Medicaid/Medicare

Medicare was implemented in 1965 to cover the medical costs of the oldest members in society.  In 1965,  the U.S. life expectancy was only 70 years old.  Now, however, life expectancy at birth is over 78 years.  Medicare is now not just covering the oldest of the old, it also covers the “moderately” old since we are living so much longer.

An NBER working paper by  John B. Shoven, Gopi Shah Goda examines what eligibility ages for programs such as Medicare and Social Security would be today and in 2050 if adjustments for mortality improvement were taken into account.  The authors conclude the following:

“We find that historical adjustment of eligibility ages for age inflation would have increased ages of eligibility by approximately 0.15 years annually. Failure to adjust for mortality improvement implies the percent of the population eligible to receive full Social Security benefits and Medicare will increase substantially relative to the share eligible under a policy of age adjustment.”

• John B. Shoven, Gopi Shah Goda (2008) “Adjusting Government Policies for Age Inflation” NBER WP #14231.

Recently, the San Diego Union Tribune reported that the Sharp Grossmont Hospital in eastern San Diego county was cited for a number of preventable deaths. Reporter Cherl Clark found numerous problems, which included:

“staff members restraining a highly medicated, 25-year-old man with schizophrenia in such a way that he was allowed to suffocate. In addition, hospital workers caused the death of an 83-year-old woman who had undergone a hysterectomy by injecting a dangerous anti-narcotic into her bloodstream. Other problems included nurses who did not know or use proper CPR, an unsanitary operating-room mattress held together by tape and glue, unsafe storage and handling of food and kitchen equipment, and use of critical medications such as heparin that had expired up to a year earlier.”

CMS is threatening Sharp Grossmont that it could lose all federal money (i.e., Medicare and Medicaid). Since 50% of Sharp Grossmont’s business comes from Medicare and Medicaid patient, this would be a disaster for the hospital. What should we do with underpreforming hospitals?

In regular markets, when a product has lower quality, people stop buying that product and switch to another one. For instance, if GM stops making high quality cars, people switch to Toyota. The market compels companies to offer a desirable bundle of quality and price or else they will lose business. Because markets are so effective at maintaining high quality, withholding Medicare and Medicaid payments from Sharp Grossmont makes sense, right?

Maybe not in this case. First of all, some hospitals may not be in a competitive market. While urban hospitals must compete with other, nearby hospitals, Sharp Grossmont is supposed to provide medical care for the entire Grossmont Healthcare District, which covers 750 square miles in San Diego’s more suburban and rural East County. This area has more than 652,000 residents and Sharp Grossmont has the busiest emergency department in San Diego County. By reducing funding, individuals who have emergencies will receive even worse care than before.

This is similar to the no child life behind program. Low preforming schools lose money. But these are exactly the schools that need more money to survive. If students had the freedom to switch schools, then penalizing a failing school would make perfect sense since the students could opt for higher quality schools. The failure of low quality schools would not be a problem if students had other schools available for them to choose to attend. If individuals do not have any choice of which school they attend, however, withholding funding from schools or hospitals can make low quality schools worse.

Will Sharp Grossmont be decertified? The CMS threat to withhold funding is likely just a bluff.

“Among the 450 hospitals in [CMS certification officer Steven] Chickering’s jurisdiction of Hawaii, California, Nevada and Arizona, 10 to 12 a year have as many major lapses, he said. Ninety-nine percent of those facilities resolve their crises and keep their federal payments, Chickering said.”

The federal government knows that removing funding from the only emergency room in a 750 square mile area is not politically feasible. Although individuals may not have much choice of a hospital in an emergency situation, in non-emergency situations patients can decide to drive longer distances to visit physicians at more competent hospitals. If CMS payments are proportional to patient volume, then Sharp Grossmont may take a financial hit due to this lower patient volume without having the hospital decertified.

Decertification is likely not the answer, but having such serious quality lapses reflects poorly on the state of health care in San Diego, and in the U.S. in general.

• Additional information on Sharp Grossmont’s predicament can be found at KPBS’s the Editors Roundtable.

The U.S. is in a huge amount of debt. This will only worsen in the short- to medium-term as the the baby boomers retire and Medicare and Social Security budgets balloon. Here’s a movie about it.

• “This country has started consuming more than it produces.” - Warren Buffet

The controversy as to how much Medicare should pay doctors is continuing to brew (see N.Y. Times article).  Congress passed a law overriding a pay cut to Medicare doctors.  Although the president vetoed the bill, Congress garnered enough support to override the veto.

Dr. Rich of The Covert Rationing Blog claims that the Medicare reimbursement mechanism “is so fundamentally ridiculous that it can only be understood by recognizing that it is a fairly typical bureaucratic attempt to covertly ration healthcare.”

How would you enjoy having legislators determine your salary?

As I noted in an earlier post, choosing a Medicare part D plan is difficult.  However, there are resources to help people choose a Medicare Part D plan based on which prescriptions they are taking and where they live.  Medicare has its own Personalized Plan Search.  The private sector also has come up with user-friendly ways to search for the best health care plans.  MedicareSaver has an easy-to-use plan selector which also includes a video guiding you along the site.

With Health 2.0 gaining strength, choosing a health insurance is not as difficult as it once was.

According to an article on TheHill.com, Medicare denies more claims than commercial insurers.

“Medicare was the most likely to deny any part of a claim, with a 6.9 percent rate. Aetna was a close second at 6.8 percent while the others ranged from 2.7 percent to 4.6 percent.

Coventry Health had the fastest median turnaround between receiving a claim and responding, at four days, according to the AMA. Medicare and CIGNA took a median 14 days; Humana and Aetna, 13 days; Health Net, 11; United Healthcare, 10 and Anthem, seven.”

Why is this? It could be the case that commercial health insurers have more efficient claims processing centers. While economists generally believe that the private sector is more efficient, in the case of health insurance claims firms make more money when they deny more claims. Thus, I am not sure that the profit motive is leading to more private-sector claims approvals.

Competition between insurers may increase claims approvals. Most physicians and hospitals must take Medicare because it represents so large a share of the helathcare spending. On the other hand, physicians may only accept patients whose insurance companies have prompt payment with fewer denials. This leads to some incentive for insurance companies to decrease claims denials.

Another reason for the differential claims denial rates is the demographics of Medicare and commercial insurance enrollees. Almost all Medicare enrollees are over 65, while commercial insurers have enrollees who are of varying ages. Since older individuals are more likely to demand high cost medical procedures, if high cost medical procedures are the ones that are more likely to be denied then Medicare’s higher denial rate may simply be due to the composition of its enrollees.

Whatever the reason, the fact that Medicare denies more claims than commercial insurers should dispel the myth that the government is simply a benevolent entity, while commercial insurers are ruthless, profit-hungry wolves. The truth–as always–lies not in the black nor the white but in the gray.

According to a report by the The Colorado Health Institute, 68 percent of rural and 74 percent of urban dentists do not accept Medicaid patients.  Even for those dentists who do accept Medicaid, many are not accepting new Medicaid patients.  The full report is available here.

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.

Throughout its history, Medicaid provided health insurance for the nation’s poor. It did this by reimbursing providers on a fee-for-service basis. In the 1990s, however, California and other states decided to let private insurance companies bid for the right to provide services for Medicaid patients. These HMOs would receive a fixed per patient per month payment and the private insurer would be responsible for providing health care to Medicaid enrollees.

HMOs may be more efficient than the government since 1) they have an incentive to keep enrollees healthy to save cost, 2) they can negotiate lower input prices, and 3) competition may lead to higher quality, lower priced medical care. On the other hand, keeping the government run fee-for-service program may have been more efficient if 1) the government’s size and negotiating power could decrease input costs, 2) there may be increasing returns to scale, 3) the HMOs may include significant markups in their bids, and 4) HMOs may offer medical services which do not appeal to unhealthy enrollees (i.e., adverse selection).

A paper by Mark Duggan in the Journal of Public Economics in 2004 aims to see if contracting out Medicaid health care provision to private HMOs decreased costs. Duggan uses the fact that California enacted a mandate that all AFDC Medicaid enrollees must switch to a private HMO. For other individuals, such as those on SSI and those who were disabled, deaf or blind, the switch to the HMO was voluntary. This mandate was enacted between January 1993 and December 1999 depending on the county. The author uses variation in the county enactment date to find the effect of Medicaid HMOs on cost.

Background

The manner in which California instituted the transitioned individuals into private managed care plans can be categorized into 3 groupings:

1. Geographic Managed Care. “the state government contracts with several commercial HMOs to coordinate care for Medicaid recipients. Plans initially applied by submitting a menu of prices at which they would be willing to insure each type of Medicaid recipient. The government then awarded contracts to the plans most likely to deliver high quality medical care at a low price, though the weight placed on quality and spending was not specified.”
2. County Organized Health System (COHS). “Under this model, the not-for-profit, community-based HMO was reimbursed a fixed amount per recipient-month that varied by eligibility category.” Individuals did not have any plan choice and the state did not allow bids from for-profit firms.
3. “Two plan” counties. In these counties, the Medicaid enrollees would be able to choose between one private, commercial plan and one not-for profit plan. “…the state solicited bids from private companies and awarded a contract to just one of the plans.”

The following chart gives the type and date of managed care mandate by county.

Methods

Duggan uses the following equations to estimate spending.

• ManCare_jkt = α₁ + γ₁Mandate_kt + μ₁X_jkt + θ_1j + λ_1t + t*ρ_1k + ε_1jkt
• Spending_jkt = α₂ + γ₂Mandate_kt + μ₂X_jkt + θ_2j + λ_2t + t*ρ_2k + ε_2jkt

Subscripts j, k, and t index individuals, counties, and years respectively. The variable Mandate is equal to the fraction of individual j’s Medicaid eligible months in which a mandate was in effect. ManCare is equal to the fraction of the j’s eligible months in which he is actually enrolled in an HMO. Spending is equal to the Medicaid spending for person j at time t.

Results

Duggan finds that the managed care mandate increased Medicaid spending. Medicaid spending increased by between 17% and 23% for counties in which the mandate came into effect. These results, however, were less pronounced where there was competitive bidding between insurance companies (i.e., the Geographic Managed Care and “Two plan” counties).

Also, despite the increased spending, the author finds no evidence of increased quality in terms of better infant birth outcomes.

• Duggan, Mark (2004) “Does contracting out increase the efficiency of government programs? Evidence from Medicaid HMOs” Journal of Public Economics, v 88(12): 2549-2572/

Consumers are starting to pay a larger share for high priced drugs.  According to the N.Y. Times (”Co-payments“), insurance companies “…are charging patients a percentage of the cost of certain high-priced drugs, usually 20 to 33 percent, which can amount to thousands of dollars a month.”  Medicare’s drug plans have introduced new fee schedules where patients pay larger copayments for Tier 4 and Tier 5 drugs.  Private insurers now followed Medicare’s lead.

Should consumers bear a larger burden of their health care costs?  On the one hand, moving towards more out-of-pocket costs will reduce premiums.  Further, higher co-payments will reduce moral hazard (i.e., the use of unnecessary medical care simply because insurance pays for it).  Also, this moves us closer toward insurance as a policy to insure people against catastrophic risk and not as a mechanism to pay for all medical care.

Still, health economist James Robinson from UC-Berkeley states that “It is very unfortunate social policy.  The more the sick person pays, the less the healthy person pays.”

David Whelan chronicles the rise (and possibly future fall) of Medicare Advantage programs in his article “Unfilled Prescription” in Forbes.

Earlier laws privatizing Medicare, starting with a pilot program in 1985, were written to give insurance companies only 95% of the money otherwise spent per Medicare member. The insurers were supposed to figure out how to make up the difference. It was a blunt way to save the Treasury money, but few companies stepped up…

The 2003 law hiked the payments to lure more insurers into the market. In some counties minimum payments to these plans reached as much as 128% of the amount Medicare traditionally spends per patient. Insurers rushed in, and costs soared. In the most remunerative counties, two times as many old people are enrolled in Medicare Advantage as the national average. As a result, taxpayers now pay an average of 12% more per private-plan beneficiary, not 5% less.

Whenever we talk about cost we also need to talk about quality.  Are people who opt for Medicare Advantage plans getting higher quality care than in traditional Medicare?  Are they able to see doctors in a more timely manner?  Is care more coordinated?  If this is the case, then the extra costs may be worth the money.

Nevertheless, an economist would guess that Medicare Advantage plans should be cheaper.  Even though the private plans have higher administration and advertising costs, they likely are more efficient than the government plans.  Further, one would anticipate that healthier seniors would choose the Medicare Advantage plans and sicker senior would be more likely to choose traditional Medicare.  This selection problem should make Medicare Advantage cheaper.

I agree that the federal government should not pay more money for private plans than it does for traditional Medicare.  It should reimburse the plans the same (or less if there is adverse selection) as it costs for the government to administer traditional Medicare and if firms want to increase the price, than seniors can pay the difference.  If seniors do not want to pay the difference, they can always opt for traditional Medicare.

Medicare is inefficient and expensive. Medicare has been expanded through Medicare Part D, which covers prescription drugs. Can expanding an inefficient, expensive system be a good thing? Gary Becker argues yes.

Since drugs have high fixed research costs but low marginal costs, having the government pay for drugs can increase innovation. In fact, a working paper by Blume-Kohout and Sood (2008) finds that “…the passage of Medicare Part D was associated with significant increases in pharmaceutical R&D, especially for classes with high elderly market share.” Further, the fact that there are high fixed costs and low marginal cost means that passing Medicare Part D will likely reduce the average cost of drugs. According to Becker:

This property of the cost of producing drugs has two extremely important implications for Medicare costs. The first is that drugs are an efficient way to treat diseases and disorders that hit a large number of men and women since then the fixed costs can be spread over a larger number of users. This makes them particularly valuable to the elderly who are a growing share of the population in the United States and all other developed countries, and in many developing countries as well, including China…

Drugs are also valuable in inefficient delivery systems that have trouble choking off medical treatments that would not pass a benefit-cost calculation. This would characterize systems with highly subsidized medical care, with excessively low deductibles, or with rules that cannot deny treatments to the very elderly and those close to dying who would benefit only a little from receiving treatment. Surgery, hospitalization, and close physician supervision are expensive ways to treat seniors who do not benefit much from this care since the cost of these procedures tend to rise in proportion to the number treated. On the other hand, while treating seniors with drugs sometimes also may not add much in the way of benefits, the additional cost per user would be much smaller than the average cost per user.

Medicare Part D may increase efficiency in the “second-best” world in which we live today.

A recent article in the Journal of Health Economics found that increasing Medicare reimbursement may have no meaningful effect on hospital use or patient outcomes.

“There is widespread concern about the quality of health care in the US, and the effect of provider payments on the quality of care is an important and unsettled issue in this debate. The critical question is whether changes in provider payments affect health. To date there is relatively little research on this question. Here, we present evidence of the effect of plausibly exogenous changes in Medicare reimbursement – caused by geographical reclassification – on hospital staffing (nurses) and patient outcomes. We find that changes in Medicare reimbursement levels of approximately 10% have no meaningful effect on hospital use of resources or patient outcomes.“ 

• R Kaestner, J Guardado, 2008. “Medicare reimbursement, nurse staffing, and patient outcomes” Journal of Health Economics, 27(2): 339-361.

The [Medicare Hospital Insurance Trust] fund also continues to fail our long-range test of close actuarial balance by a wide margin. The projected date of HI Trust Fund exhaustion is 2019, the same as in last year’s report, when dedicated revenues would be sufficient to pay only 78 percent of HI costs. Projected HI dedicated revenues fall short of outlays in this and all future years. ”

Who is this scare-mongering quotation from?  Rush Limbaugh?  Conservative think tanks?  Fox News?

Actually, this message is from the Social Security and Medicare Boards of Trustees 2008 Annual Report.  Currently, Medicare accounts for 3.2% of GDP.  The authors of the report project that by by 2028, Medicare expenditures will surpass Social Security expenditures.  By 2082, Medicare expenditures will account for 10.8% of GDP!

What is to be done?  We can increase taxes to levels that in the long run would cripple the economy.  We could cut the number of people receiving Medicare benefits.  For instance, we could increase the age at which people are eligible for Medicare or limit Medicare benefits to only certain groups (e.g.: the poor, those who are eligible for Social Security benefits, etc.).  The government could reduce the generosity of the plans by either shifting more costs to patients (i.e.: increasing co-pays and deductibles), or reduce the generosity of the benefit package (i.e.: rationing).  Or we could scrap Medicare all together and start over (e.g.: a voucher program, no elderly health insurance, mandatory savings for the purchase of health insurance later in life).

All of these ways to solve the Medicare crisis have pros and cons and those adversely affected by any change are likely to vehemently protest any reform.  Nevertheless, Medicare as it currently is structured is not a fiscally sustainable program.

Merrill Goozer reports (”CMS okays heart scan…“) on how Center for Medicare and Medicaid Services (CMS) has reversed a policy to stop paying for heart scans.  There has been no clinical evidence to show that these expensive heart scans identify heart disease any better than less expensive procedures (i.e.: stress tests).

Physician revenue, however, would be hurt by this decision and after extensive lobbying, CMS has decided that paying for heart scans may be a good decision after all.  In the words of Merrill Goozer: “Pay first, evidence later. It’s the American way.”

Michael Cannon reports (”Pennsylvania Proposes to Defraud Non-Pennsylvanians“) that Pennsylvania is manipulating the Medicaid system.  Pennsylvania is increasing Medicaid payments to hospitals (thus increasing the amount of federal matching funds) with one hand, but with the other is creating a tax on “profits of general hospitals in two counties, Allegheny [Pittsburgh] and Philadelphia.”

Thus, the hospitals will be left with the same profit level–higher Medicaid payments will be eaten away by the special tax levy–however, Pennsylvania will have to pay a lower percentage of the cost because of the additional matching funds.  Who is hurt?  Only the taxpayers in those other 49 states.

Mr. Cannon analyzes the situation more acerbically: “…the federal Medicaid program allows Pennsylvania to siphon money away from other states.  That sound you hear is your pocket being picked.”

The Wall Street Journal has an interesting article (”Markets and Medicare“) by John Goodman, President of the National Center for Policy Analysis. The article has some innovative suggestions regarding how to improve the health care system.

Medicare should allow alternative payment mechanisms, such as compensating doctors for e-mail and telephone communication with the patient (I completely agree with this). Geisinger Health System “…offers a 90-day warranty on heart surgery, similar to the type of warranties found in consumer product markets. If the patient returns with complications in that period, Geisinger promises to attend to it without sending the patient or the insurer another bill.” While this may seem like a good idea, if someone falls sick within 90 days, it may not always be possible to attribute the complication direction to the heart surgery. It may be due other co-morbidities and how seriously the health system takes this guarantee is unknown.

Virginia Mason Medical Center in Seattle will not give patients MRIs for back pain without first seeing a physical therapist. This is entirely sensible and will greatly cut costs without affecting the quality of patient care.

It is interesting that Goodman advocates the “resticted MRI use” since the NCPA says that “The NCPA’s goal is to develop and promote private alternatives to government regulation and control, solving problems by relying on the strength of the competitive, entrepreneurial private sector.” Reducing the number of MRIs run is certainly the optimal solution from a systems point of view, but reducing MRI use smells like rationing. Physicians have no incentive to decrease the number of MRIs taken–unless the insurers refuse to pay for them–since the patients demand them and many physicians are owners of the MRI care centers to which they refer patients.

What we all must realize is that all good are rationed. They are either rationed through a price mechanism, through queues or through by insurance company or government mandates.

The USA Today reports on the development of a shingles vaccine. According to the article, “The vaccine reduced shingles cases by 51% in people given the vaccine vs. those given the placebo. Vaccination reduced the burden of illness, a measure of pain and discomfort, by 61%.”

So why aren’t people getting this vaccine? One reason is how the vaccine is paid for. The vaccine, priced around $150 by the manufacturer, is covered by the part of Medicare that pays for prescriptions, not doctor visits. That means doctors are not automatically paid for shots given in their offices. Some send patients to pharmacies to get the shots or pick up prescription vials, adding steps that may reduce use, Oxman says. Others stock and give the vaccine, but require patients to pay upfront and seek their own reimbursement.

There is a law which states that drug companies must sell drugs to Medicaid at their the lowest price.  It turns out the Merck was selling drugs to hospitals at a steeper discount than what they were giving to Medicaid.  Merck will pay $399 million for overcharging in Philadelphia and $250 million for overcharging in Louisiana.

According to the New York Times (”$671 million“):

“Merck…was hiding the steep discounts it gave to hospitals by reporting higher prices to the government, prosecutors said.

From 1997 to 2001, Merck also gave money and perks to doctors and other health care professionals to entice them to prescribe Merck drugs, a practice the government called excessive.“

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

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

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

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

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

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

Which Medicare plan should you choose? Health journalist Charles Ornstein of the L.A. Times was making just this choice for his mother in “Puzzling out plan option for Medicare.” Even for a veteran health journalist, the choice is not as easy as it seems.

Below, I will give some background information which will help people like Mr. Ornstein’s mother better understand the choices she is facing.

• Medicare Advantage plan (Part C): “These programs are designed to provide full coverage — replacing traditional Medicare — and include HMOs and preferred provider organizations.” The CHA Medicare Advantage fact sheet states that “In order to join one of these plans, you have to have both Medicare Part A and Part B and you must continue to pay the Part B premiums ($93.50 in 2007). You receive all Medicare-covered benefits through the private plan chosen.” There are 5 types of plans.
  1. Medicare Health Maintenance Organizations (HMOs)
  2. Medicare Preferred Provider Organizations (PPOs)
  3. Medicare Private Fee-for-Service Plans (PFFS)
  4. Medicare Special Needs Plans (SNPs)
  5. Medicare Medical Savings Accounts (MSAs)
• Medigap plan: “Also known as supplemental plans, these cover co-pays and deductibles that patients normally pay under Medicare.” Medigap benefit packages are labeled A through L. Each letter represents a different standardized benefit package mandated by law. According to the CHA Medigap fact sheet, all Medigap plans must offer the following benefits.
  • Co-insurance for hospital days 61-90 ($248/day in 2007) and co-insurance for the 60 lifetime reserve days ($496/day in 2007).
  • 100% of the cost of hospital care beyond 150 days covered by Medicare, up to a maximum of 365 lifetime days.
  • 20% co-insurance for Medicare approved charges after the $131 annual Part B Medicare deductible has been met.
  • The first three pints of blood in each calendar year.
• Medicare Drug Plan (Part D): These are the Medicare prescription drug plans. Standard Part D coverage according to the CHA Medicare Part D fact sheet includes:
  • An initial $265 deductible.
  • Then, Part D covers 75% of the cost of all drugs between $265 and $2400 spent per year.
  • There is a doughnut hole between $2401-$5451 where Medicare Part D offers no coverage.
  • Above $5451, Part D pays 95% of drug costs.
  • After the consumer has spent $3850 in out of pocket costs, Part D will cover all drug costs.

There are so many options, what is a person to do?

First do some research to help you understand what Medicare will cost and what benefits will be included. The California Health Advocates is a good place to start. For instance, you can learn about Medicare Part A hospital benefits. Some of the benefits included are as follows:

The Medicare.gov website also has some tools to help you choose a plan. The Medicare Personalized Plan Search seems like a useful tool. Depending on your trust level in the federal government, you may or may not believe that the Plan Search is constructed in an unbiased manner. Since I do not have a Medicare claim number, I could not try out the service.

If you trust your state government more than the feds, you can look at California’s Department of Insurance rate comparison website at www.insurance.ca.gov.

You can also seek more information from one of the Patient Advocacy websites recommended by Dr. Richard Fogoros of GUTHealthcare.

Just like making any big purchase, you need to do some research, shop around, and try to find an unbiased source of information to help you find the ideal plan to meet your individual needs. Good luck!

In 2006, the federal government first began expanding Medicare coverage to include prescription drugs using the Medicare Part D program. According to one report, Part D will cost taxpayers $47 billion in 2007.

Yet it is possible that Medicare Part D could actually save taxpayers money. If prescription drugs and other medical care are substitutes, then increasing funding for lower cost pharmaceuticals could actually save taxpayers money on the more expensive hospital stays (covered by Medicare Part A) and physician visits (covered by Medicare Part B). For instance, it is possible that regularly taking beta blockers may reduce the chance that one needs an expensive heart surgery.

On the other hand, if pharmaceuticals and other medical care are compliments, than increasing Part D funding, could increase the total spending in Medicare Parts A and B. For instance, individuals taking prescriptions drugs may need to go to the doctor more often–covered by Part B–in order to have their pharmaceutical usage monitored.

So how does Medicare Part D affect other Medicare spending?

This is the question Baoping Shang and Dana Goldman investigate in their NBER Working paper “Prescription Drug Coverage and Elderly Medicare Spending.”

Data and Methods

Shang and Goldman use data from the 1992-2000 Medicare Current Beneficiary Survey (MCBS) and compares Medicare spending differentials between individuals who have a Medigap policy with drug coverage and individuals who have a Medigap policy without drug coverage.

Since Medicare spending–like most health care spending–is right skewed with a large mass at zero expenses. The authors use a two-part regression structure. In the first regression, the the authors use a probit regression to determine the probability an individual had any health care spending. In the second regression, Shang and Goldman utilize an OLS (an later an IV) structure to find the impact of Medigap drug coverage on total spending, conditional on the fact that the individual had some spending. Mathematically, the two regressions look as follows:

1. p* = β₀ + β₁*d +β₂₍d*Income) + ε
2. ln(Y|Y>0) = γ₀ + γ₁*d +γ₂(d*Income) + ν

p* is the probability of any spending, d is a dummy variable if the individual has drug benefits, and Y is total Medicare spending.
This econometric structure could lead to incorrect inferences if selection bias were present. In fact, “[c]ompared to those with prescription drug benefits, Medicare beneficiaries without drug benefits tend to be older, less educated, less likely to be in an urban area, and poorer. They are sicker in term of both self-reported overall health and histories of chronic diseases.”
In an attempt to eliminate selection bias, Shang and Goldman employ state reforms in the health insurance markets as instrumental variables. These reforms include the following:

• “Guaranteed issue requires health plans to offer coverage to all individuals, regardless of their health status or claims experience.
• Rate rating includes rating bands, very tight rating bands, and community rating. Rating bands restrict health plans’ use of experience, health status, or duration of coverage in setting premium rates for individuals. Very tight rating bands allow very limited adjustment for experience, health status, and duration. Community rating prohibits health plans’ use of experience, health status, or duration of coverage in setting premium rates for individual coverage.”

For their instrument, Shang and Goldman look at states with 1) both guaranteed issue and rate rating, 2) states with only rate rating, and 3) states with neither. Since MCBS is a panel, the authors employ a discrete factor model to control for three different levels of unobserved heterogeneity directly and allows some correlation of these fixed effect terms with the error terms.

Results

A simple two part model finds that the “prescription drug benefits increase drug spending by $157, reduces Medicare Part A spending by $135, and increases Medicare Part B spending by $31″–a net $104 reduction in Medicare spending. The more complicated structural model using structurally estimating unobserved heterogeneity parameters finds that the drug benefit increases drug spending by $170 (or 22%). However, “prescription drug benefits decrease Medicare Part A spending by $350 or 13%; and prescription drug benefits decrease Medicare Part B spending by $74 or 4% although the estimates are statistically insignificant.”

Healthcare Economist comment

Even for those who oppose government provided health insurance, few would argue with the statement that given Medicare’s existence, it is important to be sure it operates in the most efficient way possible. This paper demonstrates that Medicare Part D may be cost saving. Leaving out prescription drug benefits may lead patients to choose expensive surgeries–which are free to them since they are covered by Medicare –over taking prescription drugs–which are costly without Medicare Part D. The authors sum up their findings in a compelling manner: “…it appears that Medicare beneficiaries may have been overinsured with respect to medical services, and underinsured with respect to prescription drugs.”

Shang, Baoping; Goldman, Dana; (2007) “Prescription Drug Coverage and Elderly Medicare Spending” NBER WP #13358.

“Medicare adopted its [Medicare as a Secondary Payer] MSP policy in 1982, effective January 1, 1983. This legislation states that for individuals working at firms with 20 or more employees, and otherwise eligible for Medicare benefits, Medicare serves as a secondary payer for health care expenses. The employer’s health insurance is the first payer. Because employer-sponsored health plans tend to be more comprehensive than Medicare, these workers are effectively foregoing their Medicare benefits by working. If these same individuals were not working, they would receive Medicare as their primary health insurance.”

A recent NBER working paper (”A Tax on Work for the Elderly: Medicare as a Secondary Payer“) claims that the MSP policy creates an implicit tax for elderly workers and thus creates disincentives to work. The authors calculate that the implicit tax is 15-20 percent at age 65 and increases to 45-70 percent by age 80. Making the Medicare the primary payer (MPP) will have two fiscal impacts. First, the cost of Medicare will increase. Since Medicare will be the primary payer, it will then be paying for more treatments. Secondly, enacting an MPP policy will decrease the implicit tax, increase the income and hours worked of elderly individuals and thus increase income tax receipts. The authors claim that since the second fiscal impact will dominate the first and thus recommend that an MPP system be implemented.

• Gopi Shah Goda, John B. Shoven, Sita Nataraj Slavov (2007) “A Tax on Work for the Elderly: Medicare as a Secondary Payer” NBER WP #13383.

How do market forces affect the safety of children in hospitals? A paper by Smith, et al. (HSR 2007) looks at data from Florida, New York and Wisconsin and they see if Medicaid market concentration affects quality of care for children aged 0-17.  It is important to examine Medicaid’s affect on patient safety since about 40% of all pediatric hospitalizations are charged to Medicaid.  Recent developments have lead to a variety of Medicaid programs.

Since the early 1990s, most states, with increasing flexibility granted by the federal government, have transferred Medicaid-eligible children into managed care programs as a way to improve access to preventive services and to reduce health care expenditures. Between 1991 and 2004, the proportion of Medicaid recipients enrolled in managed care plans increased from under 10 to over 60 percent.

Using data from the State Inpatient Databases (SID) and the Healthcare Cost and Utilization Project (HCUP), the authors calculate the  Herfindahl-Hirschman index (HHI) for both Medicaid-payer and hospital concentration.  The hospital data is adjusted for available technology using the ‘Saidin Index’ and DRG diagnoses are used to adjust for hospital case mix characteristics.

The authors find the following:

At the market level, patients in markets in which Medicaid payers face relatively little competition are more likely to experience a patient safety event (odds ratio [OR]=1.602), while patients in markets in which hospitals face relatively little competition are less likely to experience an adverse event (OR=0.686). At the patient-discharge and hospital levels, Medicaid characteristics are not significantly associated with the incidence of a pediatric patient safety event.

The authors do note, however, that the number of Medicaid markets with high market power is very small and not representative of most Medicaid markets.  Thus, these results may not be very generalizable.

The 2005 Deficit Reduction Act aimed to reduce Medicaid entitlements as one means to reduce the national deficit. One portion of the bill changed eligibility rules for the elderly to qualify for Medicaid payment of nursing home (NH) expenses. In the May edition of the Journal of Health Economics, authors David Grabowski and Jonathan Gruber estimate whether or not restricting (or expanding) Medicaid eligibility rules significantly impact NH utilization.

Who pays for nursing homes?

There are generally 4 institutions which pay for nursing home (NH) care.

1. Medicare. Medicare pays 100% of the first 20 days of NH stays after a hospitalization, and a portion of NH costs between days 21-100 after a hospitalization.
2. Long-term care (LTC) insurance. Private LTC insurance is purchased at younger ages and protects against the risk of needing NH care. LTC insurance is still fairly rare; only about 4% of NH expenditures are paid by private LTC insurance plans.
3. Out of pocket payments.
4. Medicaid. Medicaid will generally pay for NH care if the individual meets certain income and asset requirements. Generally, the individual needs to qualify for Supplemental Security Income (SSI) or be in a state which allows the individual to “spend down” income in order to qualify for Medicaid.

Analysis

The authors seek to see how loosening Medicaid restrictions will impact NH usage. Expanding Medicaid income eligibility requirements, of course, will mechanically make more individuals eligible for Medicaid, but it may also make Medicaid more attractive since one does not need to “spend down” such a large portion of their assets or income. Loosening Medicaid restrictions can also affects supply. Higher Medicaid reimbursement rates will likely increase the percentage of patients who are Medicaid patients (vs. private insurance or out-of-pocket patients), but may also increase the total number of nursing home patients.

Complications

The analysis does have some complications. Certificate-of-need (CON) laws restrict the ability of NH supply to adjust to changes in NH demand. Also, the population affected by changes in eligibility are the middle class; poor individuals (always eligible) and rich individuals (never eligible) are not impacted by marginal changes in eligibility requirements. One also has to worry that Medicaid NH patients receive worse care than private insurance NH patients, but Grabowski et al. (NBER 2006) shows that this is not the case. Finally, the availability of care given by family or friends is not measured in this study and would likely impact NH utilization.

Data and Results

The data used is the National Long-Term Care Survey (NLTCS) from 1982, 1984, 1989, 1994 and 1999. The data have information on individual demographics, health, as well as income and asset levels to determine Medicaid eligibility. The econometric specification uses a probit regression with time, marriage, and state dummies included.

The authors generally find that loosening Medicaid eligibility rules has a limited impact on Medicaid NH usage. Further, the “spend down” rule that many states have adopted also does not significantly affect Medicaid NH utilization. The authors conclude: “we find consistent and clear evidence that nursing home utilization is inelastic with respect to state policies. Thus, the large increase in nursing home expenditures over the past few decades is not likely attributable to increased generosity in state Medicaid payment programs.”

• Grabowski; Gruber (2007) “Moral hazard in nursing home use” JHE, vol 26, issue 3, pp. 560-577.

What exactly is Governor Arnold Schwarzenegger proposing in his health care initiative unveiled early this year? Below I briefly summarize his press release, as to what the reforms will entail and then follow with some of my comments.

Individual Mandate

• All individuals must have a minimum level of insurance.

Children

• Children of families whose income falls below 300% of the Federal Poverty Line (the FPL was $19,350 for a family of 4) are eligible for public health insurance. Those living with families below 100% of the FPL will receive Medi-Cal insurance while those living in families with income between 101-300% of the FPL will receive Healthy Families coverage. All people living in California are eligible regardless of their residency status.
• Parents will be responsible for providing health insurance for children in families with income over 300% of the FPL.

Adults

• Adults with incomes below 100% FPL are eligible for Medi-Cal. Adults with incomes between 100% and 250% FPL are eligible for coverage through a state purchasing pool operated by the Managed Risk Medical Insurance Board. Individual insurance premiums increase as follows:
  • 100-150%: 3% of gross income
  • 151-200%: 4% of gross income
  • 201-250%: 6% of gross income
• Adults above 250% FPL will be responsible for purchasing their own health insurance, either on the private market or through work.
• Poor undocumented immigrants will receive care at the county level, through county clinics, UC hospitals, and safety net clinics.

What do I think of the plan? Expanding care to the poor is a desirable social goal. Giving the poor no choice as to what type of care they will receive, however, is undesirable. If Medi-Cal health insurance is of poor quality, the individual will experience a serious income shock if they attempt to leave Medi-Cal and enroll in private insurance and thus their choice of insurance plans is limited to one. Offering individuals the choice of having Medi-Cal/Healthy Families or receiving an equivalent contribution towards another private/employer-provided insurance plan would go a long ways towards increasing competition in this market.

Also, the plan gives a strong disincentive to work for those families which make near the 300% threshold. If a family of 4 were to earn $55,000, they would be eligible for the Healthy Families program with some premium. If they were to earn $60,000 (which is just above the 2005 FPL for a family of 4) then they would lose the Healthy Families coverage and have to find insurance on their own. The gradually increasing price of the Healthy Families program is a wise policy move, but is not sufficient to eliminate distortions due to non-linearities in the Income-Insurance benefit function.

The individual mandate is an interesting case. Is it right to dictate to families where they should be spending their limited resources? On the other hand, families could elect to go without health insurance and if they did fall ill they would be able to fall back on the government safety net. Thus, I do not hold a strong opinion on individual mandates at this time.

A recent paper in the Health Services Research journal (”Hospice…“) looks at whether hospice care reduces hospitalizations for elderly terminally ill patients in nursing homes. In the introduction, authors Pedro Gozalo and Susan Miller state that there are two main implications which result from end-of-life hospitalizations:

“At the patient level, hospitalizations of frail NH [nursing home] residents have been shown to include hazards that negatively affect the quality of life (Creditor 1993) and, in many cases, are inappropriate (Saliba et al. 2000). At the policy level, hospitalizations represent the main component of total health care costs, particularly during the last few months of life. In an recent study using both Medicare and Medicaid claims for NH decedents in the state of Florida in 1999, Miller et al. (2004) found hospital expenditures to account on average for 78 percent of all expenditures in the last month of life among those patients that did not receive hospice and 33 percent among NH residents who had any hospice in the last 30 days of life.“

The main problem in determining whether or not hospice care reduces hospitalization is the issue of selection. Individuals who enroll in hospice care may be relatively ‘healthier’ than those who are hospitalized without hospice care. Also, it could be the case that hospice patients are ones that prefer less aggressive treatment methods. Local market idiosyncrasies can also lead to erroneous conclusions.

Econometrics

To take these selection issues into account the authors use an inverse-probability-of-treatment weighting (IPTW) [see Robin, Hernán and Brumback (2000) for more on IPTW methodology].

• Let H=1 if an individual enters hospice care and H=0 otherwise;
• let Y=1 if the individual is hospitalized and Y=0 otherwise.
• Also, let P(W)=P(H=1|W) which is the probability of being hospitalized conditional on W.
• W is a vector of both patient characteristics (X) and a set of hospice provider characteristics (Z).

Using the IPTW methodology, the authors regress Y on H and X and each observation is weighted by the following term:

• H/P(W) + (1-H)/[1-P(W)]

In other words, if the individual enters a hospice, they receive a weighting of P(W)^-1, and if the individual does not enter a hospice the observation is weighted by [1-P(W)]^-1. One problem with this method is that it assumes that the vector W adequately models the choice of hospice care and that there is no unobservable sorting into hospice compared to non-hospice care. To reduce the endogeneity of the hospice characteristics (Z), the authors wisely decide to use the characteristics of the hospice nearest to the individual, not the actual hospice chosen.

Results

The authors find that the most important determinants of hospice enrollment are: principal diagnosis of cancer and patient preferences for noncurative care. Further, the paper concludes that nursing homes “that choose to contract with hospices may be less likely to hospitalize their residents, even if [the] hospice was not present.” The authors find that one quarter of the hospice effect on hospitalization is due to patient preferences, but the hospice effect on hospitalization is still strong.

• Gozalo; Miller (2007) “Hospice Enrollment and Evaluation of Its Causal Effect on Hospitalization of Dying Nursing Home Patients” Health Services Research 42:2 (April 2007) pp. 587-610.
• Robin, Hernán and Brumback (2000) “Marginal structural models and causal inference in epidemiology” Epidemiology. Sep;11(5): pp. 550-60.

The RAND health insurance experiment (HIE) demonstrated that increasing coinsurance rates decreases medical care utilization. The HIE also found that health outcomes did not vary between individuals with high, low and zero coinsurance rates.

A working paper by Chandra, Gruber and McKnight (”Patient Cost Sharing…“) re-examines whether or not this is the case using a more current dataset specifically focused on the elderly. The medical utilization data the authors use is for of all CalPERS retirees between January 2000 and September 2003. Almost all of the retirees are covered by Medicare, but since Medicare typically has a 20% coinsurance rate, CalPERS provides supplemental insurance to their retirees. The authors conduct a difference in difference estimation comparing copayment changes from the CalPERS decision to raise PPO copayment rates in February 2001 and then to raise HMO copayment rates beginning in January 2002.
The authors find that physician office visits and prescription drug utilization are very price sensitive. For office visits, the estimated price elasticity is between -1.38 and -1.90 and for pharmaceuticals the price elasticity is between -0.20 and -1.4. These findings are surprising since it is typically assumed that the demand for medical care is inelastic.

The authors also found that increased cost sharing led to a slight increase in hospitalizations. However, when the subpopulation of individuals with chronic health conditions is examined, large increases in hospitalization rates are found. This means that individuals with chronic health conditions forego office visits and drug purchases due to the increase in price, but this decision will worsen their health and thus increase the chance they are hospitalized.

Why would an insurance company want to increase the number of expensive hospitalizations? It turns out that the CalPERS insurance plans pay for the ‘first-dollar’ of office visit and pharmaceutical costs. Thus, by increasing copayments, office visits and drug use decrease. Since Medicare pays for the ‘last dollar’ of medical costs (i.e.: Medicare pays for expensive hospitalizations and surgical procedures), the CalPERS plans do not incur the cost of the increased hospitalizations. To summarize, CalPERS receives the majority of the cost savings from increased copayments whereas Medicare bears the cost of the increased hospitalizations when office visit and pharmaceutical demand decreases.

This papers shows that it is always important to take a more global, more systematic view whenever a researcher is investigating the medical field.

• Candra, Amitabh; Gruber, Jonathan; McKnight, Robin (2007) “Patient Cost-Sharing, Hospitalization Offsets, and the Design of Optimal Health Insurance for the Elderly,” NBER Working Paper #12972.

Do increases in government spending affect health outcomes? While this seems like a simple question, proving whether or not spending impacts outcomes is difficult. There are questions of reverse causality: the governments of countries or regions with more serious health problems ceteris paribus may decide to increase their allocation of health spending; thus one may erroneously conclude that government spending worsens health outcomes. Also, whenever one examines different regions or countries, a researcher must take into account heterogeneity across these geographical units. For instance, observing that Florida has higher Medicare spending and a higher death rate may not imply that government spending increases mortality, but simply that Florida has a higher percentage of elderly patients. Further, raising spending levels may increase the amount of unnecessary procedures preformed, and thus worsen health outcome measures.

Two studies which analyze government spending and health outcomes are papers by Bokhari, Gai, and Gottret (2007) and Byrne et al. (2007), both published in the Health Economics journal. The first paper analyzes cross-country government spending variation and the second looks at regional disparities in Veterans Affairs (VA) spending across U.S. regions.

Bokhari, Gai and Gottret (2007)

To control for the problems above, the Bokhari paper controls for income level (GDP), the level of donor funding, the deviation in donor funding from its historic average, and some infrastructure variables such as literacy levels, miles of roads in the country and measures of access to improved water sources and sanitation. The authors also use an instrumental variables approach to control for endogeneity in income and government health expenditures. The instrument for income is the consumption-investment ratio since the authors claim that it is correlated with GDP per capita, but not with infant mortality (the dependent variable). The authors use the military expenditures of a nation’s neighboring countries as an instrument for the proportion of spending on health. This is a decent instrument–better than using a country’s own military expenditures–but if there was a war it would be likely that another country’s military expenditures would be correlated with infant mortality measures.

While cross-country regressions should always be viewed with some skepticism, the authors do find that increasing government health expenditures decreases infant mortality as well as maternal mortality. According to the authors, “[t]he elasticity of under-five mortality with respect to government expenditures ranges from -0.25 to -0.42 with a mean value of -0.33. For maternal mortality the elasticity ranges from -.042 to -0.52 with a mean value of -.050. For developing countries, [the] results imply that while economic growth is certainly an important contributor to health outcomes, government pending on health is just as important a factor.” In developing countries where many of the top health problems come from contagious diseases, one would expect public health efforts to be particularly effective in reducing mortality rates.

The authors do wisely qualify their claims by stating that increased government health spending in countries with corrupt government can reduce health outcomes. Also, one may worry that increased government health spending may decrease government spending in other areas important to health (e.g.: water works, utilities, network of roads, and education) . For instance, having poor roads may prevent the population from easily accessing care in a hospital or outpatient facility.

Byrne, Pietz, Woodard and Petersen (2007)

The Byrne et al. paper looks at health care funding and risk-adjusted mortality in 22 VA geographical networks over a six year period. The risk-adjustment is accomplished by controlling for Diagnostic Cost Groups (DCG).

The authors conclude the following: “in cross sectional regressions that VA Networks with higher funding have lower risk-adjusted mortality when all male veterans were analyzed. However, when we analyzed a multi-year data set consisting of six years, using a hierarchical linear regression with clustering on Network, funding levels are no longer significantly associated with mortality, but Network was highly significant. This indicates that some characteristics of the Networks themselves are driving this result.” The authors, however, found a positive correlation between spending and poor health outcomes for the sickest patients in the sample. One can not be sure if this is due to increased spending leading to unnecessary procedures or because unobserved sickness levels are correlated with mortality.

Overall, it seems that in developed countries, government health care spending is not strongly correlated with health outcomes. In developing countries, however, government spending has a positive association with health outcomes likely due to public health efforts to control infectious diseases.

• Bokhari, Gai and Gottret (2007) “Government health expenditures and health outcomes” Health Economics, vol 16, pp. 257-273.
• Byrne, Pietz, Woodard, Petersen (2007) “Health care funding levels and patient outcomes: a national study” Health Economics, vol 16, pp. 385-393.

Many analysts believe that medical costs can be contained by having the government run the health care system. The Ludwig von Mises Institute disagrees with this; in fact they believe that while Medicare and Medicaid “…provided a basic welfare program that covers most persons aged 65 and older as well as all needy individuals,” these programs significantly raised the cost of medical care in the United States. The complete article (”Why is medical care so expensive?“) can be found here; an excerpt is below.

“The program [i.e.: Medicare and Medicaid] undoubtedly has saved lives as it has enabled elderly and poor people to receive medical treatment they were not able to afford on their own. It has raised the quality of living for many. But its sponsors completely ignore some undesirable consequences such as the soaring costs and the rising number of people who therefore choose to forego any health insurance coverage. “

Politicians are faced with a serious dilemma in the near future: reauthorize the State Children’s Health Insurance Program (SCHIP) and spend billions of dollars on a single-payer government health program or fail to renew the program and leave many children uninsured and many constituents angry. The Kaiser Family Foundation reports (”Several Lawmakers…“) that the SCHIP will expire on September 30th, 2007, and that currently several Democratic Congressmen are working on competing SCHIP renewal bills. The New York Times reports (”…Helath Care Battle“) that renewing SCHIP for the next five years will cost $50-$60 billion.

While SCHIP enjoys widespread support (its is politically difficult to oppose providing health insurance to uninsured kids), opposition to the program comes from a curious source: the House Black Caucus. The Health Care Policy and Marketplace Review blog says that Caucus members such as Charles Rangel oppose SCHIP because they believe

“all of that money going to cover healthy children should be used for the people who really need it – the ‘55-year-old like me’ who has diabetes or heart failure of mental illness. Medicaid funds are being used to send hundreds of thousands of healthy children of the chronically ill, near-poor diabetics to a doctor — while the actual sick person in the family sits on park bench and can’t afford to go anywhere except the ER or a public hospital, if they can afford the copay.”

Another view comes from the Health Affairs blog. In a recent post, Sarah Dine argues that providing health insurance for children isn’t enough; enabling children to easily access high quality care can be just as or more important. Ms. Dine cites a paper by Julia Lear which posits that health care professionals can often best treat children right in their own schools. The abstract from the paper is quoted below.

“A vast array of child health professionals—99,000 counselors; 56,000 nurses; 30,000 school psychologists; 15,000 social workers; and smaller numbers of dental hygienists, dentists, physicians, and substance abuse counselors—provide care to children and adolescents at school. However, most thought leaders in child health know little about this “hidden” system of care or are skeptical about its capacity to contribute to children’s well-being. Increased interest in prevention and chronic disease management, powered by escalating concern about childhood overweight, might end the isolation of school health programs and link them more effectively to community-based prevention programs and health care services.”

In recent years, the federal government has attempted to increase access to government provided health insurance. Between 1984 and 2004, the percentage of non-elderly individual with government provided health insurance rose from 13.5% to 17.5%. Over the same time period, however, the percentage of American without health insurance also rose from 13.7% to 17.8%.

In their 1996 paper, Cutler and Gruber claim that increasing access to public health insurance plans crowds out private health insurance. It is an important policy question to understand whether expanding public health insurance is reducing the amount of uninsured individuals or simply shifting Americans from private to public insurance rolls. In Cutler and Gruber (QJE 1996), the authors estimate that a 10% increase in Medicaid coverage reduced private health insurance rates by 5%; this represents a 50% crowd out level.

Subsequent studies have argued that this 50% crowd out figure is an overestimate. Card and Shore-Sheppard (2004) use SIPP data (instead of the CPS) and found no crowd out with the 1990 OBRA Medicaid expansion. A paper a year later by Ham and Shore-Sheppard (2005) in Industrial and Labor Relations Review claims that by adding state*year interaction terms to the Cutler Gruber (1996) econometric specification changes the crowd out estimate to zero. Other studies, such as LoSasso and Buchmueller (2004) and Dubay and Keeney, have found crowd out estimates on the magnitude of the Culter/Gruber paper.

To combat these critics, Gruber and Simon have released a 2007 NBER working paper to re-estimate crowd out figures using updated data. The data used are the 1996-2002 SIPP data. Despite the panel nature of the data, Gruber and Simon have decided to treat the data as if it were simply a pooled cross-section, thus losing the ability to fully control for individual or household characteristics. Their econometric estimation technique is as follows:

• INS_ijt = α + ELIG_ijt + ν_j + �?_t + ε_ijt

They authors also use an instrumental variables approach similar to the one employed in Currie and Gruber (1996). A random sample of 300 children of each age (and their families) is taken from each year of the SIPP. Eligibility rules for each state are applied to this sample for each of the 12 months of each of the years to calculate the fraction of the national sample eligible (in state j, time t) that is eligible for Medicaid. This effectively weights the rules in each state by their effects if applied nationally. Eligibility is instrumented by this ‘simulated percent eligible‘ variable. The authors also later include state*year interaction terms as well.

Using an individual level of observation, the authors find 20% to 40% crowd out, although the authors can not rule out that these estimates are statistically different from zero. Using family level estimates, crowd out is larger 60% to 80%, and these results are more statistically significant. One problem of using the family level estimates are that families where all household members are eligible for Medicaid of SCHIP and families where none of the household members are eligible for Medicaid are composed of vastly different income levels. SCHIP health insurance is available for all children part of a household with income below 133% of the federal poverty line and some children between 133% and 350% of the federal poverty line depending on the state, whereas adult generally need to be below the poverty line to qualify for Medicaid. Also, I find it unintuitive that the paper finds more crowd-out for individuals with employer-provided health insurance compared to non-group policies. Could these individuals be switching jobs to higher paying jobs without insurance and then taking up Medicaid coverage?

The authors also examine anti-crowd out measures such as mandatory waiting times between when private insurance is dropped and when Medicaid insurance is taken up. Gruber and Simon find that the waiting times are ineffective against preventing crowd out but these estimates are not precise.

• Gruber and Simon (2007) “Crowd-Out Ten Years Later: Have recent public insurance expansions crowded out private health insurance” NBER Working Paper #12858.

In 2005, approximately 114 million visits were made by Americans to the hospital emergency departments. Of these, more than eighty percent concluded with a discharge and a recommendation for follow-up care. Receiving prompt and adequate post-ER care is imperative for the resolution of many illnesses and temporary disabilities. Is timely care available for these patients?

A study by Asplin, et al. (2005) and a subsequent paper by Neath and Carlin (2006) look at how easy it is to schedule an appointment after an ER visit. To collect the data, clinics were phoned by a graduate students posing as patients just released from a hospital emergency department. Callers had four (made-up) medical conditions: pneumonia, elevated blood pressure, vaginal bleeding in the first trimester, and symptoms of depression. The depression observations were excluded from the study because many primary care physicians do not feel qualified to treat depression.

In each call, the individual claimed to have either: 1) private insurance, 2) Medicaid insurance, 3) no insurance and could not pay, or 4) no insurance but would pay for the visit out-of-pocket. A call was deemed successful if an appointment was made within 7 days and the out-of-pocket payment for the appointment was $20 or less.

Results

Asplin, et al. preform a simple paired comparison in which the same clinics are compared where the only difference between the observations is the unit of insurance the phony patient had. Neath and Carlin directly incorporate other covariates - such as the medical condition, safety-net status of the clinic, city dummy variables, etc. The results are similar in both studies, but the table below gives Neath and Carlin’s findings.