November 2009

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Medicare Cost Projections

November 10, 2009 in Medicaid/Medicare, Taxes | 2 comments

The Social Security Administration’s Office of the Actuary projects Medicare costs up to 75 years in the future. How much of your taxable income will be going to pay for Medicare in the next 10, 25, or 75 years? Take a look at this chart.

By 2085, 12.24% of your taxable income will need to go to pay for Medicare. Not shown on this chart, is that 17.78% of your taxable income will also be needed to pay for Social Security. Thus, by 2085, 30% of worker income will go to fund these two entitlement programs.

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Health Reform Bill Passes in the House: Who wins and who loses?

November 9, 2009 in Current Events, Health Insurance, Public Policy | 2 comments

A Health Reform Bill passed in the House despite declining support among the American people.  The Kaiser Family Foundation has a nice summary of what is included in the bill.  Today, I will review who wins and who loses from different aspects of the bill.

Individual Mandate.

  •  Winners: High cost individuals.  Premiums (may) decline if younger, healthier individuals are forced to buy insurance and the insurance companies.  This will only decrease premiums, however, if insurance companies can’t charge lower rates to these healthier individuals.
  • Losers: Those who don’t want health insurance or can’t afford it.  All individuals will have to pay a penalty if they do not buy “acceptable health coverage.”  Low-income families are exempt from this requirement. 

Employer funding requirements.

  • Winners: Requiring employers to pay for health insurance simply means that individuals will see lower wages in the long run.  The big winner here is big business.  They already provide health insurance for their employees.  Small company competitors however
  • Losers: Health insurance is more expensive for small companies.  Making them pay for health insurance will drive up their costs and force them to cut wages more than big businesses will.  This may make working at a small firm less attractive, especially for younger employees.  However, the smallest companies are exempt from this requirement and the government will provide subsidies to cover some health insurance cost initially.

Expand Medicaid to all individuals with incomes below 150% of the Federal Poverty line (FPL).  

  • Winners: Lower middle class individuals who are now covered by Medicaid who were not in the past.
  • Losers: Taxpayers. 

Require CHIP enrollees with incomes  above 150% FPL to obtain coverage through the Health Insurance Exchange.

  • This depends on how well the Health Insurance Exchange works.  If it is an efficient system, poor children could get better coverage and the taxpayer bill could decrease.  Or poor children could get worse coverage and the taxpayer bill could increase.  

Subsidies to individuals with incomes below 400% of the FPL to  to obtain coverage through the Health Insurance Exchange.

  • Winners: Middle class families not eligible for Medicaid who now will received subsidized insurance.
  • Losers: Taxpayers not eligible for the subsidy.

Reinsurance program for individuals aged 55-64.

  • Winners: Employees of this age bracket.  They will be more attractive to employ since their health care costs will be capped.
  • Losers: Taxpayers not aged 55-64.

Tax of 5.4% on individuals with modified adjusted gross income exceeding $500,000 ($1m for families).

  • Winners: Individuals getting subsidies, expanded public programs, etc.
  • Losers: The Rich.

The Public Option and the Health Insurance Exchange.

  • Here, the devil is in the details.  If the Public Option provides superior health care at lower cost, everyone wins (except private insurance companies).  If the public option provides superior health care but runs a deficit every year, consumers will win while taxpayers and private insurance companies will lose.  If the public option loses money and provides low quality care, everyone loses except for government employees now hired to run the public option. Similarly, the health insurance exchange may provide more choice to consumers, a standardized benefit package so the consumers can price shop, or it may reduce insurance choice by limiting the products insurers can offer. 

Savings from Medicare and Medicaid

  • Winners: If the savings come from reduced waste, Medicare enrollees will benefit (fewer unnecessary procedures will increase their health) as will the taxpayers. However, if the savings come from cuts to necessary services, Medicare enrollees will be harmed.
  • Losers: Doctors and hospitals. Cuts to Medicare mean that doctors and hospitals will get less money. If the cuts are from waste, only inefficient doctors will see their earnings hurt. If the cuts come from necessary care, then good and bad doctors will see their incomes fall.

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Weekend Links

November 8, 2009 in Current Events | No comments

Goldin and Katz: The Ten Most Important Rules of Writing

November 6, 2009 in Economics - General | No comments

Claudia Goldin and Lawrence Katz have a nice list of the Ten Most Important Rules of Writing Your Job Market Paper.  However, these tips can be used for almost any type of non-fiction writing.  Some of my favorites include:

Rule #1: You will probably not have a Nobel Prize winning idea.

  • Theorem #1: It is always possible to transform a good idea into a great paper and a superb presentation.
  • Theorem #2: Even if your idea is Nobel-worthy, you can always make it into a poorly written paper and a lousy presentation. This theorem will probably never be needed; see Rule #1.

Rule #3: Your paper is an exercise in persuasion (we mean in positive not normative economics). Your readers are your audience. They have better things to do than read your paper. Make them interested in your thesis and convinced of your argument.

Rule #4: No great paper—no matter how well constructed, brilliant, and well written—first emerged from the author’s printer in that form. It was rewritten at least 10 times. Rewriting is the true art of writing.

Rule #5: No author—no matter how careful and humble—can see all (or even most) of his or her writing errors. Trade papers with another student. Be tough; there will be some initial pain, but gratitude will follow.

Rule #6: Most paragraphs have too many sentences and most sentences have too many words. Repetition is boring. We repeat: repetition is boring. Cut, cut, and then cut again.

Rule #8: Verbalizing your argument is more difficult than writing it. Giving a presentation will reveal where your argument falls flat and will show you how to redraft the paper. Give many presentations before sending out your paper. Give them to a workshop, friends, a dog or cat, even the wall. The presentation will force you to confront inconsistencies in your argument.

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Empirical Model of Insurance Markets

November 5, 2009 in Health Insurance | 2 comments

Most economists begin to learn about health insurance market with the classic models developed by Rothschild and Stiglitz. In these models, individual risk and characteristics are measured along a single dimension. Insurance contracts pay a lump sum amount in the case of a loss. In the real world of health insurance, however, things are more complicated.

Einav, Findelstein and Levin (2009) review empirical studies to study insurance market in a more sophisticated manner.  For instance, adverse selection is a common problem in insurance markets.  Adverse selection occurs when individuals have private information about their own health that health insurers do not observe.  When insurance companies offer a menu of coverages, high-risk individuals will gravitate towards more generous insurance.

However, adverse selection may be more or less important in reality.  High-risk individuals may be risk loving and thus may prefer less generous insurance contracts; low-risk individuals may also be risk averse and prefer more generous insurance contracts.  Finkelstein and McGarry (2006) find that this occurs in the market for long-term care insurance.  On the other hand, Cohen and Einav (2007) find a positive correlation between risk and risk aversion.

Other real-world insurance complications include:

  • Adverse selection was found to be strong when individuals receive a default level of coverage and incremental coverage is competitively priced.  In general, however, the welfare affects of adverse selection tend to be small in practice.
  • The level of “observable” patient characteristics is endogenous.  Insurers have the ability to conduct more or less scrutiny in underwriting.
  • Moral hazard has different effects in different markets.  For instance, the moral hazard problem for annuities is small (i.e., few people want to kill themselves) while it is likely larger for elective medical care.
  • Most studies examine a set of contracts offered by insurance companies.  It is also important to look at what types of contracts are not offered. In some markets, certain types of coverage are not offered due to concerns about extremely adverse take-up.  Government coverage mandates for mental health and in vitro fertilization coverage may be considered responses to this problem.
  • Insurance mandates eliminate the problem of adverse selection, but create another problem: the limitation of individual choice.  When individual insurance preferences differ, insurance mandates may be welfare destroying.
  • Search frictions impair the efficiency of health insurance markets.  We see wide price variation across insurers even when the products offered are nearly identical.
  • Health insurance markets are not examples of perfect competition.  In most markets, large health insurers act in a oligopoly.

In order to truly understand how health insurance markets operate in reality, it is important to take into account these nuances.

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CoR: How Much Assurance Does Your Insurance Offer?

November 4, 2009 in Carnivals | No comments

The latest edition of the Cavalcade of Risk is up at Wise Bread.

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Federal Health Care Regulation: Taxation

November 4, 2009 in HSA, Public Policy, Taxes | 1 comment

Today we will discuss how the tax code affects health care.

  • Tax exemption of employer-provided health insurance. “In 1943, the Internal Revenue Service (ruled) that employees could exclude the value of employer-paid health insurance premiums from their taxable income. In 1954, Congress excluded by statute the value of employer-purchase health insurance from gross income.” To this day, employees essentially receive a subsidy to buy health insurance from their employers; this is because they can use pre-tax dollars to purchase employer-provided health insurance benefits.
  • Tax-deductibility of individually purchased health insurance. Individual health insurance benefits are tax deductible only if the individual itemizes deductions on their tax return. Since it is more likely wealthier individuals itemize, the benefits of this rule are more likely to accrue to the rich.
  • Deductibility of medical expenses. The IRS tax code states that individuals can deduct medcial expenses that exceed more than 7.5% of their gross income.
  • Health Savings Accounts (HSA). An HSA is a trust similar to a 401(k) where individuals can use pre-tax money to pay for medical expenses. HSAs must be linked to an high deductible health plan (HDHP) which was defined in 2006 as a plan that had a deductible not less than $1050 for the individual or $2100 for a family. Money left in an HSA account at the end of the year can be carried over to future years.
  • Flexible Spending Accounts (FSA). Individuals can deposit pre-tax dollars into a fund to pay for health care expenses. Unlike HSAs, FSAs need not be tied to a HDHP. Also, unlike HSAs, money deposited in an FSA that is not spent by years end is lost. This is why FSAs are considered “use it or lose it” accounts.

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Links: Money and Medical Care

November 3, 2009 in Current Events | No comments

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Overall Medicare Spending

November 3, 2009 in Medicaid/Medicare | 1 comment

The largest provider of medical services in the United States is Medicare.  Forty five million Americans receive Medicare.  Out of this total only 85% are elderly (aged 65 or older).  Disabled individuals, individuals with end-stage renal disease or Lou Gehrig’s disease are also eligible for Medicare coverage.

Medicare has 4 parts. Part A provides coverage for inpatient hospital services, Part B provides coverage for outpaitent and physician services and Part D provides a drug benefit. Medicare Advantage (or Medicare Part C) allows Medicare beneficiaries to enroll in private health insurance plans instead of the Parts A, B, and D.

Who pays for Medicare?

Medicare is funded by a payroll tax (2.9% of taxable earnings), general tax revenue and beneficiary premiums. Below I describe how each part of Medicare is funded.

  • Part A: Inpatient hospital services are paid almost entirely through the Medicare payroll tax.
  • Part B: Premiums paid by beneficiaries cover about one-quarter of outlays. General revenue covers the rest.
  • Part C: Medicare Advantage plans places bids with the government to provide the services at the lowest cost. This bids are compared to a benchmark based on a county-level fee-for-service Medicare Spending. Plans are either paid the benchmark if their bid is at or above the benchmark. Plans are paid 75% of the difference between the bid and the benchmark if the bid is below the benchmark.
  • Part D: Most enrollees pay one quarter of the Part D cost as premiums. In reality, however, receipts from premiums cover less than one-quarter of Part D’s total cost because some of the federal outlays for it (such as subsidies for low-income beneficiaries and for employers that maintain drug coverage for their retirees) are not included in the calculation of premiums.

What services make up the Medicare Budget?

Payment for inpatient hospital services (28%), Medicare Advantage Plans (20%) physician and supplier services (19%) make up the marjority of Medicare spending on enrollee benefits. In the fiscal year 2008, Medicare spent $453.9 billion on enrollee benefits. This chart lists the major types of services provided by Medicare and their cost.

Supplemental Insurance

Although all elderly are eligible for Medicare, some enrollees have additional coverage. For instance, 37% of fee-for-service Medicare beneficiaries also have coverage from former employers. Other individuals will purchase Medigap policies to cover the Medicare donut hole.  This chart lists the proportion of Medicare beneficiaries with supplemental health insurance.

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Why is H1N1 production so slow?

November 2, 2009 in Uncategorized | 1 comment

The Wall Street Journal has a revealing article concerning why the production of H1N1 vaccines has moved at such a slow pace.  The reasons include:

  1. Foregoing additives. The green movement doesn’t like additives in anything, but removing additives–called adjuvants–from vaccines has a cost.  ”An adjuvanted H1N1 vaccine being used in Europe contains 3.75 micrograms of vaccine stock. The same vaccine in the U.S., without the adjuvant, requires 15 micrograms of vaccine for equal potency. If we used adjuvants, we could have had four times the number of shots with the same raw material.”
  2. Require H1N1 be a single shot. “The government demanded single-dose syringes because they contain smaller amounts of thimerosal than multi-dose vials. This mercury-containing vaccine preservative continues to stir concern it can trigger childhood autism, even though this has been firmly disproven.”
  3. Using chicken eggs to grow vaccines.  As this site has mentioned before, growing vaccines in eggs is a slow process.  In Europe, “shots can be made much faster using mammalian cells to grow vaccine.”  Also, if you are allergic to eggs, you cannot get the H1N1 vaccine.
  4. FDA-mandated wait period.  ”FDA requires vaccines to sit for weeks after they come off the manufacturing line to make sure they haven’t grown bacterial impurities. This is why most of the H1N1 vaccine supply is released in waves and won’t be ready until later this winter.”

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