specificied, I will value smoking more than I had anticipated. In its original context, Laibson used hyperbolic discounting to explain the phenomenon of Christmas clubs which compel individuals to save. Having smokers post a bond which they would lose if they smoked at a future date is a solution many individuals use to quit. For instance, for every cigarette one has, the individual may compel themselves give a friend a quarter.

* Individuals maximize the following utility function each period: E[u(c_t) + b{SUM}_{j=1 to T} d^j u(c_{t+j})…d is the discount rate; b is the rate of preference between the future and now.

Sharp to prohibit physicians from seeing Non-Sharp patients

February 27, 2006 in Current Events, Health Insurance | Permalink

Sunday’s San Diego Union Tribune (“Doctors object to ultimatum on health care: Sharp wants every senior on one plan“) had an interesting article on Sharp’s decision to issue its physicians an ultimatum: either provides services exclusively for our patients or find work elsewhere.  Let us look at this from a variety of perspectives.

Sharp:

Sharp is a non-profit organization, who is the largest health services provider in San Diego county.  According to the Sharp website, the group has “four acute-care hospitals, five specialty hospitals and three medical groups plus a full spectrum of other facilities and services.”  It also has $1.4 billion in revenue.  The contracts Sharp was proposing for the doctors was a flat fee per patient regardless of the number of services provided.  If these doctors were allowed to serve fee for service (FFS) patients in addition to Sharp’s capitation patients, the physician would have an incentive to provide care to the FFS patients and ignore Sharp patients.  Care provided to the FFS patients increases a physicians profits while care provided to Sharp’s capitation patients only increases costs.

Physicians:

The physicians think this is a raw deal.  First, they will lose a large portion of their clientèle if they choose to remain with Sharp.  Secondly, if a large portion of their capitation patients  become sick, they are not able to increase FFS volume to to makeup for lost income.  Third, doctors are not actuaries and passing the financial risk for caring for patients to doctors is a recipe for disaster.  Fourth, Sharp has significant market power in the San Diego area.  Sharp’s Secure Horizons senior plan pays physicians only $44/patient per month, while Health Net Seniority Plus pays doctors $110/patient per month.
Patients:

In the short term, this will certainly cause problems.  Many elderly patients will need to change doctors and may have to commute longer distances (although Sharp did offer “20 free one way trips to Sharp providers” among those who have to switch plans).  In the long term, the industry consolidation may help to reduce price.  Sharp’s decision to create an integrated IT network should increase efficiency and quality.

Conclusion
I think what you are seeing is a reigning in of costs in order to keep premiums down.  Physician and patient choice may suffer, but the costs to elderly San Diegan residents should decrease.

‘A Wealth of Talent’: Complimentary article on UCSD’s Economics department

February 24, 2006 in Miscellaneous | Permalink

This Sunday, the San Diego Union Tribune (“A wealth of talent“) wrote a complimentary article regarding the ascendancy of UCSD’s Economics department into the elite strata of economics departments.  Last year, U.S. News and World Report ranked the UCSD economics department #10 in the nation.  As a graduate student in UCSD’s economics department, my ‘unbiased’ opinion is that the article is right on target.  The Bengt Holmstrom, chairman of the the top-ranked MIT economics department said the following:

“They are like a small-market baseball team that doesn’t have the advantages of a Red Sox or Yankees, but still does well.  They deserve a lot of credit because they can’t just pick and choose whoever they want.â€?

How to invest your money

February 23, 2006 in Economics - General | Permalink

Paul Merriman one of the few investment advisors I respect.  His blog is full of useful information.  His advice is simple:

  1. Invest in Index Funds.  For an average investor, attempting to ‘beat the market’ or is a wasteful endeavor.  Index funds diversify risk by allowing investors to hold a large variety of stocks while minimizing fees.
  2. Invest for the Long Run.  Some investors try to time the market.  Professionals may be able to do this since they can trade with very low or zero fees and may have access to insider information.  Although trading on insider information is illegal, many people still do it (see Martha Stewart).  For the average investor, fees will destroy most gains from this strategy and, by definition, the average investor gets the average return.
  3. Asset Allocation is key.  Historically, small-cap stocks have preformed better than large cap stocks.  Value stocks have preformed better than growth stocks.  Merriman suggests weighting your portfolio more towards small cap and value stocks, unless you are near retirement when you should invest heavily in bonds.

Why don’t other investment advisors advocate the same principles as Merriman.  Brokers make money every time you trade a stock; thus they have incentives to advise you to ‘pick the winners’ and trade often since it allows them to make more money.  Economists side with Merriman.  Although in the short run, 50% of stock brokers will beat the market, in the long run, Merriman’s advice will lead to better returns.

Colombia’s health insurance reform: Is managed competition for the poor working?

February 22, 2006 in International Health Care Systems | Permalink

In 1993, Colombia enacted ‘la Ley 100′ (law 100) transformed the way in which the poor are able to access health care.  Previously, the poor could go to public hospitals and receive free or inexpensive care if the hospital would accept them  This was financed through higher prices for customers who were able to pay for medical procedures.  La Ley 100, gave local authorities the funds to finance a system of competitive private managed care organizations.  The local authorities would compensate the health insurance organizations with risk adjusted premiums for every individual covered.  Because Colombia mandated a strict benefit package (with an emphasis on primary and preventative care) for each insurance company to provide, competition in this sector was based mostly on quality and not on price. 

In their 2001 article in Health Policy and Planning, Beatriz Plaza, Ana Beatriz Barona and Norman Hearst examine the implementation of la Ley 100 and its effectiveness using anecdotal and statistical evidence.  The authors found that the percentage of Colombians covered by any type of insurance rose from 28% to 57% between 1992 and 1997.  In 1996, the Colombian government added catastrophic illness (such as AIDS, cancer, major trauma, cardiovascular disease, etc.) to the package covered by the managed care organizations. 

The authors cite three problems with the implementation of la Ley 100.  The first is a lack of institutional capacity.  Many hospitals did not have accounting procedures or satisfactory IT systems to administer this program.  Further, there was evidence of fraud.  Some managed care organizations would charge the local government for people to whom an insurance card was never issued.  Secondly, spreading information regarding la Ley 100 was a slow process.  While 94% of Bogata’s poor were enrolled in the program, smaller cities and rural areas experienced enrollment rates generally between 20% and 70%.  Finally, the implementation of the program was often delayed in many areas due to administrative problems.   

While this paper generally does a good job analyzing the administrative problems which occured during la Ley 100′s implementation, it does not thoroughly investigate the economic impact.  How costly is the program per person?  Is there a moral hazard problem?  What are the usage changes by the poor?  How has the quality of care changed?  What is the effect on the middle and upper classes who have to pay 12% of their wages in order to purchase their own insurance and to finance la Ley 100?

According to the CIA World Factbook updated 10 January 2006, Colombia ranked 113th in infant mortality, 116th in life expectancy out of 226 countries. 

Plaza, Beatriz; Barona, Ana Beatriz; Hearst, Norman; “Managed Compeition for the poor or poorly managed competition?  Lessons from the Colombia health reform experience” Health Policy and Planning, No. 16 p. 44-51, 2001.

“The Genesis and Development of Medicare”

February 21, 2006 in Health Insurance, International Health Care Systems, Medicaid/Medicare, Textbook Review | 2 comments

The following is a timeline which summarizes the genesis and evolution of government provided health insurance in the United States.

Major Foreign Events:

  • 1883: Otto von Bismark, then Chancellor of Germany passes a compulsory health insurance bill for factory and mine workers
  • 1911: Germany extends compulsory insurance coverage to almost all employees
  • 1911: David Lloyd George, Chancellor of the Exchequer in Great Britain convinces Parliament to pass the National Health Insurance Act which provides: 1) a cash payment in the event of maternity or disability, 2) medical services if a workers should fall ill. The London correspondent for JAMA reports that British physicians incomes rose between 20-50% in prosperous areas and doubled in poor areas after the Nat’l Health Act.

Domestic Events:

  • 1906: John Commons, an economist at the U. of Wisconsin founds the American Association for Labor Legislation (AALL) to lobby for health care reform
  • 1917: War Risk Insurance Act – extends medical and hospital care to veterans
  • 1934: FDR creates Committee on Economic Security which advises the passage of government administered health insurance.
  • 1935: Under FDR, Social Security Act passes.
  • 1938: At the National Health Conference, FDR makes “the first definite affirmation by an American chief executive of the ultimate responsibility of the government for the health of its citizens”.
  • 1943: Wagner-Murray-Dingell bill proposed (not passed) which aims for compulsory national health insurance
  • 1946: Hill-Burton Hospital Survey and Construction Act
  • 1957: Forand Bill aiming for medicare bill introduced
  • 1960: Kerr-Mills bill passed, provides medical care for medically indigent
  • 1961: King-Anderson bill proposed (would have covered 14m recipients of social security over 65, predecessor to Medicare);
  • 1961: National Council of Senior Citizens – lobbying group for nationalized health insurance, AFL-CIO helps found
  • 1965: “MEDICARE” put into law, Mills bill passes, “Three layer cake”
    1. Title XVIII, Part A – Hospital Insurance: Provided all persons over 65 eligilbe for limited stay at hospital, based on King-Anderson
    2. Title XVIII, Part B – Supplementary Medical Insurance: Voluntary, for physicians’ and home health services,
    3. Title XIX, Medicaid – gives states options of how to care for medically needy, expansion of Kerr-Mills bill
  • 1971: Price Inflation – Physician charges rose 39% after Medicare compared with 15% in the 5 years before Medicare
  • 1972: Totally disabled included as eligible for Medicare benefits
  • 1974: Certificate of Need (CON) program adopted
  • 1981: Omnibus Budget Reconciliation Act – limits placed on inpatient, outpatient reimbursements.
  • 1982: Tax Equity and Fiscal Responsibility Act (TEFRA) – changes hospital reimbursement from cost+% to DRG

From “The Genesis and Development of Medicare” chapter by Ronald Hamowy in American Health Care: Government, Market Processes and the Public Interest, edited by Roger D. Feldman

Are market-oriented health insurance reforms possible in Latin America?

February 20, 2006 in Academic Articles, International Health Care Systems | 1 comment

Fabio Bertranou (1999) in his article in Health Policy gives a concise summary of attempted health insurance reforms in Latin America in the 1980s and 1990s. He looks at three cases: Chile’s reform in the 1980s and Argentina’s and Colombia’s reforms in the 1990s. He cites three major issues each nation faces:

  1. Does open enrollment in private insurance lead to efficient outcomes? Pure economist would generally say yes, but two problems make this unclear. First, consumers are unlikely to switch insurance providers if transaction costs are high and if they have to change doctors. Secondly, the insurance company may wish to ‘cream skim’ by attracting young, healthy applicants into their plan.
  2. What is the minimum benefit level insurers are required to have? A higher level of mandated coverage is more equitable, but reduces consumer choice.
  3. How much redistribution is desired?

Now let us take a brief look at the three reforms:

Chile

  • Mandates a contribution which is 7% of wages.
  • Citizens can choose either government provided health care (Fondo nacional de salud – FONASA) or private plans (Institutos de Salud Previsional – ISAPRE).
  • Typically, the elderly use the FONASA since the exclusionary clauses often restrict their benefits in the ISAPRE. However, younger individuals with serious illnesses often choose the ISAPRE since there is a higher quality of care.
FONASA ISAPRE
Participants Elderly Younger
Cost/Pers $100 $232
Technology Low High
Exclusionary Clauses No Yes

Colombia

  • 12% of gross wages are contributed to a centralized government fund (Fondo de Solidaridad y Garantia – FSG)
  • Entidades Promotoras en Salud (EPS), which are private insurers such as HMOs, NGOs, cooperatives, etc.
  • Colombia’s poor citizens receive vouchers to help them pay for the EPS. 30% of Colombia’s citizens receive these vouchers.
  • Plan Obligatorio de Salud (POS) – This is the minimum standard health benefit package an EPS must offer.

Argentina

  • The major reform in Argentina was to gradually consolidate the inefficient Obras Sociales, non-profit institutions often run by unions. The consolidation will occur by allowing Argentinians to be able to choose any Obra Social they wish. In the short run, the Obras Sociales will receive loans to help them modernize their administration.
  • Small, private Obras Sociales have been attracting members while the large, union run Obras Sociales have been losing members.
  • Programa Minimo Obligatorio de atencion medica (PMO) mandates that all of the Obras Sociales have a minimum benefit package for all members.
  • Many workers with higher earnings have left the Obras Sociales with relatively low average earnings.
  • The government also hopes to increase redistribution within the health care system.

Some Comparisons

  • Political: Chile instituted its reforms under a dictatorship which allowed a complete overhaul of the system. Colombia attempted to do this, but in a democracy, such sweeping reform is often opposed by vested interests. Argentina is taking a path of gradual reform.
  • Colombia is the only case where there are demand-side subsidies for the poor.
  • Argentina and Colombia have strict minimum benefit levels so most insurance plans compete on quality and not price. In Chile, insurance companies are able to compete on price and risk selection.

Original Article: Bertranou, Fabio (1999) “Are market-oriented helath insurance reforms possible in Latin America?: The cases of Argentina, Chile, and Colombia” Health Policy vol 47, p. 19-36.

Economists fail as evangelists on Sunset Blvd.

February 19, 2006 in Economics - General | Permalink

In the “Capitalism: The Movieâ€? in the March 2006 Atlantic Monthly, writer Clive Cook examines why many of Hollywood’s recent releases have been anti-capitalist.  Hollywood simply assumes that the public will run to see free-market bashing movies such as: Syriana, Fun with Dick and Jane, Wall Street, Erin Brockovich, The Insider, etc. Why?

Cook claims that most of the general public is pro-capitalist, but with reservations.  Conventional wisdom is that capitalism is a cruel system which is prey to excesses, but the ‘least bad’ alternative to any other system.  Cook blames two parties for not spreading the gospel of a free-market society.  The first group is corporate leaders who espouse competition in their speeches, but gladly accept subsidies, tax breaks, and import protection from the government.  The second group is economists.  Cook states:

“It is difficult to see where any heightened appreciation of the market system is going to come from.  Economists, presumably, ought to be supplying it.  Unfortunately in most cases, communicating a sense of wonder is not among their gifts.  In some ways, teachers of economics are probably making matters worse.  As practiced in universities, economics continues to turn inward, with ever more emphasis on math, quantitative methods, and narrow specialization.  You can make a case for that, but it silences the discipline on the thing that matters most.  Also, people are suspicious of economists: they see them as agents of a suspicious doctrine.  And it so happens that a variety of studies have shown, notoriously, that training in economics inclines people to be more “rational”–that is, more selfish and less inclined to cooperate.  This does not commend economics to the rest of us.â€?   

NHS denies medicine coverage to breast cancer patient

February 18, 2006 in Current Events, International Health Care Systems | Permalink

Thursday’s edition of the New York Times contained an article (“British Clinic is Allowed to Deny Medicine“) describing how a British court ruled that local health authorities could deny coverage of a breast cancer medicine since it was not yet approved.  The drug in question is Herceptin.

“Herceptin, made by Roche, is currently licensed for use in late-stage breast cancer. Although some studies have shown that it is also effective in treating HER-2 early-stage breast cancer, it has not yet been licensed for such use. If it does receive a license, the drug will be appraised for potential countrywide use.” – NYT (16 Feb 2006)

There are many interesting issues which arise in this article. 

  1. The Cost of Regulation.  Most people assume that regulatory bodies (such as the FDA) which ensure pharmaceutical safety do not impose costs on society.  While looking out for public safety is important, over-regulation can delay the release of useful medicine.  Ann Marie Rogers, the 54-year-old seeking Herceptin approval, is one example of how delaying the release of drugs imposes costs in the form of worsened health for the ill. 
  2. Entitlement.  If Herceptin was approved in a timely manner, what Ms. Rogers is concerned about is that the government pay for the drug which costs between $36,000 and $47,000 per year.  Large government in-kind programs do create a sense of entitlement by recipients.
  3. Liquidity Constraints.  Ms. Rogers attempted to mortgage her house in order to pay for the drug.  Her bank did not allow her to do this, however, since they were concerned that Ms. Rogers may soon pass-away and would not be able to repay the debt.  If Ms. Rogers were allowed to take out a loan against future earnings or assets, then she could purchase the drug on the private market.
  4. Centralized Health Care.  When health insurance is provided by a centralized government, the government chooses which medicines are covered and which are not.  The benefit of this is that centralized authorities can better control costs then the private market.  In the case of insurance offered by private companies, however, consumers have a choice of a variety of insurance plans, some of which may cover the medicine they need and others of which will not.  Consumer choice is the major reason why the United States has not adopted a centralized system.

A model of Medicaid’s poverty trap

February 16, 2006 in HC Economist Models | Permalink

The design of legislation which regulates Medicaid eligibility creates a poverty trap. In California, generally those who have income below 250% of the federal poverty level and who have limited assets are eligible for Medicaid. (In reality California’s Medicaid eligibility is more complicated than this. For full details of eligibility requirements see “Medi-Cal Facts and Figuresâ€? produced by the California HealthCare Foundation.)

Let me explain how the poverty trap functions. Let us examine an individual which earns 249% of the federal poverty level. The individual may desire to work more hours, but by doing so, he/she will lose the Medicaid benefit. Thus, by working more, the individual is actually worse off.

Here is my model which will describe this phenomenon mathematically. Consumers are utility maximizers:

max(c,h,l) U; U=(1-p)c + p[c-S-a*ln (1+ h +M*)]+g(l)

  • s.t.: c+p(1+j)h+wl=w{L_bar}
  • c>=0, h>=0, 0<=l<={L_bar}
  • c: consumption
  • S: disutility from being sick
  • p: probability of getting sick
  • M*: Medicaid Benefit, M*=0 if wL>E. Otherwise M*=M
  • E: Eligibility limit on Medicare, in California 250% of the poverty line
  • h=health insurance purchased
  • w= wage
  • l=leisure, L=hours worked, {L_bar}=total hours in time period
  • gamma=shadow price of income
  • g’>0; g”<0

 

The first order conditions are:

    • d c: gamma=1
    • d h: h*=a/(1+j) – 1 – M*
    • d l: g’(l)=w; L={L_bar} – g’_^{-1}(w)

Since h* does not depend on c, L, or w; dc/dL>0 on the support where c, L are continuous. However, if L=(E-e)/w where e is an arbitrarily small positive number, then increasing L by a non-differential amount will decrease consumption. Since h* does not depend on l or c, the individual will choose the same h* with or without the Medicaid benefit (assuming h*>=M). Thus, the poor individual near the Medicare eligibility limit will actually be worse off by working more. This is a poverty trap.

Conservatives often claim that the poor are lazy. While this is certainly true in some cases, and while drugs are an overwhelming problem for the poor, the vast majority of the poor are hard working individuals. They are not stupid, however. As this model shows, when working more hours leads to less disposable income, it is entirely rational to limit hours worked in order to collect the government benefit.

A voucher program could eliminate this problem. The voucher program would have the following model:

max(c,h,l) U; U=(1-p)c + p[c-S-a*ln (1+ h)]+g(l)

  • s.t.: c+p(1+j)h+wl=w{L_bar} + V*
  • c>=0, h>=0, 0<=l<={L_bar}
  • V*={h_bar}p(1+j) if h>={h_bar} and V*=0 if h<{h_bar}

In essence, this would allow the government to pay for an individual’s insurance up to {h_bar}, but workers who decide not to purchase insurance would not receive this subsidy. Since, the government will be giving free health insurance, it is irrational to not choose h*>={h_bar}. V* does not depend on earnings and thus there is no disincentive to work.

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