July 2006

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Bleeding Heart Libertarianism

July 18, 2006 in Taxes | Permalink

Arnold Kling is a respected libertarian economist who has worked at the Cato Institute.  In a post for TCS Daily titled Bleeding-Heart Libertarianism, Kling makes an argument for a negative consumption tax for all individuals.  The thesis is simple and elegent, but does have some problems.  I highlight five major ones that come to mind.

  • Fraud: If everyone poor people received a very large lump sum transfer (on the order of $20,000) for some individuals, there would be large incentives to lie about the amount of consumption that occurred.  Would people invent fake Social Security numbers to get 2 rebates?
  • Healthcare: Kling would eliminate Medicaid and Medicare. While I do not believe these are ridiculous ideas, he does not create a system which all individuals would be compelled to buy some form of insurance.  Kling simply assumes that hospitals will turn away individuals who cannot pay, yet American society has not reached the point where it will allow its hospitals to turn away patients in need. 
  • Black markets: If taxes are based on large consumption taxes, would this lead to the creation of large black markets?
  • Immigration:  Would immigrants also receive a very large tax rebate?  If this is true, then immigrants from poorer countries would move to the U.S. to receive the generous tax benefits available here.  If immigrants are not eligible for the tax deduction, when would they become eligible?  Currently, immigrants are eligible for some tax deductions (eg: the standard deduction for each child, business expenses, etc.) but not others (eg: the EITC).   
  • Inefficient Taxation: Optimal tax theory generally says that the government should tax goods with inelastic demand more than goods with elastic demand.  For instance, one should tax cigarettes because of its inelastic demand.  While a general taxation may be wise to reduce government market interference, deadweight loss could be reduced by targeting taxes.

Budget deficit trimmed: trend or statistical anomaly

July 17, 2006 in Public Policy | Permalink

Many outlets in the popular press have been heralding the reduction of the budget deficit as a sign of good times on the horizon for the U.S. economy.  The Washington Times (“Economic sunshine“) credits President Bush’s economic policies–in particular his tax cut–as the source for the economic growth which is driving the increased tax receipts.  Former Secretary of Labor Robert Reich (“President’s Economy on Parade“) is quick to point out that there is still a $280 to $300 billion deficit.  Reich says the current administration tax revenues are “still running $100 billion less than what the White House projected five years ago when it sold its tax cuts.”

Economist Jim Hamilton is less impressed with either argument (“Is the surge in tax receipts truly extraordinary?“).  In his blog, he believe that supply-side economics did not cause the surge in tax collections and that it is unlikely that there is a trend towards greatly increasing tax receipts (as a percentage of GDP) in the foreseeable future.  Using a GARCH model, Hamilton believes that the 2006 first quarter results are simply a statistical anomaly. 

Free…with a £1m parking fee

July 16, 2006 in International Health Care Systems | Permalink

The UK’s Guardian newspaper (“ NHS attacked…“) reports regarding how ‘free’ services for patients are becoming increasingly less free.  Hospitals often charge patients exorbitant rates for parking (£30 a day), hotels, and telephone access, instead of being able to charge patients the true cost of the procedure.  Officials are worried that these fees will create a two-tiered system of care, with those who can afford the fee receiving better care.

This problem illustrates the fact that ‘free’ medical care is never actually free.  Someone has to pay, whether it is taxpayers, patients, or insurers.  Further, a centralized system of care is often slow to change as medical technology and patient demands change.  For instance:

“The report will also demand an overhaul of the prescription charging system to tackle anomalies that mean some patients with long-term, serious conditions get drugs free and others do not, while even millionaires over 65 get free prescriptions.

It will argue that both times and medical demands have changed, creating quirks such as the fact that adult cystic fibrosis sufferers are denied free prescriptions because when the system was invented they were not expected to survive beyond childhood, when their drugs would be free.”

Health Wonk Review #11

July 13, 2006 in Carnivals | 4 comments

In the healthcare field, as well as for most interesting areas which merit investigation, economists and policy analysts are faced with tradeoffs.  Reducing the cost of healthcare often comes with a sacrifice in the quality or quantity of medical services provided; increasing the quality or quantity of medical services usually increases the price of healthcare. 

In this edition of the Health Wonk Review, our pundits look at both sides of the issue.

REDUCING COST

Consumer Driven Health Care (CDHC) and Health Savings Accounts (HSA) have been the the most recent policy initiative to hold down healthcare costs.  Dr. Hébert, a Louisiana blogger as well as a physician, believes that HSAs favor the wealthy, that they only help the young and the healthy, and that they will lead to worse health care.  In “HSA Gumbo” Michael Cannon of the Liberty-at-Cato responds to the doctor’s criticisms of HSAs with some very salient points.  

How has CDHC worked in the ’real-world?’  In “Adventures in (Consumer Driven) Health Care“, Henry Stern of Insure Blog draws on examples from Aetna and United Healthcare to show that CDHC is gaining popularity.  He even cites an eHealthInsurance report which claims that almost half the individuals who bought HDHP had been previously uninsured.

In “Speed Surgery“, Jason Shafrin (myself) at the Healthcare Economist tries to show why a UK initiative to give physicians incentives to complete surgical procedures faster may be a short-sighted policy.

INCREASING QUALITY

One problem with healthcare analysis is measuring quality.  Did my health improve because of a high-quality operation at top-rate facility or was the improvement simply a result of a natural healing process?  In “Is rating the ‘best’ hospitals ‘good’?“, Joe Paduda of Managed Care Matters ponders whether or not the recent release of a US News ranking of hospitals is a good thing.  Joe contends that while the rankings are a step in the right direction, they are significantly biased in favor of teaching hospitals and many “great” hospitals do not appear on the ranking. 

Increasing the importance of patient satisfaction is another way to improve the quality of medical services.  David Williams of the Health Business Blog contends that quality will truly improve once healthcare providers get serious about Customer Service.

TECHNOLOGICAL IMPROVEMENT and MANAGERIAL EFFICIENCY 

Sometimes it is possible to increase quality and reduce cost.  In any industry, this phenomenon most often manifests itself in the form of technical progress.  In “Digital Health Coming to Grandma’s House“, Dale Hunscher of FutureHIT describes how in-home wellness monitoring systems could provide constant vigilance for the elderly as well as reduce care costs through fewer nurses visits and hospitalization.  The problem is that providers and payers face a Prisoner’s Dilemma regarding who will pony up the capital needed to implement this style of care.

Regional Health Information Organizations (RHIOs) standardize medical record keeping in a given metropolitan area, leading to more accurate records and cheaper overhead costs.  In “RHIO business models“, Gary Mark Levin of Inland Empire RHIO News examines a report by the Healthcare IT Transition Group which presents some difficulties that a RHIO have in achieving financial self sufficiency.

Rita Schwab of the Medical Staff Service Professionals (MSSP) Nexus Blog offers simpler solution: Hire passionate healthcare professionals.  She also offers some ‘new rules’ management can use in order to improvement employee performance.

HEALTHCARE BLOGGING CONFERENCE

Dmitriy Kruglyak of The Medical Blog Network informs us of a great opportunity: The First-Ever Conference on Healthcare Blogging.  The conference is December 11th in Washington, D.C. and has a great list of speakers.

 

In ending, I would like to thank all of you for submitting interesting posts.  I would also like to thank Joe Paduda, Julie Ferguson, and Dmitriy Kruglak for their assistance while I have been the host. 

Conflict of Interest

July 12, 2006 in Miscellaneous | Permalink

To prove that economists are not always dull and sometimes have a sense of humor, I submit the following: DB’s Medical Rants has an entertaining cartoon on physician conflict of interest.

Optimal Health Insurance and Provider Payment

July 11, 2006 in Academic Articles, Health Insurance | Permalink

How does one design an optimal insurance policy where physicians and patients are compelled to tell the truth about the medical procedures that were completed?  This is the question of Ching-To Albert Ma and Thomas McGuire in their 1997 AER paper.  The paper is somewhat technical but I will briefly explain their setup and conclusions, along with my own analysis.

Setup

Individuals become sick with probability ‘p‘.  If this occurs and they can purchase health (medical care) which is a strictly concave function of the number of procedures done (‘t‘) and the physician effort level (‘e‘).  Thus:

  • Health=f(t,e)

The physicians can report any procedure level ‘T‘ to the insurance company that they wish regardless of the actual number of procedure (‘t‘) that they complete and which are recorded in the medical records.  Individuals get utility from income and health.  In this paper, health is measured in cash equivalent units.  Physicians are profit maximizers, but receive less utility the more effort they put forth.

Conclusions

  1. Truth Telling: In order to induce truth telling (T=t) physicians must receive a positive payment for their services (not strict capitation) and patients must have a positive co-payment.  This way, physicians will wish to increase T, but patients will not allow this since increasing T increases the co-pay.  The patient are able to reveal the true ‘t‘ to the insurer and thus truth telling is the Nash equilibrium.
  2. Effort: If the second derivative f_{t,e} is negative, effort and treatment are substitutes.  This means that more physician effort will reduce the demand for medical procedures since.  If this is the case, physicians will reduce ‘e‘ to the minimum level to maximize ‘t‘ (and thus their profits).  If the second derivative f_{t,e} is positive, effort and treatment are complements.  This means physicians can only increase ‘t’ when they increase their effort level.  In this case, physicians will put forth an high level of effort.
  3. Ethics:  What if physicians have ethical notion of a minimal level of care, so a necessary condition is that ‘f(t,e)>F‘?  In this case, e may increase from its lower bound (in the substitute case).  In a general equilibrium setting, capitation payments, however, may need to increase in order to induce individuals to enter/remain in the medical profession.  Overall, however, having an ethical minimal level of care is Pareto improving for society.

Analysis

This paper is interesting theoretically, but greatly simplifies the market.  Competition within insurance plans as well as the variety of plans available does not appear in this paper.  Further, there is likely no explicit function f(t,e) in which medical procedures translate into health; there is a significant stochastic element to health even in the face of known treatment quantities.  The paper also abstracts from many of the informational problems (such as the fact that patients may not know/understand the procedure they undergo) and assumes that supplier induced demand is limited by the patients’ medical knowledge. 

Ma and McGuire (1997), “Optimal health insurance and provider payment,” American Economic Review, Vol. 87(4), pp. 685-704.

Health Wonk Review #11 Submissions

July 10, 2006 in Miscellaneous | Permalink

Do you need more exposure for your health policy blog?  Do you have valuable insights on health policy that you believe the public needs to hear?  If so, here is the perfect avenue for you…

Healthcare Economist will be the host the Health Wonk Review #11.  The Health Wonk Review is “the best of the best”: the best blog postings from the brightest health policy minds on the web!  Please submit your posts through The Medical Blog Network (TMBN) or email me directly.  Submissions are due by Wednesday, July 12th at 9am EST.

To submit your posts through the TMBN website: click here.

If you wish to email your post of choice, please send an email to (jason.shafrin@gmail.com) with the following information:

  1. Your Name and Email Address
  2. The Name of your website and its web address
  3. The title of your post
  4. The web address of your post
  5. A brief (2-3 line) summary of its contents

Speed Surgery

July 10, 2006 in Current Events, International Health Care Systems | Permalink

Productivity.  More output with fewer inputs.  Increasing productivity is one of the few goals towards which all businesses strive. 

The Times of London reports (“Rankings to identify slow surgeons“) that the NHS will try to increase the productivity of surgeons in the UK. 

The system of “performance indicatorsâ€? will be announced this week by ministers, seeking to boost NHS productivity. A recent report from the King’s Fund, an independent advisory body, said patients had not benefited from a £340m salary increase for consultants.

NHS trust managers will be able to use the data — which will not be made public — to tell slow surgeons to copy the methods of faster colleagues.

Ministers point to the example of a specialist who more than doubled his output at a Norfolk hospital by using “production lineâ€? techniques learnt in France, which ensure he is never kept waiting for his next patient.

While increased productivity is a goal any economist would applaud, does this initiative really increase productivity?  In theory, the output good for any surgical procedure is improved health.  An increase in productivity would mean improving the average patient’s health using fewer inputs, such as a physician’s time.  The British initiative focuses only on the input side without taking to account how the change in the amount of time the physician spends on each surgery impacts the output (health).  Fewer inputs (physician time) likely means worse output (patient health).  The major problem of course is that measuring health outcomes is very difficult. 

Also, using a simple metrics to measure performance is often sub-optimal.  For instance, during my time working in finance for General Electric, I saw that individuals in the sales department would often slash their price at the end of a quarter in order to sell enough products to make their sales goals, despite the fact that this was not the most profitable way of conducting business.  Similarly, narrowing one’s focus to the time it takes to complete an operation will certainly increase the speed of the process but may not increase quality of care. 

In the U.S., fee-for-service doctors have an incentive to move faster, since the more patients they see, the more money they earn.  On the other hand, if a physician is known for doing shoddy surgical work, no patients will return to see them.  I do not know if physicians in the NHS have similar reputational issues to worry about; do British NHS patients get to choose their surgeon or are they assigned to one?

Social Security Around the World XI: Measuring Benefits

July 8, 2006 in Econometrics, Social Security | Permalink

Throughout the past week, I have spoke of the work disincentives many social security programs create.  The question is: how do we measure these disincentives.  The economics literature has given three different metrics to measure implicit social security wealth a retiree has and I will discuss each in turn.

Accrual

The accrual method measures how much the value social security benefits would increase (or decrease) if a person decides to postpone retirement by one year at age ‘t‘.

  • Accrual=SSW{t+1} – SSW{t}

SSW_{t} is one’s implicit social security wealth if they retire at age ‘t’.  This is calculated by taking the nominal benefits at each future date and multiplying them by the probability of surviving to that date as well as a discount factor. 

Take the example below:

 

Age Benefit P(Surv) NPV factor Value
64 1000 1 1.00 1000.00
65 1000 0.75 0.94 795.00
66 1000 0.5 0.89 561.80
67 1000 0.25 0.84 297.75
68 1000 0 0.79 0.00
        2654.55

Here, a pension for someone who retires at age 64 is $1000 per year.  I assume that everyone dies at age 68.  The total value of the individuals SSW is $2654.  What if the person decided to postpone retirement to age 65?

 

Age Benefit P(Surv) Discount Value
64 0 1 1.00 0
65 2000 0.75 0.94 1590
66 2000 0.5 0.89 1123.6
67 2000 0.25 0.84 595.51
68 2000 0 0.79 0
        3309.11

In my example, the individual receives $2000 per year if they retire at age 65 (instead of 64).  After taking into account the probability of surviving to each age as well as the discount factor, the person’s new SSW is $3309.  Thus the accrual amount is $655.  By postponing retirement, the individual increases their Social Security Wealth.  In many systems, this amount can be a large negative amount which gives individuals an incentive to retire early.

Peak Value

The peak value calculation is similar to the accrual method. 

  • Peak value=SSW{r*}-SSW{t}

This method takes the SSW at the age of retirement (‘r*‘) where r* is the age of retirement which maximizes the value of social security benefits and subtracts the SSW which would result from retirement this year.  This method may be optimal to capture the fact that many people retire at a target year and don’t calculate their own incentives each year.

Option Value

The option value is the most sophisticated method.  It takes into account utility from not working, but requires the researcher to model a utility function and assume parameter values.  First, let us calculate the value of retirement (V)at date ‘s’.  This is equal to the discounted expected utility of wages earned between the current date t and date ‘s-1′ plus the discounted expected utility of social security benefits earned between date ‘s’ and the end of life.

The option value is equal to: V(r*)-V(t).  This is the difference between the discounted expected utility from retiring at r* (the date that maximizes utility) and the discounted expected utility from retirement today (date ‘t’).  If the option value is positive, the individual will continue to work.  If the option value is negative, the individual will retire. 

A more comprehensive treatment is given in Stock and Wise (1990).

Stock and Wise (1990) “Pensions, the Option Value of Work and Retirement”, Econometrica, Vol. 58(5), pp. 1151-1180

Social Security Around the World X: UK

July 7, 2006 in Social Security | Permalink

The public pension system in the United Kingdom differs significantly from its peers in continental Europe.  First, private and occupational pensions play a much larger role in retirement than in the rest of Europe.  Secondly, UK projects that public pension savings will actually decrease as a percentage of GDP (from 4.5% in 2000 to 4.1% in 2050) despite an aging population.  This is due to a decrease in benefit generosity and a push for more individuals to self-insure for retirement.  

Pensions are financed through an 23.8% payroll tax on weekly earnings between £89 and £591 (11% paid by the employee, 12.8% paid by the employer).  In 1968, 80% of males between the ages of 60 and 64 were in the labor force, but now this has dropped by 1996 to just under 40%. 

First Tier: The Basic State Pension

This is a flat-rate contributory benefit payable to men over 65 and women over 60 (gradually increasing to 65 for women by 2020). To qualify for the £73 weekly benefit, individuals must pay into the system for 90% of their working life.  There is no mean-testing for this program, and delaying the receipt of benefits by one year will increase weekly payments by 10%. 

Second Tier: SERPS, Occupational and Personal Pensions

The State Earnings Related Pension Scheme (SERPS) was introduced in 1978 and pays a pension equal to a fraction of an individuals qualifying annual earnings each year since 1978.  Originally it aimed to replace 25% of an individual’s best twenty years’ earnings (up to a limit), but subsequent cuts have move the replacement rate to 20%.

Individuals can elect to opt out of the SERPS program and instead participate in private pensions (an individual retirement account) or an occupational pension.  Occupational pensions currently cover 45% of all workers.  Since 1988, individuals could also leave SERPS and their occupational pension in favor of a private savings scheme.  By the mid-1990s one-quarter of all employees had taken out a personal pension.  Blundell, Meghir and Smith note that “there is a serious issue over the number of older workers who were ‘mis-sold’ personal pensions by financial advisers who wrongly advised them that they would be better off leaving their occupational pension scheme.” It is not surprising that 22% private-sector occupational schemes plans are defined contribution (or a defined benefit/defined contribution hybrid) as compared to only 2% in the occupational schemes in the public sector. 

Other Programs

The state also has a Minimum Income Guarantee program.  This is a flat-rate, noncontributory, means tested program to help those with little income.  All individuals aged 60 and older who are unemployed receive the Minimum Income Guarantee.  The incapacity benefit is for disabled individuals.  One must undergo a medical examination by a general practitioner (GP) and be certified unable to do any work to receive this benefit. 

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