April 2006

Not everyone is like me and enjoys employing the discipline of economics in their research. On the Gendergeek blog, the author claims in her Geek-onomics post that:

It worries me that so much of the heavily gendered distortions of modern economics, in conjunction with its methodological fetishism, is unnoticed or ignored. Economics could turn out to be the new morality and it needs to be exposed for what it really is: a male chauvinist pig of a discipline, suffering from severe monomania. In Freakonomics, its flawed methods are pointlessly applied to “everything� resulting in an agreeable, but ultimately meaningless encounter. It deserves to sell (I guess) but not to be taken so seriously.

Yesterday was the NFL Draft. It is a day of hope where teams can look to their future and see a potential Pro-Bowl individual joining their cadre of players. For instance my favorite team, the Green Bay Packers, selected linebacker A.J. Hawk from Ohio State University. The team was considering trading their number 5 pick and multiple other draft picks for the No. 2 pick to select Reggie Bush from USC. Would this have been a wise choice?

A recent 2005 working paper by Cade Massey and Richard Thaler suggest that teams are overconfident in their ability to predict the sucess of a given player in the draft. They hypothesize that teams who trade picks to move up in the draft ‘overpay’ for the value they receive. To quote the article:

“Our findings suggest the biases we had anticipated are actually even stronger than we had guessed. We expected to find that early picks were overpriced, and that the surplus values of picks would decline less steeply than the market values. Instead we have found that the surplus value of the picks during the first round actually increases throughout the round: the players selected with the final pick in the first round on average produces more surplus to his team than than the first pick, and costs one quarter the price!

“Our modest claim in this paper is that the owners and managers of National Football League teams are also human, and that market forces have not been strong enough to overcome these human
failings.”

Massey and Thaler believe that the excessive self-confidence can also be applied to physicians.

“…even professionals who are highly skilled and knowledgeable in their area of expertise are not necessarily experts at making good judgments and decisions. Numerous studies find, for example, that physicians, among the most educated professionals in our society, make diagnoses that display overconfidence and violate Bayes’ rule (cf. Christensen-Szalanski & Bushyhead, 1981; Eddy, 1982). The point, of course, is that physicians are experts at medicine, not necessarily probabilistic reasoning. And it should not be surprising that when faced with difficult problems, such as inferring the probability that a patient has cancer from a given test, physicians will be prone to the same types of errors that subjects display in the laboratory. Such findings reveal only that physicians are
human.”

According to the PhRMA (Pharmaceutical Research and Manufacturers of America) U.S. drug companies spent $39.4 billion on research and development in 2005. Much of this money goes towards the clinical trials necessary for FDA approval. But how much does it cost to bring a drug to market?

In order to bring a drug to market, a firm must go through a variety of phases for FDA approval. There are pre-clinical trials on animals. Next, in phase I, a small number of healthy volunteers are tested in order to establish safe doses and to gather information on the compound. In phase II, 100-300 individuals with the disease are selected in order to determine safety and efficacy. Phase III repeats phase II, but instead uses a sample of 1000 to 3000 individuals and examines the long run health effects of the drug as well.

DiMasi, Hansen and Grabowski (2003) estimate the cost of bringing a drug from phase I to market. Their data come from the Tufts Center for the Study of Drug Development (CSDD). The firms included in their survey represent 42% of all pharmaceutical R&D expenditures in the U.S. The authors found that the time from the start of clinical testing to marketing approval was approximately 90.3 months. This figure is in addition to any development time which occurs before phase I clinical trials. The authors take into account the cost of money used to finance the R&D using a 9% real cost of capital estimate. The final estimate is that it costs–including the expense of failed drugs–$802 million to take a drug from phase I trials to approval. Over 50% of this figure is the cost of capital needed to finance the R&D over such a long period.

Some observers would say that reducing FDA restrictions would reduce the price of drugs consumers face. I do not believe this to be the case. After the R&D is spent, firms price their drug to maximize profits subject to consumer demand. Reducing R&D costs will reduce the sunk costs, but not the marginal costs for pharmaceutical producers. What reducing FDA restrictions will do is increase a firm’s incentive to invest in drug development, because the revenue threshold to make an adequate return on capital will be reduced with a lower cost of gaining approval.

DiMasi, Hansen, Grabowski (2003) “The price of innovation: new estimates of drug development costs,” Journal of Health Economics; Vol 22, pp. 151-185.

It is a great achievement that China has one of the highest life expectancy rates (72.6) of any country in the developing world. However, the CIA World Factbook reports that “One demographic consequence of the ‘one child’ policy is that China is now one of the most rapidly aging countries in the world.” The Demography Matters blog reports “Beginning around 2015, China’s post war baby boom generation will reach retirement age, and because of the one-child policy implemented since 1980, working-age population will start to shrink. By 2050, China will lose 18% of its workforce, assuming a fertility rate of 1.8, or 35% assuming a fertility rate of 1.35“

The greying of China is a serious matter. As the future comes nearer, there will be less workers to pay for huge costs of elderly medical benefits. Continued rapid economic growth is one cure to this problem, but economies of the world are inherently volatile. Allowing immigration of younger workers in the future could also help to alleviate the fiscal burdens. We can see that the ‘one child’ policy, in addition to reducing the individual liberties of China’s citizens, has also created a serious fiscal problem for China’s future.

Currently the Social Security Disability Insurance (SSDI) program covers almost 8 million Americans. The program is designed to help those who need assistance the most: those who cannot work due to disability. These individuals are entitled to approximately $830 per month.

One feature of SSDI is that it has an implicit 100% tax on earnings. If an individual is on the SSDI rolls and makes somewhat of a recovery and is able to work part time, any earned income will reduce the person’s SSDI benefits dollar for dollar. Thus, these individuals have no incentive to work even if they make a recovery.

Benitez-Silva, Buchinsky and Rust (2006) estimate the impact of a reform in which those on SSDI could keep 50% of their earnings from part time work. For instance, if an individual made $200 in a month, his or her SSDI benefit would be reduced by only $100 to $730 instead of being reduced by $200 under the status quo.

One problem with this reform is that it may attract applicants to SSDI and increase the cost to the government. Since the reform would allow individuals to earn more money than the $830 cap, some individuals who are not disabled may fraudulently apply for the entitlement. The Congressional Budget Office (CBO) estimates that the reform would cost $410 million over five years and increase the number of individuals awarded benefits by 1.2%. The Social Security Administration (SSA) estimates are that the costs would be closer to $5.1 billion and SSDI rolls will increase by awards by 6.4%.

The authors of the study use Health and Retirement Survey (HRS) to conduct a more life-cycle simulation model. Taxes, social security benefits, application waiting times, continuing disability reviews (CDRs) are all incorporated into their model. They claim that 50% of all SSDI participants will eventually experience at least a partial recovery. Their major findings are as follows:

• After the reform, SSDI awards will increase 2.2%. Other estimates: 1.2% (CBO) and 6.4% (SSA)
• There will also be a modest increase in disability awards, rolls, and expected discounted costs.
• For those who are on SSDI, pre-tax income would increase 9.3% over the status quo.
• Currently, only 9.5% of all workers decide to return to work while on SSDI. These individuals can return to work either by leaving SSDI or working for 9 months under the Ticket to Work program (TWP). Participation in TWP, however, increases the probability of a disability review. After the reform–and assuming a constant disability review rate for those working–48.9% of individuals will return to work at some point while on SSDI. This does not mean that 50% of the individuals are not truly disabled, but that 50% of the individuals will have the ability at some point in time to return to (usually) part time work.

The authors conclude that the welfare benefits of the reform to those on SSDI will more than offset the induced entry costs to society from having more applicants to the program. The authors give this program the thumbs up.

Benitez-Silva, Buchinsky, Rust, (2006) “Induced Entry Effects of a $1 for $2 Offset in SSDI Benefits“

The concept of the Physician Assistant gained its inspiration from 17th century Europe where feldshers were used in the 17th century Russian Army. In the 1960s, China employed over 1.3 million “barefoot doctors” to improve delivery of health care, especially in rural areas. Not until the mid 1960s did the U.S. begin to use Physician Assistants to deliever medical care due to a shortage of primary care doctors.

In the United States, Physician Asssitants (PAs) must be associated with a physician and must practice in an interdependent role. The partner physician, however, does not need to be physically present during a PA examination of a patient. PAs routinely deal with uncomplicated sprains, strains, hypertension, bronchitis, depression, allergies, asthma, gynecological problems, family planning and trauma. Approximately 55% of all physician assistants practice in primary care.

In order to become a Physician Assistant, the average PA spends 25 months studying an intensive core curriculum. In 2001, there were 130 training programs in universities, medical schools, colleges, and the armed forces. PAs learn the broad topics related to primary care and rotate through the major specialties. Nurse practitioners, on the other hand, traditionally are trained in one specialty (pediatrics, women’s health, etc.).
The following are some summary data for Physician Assistant which comes from the American Academy of Physician Assistants 2005 Census.
Number of Physician Assistants by Disorder in 2005

BY PRIMARY EMPLOYER

BY GENERAL SPECIALTY PRACTICED

ANNUAL INCOME (Full-time workers only)

AAPA 2005 Census

Mittman, Cawley, Fenn; (2002) “Physician Assistants in the United States,”British Medical Journal, Vol 325, 31 August 2002.

Under the Balanced Budget Act of 1997, the Federal government established the State Children’s Health Insurance Program (SCHIP), which was aimed at reducing the number of uninsured children in the United States. States were given a variety of options of how to implement this program. Nineteen states decided to operate the SCHIP program as an extension of Medicaid (M-SCHIP), fifteen states operated stand-alone programs (S-SCHIP) and 17 states used both approaches.

Researchers often use a variety of regression methods to test for the impact of government programs on various variables. A common approach in this case is to use an ‘eligibility’ variable to test for a change in insurance coverage. However, a Rosenbach, Ellwood, Czajka, Irvin, Coupe and Quinn (2001) paper gives one pause as to the effectiveness of such a simple approach.

For instance Minnesota’s M-SCHIP program extended insurance benefits to less than 100 individuals. New York’s S-SCHIP program had an enrollment of over 500,000 children. What accounts for these differences?

Prior to Title XXI–the SCHIP legislation–Minnesota already had a generous public insurance benefit for children under their Medicaid system. Children at or below 275% of the poverty line were eligible for Medicaid insurance prior to the national legislation. After the legislation, a child had to be at or below 280% of the federal poverty line–an insignificant change.

New York also had a children’s insurance benefit (CHPlus) before Title XXI came into effect. CHPlus granted insurance to children below a less generous threshold, ranging between, 100% to 192% of the federal poverty line. The state, however, rolled over all CHPlus participants (over 170,000 individuals) into their new S-SCHIP program.

Thus, it is imperative that a researcher not assume that pre-SCHIP benefit levels in each state are comparable, or else one will reach erroneous conclusions.

According to the Marginal Revolution blog (”Seeing is believing“):

Laser eye surgery has the highest patient satisfaction ratings of any surgery, it has been performed more than 3 million times in the past decade, it is new, it is high-tech, it has gotten better over time and… laser eye surgery has fallen in price. In 1998 the average price of laser eye surgery was about $2200 per eye. Today the average price is $1350, that’s a decline of 38 percent in nominal terms and slightly more than that after taking into account inflation.

Why the price decline in this market and not others? Could it have something to do with the fact that laser eye surgery is not covered by insurance, not covered by Medicaid or Medicare, and not heavily regulated? Laser eye surgery is one of the few health procedures sold in a free market with price advertising, competition and consumer driven purchases. I’m seeing things more clearly already.

Certainly, the major advantage of a free market system is that it gives the best incentives for innovation. Those who first preformed LASIK surgeries found that there was high demand for the procedure and their profits were large. However, other physicians soon gained the necessary training on how to perform LASIK and with the increased competition, prices fell.

There is no doubt that the free market is the best system to motivate the creation of innovative health care procedures. Whether the free market will maximize welfare for the more routine procedures delves into the equity-efficiency trade-off apparent in all spheres where the government interferes with the market.

The Mises Economics blog notes how George Mason University professors have been using blogs for the past few years. In addition to any individual gain the professors may receive from writing, the blogs give prospective graduate students a way to find out more about the professors with whom they will be colleagues in the upcoming years.

For anyone interested in the UC-San Diego Economics Department, Jim Hamilton’s Econbrowser blog is a great place to start.

What happens to farmers in developed nations when they or their family members get sick? Typically, much of a farmer’s savings is tied up in illiquid assets (land, crops, fertilizer, etc.) and the farmer turns to the town money lender. Since there is less competition for loans in rural areas, the money lender can charge the farmer exorbitant interests rates. If the farmer’s crops would happen to fail, the farmer can be pushed into a debt cycle which is difficult to escape.

The Indian Economy Blog looks at the success of Yeshasvini (a self funding micro health insurance scheme). Yeshasvini wisely tried to avoid the perils of adverse selection by constructing membership as follows:

“The Yeshasvini Health Scheme was open to people who were together for a purpose. Be it as a co-operative society, a grameen bank or quite simply for a reason other than health. This criterion was of paramount importance for the success of the scheme, because opening the scheme to everybody would have resulted in only people with diseases becoming members. This in turn would make a self-funding scheme unviable.”

We can see that even in rural India, helping markets to work more efficiently–instead of replacing them with government run systems–can lead to superior outcomes.

Nearly every day one reads about a revolutionary new pharmaceutical or medical procedure.  Years later, however, we often learn that this ‘breakthrough’ was only a marginal improvement, had serious side effects or simply did not work.  Ellen Goodman discusses in “Health ‘breakthrough’ anxieties” how a new breast cancer drug (raloxifene) seemed to offer a better choice to post-menopausal women at risk of breast cancer than the previous alternative (tamoxifen).  Although raloxifene did seem to outperform tamoxifen, Cynthia Pearson of the National Women’s Health Network figures that only 30 out of the 10,000 who too raloxifene for up to five years actually benefited.  The oncologist Jerome Groopman puts forth an appropriate newspaper headline:

“There’s a Small Difference in a Larger Group of Women That Has Side Effects and It’s Not Clear What’s Best for Any Individual“

The point is to be skeptical of what you read in the newspapers.  If you believe you need some sort of medication, it is your responsibility to yourself to the necessary research to find out which drugs (or medical procedures, etc.) are best for your particular situation.

“One of the quirks of the health care system is that health plans individually negotiate different prices with hospitals and doctors. The result is that two health plans can pay different prices for the same procedure at the same hospital. The contracts typically prevent a health plan from saying that it charges a certain amount for a procedure, though a health plan can show the discounted charges on patients’ bills.

Many economists contend that the practice contributes to the inefficiency of the health care system and lessens hospitals’ incentive to become more efficient. It also makes it impossible for consumers to shop for hospitals with the best prices.”

- Milwaukee Journal Sentinal, “Health plan lifts the veil on charges“) Feb 23, 2006

One major impediemnt to adequate functioning of medical markets is that consumers often do not know what prices each hospital charges them (or their insurance). HealthCare Direct LLC is trying to change this using the philsophy that “Sunlight is the best disinfectant.” The aim is to steer self-insured employers towards more cost efficient solutions, by compelling providers to release their pricing schedules.

Kellogg Business School at Northwestern University cites a Journal Sentinal article which states that:

“HealthCare Direct LLC has persuaded ProHealth Care and Columbia St. Mary’s, two health care systems in the Milwaukee area, to accept a flat rate for 26 common hospital procedures and to disclose the price of each.

The goal is to help make health care a bit more like other markets, in which buyers have an easier time determining which companies have the lowest prices and, theoretically, are the most efficient.”

After a large number of posts criticizing the American healthcare system on this very blog, it is now time to sing its praise. The San Diego Union Tribune reports today (”U.S. deaths dropped 2% during ‘04, report finds“) that the number of deaths decreased by 50,000 between 2003 and 2004. This is surprising. Despite medical advances, one would expect the number of deaths to increase due to: 1) population increase, 2) the higher proportion of elderly individuals in society and 3) the trend towards higher obesity rates.

The top three killers of Americans are heart disease, cancer, and strokes; the age adjusted death rate for each of these illnesses dropped in 2004. The heart disease rate declined more than 6 percent, the cancer rate about 3 percent and the stroke rate about 6.5 percent.

Congratulations to all those involved in improving the health care of Americans today!

Most people intuitively believe that having more nurses on staff at a hospital improves health outcomes. After reading Money Magazine’s report that an average RN earns approximately $70,000 per year, relying on ‘intuition’ may not be the most appropriate manner to judge a nurse’s cost effectiveness. Do health outcomes really improve to justify this cost?

Needleman, Buerhaus, Mattke, Stewart, and Zelevinsky (2002) provide convincing evidence that nurses do improve health outcomes in hospitals. The study examines 799 hospitals in eleven states and tests to see how variation in nurse staffing or nurses hours worked changes health care outcomes. The first stage of their analysis runs a logistic regression. The health outcome for each patient was regressed on patient diagnosis related group (DRG), age, sex, primary insurer, state of residence, a dummy for emergency admission and the presence of any chronic diseases. These factors were added up and each hospital was assigned a risk factor. The second stage uses an ordinary least squares (OLS) regression to calculate the difference between the expected health outcome and the actual outcome using hospital dummies, nurse staffing and hours, the number of beds, etc.

Below is a table of their results. All coefficients less then 1.00 indicate that health outcomes improved. Outcomes statistically different from 1 at the 5% level receive a star (*).

Since outcomes improve in all six of the seven categories under the first model and in four of seven categories under the second model, it seems that nurses do have a positive effect on health.

I find two possible problems with the study:

1. Nurses may be a proxy for quality. Good hospitals may have better technology, more qualified doctors, and more nurses. The superior health outcomes may not be due to the nurse staffing at all but to other factors which are correlated with the number of RN work hours.

2. The first stage logistic regression may have omitted variables. For instance, if rich people have better health outcomes—due to lifestyle choices—and are able to afford hospitals with more nurses, we would find a spurious correlation between health and nurse staffing, since nurse staffing level is simply a proxy for inherently healthier patients.

Despite these two problems, the evidence does seem convincing. As standard economic theory would predict, increasing inputs (nurses) will lead to increased outputs (health) ceteris paribus.  Future research needs to determine more precisely what is a nurse’s cost benefit ratio in order for hospitals to ascertain the appropriate RN staffing.

Needleman, J; Buerhaus, P; Mattke, S; Stewart, M; Zelevinsky, K (2002); “Nurse Staffing Levels and the Quality of Care in Hospitals,” New England Journal of Medicine, Vol 346 (22).

Nata, in Botswana, is a village of 5000 people located on the edge of the Makgadikgadi Pans. Unfortunately, HIV/AIDS is having a devastating effect on the people of this small village. Botswana has the second highest HIV infection rate in Africa. The current rate of infection is 37% nationally and Nata’s rate of infection is even higher. The pandemic has left Nata with over 400 orphans.

Still, these people live half-way around the world. How can we help them? Much of foreign aid is stolen by dictators or bureaucrats. What can be done?

Fortunately, the village of Nata, Botswana has a blog (”The Nata Village blog“). Jon Rawlinson set up the site and Melody Jenkins, a U.S. peace corps volunteer, writes the posts. You can learn a great deal about the village and also donate if you so choose.

For instance, patients in Nata are not adhering to their anti-retroviral treatment at the same rate as those that live nearer to the clinic in Gweta; this is due to a lack of transportation to the nearest clinic to pick up the medicine. Also, the site has a brief biography of an inspirational villager named Reggie.

Another reason to love the Internet.

DB’s Medical Rants cites an interesting New York Times article (”Medicaid Hurdle for Immigrants May Hurt Others“) regarding the administrative burden created by a new law requiring all Medicaid recipients to prove their citizenship in order to receive the public insurance.

Economists typically believe that there is too much regulation in the medical field. Due to problems of asymetric information in determining doctor quality, economists believe there is a role for certification and licensure, but these requirements are currently too strict. For instance, many routine procedures could be preformed by a Nonphysician Clinician (NPC) such as a Physician Assitant (PA) or a Nurse Practioner (NP) at a lower cost with a small reduction in quality.
According to the American Academy of Physician Assistants (AAPA), there were 66,111 physician assistants practicing in the United states in 2005. Physician’s Assistants have varying levels of autonomy and prescription permission (see the DEA website) depending on the state legislation.

Below I will briefly outline the development of the position of the physician assistant.  There is a more complete timeline located at the Physician Assistant History Center.

Timeline

• 1964: Dr. Eugene Stead, Jr., disillusioned by organized nursing rejection of the nurse clinician program, decides that ex-military corpsmen with their previous training and experience would be suitable candidates for his two-year experimental program.
• 1966: Allied Health Professions Personnel Act (PL-751) promotes the development of programs to train new types of primary care providers.
• 1968: Health Manpower Act (PL-490) funds the training of a variety of health providers; American Association of Physician’s Assistants (AAPA) is incorporated
• 1970: Kaiser Permanente becomes first HMO to employ PA.
• 1972: National Board of Medical Examiners begins developing a certification examination for accredited PA educational program.
• 1976: Federal support of PA education continues under grants from Health Professions Assistance Act (PL94-484).
• 1977: Rural Health Clinic Services Act (PL95-210) provides Medicare reimbursement of PA and nurse practitioner (NP) services in rural clinics.
• 1986: Omnibus Budget Reconciliation Act PL 99-210 allows Medicare Part B to pay for PA services in hospitals and nursing homes
• 1987: Additional Medicare coverage of PA services in rural and underserved areas approved by Congress
• 1997: Balanced Budget Act of 1997- Congress increases PAs reimbursement rate to 85% of physician cost (previously 75% in hospitals, 65% for assisting at surgery, and 85% in nursing facilities)
• 2000: Mississippi is last state to enact legislation authorizing PAs to practice

The use nonphysician clinicians (NPCs) in the provision of medical care has grown over the years. Although physicians still dominate the medical field, there were over 66,000 Physician Assistants in the United States in 2005. Before Physician Assistants (PAs) and
Nurse Practitioners (NPs) were licensed, physicians were the only individuals permitted by law to perform a variety of medical procedures. Most people would agree that the use of PAs and NPs can reduce medical costs. The more important question is how much quality (if any) is sacrificed when NPCs are used instead of MDs. It is my hypothesis that certain more ‘routine’ procedure could be done more cost effectively using NPCs, and the change in health outcomes would be negligible.

[See full paper proposal below]
Paper Proposal: Physician Assistants

The popular press has been decrying the existence of large numbers of Americans without medical insurance. From Indiana to Wisconsin to California, politicians are looking for a means–such as government provided health insurance–to give more residents medical insurance. Economists, however, generally speak out against the provision of private goods by the government.

An interesting solution was proposed by Pauly Herring and Song (2002) in which individuals would receive a $1000 refundable tax credit if they (or their employers) purchased health insurance. The study focuses on single individuals using the 1996-97 Community Tracking Survey (CTS). Using the eHealthInsurance.com website, they were able to calculate the premiums each individual in the CTS survey would pay if they were currently applying for insurance. The authors assumed participants would choose the lower priced options and thus calculated the premiums owed at the 10th and 25th quartiles for a variety of deductible amounts.

Results

• They found that using this credit, approximately 20% of all individuals who had previously purchased individual insurance would pay zero net premiums after applying the credit.
• Assuming an Arrow-Pratt absolute risk aversion coefficient of 0.00095, Pauly, et al. are able to calculate a reservation price for each person, using an expected utility framework. They find that of all the currently uninsured individuals in the sample, 77%-85% would take up the insurance.
• The 85% number, may be overly optimistic. The calculated reservation price is actually greater than the absolute premium for 23% of the sample, and thus the authors settle on 60%-65% as a more conservative estimate. The lower take-up rate may be due to the fact that most poor individuals are able to receive charity care at no cost, and thus have less of an incentive to purchase insurance at some non-zero cost.
• According to Health Affairs, maintaining the tax-exempt status of employer-provided group insurance cost taxpayers $188.5 billion in foregone revenue in 2004. If we implemented the voucher system where single households received a $1000 credit and family households received a $2000 credit, the cost to taxpayers would be only $142.9 billion assuming all individuals received the credit (calculations made using US Census population projections p. 18). This does not even take into account the cost reductions from decreased Medicaid and/or Medicare usage.
• One issue to worry about with this proposal is fraud. Will people falsely report that they have insurance in order to receive the credit? I would assume this wold occur, but the prevalence can not be predicted.

Pauly, Herring, and Song (2002) “Tax Credits, the Distribution of Subsidized Health Insurance Premiums and the Uninsured” Forum for Health Economics and Policy, Vol 5(5).

In an attempt to reduce costs, Medicare enacted a Prospective Payment System (PPS) in 1983. Medicare aimed to pay hospitals a fixed rate based on the Diagnosis Related Group (DRG) plus/minus an adjustment for location and local wage. Although this system gives hospitals the incentive to misclassify patients into high profit DRG, I will assume for simplicity that the hospital diagnose the patient’s illness with perfect accuracy. I briefly outline a model in order to analyze how PPS effects hospital (or providers) incentives.

The Model

The hospital makes a profit on each patient of: P-C(s)-c(q(s))

• P is the reimbursement rate from Medicare based on the DRG; C(s) is a cost function depending on sickness, c(q(s)) is the additional cost incured by the hospital for additional quality of care. C’,C”,c’,c”,D’,D” are all strictly positive.

Total profits for the hospital are: D(q)*[P-C(s)-c(q)]; where D(q) is the consumer’s demand function. Firms maximize profits by choosing the quality level for each sickness type. The first order condition for the firm is:

• D’[P-C(s)-c(q)]=D*c’(q)

If we totally differentiate the above equation (remember q is a function of s), we have:

• d(q(s))/d(s)=[D''(P-C-c)-2D'c'-Dc'']/[D'C'] <0

Discussion
What does all this math mean? Well since dq(s)/ds<0, this means that discretionary quality falls with severity for all profitable patients and is set to zero for unprofitable patients. Since the PPS payment system does not reimburse providers for additional quality of their work with patients, these providers have an incentive to decrease quality. On the other hand, if we construct a 'cost-plus' system where hospitals are reimbursed at (1+x%) of cost, hospitals have an incentive to treat the most severe illnesses since they are the most profitable.

Models as developed in: Meltzer and Chung (2002) “Effects of Competition Under Prospective Payment on Hospital Costs Among High- and Low-Cost Admissions: Evidence from California in 1983 and 1993″ Forum for Health Economics and Policy, Vol 5(4).

The problems with the Medical Malpractice system in the US have been well-documented. President Bush has presented proposals to cap punitive damages in malpractice litigation. Other others have decried the fact that despite a large number of negligence cases each year, very few patients bring suit to court. Below are two studies which should give the reader a more informed perception of how malpractice law functions in the United States today.

This first study is by Brennan, Sox and Burstin (1996). These authors find that iatrogenic injuries in New York account for 3.7% of all hospitalizations and negligent iatrogenic injuries account for 1.0% of hospitalizations. Below is their data for the number of people filing suits:

A second report by Studdert, Mello and Brennan (2004) confirm some of the Brennan, et al.’s findings. Citing a Medical Insurance Feasibility Study, 4.6% of all hospitalizations in California involved iatrogenic injury and 0.8% of all hospitalizations involved negligent iatrogenic injuries. These numbers are similar to the 3.7% and 1.0% which Brennan, et. al. estimate.

There are three issues here which I would like to touch on.

The first is that despite conventional wisdom that physician are nearly infallible, 3-5% of all hospitalizations are due to doctor error. One of the greatest risks facing the American medical system is…well…the American medical system. The easiest and most effective way to decrease the error rate is to integrate Information Technology (IT) into the medical field. The Healthcare IT Guy has some good suggestions.

Malpractice suits are not common. Less than 3% of people who receive negligent physician care actually sue. One must note that it is difficult for a patient to determine if negligence has occurred. ‘Do I feel sick because the treatment is not working or is this the doctor’s fault?’

Although only one in a thousand people who receive no medically induced injury sue, these ‘no injury’ cases make up over half of the malpractice caseload.

Brennan, Sox, Burstin (1996) “Relation Between Negligent Adverse Events and the Outcomes of Medical-Malpractice Litigation” New England Journal of Medicine Vol 335 (26).

In England, all residents receive free medical care from the National Health Service (NHS), which is run by the Department of Health. Many critics of nationalized health care would say that publicly provided medical care is often of inferior quality to that of medical care provided in the private market. A recent Times (UK) article (”Doctors opt to have private operations“) substantiates that claim. The article cites a recent survey of 500 physicians, in which 41% elected to pay for private insurance even though 90% of those surveyed worked for the NHS. Why would a physician pay for medical care when they received free medical care from the NHS:

“Dr Sarah Burnett, a consultant radiologist in London who worked in the NHS for 15 years, said she took out private medical insurance while she was employed in the state service because she was unimpressed with the level of care she witnessed first hand.

‘NHS treatment is not a pleasant experience in any way — from the standard of the food, to ward cleanliness and the chance of catching MRSA,’ she said.”

Iqbal Quadir is not your typical investment banker. Inspired by the non-profit Grameen Bank’s success in his native country of Bangladesh, Quadir has created a variety of initiatives which allow the private sector to be the driving force for development in the Third World. CNN and The Economist (”Power to the People“) both report of Quadir’s initiatives to bring cell phone service, power, and other clean water to the developing world using entrepreneurs. For instance, Emergence Energy is one of his ventures which aims to establish small, neighborhood power plants in Bangladesh that can provide electricity to a handful of homes. Below is an excerpt from the Economist article on Quadir’s clean water program:

At the same time, Mr Quadir is pursuing two other bottom-up initiatives. The first, CleanWater, is dedicated to supplying safe drinking water to Bangladeshi villages, where arsenic contamination is a grave problem. Rather than relying on aid agencies or governments to install equipment, Mr Quadir hopes to license a chemical preparation that can remove arsenic from water and make it safe to drink. The chemical would then be distributed and sold, like salt, via a network of local entrepreneurs; Mr Quadir estimates that buyers would have to spend around $3 per person per year on the chemical to ensure a safe water supply, which is well within reach of most villagers. Again, this initiative would create jobs, provide a wider societal benefit, and give people the means to solve a serious problem themselves.

According to U.S. Department of Health and Human Services, over 1% of all children below the age of 12 were victims of maltreatment in 2004. Child abuse cases appear frequently on the news and it is truly a sad situation. Most people’s first reaction is that we need more stringent supervision of parents and the government should take kids away from abusive homes more frequently.

In the seminar I attended today, Joseph Doyle (”Child Protection and Child Outcomes: Measuring the Effects of Foster Care“) argues that in the case of Illinois, the government may be putting too many kids into foster care. Doyle has gotten access to the Illinois Department of Child and Family Services’ Child Abuse and Neglect Tracking System (CANTS) and has matched children in foster care with other data sources which track 1) delinquency, 2) teen pregnancy and 3) employment status and wages.

In his estimation, Doyle uses variation in an investigator’s propensity to send a child to foster care as an instrument for the likelihood a child is sent to foster care. More explicitly, the instrument is the investigator’s prior removal rate (the percentage of previous cases which he/she has sent to foster care. Since the cases are assigned in a cue to investigators (with the exception of children who are Spanish speakers) he has a quasi-experimental setup. He uses fixed effects as well for each (zip code*county*Spanish Speaking) cell.

Doyle finds that marginal child placed in foster care is 10%-20% more likely to be arrested, 10-20% more likely to become pregnant as a teenager, and 10% less likely to be working when they become an adult than the marginal child who was not placed in foster care. This does not mean that society should completely abandon the foster care system. Since severely abused children will be placed in foster care no matter which investigator is assigned and abuse free homes will never be assigned to foster care, Doyle’s coefficients only measure the impact of foster care on the marginal children. The above estimates represent a Local Average Treatment Effect (LATE). Abuse in foster care homes does occur and having the idealistic view that foster care is always a safe haven for these children may be naïve. The policy implication is that children should be assigned to foster care less frequently than is the current status quo in Illinois.

“On ‘Meet the Press’ in October 2004, when Tim Russert, the host, asked Jim DeMint, a South Carolina Republican representative then in the middle of what turned out to be a successful campaign for the U.S. Senate, to explain his position in favor of a total ban on all abortion procedures. DeMint was reluctant to answer Russert’s repeated question: Would you prosecute a woman who had an abortion? DeMint said he thought Congress should outlaw all abortions first and worry about the fallout later. ‘We’ve got to make laws first that protect life,’ he said. ‘How those laws are shaped are going to be a long debate.’

Russert refused to leave the congressman alone. ‘Who would you prosecute?’ he persisted.

Finally DeMint blurted, ‘You know, I can’t come up with all the laws as we’re sitting right here, but the question is, Are we going to protect human life with our laws?’

In El Salvador, the law is clear: the woman is a felon and must be prosecuted.”

This Sunday’s New York Times magazine has an interesting article (”Pro-Life Nation“) on abortion in El Salvador. Many countries such as Chile, Malta, and Colombia outlaw abortion, but El Salvador is one of the few who prosecutes the mother seeking the abortion as a felon. Penalties are stiff in El Salvador:

“…the abortion provider, whether a medical doctor or a back-alley practitioner, faces 6 to 12 years in prison. The woman herself can get 2 to 8 years. Anyone who helps her can get 2 to 5 years. Additionally, judges have ruled that if the fetus was viable, a charge of aggravated homicide can be brought, and the penalty for the woman can be 30 to 50 years in prison.”

Another problem which arises is that physicians in El Salvador have an obligation to both protect doctor-patient confidentiality and to accumulate evidence for the prosecution of an abortion case.

Whichever side you fall on in the debate on abortion, the article is certainly an interesting one.

It is common knowledge that healthcare institutions such as the government (through Medicare and Medicaid) and HMOs are able to negotiate with hospitals for low prices due to their market power. Most individuals who pay out of pocket for medical services can expect face prices which are 30%-50% higher than those of Medicare patients.

A Wall Street Journal article on February 21, 2006 (Page B1) describes how Amish and Mennonite elders negotiated with the Heart of Lancaster Regional Medical Center in order to secure less expensive medical care for their fellow worshipers. After many members had visited clinics in Tijuana, Mexico for treatment, the Anabaptists decided a better option was to negotiate their own group rates with the local Medical Center for services such as orthopedic surgery, biopsies and childbirth. The elders threatened to abandon usage of the facility in favor of flying to Tijuana for the procedures if their demands for discounts were not met. As part of the final agreement, the members of the Anabaptist community were required to pay for 50% of the procedure up front in order to insure they would receive the discount. The WSJ continued:

Heart of Lancaster wasn’t worried about risking steep losses if elaborate surgeries went awry: Anabaptist patients generally don’t want such procedures. “If you’re paying out of pocket, you’ll hunt for bargains,” says Lee Christenson, chief executive of Heart of Lancaster, who bargained with the Anabaptist elders. “Basically, the Amish won’t pay for health care they don’t need.”

Interested in the medical field but not a doctor?  Looking to help those in developing countries who are live without access to a physician?  A great resource to use is Where there is no doctor, a classic text published by Hesperian Books.  I recently bought a copy in Spanish (Donde no hay doctor) while I was in El Salvador and the book is spectacular.  Diseases, symptoms and treatments are described thoroughly but simply; pictures abound to help clarify the narration.  Dr. David Morley called it “The best medical book written in the last 10 years…”  One customer from Malawi stated that:

“Everything and anything you need to know about healthcare. We live in the heart of Africa where there are no doctors, and mysterious illnesses and bacteria keep popping up. Since we have this book there is much less cause for worry. Don’t leave home without it!”

Unlike most the publishers of most reference guides, the Hesperian Books encourages individuals to copy relevant sections of the book and distribute them to needy communities as long as the material is provided at no cost.  Since the book has been translated into over 70 languages, literate populations in developing countries now have a resource to educate themselves on their own healthcare needs.

One of the largest healthcare risks in many countries is war. Between 1980 and 1992, El Salvador experienced a violent civil war between the right-wing military government and the FMLN (Frente Farabundo Mari para la Liberacion Nacional) communist guerrilla forces. The conflict began to boil over in 1977 when armed forces arrived at Universidad Centroamericana and assassinated six Jesuit priests who were defending the rights of the poor. After the assassination, the archbishop Oscar Romero cut off ties with the government and vehemently spoke out against the government’s repressive policies. After tolerating his outspoken behavior for three years, the government decided to end Romero’s advocacy; Romero was assassinated in 1980 and a civil war ensued.

The village where I stayed (Ciudad Romero) was a FMLN stronghold. As the war began, the government attacked and the villagers fled to Honduras. The military of Honduras, however, was friendly with the right-wing Salvadoran government and the community lived for six months surrounded by military personnel from both countries. As the health of the villagers began to deteriorate and food became scarce, the UN and Panama decided to offer the villagers refuge in Panama. The community lived in the Panamanian jungle for eleven years until the peace accords were signed in 1992 and they were allowed to return and re-establish their town in the Usulatan province.

Today there is an uneasy peace, but discord between the two groups is strong. The divide between the right wing ARENA party in power and the left wing FMLN party has led to central government to spend money mostly in the areas which support ARENA. For instance, Ciudad Romero had no health clinic, but the nearby village of Isla de Mendez–in which a majority of the population still supports the right wing cause–does have a health clinic paid for by the central government.

El Salvador is a turbulent country, where earthquakes, volcanoes, hurricanes and war are a constant threat. One can only hope that this fragile peace will remain and that the quality of life for the Salvadorans will improve in the future.

I would like to thank all the Salvadorans who showed me such gracious hospitality while I was visiting their country. In particular: a Leonides, por compartir sus conocimientos; a Christino por su amable sonrisa y por cantarnos sus rancheros; a Lorena por su belleza escondida; a Carlos y Maribel por prepararnos la comida bien rica; a Jenni y Katia por su inocencia, y a Carlitos, el gran pintor, por el dibujo que me diste. Gracias.

In El Salvador, one finds two parallel health care system.  The first uses state-of-the-art technology, qualified doctors, and physician spend ample time with patients.  The second employs third world technology, treats severe illnesses superficially, and doctors are overworked.  Which of these systems is run by the government?  Which of these systems serves the poor?

As you probably guessed, the first healthcare system described above involves doctors in private practice with a fee for service (FFS) provider payment system.  Using the private physician and medical facilities is expensive; only the wealthy can afford these procedures.  The poor are relegated to using the free government hospitals and clinics.  These facilities do an adequate job of providing immunizations, prenatal care and educational material, but do not have the funds or the staffing to perform surgical procedures which in the U.S. would be considered routine.  Many Salvadorans I spoke with complained that doctors in the public hospitals treat all serious diseases the same: they give patients an aspirin and tell them to grin and bear it since surgery or other complicated procedures are not available.

Also, one notes a distinct difference between urban and rural clinics serving the poor.  Both provide only the most basic of services, however, rural physicians do have more time to spend with patients due to the lower population density.  One physician in the village of Isla de Mendez told me he only saw about 25-30 patients per day and about half of these were educational prenatal visits.  The residents of Isla de Mendez, however, do not have access to medical care on weekends because the physician returns to his home three hours away in the city of San Miguel.  In an urban clinic, patient volume is much higher and wait times of many hours is common, but physicians are available on weekends for emergencies.

The central government also employs promotores, workers who visit villages (such as Ciudad Romero) who do not have a clinic and educate the population about public health risks.  Unfortunately, it seems that the promotores are not very effective since the villagers do not hold these workers in as high esteem as physicians.  Further, since the promotores travel from village to village, they rarely establish a strong bond with the community to make sure that the educational information they impart is implemented.

Plastic bottles strewn on the street, trash fires burning in front of homes, and primitive latrines…El Salvador is pretty much the antithesis of a stereotypically pristine European city. While in the US, we take trash collection for granted–we put our waste into the trash/toilet and it is taken away–in El Salvador waste disposal does not operate as smoothly.

Many residents in rural villages do not have access to trash collection and thus resort to burning their garbage under a pile of leaves. The smoke from burning mounds pollutes the air and the smell is potent. In addition to problems of cigarette smoke and excess dust from dirt streets, the burning of trash has contributed to a high rate of respiratory disease in El Salvador. The burning of garbage made from plastic pollutes the air even more than the typical household refuse. The solution to the problem that one NGO came up with was to have a trash compost area for each house where biodegradable waste could be buried under a layer of dirt and leaves in order to reduce air pollution. The waste would slowly decompose and air pollution—and thus respiratory disease—could be reduced. Paved streets would also reduce pollution from the dust spewed into the air from passing cars and farm animals but this solution is more expensive (although it does have the economic benefit of decreased transportation costs).

Another problem rural El Salvador faces is the disposal of human waste. Since the water level is only 10-15 feet below the ground in the low-lying Bajo Lempa region, allowing residents to defecate into the ground can pollute drinking water, leading to parasitic diseases. One NGO has used raised latrines to solve this problem. The latrines have a concrete box located above ground and below the toilet. Feces fall from the toilet into the chemical lined concrete box in which the chemicals dry the human feces into a solid mass. The feces/chemical mixture can them be removed from the area below the latrine and be used for fertilizer. The cost of one of these raised latrine units is around $600 per unit.

“What are the most significant problems facing El Salvador today?” I asked ‘Chungo’, the nickname of a fifty one year old representative of Ciudad Romero? His response was: 1) clean water, 2) electricity and 3) paved roads.

When visiting a clinic in the village of Isla de Mendez, I asked the resident doctor what single project he would elect to improve the health status of his patients, he stated “Clean water for the residents to drink.”

In El Salvador, like most other developing nations, their most pressing need is that for clean water. CNN reports that over 1.1 billion people do not have access to clean drinking water in the world. The NGO Global Water claims that over 40,000 people die each day from diseases directly related to drinking polluted water.

Fortunately, El Salvador has very good access to water. Rivers are abundant; the water level in the Bajo Lempa region I visited was only about 10-15 feet below the ground. Access to clean water, however, is another story. Many residents were ill with parasitic infections and a fellow volunteer received a rash after wading into a polluted bay on the Pacific coast.

Since El Salvador is not water poor, the solution to its health problem is simply to clean the water which already exists. In the largest city, San Salvador, water is provided by the government in a centralized manner, much as it is in the United States. The small village of Ciudad Romero employed wells from which its residents received running water.

In other rural areas, however, centralized water provision may be too costly to justify for areas which are not densely populated. There were two solutions the villagers used: chlorine tablets or individual filtration systems. The clinic I visited gave chlorine tablets to some residents without clean water, but I was not able to discern if these were free. Most residents resisted using the tablets since they claimed that the water tasted bad. Fifty five of about 350 families in Isla de Mendez had a filtration system in which bath and laundry water passed through different stone basins, with each basin filtering out a different kind of impurity. In the last stage of the treatment, the water passed through stone filters. The system seemed to be working well, but the local NGO had to educate the population on its use since the device had to be cleaned every three days. Without the education component, the funds invested in the filtration system could have gone down the drain.

This week, I will be doing a five part report on what I have learned from my eight-day community service trip to El Salvador. The trip was organized by the non-profit AJWS and was led by employees of the Salvadoran non-profits La Coordinadora del Bajo Lempa and the Foundation for Self Sufficiency in Central America (FSSCA). The majority of the time I was located in the rural town of Ciudad Romero in the Usulatan department, but I did visit other towns as well as the capital of San Salvador. In the course of the week, I was able to speak with a variety individuals: a doctor at a local clinic, community leaders from the villages of Ciudad Romero and Isla de Mendez, a student from the Universidad Centroamericana, workers at various non-profits, and many Salvadoran families.

The major healthcare issues for rural Salvadorans for which they seek medical treatment are the following:

• Childbirth
• Fever
• Dehydration
• Diarrhea
• Injuries from Accidents (eg: lacerations, broken bones, etc.)
• Parasites
• Asthma Attacks

Basic immunizations are widely available to all citizens free of charge. Access to doctors in urban areas is relatively easy, but expect to spend a large amount of time in the waiting room. For rural citizens, one may have to travel up to an hour to reach a nearby clinic and hospitals are often more than an hour away due to the poor state of most roads. For instance, to drive from Ciudad Romero to the nearest hospital took a little over two hours. In a larger country, the problem of transportation from rural areas to hospitals would be even more prevalent than in the case of the small country of El Salvador.

Below is the Schedule for the rest of the week’s posts:

• Tuesday: (Part II) Water
• Wednesday: (Part III) Sanitation
• Thursday: (Part IV) The Salvadoran Healthcare System
• Friday: (Part V) Government, History, and Service Procurement