February 2007

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You’ve got mail

February 14, 2007 in Current Events | Permalink

The Washington Post reports today (“U.S. Senators…“) that 5 Democratic and 5 Republican senators have signed a letter requesting that President Bush “fix the American health care system.” What does fixing the health care system entail for senators Kohl (D-WI), Thune (R-SD), Wyden (D-OR), DeMint (R-SC), Conrad (D-ND), Bennett (R-UT), Salazar (D-CO), Lott (R-MS), Cantwell (D-WA) and Crapo (R-ID)? The senators pointed to six major issues. Below are a listing of each issue along with my commentary.

  1. “Ensure that all Americans would have affordable, quality, private health coverage, while protecting current government programs.” Everyone wants quality goods for affordable prices. I would love to have eaten a quality Maine lobster tonight for dinner and paid only $1, but that is not likely to happen. Generally, there is a tradeoff between quality and cost, but most politicians do not seem to realize this. Also, while I agree with the senators that health insurance should be administered by private companies, I believe that government health insurance programs such as Medicaid and Medicare could be replaced with subsidies for private insurance.
  2. Modernize tax rules. I concur with the senators that the health insurance tax deduction as it currently stands not only favors the wealthy but also distortionary.
  3. Create incentives for states to design health solutions. Decentralization is a great idea.
  4. Focus on prevention strategies. Although I agree that money spent on known preventative treatments are often cost saving in the long run, the majority of health care spending is for supply-sensitive costs (see P4P post).  A focus on preventative care is good policy, but is unlikely to decrease medical costs significantly.
  5. Encourage cost-effective chronic care and more compassionate end-of-life care. These suggestions are too general and thus have no teeth. Of course more effective care is better, but do the senators want the government to restrict less cost-effective care? How will the government evaluate which treatments will be placed in the ‘less-effective care’ category? Also, it is basically impossible for policy-makers to measure something as abstract as a ‘compassion level’.
  6. “Improve access to information on price and quality of health services.” This is a important role for the government to fulfill (see post on California healthcare quality report card).

For those who are interested, the complete press release on the Senators’ letter to President Bush can be found here.

Learned Hand

February 13, 2007 in Economics - General | Permalink

This quarter I am a Teacher’s Assistant in a Law and Economics class at UCSD. In one of the lectures I learned about economists’ favorite judge: Justice Learned Hand.

Hand is most famous for his rule for determining negligence in the U.S. v. Carroll Towing case. Legally, negligence occurs when 1) the defendant has a duty of care to the plaintiff, 2) the defendant breaches this duty, 3) there must be a factual causal connection between the breach and the harm and 4) the harm must not be too remote a consequence of the breach.
Hand claimed that negligence was to be found only if the burden (cost) of precautions was less than the probability of the accident multiplied by the gravity (cost) of the accident. The pragmatic formula can be seen from some examples on the Economica Ltd. website.

  • “…in Hewson v. City of Red Deer (1977) 146 DLR (3d) 32 (Alta. CA), a City employee left the keys in the ignition of a bulldozer. Subsequently, the bulldozer was stolen and driven into the side of Hewson’s house. The City was found not to be negligent largely because (a) the bulldozer was left two blocks from Hewson’s house; (b) it was left at midnight; and (c) the operator was absent for only 25 minutes. All three of these factors suggest that the probability of an accident was quite low. And the first factor suggests that the average damages which might occur if the bulldozer was stolen were low (because the bulldozer would have to be driven a long distance before causing any harm.)
  • In Weaver v. Buckle (1982) 35 AR 97 (Alta. QB), Weaver (a child) ran out in front of Buckle’s car and was injured. The court implied that it would not normally have found Buckle to be negligent for causing this accident. However, as the road was narrow, it found that he should have been driving more slowly, to take account of the general conditions of that road. The court concluded that if he had been driving more slowly, the probability that this accident would have occurred would have been reduced substantially. Buckle was found 60 percent liable. In economic terms, this finding suggests that it is not simply this accident which determines the “costs of an accident” (A, in my terminology). Rather, it is all accidents which might have been prevented had the defendant taken additional precautions.
  • In Jordan v. Schofield (1996) 148 NSR (2d) 104 (NSSC), Schofield’s 7 year-old son played with a lighter and caused a fire in an apartment building belonging to Jordan. The court concluded that Schofield was not negligent. Although parents are responsible for taking “reasonable” precautions to watch their children and to put harmful things out of their way, at some point the costs of additional precautions become prohibitive. Parents will not be found negligent for failing to take precautions beyond that point. For example, parents will not be negligent for leaving children unattended around “ordinary” dangers (such as knives or scissors) for a few minutes. They may, however, be negligent for leaving their children unattended around such dangers for longer periods of time, or for leaving them for only a few minutes around more dangerous items (such as fires burning in fireplaces). In economic terms, the cost of taking additional precautions is to be weighed against the probability that an accident will occur if those precautions are not taken.”

Hand was also famous for his ‘Spirit of Liberty‘ address in New York’s Central Park in 1944. Below is an excerpt from this speech:

What do we mean when we say that first of all we seek liberty? I often wonder whether we do not rest our hopes too much upon constitutions, upon laws and upon courts. These are false hopes; believe me, these are false hopes. Liberty lies in the hearts of men and women; when it dies there, no constitution, no law, no court can even do much to help it. While it lies there it needs no constitution, no law, no court to save it. And what is this liberty which must lie in the hearts of men and women? It is not the ruthless, the unbridled will; it is not freedom to do as one likes. That is the denial of liberty, and leads straight to its overthrow. A society in which men recognize no check upon their freedom soon becomes a society where freedom is the possession of only a savage few; as we have learned to our sorrow.
“What then is the spirit of liberty? I cannot define it; I can only tell you my own faith. The spirit of liberty is the spirit which is not too sure that it is right; the spirit of liberty is the spirit which seeks to understand the mind of other men and women; the spirit of liberty is the spirit which weighs their interests alongside its own without bias; the spirit of liberty remembers that not even a sparrow falls to earth unheeded; the spirit of liberty is the spirit of Him who, near two thousand years ago, taught mankind that lesson it has never learned but never quite forgotten; that there may be a kingdom where the least shall be heard and considered side by side with the greatest.

Does immigration decrease emergency department usage?

February 12, 2007 in Academic Articles, Medical Studies | Permalink

There are many myths in the popular press regarding what are the major determinants of increasing health care costs. Some pundits claim that illegal immigrants that do not purchase insurance are using emergency departments (ED) for primary care services, thus driving up the cost of health care for American citizens (see Science Daily‘s interview with Jack Martin of the Federation for American Immigration Reform).

A study by Peter Cunningham (2006) in Health Affairs found this not to be the case. The author employs the 2003 Community Tracking Study (CTS) to study ED usage in 60 different U.S. sites. The findings are summarized in the chart below.

High ED Usage Low ED Usage
Citizens Non-citizens
Black White, Hispanic
Below Poverty Line Above Poverty Line
Poor Health Good Health
Live near ED Live far from ED
Medicare/Medicaid insurance Private insurance or uninsured
Long physician appt. wait times Short physician appt. wait times
More outpatient visits/physicians Less outpatient visits/physicians
More CHC revenue Less CHC revenue
   

Surprisingly, non-citizens have an ED visit rates which are 17.2% below those of an average American citizen. Among residents below the poverty line, non-citizens ED visit frequency is 30.3% below that of poor Americans. Also, while African Americans tend to use the ED more frequently, Hispanic ED usage is on par with that of whites.

It is also found that the uninsured have ED usage rates similar to individuals who hold private insurance. People with Medicare or Medicaid insurance use emergency room services much more frequently than the uninsured.

Some of the Cunningham’s conclusions include:

  • HMOs help to reduce ED usage for the poor, but HMO insurance coverage has no effect on ED visit rates for individuals above the poverty line.
  • Increasing Community Health Center (CHC) revenue per poor person in a zip code decreases emergency room visit rates for the poor. Also, longer appointment wait times and more outpatient visits per physician lead to more ED visits. These findings suggests that when communities offer convenient and high quality substitutes for ED visits, patients take advantage of these services. When the patient must wait a long time for an appointment or receive poor care once an appointment is made, then the ED is often the location of choice for medical care.
  • Approximately 25% of the differences in ED utilization rates across sites were due to variation in population characteristics.

As the author suggests, “…reducing ED use defies simple solutions such as expanding insurance coverage or restricting access for undocumented immigrants.”

Cunningham (2006) “What Accounts For Differences In The Use Of Hospital Emergency Departments Across U.S. Communities?” Health Affairs. vol 25, no. 5, pp. w324-w336.

Notional Defined Contribution Model

February 9, 2007 in Social Security | Permalink

Recently I came across a paper by John Williamson describing a Notional Defined Contribution Model as a replacement for state pension system. Countries who have adapted the Notional Defined Contribution (NDC) model include Sweden (1994), Italy (1995), Latvia (1996), the Kyrgyz Republic (1997), Poland (1999), and Mongolia (2000). The model is in essence a pay-as-you-go framework, but benefits are closed linked to contributions. Policymakers hope this will encourage labor force participation.

Individual have an account which details how much money (in taxes) they have paid into the system. This account, however, is entirely virtual in that individuals do not have access to the fund in these accounts. The government chooses a “virtual” rate of return usually based on economic factors such as price inflation (e.g.: in Italy and Latvia) or a mix of wage and price inflation (e.g.: in Poland and Sweden).

Those in favor of this plan claim that since benefits are mostly tied to contributions, this may encourage labor force participation during a person’s working years; on the other hand the NDC model is less redistributive than a guaranteed benefit pension program. There is no financial market risk since the accounts are contemporaneously paid out from the current labor force to current retirees, but there is demographic risk. If a country has few workers and many retirees, the “virtual” rate of return must be lowered to account for this. The NDC plan has lower administrative cost than one in which individuals have access to their accounts because of economies of scale and lower transaction costs, but there is no incentive for individuals to increase their savings.

To me, this plan sounds exactly like the current U.S. Social Security system. Every worker has an account with their Social Security Contributions to date. These funds, however, are not owned by the individual but are paid contemporaneously to retirees. Upon retirement, an individual receives a Social Security pension based on the value in the account. (This is a simplification since Social Security payments are subject to a cap, and the payments also depend on the number of working years).

A more sensible plan is the Chilean system of personal accounts. According to the Cristian Science Monitor, (“In Britain and Chile“):

“The second and main pillar is the obligatory monthly payroll deduction of 12.3 percent. Ten percent goes into the worker’s own account, administered by one of six private pension funds, while 2.3 percent covers administrative fees. Unlike in the US, the payroll tax is funded entirely by the employee. At retirement – age 60 for women, 65 for men – they take out what they put in, plus accumulated gains. Currently 3.6 million Chileans, or 65 percent of the 5.5 million-person workforce, are actively contributing under this system.”

There are a few caveats. The Cato Institute (“Empowering workers“) notes, “This percentage applies only to the first $22,000 of annual income. Therefore, as wages go up with economic growth, the ‘mandatory savings’ content of the pension system goes down.” Also, if an individual works at least twenty years, they are eligible for a state-sponsored minimum pension. Thus, individuals will not be destitute in old-age, even workers with lower wages over their lifetime.

The privatization of a portion of the state pension program was less successful in Britain, however. “Pension sellers, working on commission, frequently coaxed… [workers] into unsuitable products, often overstating the potential for returns.” Still, keeping retirement savings in the hands of individuals will lead to more savings and ensure sufficient funds at retirement for all individuals; especially when paired with a minimum state-provided benefit.

Basic Econometric Concepts: Time Series

February 9, 2007 in Econometrics | Permalink

Today I will review a few basic concepts of time series econometrics. A time series is a stochastic process where observations appear in different time periods. For instance, {zi} (i=1,2,3,…) is a stochastic process with zi representing the GDP each quarter. Below are a few important definitions which are important to econometric estimation using time series data.

  • Covariance Stationary Processes. A process is covariance stationary if i) E(zi) does not depend on i, and ii) Cov(zi,zi-j) exists, is finite, and depends only on j but not on i.
  • White Noise. A covariance stationary process, {zi}, is white noise if E(zi)=0 and Cov(zi,zi-j)=0 for j≠0. We typically assume that the error term in most estimating equations is white noise.
  • Ergodicity. A stationary process is said to be ergodic if:
    • limn->∞|E[f(zi,...zi+k)g(zi+n,...zi+n+l)]| =|E[f(zi,...zi+k)||E[g(zi+n,...zi+n+l)]|
    • This means that as the observations from time series become further and further apart, they become independent.

    • E(xi|zi-1,zi-2,zi-3,…z1)=xi-1.
    • This means that given all the information from the past, our best guess at the value of x in this time period is the value of x last time period. For instance, Hall’s Martingale Hypothesis states that given a variety of macroeconomic variables, my best guess of aggregate consumption this quarter is equal to aggregate consumption last quarter.

    • z1=g1
    • z2=g1+g2
    • …
    • zi=g1+g2+…+gi

  • Martingale. Let xi be an element zi. The scalar process {xi} is a martingale with respect to {zi} if:

  • Random Walk. A random walk is a specific type of martingale made up of the sum of a white noise process. Let {gi} be a white noise process. Then a random walk process {zi} would equal the following:

For further information, see: Hayashi, Fumio (2000) Econometrics. Princeton University Press. USA.

Health Wonk Review #25

February 8, 2007 in Carnivals | Permalink

This week’s edition of the Health Wonk Review is up at HealthBlawg.

Global-HELP

February 8, 2007 in Miscellaneous | Permalink

Knowledge is power. Medical care is a product in which individuals offer patients compensate doctors according to their expertise in the health care field. One way to help sick individuals—especially in developing countries—is to increase their own knowledge of the illnesses which afflict them.

One organization working to spread health care knowledge is Global-HELP. The organization publishes and translates medical guides for various ailments and makes the information available to the public free of charge. This non-profit is similar to the more widely known Hesperian Foundation, of whom I mentioned in my April 8th post. The Global-HELP website describes itself as follows:

“The Global-HELP Organization, commonly referred to as HELP (Health Education using Low-cost Publications), is devoted to making knowledge about health-care accessible worldwide. By using a network of donors, authors, producers, health-care workers, and volunteers, our publications can be made available without charge.

Thanks to advances in software and communication, we can now make these publications available to places and people throughout the world.

All of our publications may be downloaded in PDF format from this website, and printed versions of select publications are also available. When used in developing countries, we provide printed publications for only the cost of mailing. For developed countries, printed publications may be purchased at a reasonable price.

Global-HELP is a humanitarian organization that is non-political and values racial, cultural, and religious diversity.”

Becker-Posner debate Bush healthcare plan

February 8, 2007 in Current Events, Economics - General | Permalink

Below are some quotations from Gary Becker and Richard Posner’s debate on the Bush healthcare plan.

Becker:

“Since under present tax law, medical expenses has to exceed 71/2 % of a family’s taxable income before this spending begins to be tax deductible, it is very hard to get any tax benefits with individual health insurance. This aspect of tax law helps explain why so many Americans do not have any health insurance. The proposed tax deductibility for persons with their own health insurance plans would sharply reduce the net cost of getting private health insurance for many of the almost 47 million Americans who presently do not have such insurance, Medicaid, Medicare, or are under the 10 year old State Children’s Health Insurance Program. It would also contribute to leveling the playing field between persons who get health coverage through jobs, and those who must get insurance as individuals, perhaps because they have no job, or are self-employed, or their employers do not provide health insurance.”

“The main reason usually given is that since all persons must be accepted for treatment by hospital emergency rooms, regardless of whether they have insurance, taxpayers and other hospital patients who do have insurance bear the cost of treating persons without insurance. Due to this ‘externality’, persons without health insurance impose costs on others whenever they use emergency health care facilities…Yet this incentive is limited since emergency room care is neither the most effective nor the most pleasant. A few studies indicate that emergency rooms are not used disproportionately by the uninsured, probably because they are mainly young and healthy, so the total cost imposed on others of emergency room visits by the uninsured is likely not large…a better way to handle that would be to mandate that everyone purchase basic health insurance that covers catastrophic health problems.”

Posner:

“I cannot think of a good reason for subsidizing health insurance, or, indeed, for the demand for noncatastrophic health insurance. The economic explanation for insurance is that because of diminishing marginal utility of income, people will pay to avoid a big financial loss (e.g., will pay $2 to avoid a 1/100,000 prospect of a $100,000 loss, even though the actuarial cost of such a prospect is only $1), but most medical expenses are modest. So if there were no tax subsidy for health insurance, probably much less would be purchased, which would be fine. People might even be healthier, because diet and other life-style choices are substitutes for medical care and thus for health insurance.”

“The fact that millions of people have no health insurance does not strike me as a social problem. It is true that they are free riders, … [and] the quality and conditions of charity medical treatment (such as long queues in emergency rooms) discourage overuse of “free” medical care–it isn’t really free, because the nonpecuniary costs are substantial.”

“The best, though politically unattainable, reform would be to abolish Medicare, brutal as the suggestion sounds. Then people would purchase catastrophic or other medical insurance for their old age, or depend like the young on charity. If it were thought “unfair” to make elderly people of limited means pay for their entire costs of health care, there could be a subsidy, but it should be means-tested, unlike Medicare.”

Regulating Misinformation

February 7, 2007 in Academic Articles, Information | Permalink

  • “Cancer cured with soothing balmy oils.” Appeal to Reason
  • “According to this repeated nationwide survey, more doctors smoke Camels than any other cigarette.” – TV ad
  • Regarding patent medicine sold at the end of the nineteenth century: “…the medicines were ineffectual. Some of the syrups contained as much as 80 per cent alcohol; many of the tonics used cocaine and morphine. Some of the medicines destroyed health, and make drunkards and dope addicts out of their users.” Weinberg and Weinberg (2006) The Muckrackers.

False advertising has been a problem since the beginning of commerce. Deliberately misleading messages lead consumers to purchase products which they do not need or ones which may even harm them. In the 2006 NBER Working Paper “Regulating Misinformation,” Edward Glaeser and Gergely Ujhelyi create a theoretical model to examine what are the optimal governmental strategies to combat misinformation.

Previous economic analyses have often espoused laissez faire polices. These studies would claim that misleading information is either ineffective because the wisdom of the masses will prevail or because the government is an poor arbiter of what exactly is defined as misinformation. Still, companies spend millions of dollars on misinformation advertising campaigns (see Zyprexa rep post) so they must be at least somewhat effective in changing popular opinion.

Model

Glaeser and Ujhelyi create a theoretical model using an Cournot-style oligarchical setting. Total quantity, Q(P), is equal to N(a-c-P)/a. There are N number of people who receive benefits from the product and there are J number of equally sized firms. The variable c is equal to the individuals expected health cost of using the product which can be erroneous. This perceived cost, c is equal to the true cost, c0, minus an error term, ε (c=c0-ε). Using the formulas for solving Nash equilibrium, we can see that each firm will produce q=N(a-c)/[a(J+1)] quantity of the good. On an industry-wide level, we find:

  • Q(ε)=JN(a-c)/[a(J+1)] = J*q
  • P(ε)=(a-c)/(J+1)
  • Π(ε)=JN(a-c)2/[a(J+1)2]

We see that the cross derivative QεJ>0 because more firms increase their output in response to higher demand caused by the increase in misleading information transmitted to consumers.

Looking at the mathematics, the authors suggest that misinformation may actually be welfare enhancing if there are other market imperfections. For instance, in the case of monopoly, price is raised and thus the quantity consumed in a monopolistic environment is below the optimal level. With false advertising under monopoly, the authors argue, the equilibrium quantity could move closer to the socially optimal level.

The authors assume advertising is a public good on the industry level. Proposition 3 of the paper claims the following: 1) total advertising expenditure increases with market size, 2) total advertising expenditure decreases with the true health-cost, c0; and 3) total advertising expenditure decreases with the number of firms. Conclusions (1) and (2) are relatively self-explanatory. Conclusion number (3) is sensible since it implies that as competition rises, misinformation falls. “This is the classic example of the free rider problem. All firms benefit by confusing consumers about the costs of the product, but if there are too many firms, they will fail to invest in this industry-level public good.”

Conclusions

The authors conclusions are as follows:

  1. Misinformation may not be socially inefficient (as in the case of monopoly). Further “misinformation is more likely to be welfare reducing when prices are closer to marginal costs than in a more monopolistic setting.”
  2. When advertising only misinforms, a tax on advertising or an equivalent quantity control (e.g.: Pure Food and Drug Act of 1906) is optimal.
  3. Counter-advertising by the government is ineffectual because the government much incur costs to air the advertising and the government actions may lead to increased industry level advertising.

The health care industry is one where people pay large amounts of money for accurate information (e.g.: correct diagnoses, assessment of physician or hospital quality, etc.) and other individuals pay large amount of money to breed misinformation (e.g.: false advertising for pharmaceuticals). Understanding the role of information in the health care industry is very important. While the paper analyzed here is only theoretical – it does not give any empirical evidence to back up its mathematics – and the analysis only pertains to information problems with regards to advertising, the study is a step in the right direction towards helping society understand the role of information in the medical field.

Ambulatory Process of Care and Quality of Life Outcomes

February 6, 2007 in Academic Articles, Information, Medical Studies | Permalink

A push towards more accurate evaluation of health care quality has become a major public policy goal in recent years. The Department of Health and Human Services now has a website ranking hospital quality and California has a Healthcare Quality Report Card. One problem with simple quality measures such as mortality or morbidity rates are that physicians who have a patient base with a lower initial health level are penalized—according to the scoring—for treating the patients who need care the most. For this reason, health care rankings have moved from outcome-based rankings to process-based rankings. For instance, the California Report Card ranks insurance plans by such factors as whether or not individuals with diabetes had an eye exam and the percentage of pregnant women who had a check-up visit 21-56 days after delivery.

One puzzling finding Kahn et al. (2007) encounters in their data is that ambulatory care centers with better process of care scores have patient with a worse health outcomes. Using a simple ordinary least squares (OLS) procedure would lead to the erroneous conclusion that more care leads to worse health. Of course, individuals who are sicker are specifically the patients who need to undergo the most procedures.

To control for this problem, Kahn and co-authors use an instrument variables method. The independent variable—the process of care variables—is instrumented with a structure of care variable. The structure or care is defined in the data by a set of medical organization dummy variables. This IV estimation technique will provide unbiased, precise estimates if the medical organization dummies are correlated with the process of care, but the structure of care only affects health outcomes as mediated by the process of care. I believe that this is a reasonable assumption.

Using this methodology, the authors do in fact find that better processes lead to better health outcome. Moving a patient from a process of care score in the lower quartile to a process of care score in the highest quartile will lead to approximately a 10% increase in the PCS health score.

While the conclusion of this paper seems obvious—better process of care scores lead to better health outcome—the authors have done a yeoman’s job of proving this empirically. Further, the paper casts doubt upon the conclusions from other studies which use OLS regressions to compare health interventions and health outcomes.

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