January 2008

You are currently browsing the monthly archive for January 2008.

PacifiCare fined $3.5 million for claims-processing violations

January 31, 2008 in Current Events, Health Insurance, Managed Care | Permalink

According to the San Diego Union Tribune, yesterday PacifiCare was fined $3.5 million and the California Department of Managed Health Care is seeking up to $1.3 billion in additional penalties for “130,000 alleged claims-processing violations…in California between July 1, 2005, and May 31, 2007.” PacifiCare is the second largest HMO in San Diego and the fourth largest health insurer in California.

These violations have prompted California Insurance Commissioner Steve Poizner begin an audit of the eight largest California health insurers to determine whether or not these companies have engaged in similar billing practice.

Joe Paduda of Managed Care Matters argues that the ruling is another piece of evidence which favors a  single-payer system.  Mr. Paduda states:

For those (including me) forever excoriating health systems and hospitals for their outrageous error rates, the debacle at Pacificare, the recently-acquired division of United Healthcare (one of my past employers) make the delivery sector look like a paragon of performance. I’m not overly surprised, as mergers involve systems conversions, the amalgamation of provider networks and contracts, and the shifting of work around to different call centers and processing locations. Duplicate staff positions are identified and people laid off, and when they walk out the door so does the expertise and understanding that enabled the operation to run smoothly.

The question remains, would a single-payer system perform better?  The government is not known as the paragon of efficiency.  With a single payer system, likely one of two things will happen:

  • Government administrators will make claims processing errors just as health insurance administrators do now, or
  • government administrators will deny less claims erroneously, but this will likely coincide with the acceptance of more unnecessary or false claims, thus increasing overall health care costs.

A single payer system may lead to improved claims processing.  However, for anyone to be convinced that a single payer system is the way to go, one must not only show that the present system is flawed, but that a single payer system is a significant improvement.

Tags:

Insurance Markets and Advantageous Selection

January 30, 2008 in Asymmetric Information, Health Insurance, Information | 5 comments

Adverse selection is often seen as a major impediment to the efficient functioning of insurance markets. Rothschild and Stiglitz (1976) create a model where high risk people buy full insurance while low risk individuals buy partial insurance. Yet empirically, one finds that in some insurance markets, low risk individuals purchase more insurance than high risk individuals.

An NBER working paper by Cutler, Finkelstein and McGarry (2008) claims that preference heterogeneity may explain this phenomenon. If low-risk individuals also have a stronger risk aversion preferences, than they may buy more insurance than a high-risk individual who has risk loving preferences. This work is an extension of the Finkelstein and McGarry (AER 2006) article discussed in one of my earlier blog posts.

Using data from the Health and Retirement Study (HRS), the authors measure risk tolerance using the following variables: smoking, having 3+ alcoholic drinks per day, job-based mortality risk, receipt of preventive health services, and seat belt usage. The authors find a negative relationship between individuals who engage in risky behavior (i.e., smoking, drinking, and those working in a high-risk occupation) and the percent who purchase various types of insurance, and a positive relationship between those engage in risk reducing behavior (i.e., preventive medical care, seat belt usage) and the purchase of insurance.

  Smoking Drinking Job Risk Prev. care Seat belt
Life Ins - - - + +
Annuity - o - + +
Long-term care o o - + +
Medigap - o - + +
Health Ins - - - + +
           

In the above chart, ‘+’ represents a positive statistically significant correlation, ‘-’ represents a negative statistically significant correlation, and o indicates that the relationship is not statistically significant.

The authors can also measure risk preferences based on respondents answers to income gamble questions. There is a weak relationship between risk preferences and risk behavior however.

The authors confirm that risk behavior lead to an increased probability of adverse events which would be covered by insurance. For instance, smoking increases mortality which would lead to an earlier life insurance payout. Increased preventive health activities decrease the probability of a nursing home stay.

Thus the authors conclude the following:

Our analysis yields two main findings. First, in all five markets, we find that individuals who engage in what are commonly thought of as risky behaviors (smoking, drinking, or prior employment in jobs with higher mortality rates) or who do not take measures to thought to reduce risk (preventive health activities or wearing of a seat belt) are systematically less likely to hold each of these insurance products. Second, we find that these same individuals tend to have higher expected claims for life insurance and long term care insurance, but lower expected claims for annuities; for Medigap and acute health insurance, there is no systematic relationship between the behavior measures and expected claims.

These results can help to explain the puzzle of insurance we started with: why is adverse selection not more common? In annuity markets, there is clear evidence of adverse selection: people who live longer are more likely to buy insurance. The standard adverse selection model is one explanation for this, but so is variation in risk tolerance; people who have less risky behaviors live longer and are more likely to buy annuities. In life insurance, our results suggest that differential risk tolerance can help explain why people with lower mortality rates have more insurance. Similarly, in the case of long-term care insurance, people who use more preventive care or are more likely to wear seat belts buy insurance more readily but also stay out of nursing homes.

Cavalcade of Risk #44

January 30, 2008 in Carnivals | Permalink

The latest edition of the Cavalcade of Risk is up at The Digerati Life.

Kaiser Online

January 29, 2008 in Current Events, Healthcare IT | Permalink

The Sacramento Business Journal has an interesting article (“Better communication…“) on Kaiser Permanente’s online system for patients called “KP HealthConnect.”  The system allows patients to schedule appointments, refill prescriptions, view lab results and email doctors.

Flat Tax – Part II

January 29, 2008 in Taxes | Permalink

Earlier this month, I wrote about how the flat tax has been gaining popularity in Russia and Eastern Europe.  It seems that businesses like the flat tax as well.

The Cato-at-Liberty blog notes (“…Losing Business to Flat Tax Neighbors…“) that many businesses are leaving ‘high tax-Hungary’ for its flat tax neighbors.  According to a Budapest Times  story,”flat tax is now the preferred system among the post-communist economies of Central and Eastern Europe. Is Hungary – already suffering the lowest rate of economic growth of the new EU member states – in danger of being left behind?…Thousands of Hungarian companies have already relocated their headquarters to Hungarian-speaking southern Slovakia – not only are taxes lower, but accounting has been made child’s play.”

Why do people like the flat tax so much?  The reason is that it is simple, fair, and decreases tax evasion.  The  flat tax is “…a simple, low-rate tax which is easy to collect and difficult to evade is likely to raise more money than a high-rate tax system that is full of loopholes and which nobody fully understands.”

Score one for economists Robert Hall and Alvin Rabushka who have consulted extensively in designing the flat tax systems in Eastern Europe.

Tags:

2008 State of the Union

January 29, 2008 in Current Events | Permalink

In President Bush’s 2008 State of the Union address, health care issues were mentioned, but did not play a prominent role.  Whitehouse.gov has the full State of the Union transcript.

State of the Union: Summary of Healthcare Issues Addressed

Bush reiterated his earlier reform proposals to end the tax deductibility of employer-provided health insurance and to expand health savings account yet no.

“To build a future of quality health care, we must trust patients and doctors to make medical decisions and empower them with better information and better options. We share a common goal: making health care more affordable and accessible for all Americans. (Applause.) The best way to achieve that goal is by expanding consumer choice, not government control. (Applause.) So I have proposed ending the bias in the tax code against those who do not get their health insurance through their employer. This one reform would put private coverage within reach for millions, and I call on the Congress to pass it this year. (Applause.)

The Congress must also expand health savings accounts, create Association Health Plans for small businesses, promote health information technology, and confront the epidemic of junk medical lawsuits. (Applause.) With all these steps, we will help ensure that decisions about your medical care are made in the privacy of your doctor’s office — not in the halls of Congress. (Applause.) ”

Bush also discussed the need to increase funding for basic research:

“On matters of life and science, we must trust in the innovative spirit of medical researchers and empower them to discover new treatments while respecting moral boundaries. In November, we witnessed a landmark achievement when scientists discovered a way to reprogram adult skin cells to act like embryonic stem cells. This breakthrough has the potential to move us beyond the divisive debates of the past by extending the frontiers of medicine without the destruction of human life. (Applause.)

So we’re expanding funding for this type of ethical medical research. And as we explore promising avenues of research, we must also ensure that all life is treated with the dignity it deserves. And so I call on Congress to pass legislation that bans unethical practices such as the buying, selling, patenting, or cloning of human life. (Applause.)”

President Bush also perceptively mentioned that entitlement such as Social Security, Medicare and Medicaid will eat up more and more of the federal budget as time passes and will necessitate large tax increases, benefit cuts, or an increase in the deficit, yet no new concrete solutions were proposed in the speech.

The final health care issue mentioned was President Bush’s desire to “double our initial commitment to fighting HIV/AIDS by approving an additional $30 billion over the next five years.”

Healthcare Economist commentary

The Healthcare Policy and Marketplace Review notes that none of Bush’s 2007 healthcare reform proposals (e.g.: standard tax deduction for health insurance, expand Health Savings Accounts, medical liability reform) were enacted so why would this year be any different?  It is likely that none of the 2008 proposals will be enacted as well.  With a new president set to take office in less than a year, there is little chance of wholesale reform.

I do agree that employer-provided and individually purchased insurance should be treated similarly, but offering tax deductions for both is not the answer.  The tax deduction is more beneficial for individuals with a higher marginal tax rate (the rich) and thus the tax deduction will most those who need it least.  Instead, we should end the tax deductibility of health insurance completely.  A flat rate subsidy or voucher for every individual (or possibly a risk-adjusted subsidy based on the indivdidual’s age and sex) would make more sense.

Conceptually, I am in favor of health savings accounts, but not as they currently are used.  HSA are simply a tax deduction mechanism for those with sufficient wealth and liquidity.  Poor individuals who need more liquid asset will not be able to take advantage of the HSA.  Singapore has a mandatory HSA in which funds are automatically are deducted from one’s checking account.  I am generally not in favor of mandatory saving, but this Singaporean example is intriguing and fairly egalitarian.

I do support President Bush’s proposal for more funds for basic science research and HIV/AIDS treatment.

It will be Barak Obama, Hilary Clinton, John McCain, Mitt Romney or some other presidential candidate who will have the opportunity to institute significant health care reform because this will not happen during the final year of the Bush presidency.

Tags:

Do political parties matter?

January 28, 2008 in Economics - General | Permalink

What happens when your the government is run by those tax-and-spend, dovish, universal health care loving, welfare promoting big government Democrats? Is there a difference when the low tax, hawkish, drug company pawns, anti-equality, small government Republicans take over? Few would question that there are significant ideological differences between the two parties and that federal and state elections have a large impact on the direction this country will take. But do parties matter for local elections?

This is the question analyzed by Ferreira and Gyourko in their 2007 NBER working paper. The authors use a regression discontinuity frame work (à la Lee 2001, Lee 2007) to analyze the outcome of 4,543 elections in 413 cities between 1950 and 2005. The authors find that on the local level, party labels do not affect 1) the size of government, 2) the allocation of spending, or 3) crime rates. This is true despite the fact that the incumbent has a large political advantage.

Why would this be the case. The authors argue that Tiebout sorting can lead to fairly homogeneous preferences among residents. Thus, when mayors run for office, there is less room for idealism. Further, ‘big ticket’ questions such as abortion, national defense spending, and foreign policy are not decided on the local level and these ideological issues–which often dominate federal elections–are not important in national elections. For instance, the Republicans in general may be against allowing illegal immigrants to obtain citizenship, but New York elected two Republican mayors (Guiliani and Bloomberg) who were necessarily ‘pro-immigrant’ due to a constituency made up of many first and second generation immigrants.

Patents in India

January 25, 2008 in Pharmaceuticals | 1 comment

The enforcement of intellectual property rights (IPR) in less developed countries is currently a topic of much public debate. Whether it is protecting the copyrights of Western recording artists or preventing `copycat’ technology goods, OECD countries are attempting to compel less developed countries (LDCs) to enforce IPR in their country. No area of IPR enforcement is more controversial, however, than patent protection for pharmaceutical drugs. In the 1995 Uruguay round of the World Trade Organization talks (WTO) the Trade Related Intellectual Property Rights (TRIPS) agreement was reached. TRIPS specifies that all WTO members must enforce product patents in all fields. While on paper this has occurred, in many countries pharmaceutical patent protection is either not enforced or—as in India—it is explicitly excluded from the TRIPS agreement.

In their 2003 NBER working paper, Chaudhuri, Goldberg and Jia (CGJ) attempt to measure the welfare effects of pharmaceutical patent enforcement in India for the anti-bacterial category fluoroquinolones. The main value of the paper is that the welfare effects are calculated using estimated parameters from retail pharmaceutical audits performed by an Indian market research firm. In most prior studies on LDCs, welfare effects were estimated either in a purely theoretical framework with assumed parameters or employing estimated elasticities from studies on developing countries. While this study provides an interesting case study that can help researchers understand the health care market in LDCs, the authors examination of the welfare effects of IPR occurs in a static setting. Patents are inherently inefficient in the short-run, and Chaudhuri, Goldberg, and Jia’s findings of significant welfare losses are hardly surprising since dynamic innovation effects are not taken into account. Despite these flaws, the paper does give future researchers a base upon which to build dynamic models in the future.

The main finding of the CGJ paper is the patent protection in the fluoroquinolone product market reduces welfare dramatically. The authors claim that if patent production was introduced into India, consumer surplus would drop by 32 billion rupees ($713m USD), domestic profits would drop by 2.3 billion rupees ($50m USD) and foreign producers would only gain about 2.6 billion rupees ($57m USD). While, this claim is eminently believable, the result is far from surprising. In all settings, patents create rents for the firms which hold them; thus it is always welfare improving to eliminate patents in the short run. What the paper mostly ignores is the dynamic effects in which patents act as an incentive for innovation.

Ignoring dynamic effects is acceptable using only very restrictive conditions. India may represent such a small market that western firms would have no incentive to perform R&D for cures for India specific diseases regardless of if patent protection is enforced or not. Further, India may be so poor that no one would purchase the drug at patent-protected world prices. If the only profitable price to sell drugs in India is below the world price, Indian nationals would have an arbitrage opportunity on the world market and worldwide profits of the patent-holding firm would be eroded. Finally, without patent protection, firms may avoid selling in India for fear of local firms creating generic drugs.


Each of these conditions is most likely not satisfied in India. While India does have a low GDP per capita (currently 154th in the world), it is still the fourth largest economy due to its sizable population. Firms may be wary of selling at below world prices since their goal is to maximize worldwide profits and not simply to optimize profits within the Indian market. In this case, the equilibrium simply states that multinationals should charge the world price. Development of generic drugs is a valid worry for western firms, but with the advent of the internet and global professional networks, Indian firms are able to create generic drugs whether or not a Western drug firm sells in India. In fact, the CGJ paper states that India is the leading producer of generic drugs in terms of volume. For all of these reasons, the CGJ paper’s lack of attention to the R&D incentives patents provide creates great doubts as to the validity of any long-run welfare estimation.

CJG find evidence that a domestic product is often a better substitute for another domestically produced product using a different molecule than it is for a foreign-produced produce using the same molecule. CJG claim that distribution networks may explain this finding, but a more realistic conclusion is that doctors who recommend domestically produced ciprofloxacin may also recommend domestically produced norfloxacin. One difficulty in modeling health care demand is that patients do not have perfect information and purchasing decisions are heavily influenced by doctor recommendations. Further research could explore why domestic drugs using different molecules are good substitutes taking into account informational asymmetries.

The major finding of this paper is that patents create significant welfare losses, most of which occurs on the consumer side from decreased product variety. This is not a novel finding since patents by definition create distortionary monopoly rents for its holders at the cost of consumer surplus. The key research question to answer in this field is to estimate the elasticity of R&D for multinational and local firms with respect to LDC patent protection. Since the Indian government knows the disease burden of its country, offering prize money for the discovery of a vaccine or treatment for a specific disease would likely be Pareto improving compared to patent enforcement. The Rockefeller Foundation has pursued this tract and has posted an award for a diagnostic test for chlamydia and gonorrhea. It still remains an open question whether or not pharmaceutical patents improve welfare, and future studies analyzing the health care market should examine whether patents, prizes, research contracts or no IPR enforcement whatsoever is the best way to improve welfare in LDCs.

Tags: ,

Too few US adults get their shots

January 24, 2008 in Current Events, Vaccinations | Permalink

Reuters reports (“Too few…“) on the problem that U.S. adults not receiving necessary vaccines.

“Only 2 percent of U.S. adults last year got a shot that can protect them from painful bouts of shingles, health officials said on Wednesday in a study that shows what they call unacceptably low rates of adult vaccination against a range of diseases.

Adults also failed to get vaccines that can protect them against tetanus, whooping cough and even influenza — despite years of campaigning, the U.S. Centers for Disease Control and Prevention [CDC] found.”

There are a variety of vaccines and different vaccines only apply to certain demographic groups based on their age, sex and risk factors. Some risk factors are obvious (e.g.: being HIV positive, having sex with prostitutes) but others are more mundate (e.g.: working in the healthcare or public safety sectors, being a first-year college student, traveling abroad).
Here at the Healthcare Economist, I don’t just point out potential problems, I offer solutions:

If you do not know which vaccines you need to get, go to the CDC Immunization website and TAKE THIS QUIZ. Childhood immunization schedules are also available.

Tags:

Health Wonk Review

January 24, 2008 in Carnivals | Permalink

The latest edition of the Health Wonk Review is up at e-CareManagement.

« Older entries