April 2009

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Lottery Gambling is addictive

April 6, 2009 in Economics - General, Taxes | No comments

An NBER working paper by  Jonathan Guryan, Melissa Schettini Kearney (2009) gives strong evidence that gambling is addictive using a creative identification technique:

“We use the sale of a winning ticket in the zip code, the location of which is random conditional on sales, as an instrument for present consumption and test for a causal relationship between present and future consumption…Our data from the Texas State Lottery suggests that after 6 months, roughly half of the initial increase in lottery consumption is maintained. After 18 months, roughly 40 percent of the initial shock persists, though estimates become less precise. These estimates provide an upper bound on the degree of addictiveness in lottery gambling. They also highlight the potential effectiveness of innovations and advertising campaigns designed to increase lottery gambling.”

The authors wisely note that the welfare implications of their findings are ambiguous.  Is the increase in lottery sales due to increased addiction or learning-by-doing (i.e., it’s fun to play the lottery and I do it in moderation)?  If individuals become “…rational addicts in a Becker-Murphy sense, optimal provision and pricing would depend only on the external harm imposed, for example, on family members from the displaced consumption of other household goods.”

Further, government sponsored gambling is a way to raise money for public expenditures.  One must compare the deadweight loss from standard revenue raising measures (e.g., sales and income taxes) compared to lotteries.  I presume that the deadweight loss from raising revenue via the lottery is smaller than sales and income taxes in the absence of addictive gambling, but may be larger in the case where compulsive gambling becomes a widespread problem.

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What is it like to be a librarian? “Essentially, it is all about money and power.”

April 5, 2009 in Books | 2 comments

Harvard Professor Robert Dardon has a fascinating piece on books, college libraries, copyrights, and what’s Google’s drive to digitize the world’s books means to society.  Some excerpts from the original New York Review of Books article are below.

  • One of my colleagues is a quiet, diminutive lady, who might call up the notion of Marion the Librarian. When she meets people at parties and identifies herself, they sometimes say condescendingly, “A librarian, how nice. Tell me, what is it like to be a librarian?” She replies, “Essentially, it is all about money and power.”
  • In 1790, the first copyright act—also dedicated to “the encouragement of learning”—followed British practice by adopting a limit of fourteen years renewable for another fourteen.  How long does copyright extend today? According to the Sonny Bono Copyright Term Extension Act of 1998 …it lasts as long as the life of the author plus seventy years. In practice, that normally would mean more than a century. 
  • Encyclopédie of Diderot, which organized knowledge into an organic whole dominated by the faculty of reason, with its successor from the end of the eighteenth century, the Encyclopédie méthodique, which divided knowledge into fields that we can recognize today: chemistry, physics, history, mathematics, and the rest. In the nineteenth century, those fields turned into professions, certified by Ph.D.s and guarded by professional associations. 
  • Along the way, professional journals sprouted throughout the fields, subfields, and sub-subfields. The learned societies produced them, and the libraries bought them. This system worked well for about a hundred years. Then commercial publishers discovered that they could make a fortune by selling subscriptions to the journals.
  • The Journal of Comparative Neurology now costs $25,910 for a year’s subscription; Tetrahedron costs $17,969 (or $39,739, if bundled with related publications as a Tetrahedron package); the average price of a chemistry journal is $3,490
  •  If approved by the court—a process that could take as much as two years—the settlement will give Google control over the digitizing of virtually all books covered by copyright in the United States.

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The future of the current round of IMF Loans

April 2, 2009 in Economics - General | No comments

Businessweek reports that the members of the G20 “…will pledge funds ‘more than doubling’ the amount the IMF initially sought to $750 billion.”  Bloomberg reports that “In the past six months, the fund has approved $16.4 billion for Ukraine, $15.7 billion for Hungary, $10.4 billion for Latvia, $2.5 billion for Belarus, $2.1 billion for Iceland, $7.6 billion for Pakistan and $516 million for Serbia.” 

One question is, what is the nature of a loan from the IMF?  It is not a contract between individuals or firms.  It is not a contract between governments and banks.  It is a contract between one government and another.  The politicians of developing countries are agreeing to pay back the loan in the future.  Unfortunately, while the promise of current politicians to pay back the loan may be made in good faith, this does not imply that future politicians will uphold their end of this bargain.  Future politicians in the developing world will claim that the West is imposing an undue burden upon them with these large loans.  Bono has been arguing for debt relief for developing countries for many years now. 

The book The Bubble that Broke the World chronicles the history of World War I reparations.  Germany could not afford to pay for reparations.  Germany then took out loans from the U.S. to pay for these reparations.  Germany then claimed that the reparations (and the loan) imposed too much of a burden and wanted to default.

We see that throughout history, loans between countries do not work out as intended.   There are better options than offering loans to these developing countries.  One option is that the developing countries could get loans directly from banks or issue bonds.  Although the foreign countries would pay higher rates then would be the case than if the loan was backed by the IMF, it would be free of the political taint of the burdonsome IMF loans.  With loans made from bankers, developed countries would have a responsibility to pay back the loan to creditors or else stigmatize their country to investors and thus face increased interest rates for many yeas to come.  

If the developed countries really want to help developing countries, they could just give them the money.  One should not think of loan as aid.  Bankers certainly do not.  

If the G20 wants to help developed nations, they should give them money.  If they would rather spend money on domestic issues, that is fine as well.  However, offering loans is a disingenuous way of ‘helping’ the developed world.

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Overweight Children: Rural vs. Urban

April 2, 2009 in Obesity | No comments

Rural children are more likely to be overweight than urban children, despite the fact that children living in urban areas engage in less physical activity.

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Health Wonk Review: Yogi Berra Edition

April 2, 2009 in Carnivals | No comments

In honor of the beginning of the baseball season, Health Accesss Weblog presents this week’s Health Wonk Review with a Yogi Berra theme.

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Health Insurance in an Experimental Market

April 1, 2009 in Health Insurance, Public Policy | 6 comments

Using real world data is fraught with complexity.  Wouldn’t it be nice to randomly change government regulations and see how people react?  A paper by Stephen Rassenti and Carl Johnston use a laboratory experiment to do just that.

In the experiment, survey participants are in charge of running a firm.  The firm must decide if it will provide health insurance for its employees and if so which plan should it choose.  Participants are randomly assigned for firms varying across firms size, high or low margin businesses, and industry.  Providing health insurance for one’s employee 1) reduces the probability they will get sick and also 2) can be used to attract employees.  However, more generous health insurance plans have an adverse impact on the firms bottom line.

The paper examines what happens under the following reform scenarios.

  • No mandates and no mandated employer contributions.
  • Employer Mandate – employers must offer insurance, but employees need not take it up
  • Employer Mandate + 50%.  Employers must offer health insurance and are mandated to pay for at least 50% of health insurance costs.
  • Individual Mandate – All U.S. residents must buy insurance, but employer has no obligation to offer it
  • Employer Mandate + Individual Mandate – Employers must offer insurance.  Individuals must buy insurance, but individuals need not buy insurance from their employer.
  • Restricted Rating – Insurers cannot increase rates on individual firms based on medical costs unless it raises rates on all other firms.  It can discriminate premiums based on firms size.
  • Individual Mandate with Ratings restriction.

In most situations, economists believe that mandates decrease societal welfare.  Limiting the choice set of employers and employees through mandates eliminates potentially optimal health insurance choices.  However, the insurance market is complex.  Mandating insurance coverage can spread risk across individuals which may increase societal equity.  Further employer mandates may improve labor market matching, since workers may be more likely to leave for a better job, if they are sure they will have health insurance in the new firm.  

How do these predictions play out in the experimental market set up by Rossenti and Johnston?

Results

  • Individual mandates decrease worker earnings. This is not supririsng.  Forcing an individual to buy health insurance will of course decrease the percentage of people who are uninsured.  Most people who do not have insurance want health insurance, but they choose not to purchase because of the expense.  Forcing people to buy health insurance decrease the amount of fund individuals have left to pay for rent, food, and education for their children.
  • Employer Mandates.  ”Employer mandates cut earnings of companies,  particularly those of small companies…and firms with low-margin businesses”
  • Employer/Individual Mandate combination.  ”…the combination of employer-and individual-mandates with mandatory minimum employer contributions was associated with the lowest profit performance (and highest employee earnings) in the study. On the other hand, combining individual and employer mandates with no mandatory minimums was associated with higher company profit, higher profitability, and a substantial drop in the cost of substitutes for workers on sick leave.
  • Mandates and health.  Mandates did increase in workplace attendance (an indicator of health) in the survey.
  • Required Employer Contributions. Mandated minimum employer health insurance contributions increase employees net wage compared to an individual mandate without employer minimums, but decrease firm profitability, especially for small business and low margin businesses.  Further, mandated minimums increase firm bankruptcy risk.
  • Large Companies like mandates.  Why would a company want to force itself to pay health insurance premiums?  Since most large companies already provide health insurance, this mandate would compel its smaller competitiers to also offer health insurance.  Since they  have economies of scale, large companies can provide it cheaper than small or medium sized companies.  This gives large companies a competitive advantage in attracting superior talent.  

Healthcare Economist’s take

The experimental setting provides an interesting laboratory for testing different types of health reforms. While the experimental setting has the benefit of eliminating endogeity problems, the validity of the results depend how realistic is the experimenter’s parameterization of outcomes.  

The results do shows that mandates can affect employee earnings.  However, these changes in employee earnings could represent a short-term phenomenon. Gruber (1994) finds that the cost of the mandated maternity benefit is fully reflected in lower wages.  Thus, the increased cost to the firm of an employer mandate to provide health insurance will be reflected in a proportional drop in wages for workers in the long run.

The most interesting part of this paper is the differential effect of mandates on small and large business.  Large business are effective pooling mechanisms and can provide health insurance in a cost effective manner.  Thus, mandates to provide health insurance will have a small impact on large firm profitability.  The authors, however, run the experiment in only a domestic setting.  Large firms may not like mandates once we take into account that their foreign competition may not have to provide health insurance for their workers.  Thus, even large firms could be at a cost disadvantage, but this aspect is not part of the study.

Compared to large firms, small businesses are not an effective risk pooling institution and further do not have the economies of scale to administer health insurance plans efficiently.  When small businesses are forced to provide health insurance, the authors find that this adversely affects their bottom line and increases their risk of bankruptcy.  Mandating the businesses pay a fixed share of health insurance premiums only exacerbates this problem.

Costing Methods

April 1, 2009 in Hospitals, International Health Care Systems, Medicaid/Medicare | No comments

How do hospitals estimate the cost of different inpatient stays?  A paper by Clement et al. (2009) reviews 3 techniques:

Microcosting. “With microcosting, a detailed list of each component of a patient’s care is created and costed separately for each facet of a patient’s hospitalization. Given the level of detail, microcosting is generally considered the ‘gold standard’ for costing inpatient stays.”  Direct and indirect (overhead) costs are allocated over the patient’s entire hospital stay. “…nursing hours, the electricity required to light the recovery room, the catheter implanted, the operator’s time, food costs, etc. are captured and detailed. Given its labor-intensive nature, microcosting is not implemented in many hospitals.”


Refined-grouper number. Canada implemented the first DRGs in 1967.  “The system classifies patients into categories capturing cases of similar clinical, utilization, and length of stay characteristics. The categories were then further subdivided based on secondary diagnoses, sex, age, and discharge status creating DRGs.”

In 1983, Medicare adopted the the DRG system as a prospective payment instrument.  Later the rDRG was created.  The rDRG “applies a complication and comorbidity overlay to the DRG. Thus, the principal diagnoses group similar cases, as in the original DRG system, and the secondary diagnoses are used to subsequently classify cases into rDRG. In Alberta, a system based on rDRGs was used to group cases into groups comprising similar cases … The groupers are developed using a two-step process. First, based on the principal diagnosis or procedure code, cases are grouped together. Subsequently, cases are further grouped within the principal diagnosis group, based on secondary diagnoses and procedural codes. The two-step grouping process classifies cases into RGN that correspond to the rDRG grouping system.

A cost is developed by Alberta Health and Wellness (AHW) for each RGN using the microcosting data. A weighted average of each RGN cost across hospitals in Alberta is calculated and subsequently adjusted for the severity of case mixes within hospitals.”

Case-mix-groupers. Introduced in Canada in 1983, CMGs constitute a Canadian grouping system that is analogous to, but different from the DRG system developed in the United States…Cases are classified into CMGs based on the most responsible diagnosis as opposed to the principal diagnosis used in the DRG methodology…Thus, CMGs attempt to capture the diagnosis responsible for the greatest proportion of the hospitalization instead of the admitting diagnosis. An ‘average patient cost’ is calculated from all the microcosting data…Each CMG is assigned a relative index weight (RIW) that represents the complexity of the case in comparison to the average patient. The average annual cost per admission can then be determined for specific CMGs…A cost for each hospitalization can then be estimated by multiplying the CMG-specific RIW by the average Canadian cost per case ($3,103 per case).”

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