May 2008

NPR’s This American Life has a great episode (”The Giant Pool of Money“) explaining in a non-technical, entertaining manner how the “credit crunch” came upon us. The episode looks at all the parts of the mortgage-backed securities chain: home owners and borrowers, brokers, banks, rating agencies, Wall Street, and foreign and domestic investors.

A special program about the housing crisis produced in a special collaboration with NPR news. We explain it all to you. What does the housing crisis have to do with the turmoil on Wall street? Why did banks make half-million dollar loans to people without jobs or income? And why is everyone talking so much about the 1930s? It all comes back to the Giant Pool of Money.

Many studies have attempted to determine how the manner in which physicians are compensated by health insurance companies affects the quantity of medical care provided. Today I will summarize some seminal studies in this field.

Epstein, Begg and McNeil (NEJM 1986)

In this study, the authors examine whether or not there is a difference in the rate of ambulatory testing between physicians in a large fee-for-service (FFS) group and a large prepaid group. The physicians were internists who were caring for patients with uncomplicated hypertension. The authors found that 50% more electrocadriograms (EKGs) were obtained in the FFS group and 40% more chest radiographs were obtained in the FFS group [compared to the prepaid group]. There did not seem to be any difference in testing rates between FFS and prepaid doctors for blood counts and urinalyses. This is not surprising, however, because the profit physicians earned from EKGs and chest radiographs was significantly higher than the profit they made from each blood count or urinalysis. Further, the cost of preforming EKGs and chest radiographs was much higher than the cost to preform blood counts and urinalyses.

Thus, this study concludes that patient testing rates are different between FFS and prepaid doctors, but this effect is only observed for high cost and/or high margin ambulatory tests.

Newhouse and Marquis (JHR 1978)

Physicians may treat patients differently based on how the patient’s insurance company pays them. However, the patient base of most physicians includes a wide variety of health plans and thus it may be difficult to discriminate care levels by insurance type. The “norms hypothesis” predicts that physicians treat patients in accordance with the average or modal insurance coverage in a given metropolitan area. In other words, “the level of a community’s insurance coverage determines physician norms.” If this were true, it would imply that there would be significant variation in medical care quantities across geographic regions but very little variations by patient for each physician.

The authors use data from the RAND Health Insurance Study in Dayton, Ohio. The authors test whether or not the patients own insurance rate will affect hospital admissions, the length of a hospital stay or the number of physician office visits. The authors find no evidence that community-level coinsurance rate impact hospital admissions, while the patient’s own coinsurance rate significantly affects hospital admission. In the 1963 data, neither the community insurance variable nor individual insurance variable had any affect on the length of a hospital stay or the number of physician visits, however in the 1970 data, individual coinsurance rates had a large impact on the length of a hospital stay or the number of physician visits, while the community level coinsurance rate had no impact on these dependent variables.

Hellerstein (RAND J Econ 1998)

Most health policy wonks believe we could significantly reduce health care costs without sacrificing quality by using more generic drugs. Many states have passed “permissive substitution laws” which allow pharmacists to substitute generic drugs in place of name-brand ones unless the physician explicitly instructs them not to do so. Other states use a “two-line” prescription method. With these prescription pads, doctors can sign their name in one of two spots: the first indicates that generic substitution is allowed and the other indicates that the brand name option is medically necessary.

Hellerstein uses data from the 1989 NAMCS, and finds that “30% of the unobserved (residual) variance in the prescription choice is physician-specific, rather than patient specific.” Does an individual’s health insurance influence the physician’s prescribing behavior? This paper finds that an individual’s health insurance does not influence prescribing decisions. However, “conditional on a patient’s insurance status, a patient who switches to a physician with a marginally greater fraction of HMO patients is 10.12% more likely to receive a generically written prescription.”

Summary

Why does the composition of the physician’s patient base seem to matter for Hellerstein (1998), but not for Marquis and Newhouse (1978) or Epstein, Begg and McNeil (NEJM 1986)? The main reason is likely that Hellerstein examines medical care in which physician do not receive any compensation. Physicians receive no more or less revenue from prescribing name brand compared to generic drugs and thus have no incentive to find out how they are being paid by each individual’s insurance company. On the other hand, Marquis and Newhouse found that hospital admissions, the length of the hospital stay, and the number of office visits is affected by an indvidiual’s health insurance variables since this type of medical care is high margin and high cost. Similarly, Epstein, Begg and McNeil (1986) found that how an individual’s insurance company compensates physicians matters for high margin, high cost EKGs and chest radiographs, but does not seem to matter for low margin, low cost blood counts and urinalyses.

• Epstein AM, Begg CB, McNeil BJ. (1986) “The use of ambulatory testing in prepaid and fee-for-service group practices: Relation to perceived profitability.” N Engl J Med. 314(17):1089-94.
• Newhouse JP, Marquis MS. (1978) “The norms hypothesis and the demand for medical care.” J Hum Resour. 13 Suppl:159-82.
• Judith K. Hellerstein (1998) “The Importance of the Physician in the Generic versus Trade-Name Prescription Decision,” The RAND Journal of Economics, Vol. 29, No. 1, pp. 108-136 .

Many patients have an idealized view that physicians customize their treatments for each individual patient.  For instance, do physicians tailor prescription dosage based on individual characteristics and responses over time, or will they simple prescribe the standard dosage?

A paper by Frank and Zeckhuaser (JHE 2007) find that norm-following behavior (rather than patient-by-patient customization) is very prevalent.  The authors claim that there are 4 reasons why a physician would strictly adhere to a professional norm rather than customizing their treatments to maximize the quality of care for each individual patient.

1. Communication costs. In order to prescribe treatment outside of the norm, the physician must communicate their reasons for doing this to the patient.  If patients have preconceived notions of how they want to be treated, physicians may have to expend significant effort to convince the patient that this individualized treatment is the best way to proceed.
2. Cognition costs. As every person knows, exerting mental effort is costly.  Physicians can cut down on the cost of diagnosis by using heuristics.  These shortcuts may not be optimal for every patient, but they generally “do a reasonable job for a broad array of cases” and also cut down on the physicians mental computing costs.
3. Coordination costs.  Physicians often have to work with other physicians.  The more physicians customize their treatment, the more difficult it is to communicate this alteration in care levels with specialists and thus more difficult to coordinate care.
4. Capability costs.  Physicians are trained in certain treatments.  If a new, better treatment comes along, the physician has a choice of either 1) doing the old treatment, 2) learning the new treatment poorly and performing the new treatment, or 3) learning the new treatment well and performing the new treatment.  Choice (3) may be optimal from the patient’s point of view, but for the physician it may involve significant fixed costs involved in acquiring the human capital necessary to preform the new procedure.  If the physician decides not to incur the cost to learn the new technique well, it may in fact be optimal to choose option (1) over option (2) and thus old techniques will persist.

While these four costs will push physicians towards following norms, superior patient outcomes may compel doctors to customize their care.

Results

Frank and Zeckhuaser use data from the 2004 NAMCS to determine whether or not physicians customize the length of the patient visit or prescribing behavior.  The authors find that customization in prescribing behavior occurs most frequently for patients with chronic conditions.  This is likely because altering the “standard” treatment has more benefit for ‘repeat-visit’ patients than those with simply an acute illness.  However, race, gender, number of physician visits and insurance type do not affect prescribing behavior.

Regarding length of the office visit, the most important factor is whether or not the patient is a new patient.  Individuals who were self-pay had shorter visits while those with had Medicare insurance had longer visits, but these results were fairly small in magnitude.  Twenty-eight percent of the differences in the length of an office visit was due to physician specific factors.

Overall, the evidence shows that physicians often follow norms rather than customize care.  Also, it seems that the manner in which physicians are paid has no bearing on how they treat patients.  However, this is likely due to the fact that 1) it is very difficult to customize visit length especially when physicians are dealing with eleven managed care contracts on average [see other evidence in "Time Allocation" post on Tai-Seale et al. (2007) or the "Doctors Behave" post on Glied and Zivin (2002)], and 2) physicians do not receive compensation for pharmaceuticals and thus have no financial incentive to tailor treatment to patients based on their individual insurance.

My “Operating on Commission” paper does find that physicians tailor surgery treatment based on how they are compensated, but this is likely because 1) these are high margin procedures where it is worth the physicians time to find out how they are being paid, and 2) unlike pharmaceuticals, the surgeon is the one who receives the compensation directly.

• Richard G. Frank and Richard J. Zeckhauser (2007) “Custom-made versus ready-to-wear treatments: Behavioral propensities in physicians’ choices” Journal of Health Economics, Volume 26, Issue 6, Pages 1101-1127.
• Tai-Seale M, McGuire TG, Zhang, W (2007) “Time Allocation in Primary Care Office Visits” HSR vol 42(5), pp. 1871-1894.
• Sherry Glied and Joshua Graff Zivin (2002) “How do doctors behave when some (but not all) of their patients are in managed care?” Journal of Health Economics, Volume 21, Issue 2, Pages 337-353.

Economist Greg Mankiw reveals the answer in the “Trade: why not?” post on The Free Exchange blog.

At least Joe Paduda thinks so.  His post today gives an example from the employer GTE.  GTE was worried about ER and inpatient admissions rate for children with asthma.  Why?  Because employees who were single parents would miss work to take care of their children when they were sick.

Mr. Paduda’s argues convincingly that employers care about the health of their employees in order that they come to work and make profit for the company.   Of course, individuals also have an incentive to maintain their health for personal reasons.  Employers may be more worried about employees missing work if they are paid on a salaried basis; the cost of the lost time at work accrues mostly to the company.  On the other hand, if an employee paid on an hourly basis without sick days, then the cost of missing work may fall more upon the employees.

The argument that employers prefer insurance benefits which return individuals to work and do not encourage them to stay at home is a key point.  However, employers likely care more about maintaining healthy people’s health.  This way they won’t miss work and the firm can recoup the training costs they invested in the employee.  On the other hand, if an employee is stricken with a long-term, debilitating disease, the employer would prefer to get rid of the employee and not cover his medical costs whereas for the individual, the case of a drawn out, expensive, debilitating illness is exactly the reason they want insurance.

Thus, while there are many compelling reasons why insurance should be employment based (e.g., risk pooling, economies of scale, more choice than a single payer system), believing that employer’s can design a superior health insurance benefit schedule is not one of them.

Much of health care data is characterized by a large cluster of data at 0, and a right skewed distribution of the remaining outcomes. For instance, people who do not get sick generally use $0 of medical care. Those who do get sick, use a varying amount of medical care dollars, but there are a large number of outliers with extremely expensive medical care. How do health economists take these anomalies into account?

David Madden looks at two alternatives to correct for the shape of the distribution in his 2008 JHE paper: sample selection and two-part models. Zero consumption of medical can be caused from two different decisions: a participation decision and a consumption decision. For instance, in the case of smoking, individuals may decide not to smoke no matter how cheap cigarettes get (participation decision). On the other hand, some smokers may decide not to smoke during a given time period because cigarettes are very expensive or they have low income (consumption decision). Since people can not smoke negative cigarettes, there still may be a cluster of observations around zero.

Assume that individuals utility from participation is equal to w=α’Z + v. If w>0, then d=1, (the individual participates) and if w<0, then d=0, (the individual does not participate). For consumption, individuals will choose y**=max[0,y*]; y*= β’X + u. A general model can be written as follows:

• L₀ = Π₀ [1-P(v>-α'Z) P(u>-β'X |v>-α'Z)] Π₊ P(v>-α’Z) P(u > -β’X|v>-α’Z) g(y|v>-α’Z,u > -β’X)

If u and v are independent, then we have the Cragg model:

• L₁ =Π₀ [1-P(v>-α'Z) P(u>-β'X)] Π₊ P(v>-α’Z) P(u > -β’X) g(y|u > -β’X)

If we assume that the participation constraint dominates the consumption constraint (which is likely in the smoking example, but maybe not for drinking), then we have P(y*>0|d=1)=1 and g(y*|y*>0,d=1)=g(y*|d=1). This means that if you are a smoker you will have at least one cigarette per period. When the participation constraint dominates, we ignore the consumption decision and we have the following likelihood function which corresponds to the Heckman Selection model.

• L₂ =Π₀ [1-P(v>-α’Z) Π₊ P(v>-α’Z) g(y|v>-α’Z)

If independence is assumed, then we are left with probit for participation and OLS for consumption. This is the two part model:

• L₃ =Π₀ [1-P(v>-α’Z) Π₊ P(v>-α’Z) g(y)

Which of these models works best empirically?

Results

Madden looks at the fit of regressions trying to model smoking and drinking behavior using a wide variety of covariates. In general, the two-part model seems to be perform better in the data used for this study, but the author wisely notes that deciding between the Heckman selection and the two-part model should be done on a case-by-case basis.

• Madden, David (2008) “Sample selection versus two-part models revisited: The case of female smoking and drinking” Journal of Health Economics, 27(2): 300-307.

Vaccines work well because of an adjuvant. The adjuvant boosts immunity but physicians did not know how it worked until now. The Economist reports (”A shot in the dark not more“) that Stephanie Eisenbarth, Richard Flavell an co-authors have discovered that the adjuvant “works by stimulating bits of the immune system called NOD-like receptors.”

Why is this discovery important?

“The value of that is shown by another piece of news. This week GlaxoSmithKline, a big British drug company, won the European Union’s approval for a ‘pre-pandemic’ vaccine that promises protection against multiple strains of bird flu. This vaccine depends, according to Emmanuel Hanon, who helped develop it, on an oil-in-water-emulsion adjuvant so good that only a twentieth of the normal amount of antigen is needed. So how does this amazing adjuvant work? Dr Hanon admits that his team does not actually know.“

The Kaiser Family Foundation has a new BlogWatch feature.  Every Tuesday and Friday, the site will highlight some of the best health blogging on the net.  Check out the inaugural edition here.

My grandmother is 96 years old and incredibly lives on her own.  My mother drops off packages of food she prepares for my grandmother and gets her mail, but my grandmother still does her laundry and gets herself ready in the morning. Bringing in some help for her or moving her to an assisted living facility are options, but my grandmother loves her home, sees herself as fiercely independent, and a change would be difficult for her at this age.

Lately, however, it has been getting tougher for my grandmother to live on her own, which is why a New York Times article on high-tech elderly monitoring systems caught my attention.  The article talks about how some sons and daughters have installed motion sensors and a remote monitoring systems to check up on their aging parents.

“Sensors attached to the wall are able to register when Mrs. Trost [an elderly parent] gets out of bed and whether she stops at her medication dispenser, and to alert her daughters to any deviations from her routine that might indicate an accident or illness. The family is updated by electronic report every morning.”

This technology not only is beneficial for the elderly individual (who gets to stay in their home), and for their family (who can more quickly check up on their loved ones), but can also saved costs by delaying the time when the elderly are moved to an assisted living facility.  Elderly concerns with privacy is a problem and people (like my grandmother) would likely resent the monitoring…at least at first.

Nevertheless, as people around the world continue to live longer, monitoring technology can help keep the elderly in their homes and out of assisted living facilities.

Economists predict that longer life expectancy leads to more investment in education. For those who live a short time, sacrificing working years for education is not worthwhile if the payback period is short. For those with a longer life expectancy, an individual can reap the monetary rewards from education over a longer period of time.

An NBER working paper by Seema Jayachandran looks at a what happens to educational investment after there was a 70% reduction in maternal mortality risk in Sri Lanka. The decreased maternal mortality rate was due to a number of factors: an increase in the number of hospitals, clinics and health centers, an increase in the number of trained birth attendants, transportation improvements such as free ambulances, and increased adoption of western technologies such as sulfa drugs and penicillin. Further, there was significant success in eradicating malaria during this time. Also, most of the medical services were provided for free.

Jayachandran uses a difference-in-difference-in-difference (DDD) strategy. “The first difference is over time, since maternal mortality fell between 1946 and 1953. The second difference is across geographic areas; the magnitude of the MMR declines varied considerably across Sri Lanka’s 19 districts. The third difference is between genders; maternal mortality is quite unique among major causes of death in that it exclusively pertains to women.”

The results of the study are that the decline in “…maternal mortality risk over the sample period increased female life expectancy at age 15 by 4.1%, female literacy by 2.5%, and female years of education by 4.0%.”

• Seema Jayachandran (2008) “Life Expectancy and Human Capital Investments: Evidence From Maternal Mortality Declines” NBER WP #13947.

Living in an urban, pedestrian friendly area may compel individuals to walk more, and thus reduce the likelihood one is obese. Living in a suburban, car-dependent area makes walking less attractive and thus could increase obesity. Some studies have shown that individuals who live in the suburbs weigh more than individuals living in urban areas. Does living in the suburbs cause obesity?

The Vox EU website cites a paper (”Fat City“) that claims that urban sprawl is not to blame for increasing waistlines. The authors examine six years worth of data on 6000 people, 79% of whom changed addresses. They find that people who are more likely to be obese are more likely to move to sprawling neighbourhoods. However, those who moved from urban to suburban areas showed no additional weight change compared to individuals who moved from suburban to urban areas. It looks like a case of correlation not being the same as causation.

• HT: Free exchange.

To find out how “walkable” your neighborhood is, check out Walk Score.

There was this statistics student who, when driving his car, would always accelerate hard before coming to any junction, whizz straight over it , then slow down again once he’d got over it. One day, he took a passenger, who was understandably unnerved by his driving style, and asked him why he went so fast over junctions. The statistics student replied, “Well, statistically speaking, you are far more likely to have an accident at a junction, so I just make sure that I spend less time there.”

Maybe this isn’t the best way to minimize your risk. Our experts bloggers offer more profound risk advice in the 52nd edition of the Cavalcade of Risk.

Introduction to Risk (Baseball player, Nobel prize winner explain risk)

• For those interested in baseball, Rich Maltzman uses a baseball analogy to explain how people view risk in the A verse on risk article posted at Scope crêpe.
• The Cognition and Language Lab summarizes Daniel Kahneman’s Nobel-prize-winning model showing that “loss aversion” can better characterize how individuals react to risk.

Hot Jobs (Chief Risk Officer, Scuba Diver, Astronaut/Exterminator)

• With the world’s banks bleeding from their over-exposure to bone-headed investments and bad loans, Leon Gettler of Sox First claims that the latest hot job is Chief Risk Officer.
• How does a Scuba Diver conduct a risk assessment for a dive plan? Diving pro Jill Heinerth explains.
• NASA is battling an infestation of electronics-eating ants. The Risk Factor blog investigates the situation.

Health and Medical (Over-medicated? Over-treated? Over-weight? etc.)

• Are we over-medicating Chronic Conditions? Bob Vineyard of InsureBlog gives us some facts and statistics supporting the claim that that cutting back on med’s reduces your health risks and decreases medical costs.
• Medical tests have risks as well. David Williams of the Health Business Blog reports on WellPoint’s web-based patient exposure tool (Aimee) that provides information for doctors and patients about the amount of radiation associated with various scans.
• Louise of Colorado Health Insurance Insider discusses a heated debate in the UK about whether patients in the National Health Service should be allowed to privately purchase treatments that are denied by the NHS.
• Does being severely overweight increase the risk of depression? Therapist Unlimited weighs in.
• Can making physicians more at risk for a lawsuit increase the quality of medical care? Jason Shafrin of the Healthcare Economist investigates in his Tort Reform and Birth Outcomes post.

Housing Risk

• Buying a house is one of the most significant risks an individual takes in their life. Ernesto TIG of InsuranceYak.com warns that a “buyer beware” mentality is likely warranted in his Costner vs Maronda Homes post.

Computer Risk

• The Security and Risk Management Strategies Blog wonders whether Microsoft’s Security Development Lifecycle (SDL)–the well-publicized security training every Microsoft developer went through–is actually decreasing working?

Personal Finance

• Is the average investor over- or under-estimating real estate risk in the declining market? Super Saver weighs in with Properly Assessing Risk posted at My Wealth Builder.
• Mag Herrera of ‘Life. Money. Development’ is a personal finance advisor who actually likes Credit Cards.
• What is the difference between market risk, inflation risk and management risk? The Blueprint for Financial Prosperity blog explains in their post titled Understanding Investment Risk Types.
• Investing Angel of Stock Tips explains that the “herd mentality” causes most investors to Buy High And Sell Low.
• Almost any investment you will make is risk. But in The Top 25 Low Cost US Money Market Funds, Larry Russell of the Skilled Investor Blog extols the virtues of maximizing the return on the component of an investment you can control: the fees.

The Economist (”Doctor on Call“) has an shows that mobile phones may have another use for doctors: a microscope.

“Mr Maamari is a member of a research team led by Dan Fletcher, a professor of bioengineering at the University of California, Berkeley, which has developed a cheap attachment to turn the digital camera on many of today’s mobile phones into a microscope. Called a CellScope, it can show individual white and red blood cells, which means that with the correct stain it can be used to identify the parasite that causes malaria. Moreover, by transmitting an image directly over the mobile network, the CellScope could greatly help with the remote diagnosis and monitoring of many illnesses.“

Joe Paduda finds the price inflation is slowing for drug purchased through Workers Comp programs.

“Drug trend continues to moderate, with inflation in 2007 coming in at 4.3%. That’s a big improvement over last year’s 6.5%, which was a big improvement over the previous year’s 9.5%…”

One reason for the price decline may be that more people are using generic drugs. The percentage of prescriptions filled with generic “looks to be in the high seventy percent range.”

Mr. Paduda is also compiling his Fifth Annual Survey of Prescription Drug Management in Workers Comp which I am sure will be an interesting read.

Today, Google has made its Google Health program publicly available. You can get a tour of Google Health here and FAQs are available here.

TechCrunch has a great comparison (”…Hands-on Look“) of Google Health and Microsoft’s HealthVault.

“Whereas HealthVault’s strengths seem to lie in tying together different health information silos on the back end, Google Health is focusing more initially on the consumer side. It is trying to do an end-run around the health establishment by trying to get consumers to manually load their own medical information into their profiles. HealthVault allows this as well, but seems to have stronger partnerships with back-end health data providers.”

Google promises never to advertise on Google Health. So how will they make money? Likely, there will be a Google search bar in the Google Health portal and Google can collect ad revenue from related Google.com searches.

TechCrunch wisely points out that:

“…the key is importing your medical record in there. That is going to be a huge hurdle in terms of people feeling comfortable giving that sort of data to Google in the first place, and then simply getting the data in an electronic form from their doctors.”

El periódico el País relata su opinión en el artículo “El Dr. Google te recuerda que tomes la pastilla” (en español).

As the cost for health care has continued to rise, many Americans have looked for less expensive treatments in foreign countries. Living in San Diego, I can attest that many Southern Californians head to Tijuana to have their prescriptions filled. A Minot Daily News article (”Medical onshoring…“) claims that “more than 150,000 Americans traveled abroad for health care in 2006.” The article continues to state that Blue Cross and Blue Shield of South Carolina has formed affiliations with health care facilities in Thailand, Turkey, Ireland, Costa Rica and Singapore. Can anyone get affordable health care in the U.S?

The answer may be yes…on American Indian sovereign lands. C.A. Chien is proposing a Medical Onshoring project (see his Medical Onshoring blog). Health workers from foreign countries can be hired for lower wages and will not be subject to U.S. medical restrictions while they are on American Indian sovereign lands.

One wonders if the quality of care will suffer? Chien states that all his facilities “…will be accredited at JCI levels, equal to those in Japan, Singapore, Thailand, India, Europe, or the U.K.” In the Minot Daily article, Chien continues argues that “…his system and its proprietary technology could reduce U.S. health-care costs by at least 15 percent.”

Although the impact of this model may be limited to those who are living in areas near American Indian lands, I am in favor of any innovation which could lower costs while maintaining quality.

The Economist has an interesting article on how pharmaceutical companies are trying to hawk their wares in developing countries (”Quagmire or goldmine?“) Generally, Pharma has stayed away from selling in developing countries due to uncertainties in their level of patent protection. For instance, Brazil has “threatened to invoke compulsory licensing (a legal mechanism that, in effect, legitimises such trampling [of patent rights]) to browbeat a foreign drugs firm into offering huge discounts.”

However, emerging economies are a growing market. Companies such as Moksha8, have started to market branded drugs to affluent customers in developing countries. Further, research into emerging economy-specific diseases is growing.

Hopefully, all this money rushing into emerging market pharmaceuticals will better the health of those living in poorer regions around the world.

This past weekend, I went to Washington, D.C. for a conference. I was able to slip away for a few hours to spend some time at the Newseum, a very interesting museum about News. Thus, this week I will present the Health Wonk Review in newspaper format.

COVER STORY

Health Affairs Blog: Health Reform In The 2008 Election. A conversation with a Harvard health policy professor, the president of Health Policy and Strategy Associates Inc, and a health policy correspondent for NPR.

• See also California’s experience with high-risk pools (MRMIP) in the REGIONAL section.

POLITICS & MEDICARE

Colorado Health Insurance Insider: Two former HHS secretaries discuss ways to cut the cost of Medicare. Donna Shalala advocates eliminating waste and streamline the process in an effort to provide universal health care while Tommy Thompson who advocates increasing Medicare premiums, increasing the age for Medicare eligibility, and cutting benefits.

Health Care Renewal: “Punching primary care in the face.” How the RBRVS Update Committee’s advice rebarding Medicare’s physician reimbursement system will affect compensation for primary and preventive care.

Healthcare Economist: Medicare Part D decreases average overall pharmaceutical price by 12%. Drug formularies and negotiation with pharmaceutical companies are the cause.

Toxic World Blog: Why is the Bush administration trying to loosen the regulations to reduce pollution recently? EPA figures state that “we would go from a cost of $20 billion to a savings of $23 billion if we tightened smog rules…”

Home of the Brave: “Over 50% of all inpatient psychiatric care is delivered in prisons in the US.”

BUSINESS & TECHNOLOGY

Code Blue Now: French doctors make twice the average French wage, but American doctors earn five times the average American wage. Why is this? It can partially be explained by looking at differences in malpractice laws and the fact that medical school is nearly free for most French physicians.

Disease Management Care Blog: Coordinated Delivery Systems vs. Integrated Delivery Systems. Can an “outsourced and modular approach to health care” improve quality?

InsureBlog: What the hell is a “Doctor Nurse?”

Workers Comp Insider: Why aren’t more insurers focusing on wellness in workers comp programs?

The Health Care Blog: The pro and cons of one Health 2.0 website. And why iMedix creeps out Craig Stoltz.

REGIONAL (Revealing my West Coast Bias)

Health Access California: John McCain’s health care reform plans including creating high-risk pools. California, already has a high risk pool: MRMIP. How is it working? While MRMIP is a lifeline for individuals with pre-existing conditions, it is expensive, has an annual benefit cap of $75,000, and has a waiting list of 500 people.

Health Business Blog: Interview with Richard Noffsinger, CEO of SafeMed. SafeMed is based in San Diego.

OPINION & MISCELLANEOUS

Freedom and Individual Right in Medicine: FAQ on Free Market Health Insurance. In a free market, insurers should be able to exclude individuals based on a pre-existing condition and one should realize that it is not one’s social obligation to subsidize the health care of those who can’t afford it.

Systems Thinker reminds us that May is Borderline Personality Disorder Awareness Month.

Many doctors claim that the medical malpractice system is broken and needs to be fixed. Doctors have high malpractice insurance premiums and often practice defensive medicine to protect themselves against lawsuits. To help alleviate this problem, many politicians have asked for some sort of tort reform. Tort reform can be generally categorized into 4 types of legal changes:

1. Caps on noneconomic damages. Noneconomic damages cover items other than monetary losses, such as pain and suffering.
2. Caps on punitive damages. Punitive damages are awarded in addition to compensatory (economic and noneconomic) damages in order to punish defendants for willful and wanton conduct.
3. Modifications of collateral-source rule. Under the common-law collateral source rule (CSR), amounts that a plaintiff receives from sources other than the defendant (e.g., from his or her own insurance) may not be admitted as evidence in a trial.
4. Modifications of the joint-and-several liability (JSL) rule. In a trial with more than one defendant, the first step is to apportion blame for the harm. Under JSL, the plaintiff can then ask the “deep pockets” defendant to pay all of the damages, even if that defendant was responsible for only a small fraction of the harm. Modifications to the JSL rule often hold that the “Deep pockets” defendant must be at least 50% liable for the harm in order to be held 100% responsible for the damages.

Which of these reforms are helpful? A paper by Currie and MacLeod (QJE 2008) aims to answer this question. The authors look at variation in tort laws across states between 1989 and 2001. They claim that malpractice laws put doctors more at risk for a lawsuit is a good thing because it will cause them to behave more carefully. When doctors fear expensive lawsuits or a blow to their reputation, they may behave with more caution. Thus, capping punitive and non-economic damages should decrease caution. On the other hand the JSL rule puts doctors more at risk. They will not be protected from a suit simply be associating with a deep pockets hospital.

Empirical Results

To test this, the authors look at the number of Caesarean sections performed and the rate of induction or stimulation of labor. C-sections are popular with doctors because they receive additional compensation compared to a “regular” birth. However, performing a C-section on a mother who does not need it exposes them to additional risks. The authors find that “JSL reform reduces C-sections and complications of labor and delivery…In contrast, caps on damages are found to increase procedure use, and hence costs. They also increase complications of labor and delivery in some specifications.”

For a robustness check, the authors look at C-section rates for high- and low-risk babies separately. The authors assume that doctors have less treatment discretion for high risk cases, and the results demonstrate that tort reform had less of an effect on procedure rates or outcomes for high risk cases.

• Currie, Janet; MacLeod, W Bentley (2008). “First do no harm? Tort reform and birth outcomes” Quarterly Journal of Economics, v 123(2): 795-830.

What is life really like working in a hospital? The Economist reviews a recent book by Julie Salmon titled Hospital: Man, Woman, Birth, Death, Infinity, Plus Red Tape, Bad Behavior, Money, God and Diversity on Steroids.  Here is an excerpt from The Economist:

“…the fine grain of Ms Salamon’s observations allows her to paint a compelling—and damning—portrait of a dysfunctional health-care system. She describes the chaotic emergency room, with patients waiting in holding patterns like aircraft at a busy airport, and the “frequent flyers”, as the staff call those they send away with prescriptions for medicines these patients cannot afford, knowing they will soon be back in a bad way once more.

She meets uninsured patients with seven-figure bills, destined never to be paid, who know that only if they stay do they retain the right to be treated. (The hospital can force them to leave only if they can do so on their own two feet.) And she meets some whose stay will be tragically brief, because lack of insurance has kept them away from doctors until it is too late. One such is a young mother from the Dominican Republic without papers but with cancer that is already terminal before she seeks medical help. She dies so quickly that there is little the hospital’s staff can do other than help her relatives arrange care for her three small children.”

• Julie Salamon “Hospital: Man, Woman, Birth, Death, Infinity, Plus Red Tape, Bad Behavior, Money, God, and Diversity on Steroids,” Penguin; 363 pages.

For many years price increases in the medical sector has outpaced overall inflation by a significant amount. According to the Bureau of Labor Statistics, here is the increase in consumer prices over the last few years.

Medical inflation is outpacing general inflation by an average of 1.5% per year. But is this measure of medical inflation accurately measured? Not according to paper by Joseph Newhouse (1992). Here are 4 reasons why not.

1. Medical CPI measures input, not final goods. The CPI for medical services focuses on inputs such as physician visits or hospital days. However, the service the patient consumers is treatment for a specific disease. An increase or decrease in the requisite number of doctors visits is a change in the input towards treatment. A true measure of medical CPI would measure how the price to treat a disease changes over time.
2. Actual Prices not observed. Generally, statisticians use the list price as the price of medical services. However, very few people pay this list price. Most individuals have insurance and these insurance companies negotiate bulk discounts. Thus, the list price is not the relevant price for most individuals.
3. Quality changes. Even if one uses the same amount of inputs in treating a disease, the quality of medical care has likely increased over time. Of course, observing quality changes in medical care is extremely difficult.
4. Medical CPI weight out-of-pocket expenses. Medical CPI weighs the cost to consumers of medical spending. However, since most people have health insurance, items which are paid more frequently out of pocket receive a higher weight. For instance, dental care is more frequently paid out of pocket and thus receives a higher weight in the CPI. [I am not sure if this weighting has changed in more recent versions of the medical CPI].

• Joseph P. Newhouse (1992) “Medical Care Costs: How Much Welfare Loss?” The Journal of Economic Perspectives, Vol. 6, No. 3 (Summer, 1992), pp. 3-21

On Friday I posted on Consumer Driven Health Care.  These consumer driven health plans (CDHPs) involve individuals having direct discretion about how health care dollars are spent.  If you are interested in CDHP, there may still be some confusion over which H?A you prefer.  Is a HRA (Health Reimbursement Account or Health Reimbursement Arrangement) or a HSA (Health Savings Account) better?  Scott Borden of OFM Benefits Consulting gives some simple explanations in his Kansas City Star article (”…Health Insurance for Workers“).

What is Medicare Part D?

Medicare Part D began in 2006 and provides insurance coverage for pharmaceuticals for the elderly. The program is set up so that the government does not purchase the drugs directly, but subsidizes private prescription drug plans, which then negotiate prices with the pharmaceutical companies. There are two types of Part D plans. The first are prescription drug plans (PDP) which only cover drugs. Medicare Advantage plans (MA-PD) are comprehensive, managed care insurance plans which also include insurance coverage for pharmaceuticals.

Typical Part D coverage includes a $250 deductible, with 75% coverage for the first $2000 (after the deductible). Part D defers 0% of the cost of drugs between $2000 and $3599–the “donut hole”–and then once annual spending reaches $3600, Part D pays only 95% of the costs.

The government subsidies these PDP and MA-PD plans based on a bidding process. A national average bid is calculated and multiplied by some constant percentage (it was 34% in 2007) to determine what premium the enrollees will pay. The 66% subsidy is distributed to the plans as a lump sum, so that if plans offer higher or lower premiums, the enrollee incurs the full cost (benefit) for higher (lower) premiums.

To reduce the possibility of crowd-out, CMS subsidies firms that provide prescription drug coverage to their retirees.

What does economic theory predict about Medicare Part D’s influence on prices?

Many economists would at first glance believe that this would lead to an increase in prices. Consumers should be have less elastic demand since they will only be paying for a fraction of the drug cost if they have Part D insurance. An NBER working paper by Duggan and Morton (2008) believe that this will not be the case. First, PDPs and MA-PD have large customer bases and can negotiate bulk discounts. Individuals do not have the buying power to negotiate these discounts. Further, drug companies often use formularies which advise patients as to alternative drugs (e.g., generics) which are cheaper. Physicians advice patients as to the most medically effective drug, but not the most cost effective treatment. Thus, insurance company formularies can make patient cross price demand elasticities for drugs more elastic since they are more aware of comparable drug substitutes.

Further, the production of pharmaceuticals is one with extremely high fixed costs (e.g., R&D, advertising) and very low, relatively flat marginal costs. Thus, prescription drug insurance will likely increase pharmaceutical utilization, which will decrease average costs.

Medicare Part D’s impact on Price

Duggan and Morton find the Medicare Part D decreased average overall price by 12%. Patients of course pay even less than this 12% figure, because insurance pays for a portion of the drug costs. Thus, for patients moving from cash payment to Medicare Part D, net drugs prices for them decreased 24%.

This decrease, however, could have reflected an overall decrease in drug costs and may be unrelated to Part D insurance. To test this, Duggan and Morton examine the prices of drugs in “protected” therapeutic classes. The government mandate that insurance companies must cover all drugs for treatment categories such HIV, anti-cancer, immunosuppressant, etc. Because the Part D plans are mandated to cover all drugs in the category, plans cannot 1) use their buying power to negotiate lower prices since producers know that the drug must be covered and 2) use formularies to direct enrollees to less expensive alternatives since all drugs must be covered. Thus, the authors predict that for drugs in these protected classes, their should be no price decrease. This is exactly what the authors find.

“The results…suggest that drug prices offered by Medicare part D plans grew with others in those therapeutic categories where their ability to move market share was most limited. This provides some support for our model…which predicted smaller price declines (or larger price increases) for those treatments without good substitutes.”

• Duggan, Mark; Morton, Fiona Scott; 2008. “The Effect of Medicare Part D on Pharmaceutical Prices and Utilization“, NBER WP #13917.

I will be in Washington D.C. from today until Sunday night attending the Institute for Humane Studies Research Colloquium.  Blogging will resume on Monday.

The latest edition of the Cavalcade of Risk is up at Hill’s Personal Finance.

Consumer directed health plans (CDHP) seem like an attractive option for small businesses. CDHPs utilize high deductible health plans (HDHP) making patients pay more money out of pocket. Because of this, insurance premiums are lower. These HDHPs can be linked to Health Reimbursement Arrangements (HRAs) or Health Savings Accounts (HSAs). Since small businesses do not benefit from economies of scale with respect to the purchase of insurance, HDHPs may be especially attractive for this group.

A paper by Gates, Kapur and Karaca Mandic (2008) find this not to be the case, however. Firms employing 3-49 people are no less likely to offer high deductible health plans than are large firms–conditional on offering insurance. Midsize firms employing 200-499 workers are less likely to offer HDHPs than larger firms.

If the firm offers a HD health plan, will they offer an HSA? One may guess that small firms are less likely to offer HSAs if there are fixed costs to implementing an HSA. Small firms will have higher average costs to offering HSAs, if offering HSA is a true fixed cost and its cost to the employer is not proportional to the number of employees in the firm.

It turns out that small firms between 3-49 workers and firms with 200-499 workers are less likely to offer HSAs–conditional on offering HDHPs–than large firms with 500 or more workers. Middle sized firms with between 50 and 199 workers are just as likely to offer HSAs as large firms.

Other findings of the study include that HSAs are most popular in the Midwest and the South and, surprisingly, firms with a higher proportional of low-income workers are more likely to offer HSAs.

• Susan M. Gates, Kanika Kapur, and Pinar Karaca-Mandic (2008) “Consumer-Directed Health Plans and Health Savings Accounts: Have They Worked for Small Business?,” Forum for Health Economics & Policy: Vol. 11: Iss. 2 (Health Economics), Article 4.

John Tierney writes in The New York Times (”Appeasing the Gods…“) that “”We buy insurance not just for peace of mind or to protect ourselves financially, but because…we think buying health insurance will keep us from getting sick.”

A rational person would believe that buying insurance against an event will not alter the probability that it will occur–ignoring issues of moral hazard.  For instance, the act of buying health insurance should not make us less likely to be sick.  Using more preventive care which is cheaper due to insurance can prevent illness, but the act of buying health insurance should not effect the probability one gets sick holding constant the medical care levels.

A better example may be travel insurance.  “Last year, tens of millions of people bought life insurance for scheduled flights of airlines in the United States. Not one of those insured passengers died in a crash.”  Is this a waste of money?  Not if you are superstitious and believe that the act of buying life insurance affects the probability your plane will crash.

“So when we think about passing up flight insurance, we conjure up disaster just as easily as ancient Greeks imagined a thunderbolt from Olympus, and we too figure we can avert it through the equivalent of a bull sacrifice. Intuitively, we haven’t made great strides since Homer’s day. But at least our gods take credit cards.”

• Hat tip to Arnold Kling at EconLog.

The Health Affairs blog has an interesting article on why Arnold Schwarzenegger’s health care reform plan for California has been shelved.

• Hat tip to Joe Paduda of Managed Care Matters.

As General Eric Shinseki, former Chief of Staff, U. S. Army, said “If you don’t like change, you’re going to like irrelevance even less.”

Rating websites are all the rage on the internet. From RateMyTeachers.com to RateMyCop.com, you can rate practically anything nowadays.

A new website called Vitals.com allows you now to rate your doctor as well. In addition to being able to read reviews from other patients, there are also other physician statistics. For instance, Vitals.com informs you whether or not the doctor is board certified, where the physician graduated from medical school, and also the rating of the medical school where they graduated.

For me, the more information available for patients, the better.

Is the free market working?  Looks like.  Wal-mart just dropped its prices on pharmaceuticals.  According to a Marketwatch article (”Wal-mart…“) :

• Wal-mart will fill prescriptions for as many as 350 generic drugs costing $10 for a 90-day supply
• Over 1000 over-the-counter drugs are priced at $4 or less.  Many of these include Wal-mart own private label Equate brand.

Wal-mart must compete with some supermarket chains that are offering free generic drugs to draw consumers into the store.

Traditional economic theory suggests that when the price of a good falls, the amount supplied will fall as well. Most economists always assume that the supply curve is upward sloping.

But that is not always the case in medical world. Because a physician serves both as the patient’s advisor and the supplier of medical treatment, physicians can induce patients to increase the amount of medical care they wish to receive. Patients are easily convinced because of 2 market failures: asymmetric information and moral hazard.

Asymmetric information means that the physician know more about your health condition than you do. Thus, patients rely on the advice of the physician. Moral hazard occurs because patients have health insurance. Since patients do not pay for the care they receive (or pay for it at a reduced rate), they are very amenable to follow the doctors orders.

A 1998 letter from the Health Care Financing Administration (HCFA) found that it was typical that a 50% offset will occur when Medicare payments are reduced. This means that a 20% reduction in price, will lead to a 12.5% increase in quantity. Overall, this will lead to only a 10% decrease in total cost. Since 10% is 1/2 of 20%, we have a 50% offset. Physicians are increasing the quantity provided in order to make up for the income lost from lower Medicare reimbursement rates.

This is a classic example of supplier induced demand.

An article by Yip (JHE 1998) found that this was the case for coronary artery bypass graft (CABG) surgeries as well.

• Winnie C. Yip, 1998. “Physician response to Medicare fee reductions: changes in the volume of coronary artery bypass graft (CABG) surgeries in the Medicare and private sectors.” Journal of Health Economics, Volume 17, Issue 6, December 1998, Pages 675-699

“I mean, a man has to stand for something.”

• James Woodard, wrongfully convicted of killing his girlfriend 27 years ago, on why he did not lie and admit his guilt during one of the twelve times he came up for parole.

The full story is on 60 Minutes.

Can we think of issues related to violent crime as basically similar to that of a contagious disease?  This is the question an article in the N.Y. Times Magazine (”Blocking the Transmission of Violence“) attempts to answer.

Violence may spread like an epidemic; murders lead to revenge killings, which lead to more revenge killings.  Stopping the “transmission” of violence at its source is the goal of Gary Slutkin and his CeaseFire organization.  “CeaseFire tries to deal with these quarrels on the front end. [Interrupters'] job is to suss out smoldering disputes and to intervene before matters get out of hand.”

This is a radical approach, but will it work?

Academic journals are places where medical practitioners can go to view the latest, most cutting-edge, medical technologies. These journals are peer reviewed and are supposed to be places where rigorous, unbiased research is conducted. Some of these articles may not be as unbiased as once thought.

NPR’s Marketplace reports (”Drug Companies…“) that drug companies have been distributing academic journal articles to doctors in order to persuade them to use their drug. Prima facie, this may seem to be an innocuous practice–having drug reps show doctors cutting edge techniques helps to increase the physician’s knowledge. However, it has been found that some of these articles alledgedly written by academic researchers are actually ghostwritten by pharmaceutical companies.

Joseph Ross found when he led a study on medical ghostwriting. He says, in the best case, the drug companies provide information to independent experts and then get out of the way. But . . .

JOSEPH ROSS: Who knows how often that actually happens. The worst case scenario is, a company says, “We’ll have a medical publishing company handle everything. They’ll write the papers, we’ll approve it before we even send it to the doctors. Then we’ll let the doctors lightly edited it if they want to, and then we’ll send it out with their names on top.”

“Perfect order is the forerunner of perfect horror.”

• Carlos Fuentes

“Trade is a social act”

• John Stuart Mill

The New York Times reports (”Dental Clinics…“) that the American Dental Association’s branch in Alaska has filed a lawsuit to stop dental therapists from practicing. 

“The dental associations say they simply want to be sure that patients do not receive substandard care. But some dentists in public health programs contend that dentists in private practice consider therapists low-cost competition. In Alaska, the federally financed program that supplies care to Alaska Natives pays therapists about $60,000 a year, one-half to one-third of what dentists typically earn.”

Who are dental therapists?  Generally, one can think of them as similar to physician assistants or nurse practitioners in the dental world.  To qualify as a dental therapist, candidates must undergo a two year training program.  In Alaska, dental therapists may practice basic surgical procedures such as drilling and filling cavities and performing routine tooth extractions.  Dental therapists may be cheaper, but are they doing a good job?

“So far, the program appears to be providing high-quality care, according to one study in 2006. The study, by the Baylor College of Dentistry, looked at about 600 procedures in more than 400 patients and found that the quality of procedures performed by therapists was no different from that provided by dentists.”

• Hat tip to Tyler Cowen at Marginal Revolution

The latest edition of the Health Wonk Review is up at the Medical Humanities Blog.

Increasing obesity rates have significant costs to society. An article in MSN Money (”What if no one were fat?“) claims that if, on average, each American was to lose 20 pounds, we would save $487 billion. Where is this number coming from?

• Savings on fuel for cars and airlines due to their lighter loads would top $5 billion.
• Plus-sized clothing costs 10% to 15% more, so shoppers would save $10 billion on shirts, pants and dresses.
• Reduced food consumption would translate into a savings of $81 billion.
• The medical costs of obesity-related problems such as diabetes, stroke and heart disease run near $140 billion.
• Productivity in the workplace would jump from fewer sick days and better health: This would lead to a savings of $257 billion.
• The weight loss industry might become obsolete, resulting in a savings of $55 billion.

Are these figures credible? The savings on flights and car trips likely are true. Reduced material cost from plus-sized clothing may save costs, but any way to standardize the body shape would save costs. There would be significant cost savings as well if individuals were the same height. Cynthia Istook, an associate professor in textile apparel at North Carolina State University, says clothing makers could then afford to offer more variety in hip and bust sizes, rather than asking every woman to squeeze into an hourglass shape. Thus, costs likely would not decrease, but customization would increase.

Would reduced food consumption reduce obesity? The problem is not that food is too expensive; it is that it is too cheap. Eating a high calorie diet for a low cost is easy (just grab some fast food or buy processed food at the grocery store). Buying fresh fruit and vegetables is more expensive (in terms of calories per dollar) than eating processed food. Thus, moving people to a healthier diet will likely decrease obesity, but increase food costs.

Lower obesity rates likely would decrease disease rates. But just because there is a correlation between obesity and disease rates, doesn’t mean that obesity is the causal factor. It could be that individuals who are obese are also more disease-prone and this would be the case even if they lose weight. Still, on an annual basis, healthier living of course does decrease medical costs. Over a lifetime, however, healthier lifestyles and reduced obesity may actually increase medical costs (see 12 Feb 2008 post).

Sick days may decrease when obesity rates drop, but individuals may have less time to work if they go to the gym everyday. Also, it is highly unlikely the weight loss industry would disappear. Individuals are always unsatisfied with their bodies. Money saved on weight loss programs might now go towards plastic surgery or gym memberships.

Further, these figures do not take into account the utility loss people will incur not eating the foods they choose.

What would we do with all the money we saved from reduced obesity? Maybe we could celebrate with some bananas foster or Extraordinary Desserts.