December 2007

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How much uncompensated care do doctors provide? Less than zero.

December 17, 2007 in Physician Compensation | 4 comments

Doctors are often perceived as benevolent professionals. They are hard-working individuals who extend their largesse by giving away free medical care to those in need. Studies by Cunningham and May (2006) and the American Hospital Association find that doctors provide uncompensated care equal to 6.3% or 5.6% of their cots annually respectively.

A recent Journal of Health Economics article by Gruber and Rodriguez concludes that these figures may be overstated. In fact, the study finds that physicians provide negative amounts of uncompensated care to the uninsured.

How is this possible? While it is true that doctors do give away free care to the uninsured and that many of those without insurance do not pay their bills, the uninsured patient often pay a large portion of the list price whereas those who have insurance receive a negotiated lower price. Thus, the authors find that “the majority of physicians actually make money, on net on their uninsured patients…12-14% of physicians found their uninsured patients more than twice as profitable as their insured patients; that is the net payments from the uninsured were more than twice the expected payments from the insured patients.”

Even when the authors ignore the higher list prices the uninsured pay, they still find that only about 1% of total revenues are given away as free care to the uninsured. Much of this amount, however, is due to non-payment by the patients rather than free care given away by the physicians.

Medicine may be a business after all.

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The Economics of Alcohol Control

December 14, 2007 in Books | Permalink

I recently finished reading a very through, level-headed book analyzing the Economics of Alcohol Policy. The book is titled Paying the Tab: The costs and benefits of Alcohol Control by Philip Cook. The book focuses mostly on the costs of alcohol consumption. This is due to the fact that it is much easier to estimate the costs of alcohol consumption (e.g.: drunk driving, spousal abuse, health affects, homicide) than the benefits (e.g.: the enjoyment from drinking, possible health benefits from moderate drinking).

Cook wisely notes that alcohol research must be conducted “with boldness tempered with humility.” Data on alcohol consumption is notoriously unreliable. Individuals tend to underestimate their alcohol consumption on surveys. Wholesale alcohol tax records are more accurate but “takes no account of wastage, illicit production for sale (moonshining), or production at home.”

There is little doubt that alcohol is one of the biggest public health issues in the U.S. Alcohol costs include motor vehicle fatalities, increased homicide rates, and health issues such as cirrhosis. The CDC estimated that “63% of all potential lives lost due to drinking were due to acute effects of drinking, namely injuries resulting from assault, suicide, traffic accidents, poisoning, and so forth.”

So why do people drink? Some people enjoy the taste of a fine wine; others enjoy the intoxication of alcohol. According to journalist Pete Hamill, alcohol offers “confidence for the shy, clarity for the uncertain, solace to the wounded and lonely, and above all, the elusive promise of friendship and love.”

According to Cook, the best manner in which to balance these costs and benefits is to impose a higher alcohol tax. This policy has been shown in many studies that when the cost of alcohol increases, alcohol consumption decreases. Taxing is attractive because 1) it still allows individuals the choice to consume if they please, 2) it reduces overall alcohol consumptions and the adverse consequences that come with increased alcohol consumption and 3) it raises money for the government. One problem with all taxes, however, is that a black market may emerge to avoid the tax.

Further, one can think of the tax as a “user fee” that alcohol drinkers must pay in order to pay for the externalities alcohol consumption creates (e.g.: drunk driving, costs to public health care entities). Other regulations, such as zero tolerance drinking and driving laws for minors, have been shown to be effective. On the other hand, increase jail time for DUIs and more punishments for establishments which serve minors do not serve to decrease alcohol consumption.

Cook does a wonderful job of showing allowing anyone to drink any time they wish is not ideal. Some restrictions are welfare improving. Yet complete Prohibition is not the answer either. Neither libertarians nor tee-totalers are completely in the right.

In 1948, Mississippi Judge Noah Sweat summed up the arguments for and against alcohol:

If when you say ‘whisky’ you mean the devil’s brew, the poison scourge, the bloody monster that defiles innocence, dethrones reason, destroys the home, creates misery and poverty…–then certainly I am against it.

But, if when you say ‘whisky’ you mean the oil of conversation, the philosophic wine, the ale that is consumed when good fellows get together, that puts a song in their hearts and laughter on their lips, and the warm glow of contentment in their eyes…if you mean the drink that enables a man to magnify his joy, and his happiness, and to forget, if only for a little while, life’s great tragedies and heartaches and sorrow…–then certainly I am for it.

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Quotation of the day

December 14, 2007 in Miscellaneous | Permalink

“Getting old ain’t for sissies.”

Lillian Paley, my 95 year-old grandmother

 

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Importation and Innovation

December 13, 2007 in Pharmaceuticals | Permalink

Would drug importation from countries such as Canada be welfare improving for the U.S.? In the short run, the answer is yes. Lower prices will made pharmaceuticals more affordable and more pharmaceutical consumption closer to the static equilibrium level. In the long run, however, lower drug company profits may lead to less innovation in terms of new chemical compounds brought to market.

Frank Lichtenberg tries to test whether or not drug importation will decrease pharmaceutical innovation by using disease incidence (i.e.: the market size for the drug to be created) as a pseudo-experiment for what would happen under a drug importation scheme.

Lichtenberg looks specifically at chemotherapy drugs and finds that the elasticity of the number of chemotherapy regimens with respect to the number of cancer cases is 0.53. In words, “a 10% decline in drug prices would therefore be likely to cause at least a 5-6% decline in pharmaceutical innovation.”

Yet is market size truly a good proxy for what will happen if pharmaceutical trade barriers are destroyed? I would guess not. If pharmaceutical companies care at all about patient health and not just profits, then it is more likely that these companies will try to find cures for diseases where a large number of people are affected. Even if drug companies are profit maximizing, creating a cure for a serious, high-incidence disease (such as cancer) may have positive reputational effects for the company, thus enabling them to increase the price or increase the quantity sold of other drugs.

Further, the number of drugs that treat a given disease may be less important than whether or not there is at least one drug which does a good job of treatment. Copycat drugs may not be welfare enhancing, but would certainly be positively correlated with market size.

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Health Wonk Review

December 12, 2007 in Carnivals | Permalink

The Health Wonk Review is up at David Harlow’s HealthBlawg.

Of particular interest is the Sentinel Effect’s conversation with Harvard health economist David Cutler.

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Subprime Lending

December 12, 2007 in Economics - General | Permalink

One of the biggest news stories this year is the collapse of the subprime mortgage lending market. Why did this happen? How much do we really know about subprime lending?

A working paper by William Adams, Liran Einav and Jonathan Levin examines the subprime market for automobile loans. The authors find that liquidity constraints are a major force in shaping the subprime loan market. They find that car loans spike in January through March. Why is this? Poor individuals often take out a loan against their tax rebates. These rebates can be very high–up to $4500–and these individuals will use these rebates to help finance a car purchase.

Finance charges for these loans are very high. Interest rates usually surpass 20% and often at the state-mandated 30% interest cap. A $11,000 loan paid off over 42 months would incur $6000 of finance charges.

Yet it seems that loan demand within the subprime market is not very responsive to interest rates. It is, however, much more responsive to the amount of the down payment.

We estimate that a 100 dollar increase in the minimum down payment reduces the probability that an applicant will purchase by 0.0301, while a 100 dollar increase in the car price reduces the purchase probability by only 0.0034. That is, a 100 dollar increase in the minimum down payment has the same e¤ect as a 900 dollar increase in car price. This can still be explained in the absence of liquidity constraints, but it requires a much higher annual discount rate of 427 percent.

The authors found evidence of both moral hazard and adverse selection in the subprime market. Moral Hazard means that individuals are more likely to default on large loans. Adverse selection occurs when high risk borrowers desire large loans. The authors find that when a loan amount increases $1000, the default rate increases 24%. Sixteen percentage points is due to moral hazard and the rest is due to adverse selection.

Are there any ways to mitigate these market failure problems? The authors find that “risk-based minimum payments play a substantial role in mitigating adverse selection in financing choices.” These factors lead to the observation that “in practice, observably risky buyers end up with smaller rather than larger loans because they face higher down payment requirements.” Modern credit scores give the lender more information regarding the credit-worthiness of the borrower and help to match high-risk borrowers with smaller loans.

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Doctors figure out what house movers, wedding planners, and tax accountats figured out ages ago

December 11, 2007 in Current Events, Hospitals, Information, Medical Studies | Permalink

A New Yorker article (“The Checklist“) recounts Peter Pronovost’s efforts to improve the delivery of medical care. One of his simplest ideas was to invent a 5 step checklist to reduce line infections:

Doctors are supposed to (1) wash their hands with soap, (2) clean the patient’s skin with chlorhexidine antiseptic, (3) put sterile drapes over the entire patient, (4) wear a sterile mask, hat, gown, and gloves, and (5) put a sterile dressing over the catheter site once the line is in.

All doctors know these 5 steps, but in the distraction-filled world of the I.C.U., it is very easy for the physician to forget any one of the steps. Dr. Pronovost’s checklist idea has extended to other treatment areas as well. Yet he believes that Americans are still not getting serious about treating medical care as a science.

“The fundamental problem with the quality of American medicine is that we’ve failed to view delivery of health care as a science. The tasks of medical science fall into three buckets. One is understanding disease biology. One is finding effective therapies. And one is insuring those therapies are delivered effectively. That third bucket has been almost totally ignored by research funders, government, and academia. It’s viewed as the art of medicine. That’s a mistake, a huge mistake. And from a taxpayer’s perspective it’s outrageous.â€? We have a thirty-billion-dollar-a-year National Institutes of Health, he pointed out, which has been a remarkable powerhouse of discovery. But we have no billion-dollar National Institute of Health Care Delivery studying how best to incorporate those discoveries into daily practice.

Checklists are not the solution to every problem.  A large portion of medicine deals with complex condition with large uncertainties and many disease interactions.  Further, it may be more difficult for an insurance company to institute checklists than a hospital manager or someone further down the chain of command.  Nevertheless, standardization in medicine should help to dramatically improve quality.

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Medicare Part D and Switching Costs

December 10, 2007 in Economics - General, Medicaid/Medicare, Pharmaceuticals | Permalink

It’s decision time for Medicare Part D purchasers. Seniors have until December 31st to make their Part D choice and this decision is not a painless one.

The Marketplace Money radio program recently reported (‘Deciphering Part D‘) that “the most popular policies have increased their prices substantially, especially Humana and United Healthcare, the ones that most of the people are in. Some of the policies’ prices have even doubled. So even though the average prices have only increased by about 14 percent, if you’re in one of the more popular plans, it’s really important to look at what your costs will be next year because you may want to change to a different policy.”

How can some plans double their prices yet still retain customers? Neo-classical economists would say that if the price of insurance at one company would rise, all seniors would switch to the cheaper plan and there would be a competitive equilibrium at the market price. Yet in the presence of switching costs, the insurance companies may be able to raise prices significantly without losing many customers.

Switching costs for Medicare Part D include the time consuming process of selecting from the hundreds of Medicare Part D plans. Children of seniors may also have to aid their parents in selecting a plan. Thus, if the price of my Part D insurance went up 16% while the rest of the plans went up 14%, I may decide to pay the higher price since I do not want to incur the search costs of finding a new Medicare Part D plan.

Companies such as Humana and UnitedHealth knew this would be the case. In the first year of Part D, these companies likely under-priced their insurance plans to attract customers. Once the customers had settled on their policies, they could more easily raise prices.

Despite the market inefficiencies caused by switching costs, this is not a reason to completely abandon a free market system. If the price increases of an individual company get too high, they will eventually outweigh the switching cost and the senior will move to a new plan. Further, information technology advances can help reduce switching costs. For instance, Medicare has a Prescription Drug Plan Finder that helps to estimate the cost of different plans depending on which prescriptions you are taking.

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N.Y. Times 10 Best Books of 2007

December 10, 2007 in Books | Permalink

The New York Times came out with its list of the Ten Best Books of 2007 on Sunday.  Here’s the list.

Quality Improvement Tools & Techniques

December 7, 2007 in Books, Textbook Review | Permalink

For those of you in the operations research side of the medical care world, you may recognize an interesting textbook by Peter Mears title Quality Improvement Tools and Techniques. The book is a good reference tool, but is a little difficult to slug through. It has so many graphs, outlines, quotations, that there is little room for text. The book gives classic B-school tools such as: a fishbone diagram, deployment charts, focus groups, benchmarking and customer needs mapping. For those with little statistical background, the book also explains in a simple, concise fashion how to construct pie and bar charts, histograms, radar charts, pareto diagrams and control charts. The book is somewhat out of date in that it does not give detailed explanations of how to perform these actions in a statistical program such as Excel.

Quality

Quality is a key component of customer (or patient) satisfaction with any service or product. In medical care, measuring quality is even more difficult than in other fields. There are three types of quality:

  • Perceived Quality: This is the customer’s (patient’s) personal belief as to the quality they receive.
  • Actual Quality: This is often measured by some quantitative metric (e.g.: defects per 100, number of breakdowns, ease of use). In the medical world, finding relevant metrics to measure performance is difficult. Often we can measure the amount of medical errors per 100 patients a physician makes, but this will not measure superior physician quality. Peer review is one way to measure actual quality, but since this is often done in a non-quantitative way, even most medical professionals are uncertain of quality of care they give.
  • Expected Quality: This is the quality level a customer expects. This is often influenced by marketing and word-of-mouth information. An example of differences in expected quality would be that someone with top notch health insurance coverage would likely expect a professional, sleek, expensive office setting in the San Diego area. If the same person had no health insurance and decided to go to Tijuana for medical care, their expected quality of care would likely be lower.

Taguchi Methods

Dr. Genichi Taguchi is a Japanese statistician and Deming Prize winner who has introduced a novel quality control system. Below I point out some of the highlights.

  1. Quality is measure by the total loss to society. What is the total loss to society? It contains 2 parts. First there is the cost to manufacture or provide the good to the consumer. Second, there is the cost of inferior quality. In the healthcare setting, simply reducing financial costs will be unsatisfying under the Taguchi methodology if quality of care is not at the same time maintained or improved.
  2. Continuous Quality Improvement and Cost Reduction are necessary. Did you hear that economists? Most economists analyze a problem in a fairly static setting. Technology parameters are taken as given and economists are able to derive an optimal solution for a given problem. This answer is less satisfying if you know that your parameter assumptions are relevant only in the very short run. Economists such as Schumpter and his notion of creative destruction are able to incorporate a ‘continuous improvement’ framework in their economic analysis.
  3. Quality improvement involves reducing variation. It is important to have a quality product all the time. This is done by reducing variation (e.g.: 6σ methodologies). This precept is very difficult to apply to medical care because of patient heterogeneity.
  4. Product and Process Design have a strong impact on quality. In service sectors, often product and process design are one and the same.

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