Public Policy

The L.A. Times reports on Frank Lucero, a man arrested for drug use, petty theft.  Mr. Lucero had glaucoma and while he was in prison, his eye ailment went untreated.  

Lucero hadn’t been able to see much since being diagnosed with glaucoma while at Soledad State Prison in 2005. Still, with medication, he was able to work jobs moving furniture in between time served for drug use, petty theft and skipped meetings with his parole agent.

…three months into a yearlong sentence, with dozens of appeals to see an eye doctor unheeded and the pain growing unbearable, Lucero said, he still had neither the anti-inflammatory medication nor a prescription for glasses.

He had headaches and dizziness.  His equilibrium and speech were affected.

“Some days I couldn’t put together a sentence without yammering and stuttering,” he said.

On May 23, 2008, Lucero was sitting on his bunk, his head cradled in his hands, when his throbbing eyeball “just exploded.”

Should Prisoners get health insurance?
With state budgets reeling, how much of a priority should health care be for prison inmates?  Many people will argue that it should be very low on the list.  Why should prisoners get ‘free’ health care when there are 45 million employed Americans?

On the other hand, even employed Americans have the right to purchase medical using their own savings or through taking out debt.  Prisoners do not have this option.  Further, since the state is the custodian of these prisoners, it has a fiduciary right to give them at least a minimal level of health care.  

Giving Frank Lucero glaucoma drops would have been much cheaper than paying for an ambulance to after his eye burst from the pressure.

The Boston Globe reports that “Overseers of Massachusetts’ trailblazing healthcare program made their first cuts yesterday, trimming $115 million, or 12 percent, from Commonwealth Care, which subsidizes premiums for needy residents and is the centerpiece of the 2006 law.”  The reduction in the Commonwealth Care was caused by the bad economy.  Not only does a bad economy mean fewer tax revenues as earnings are cut, but demand for government health insurance grows as laid off employees lose employer provided care.

Opponents of government health plan may use this as evidence that government-run health care can’t work.  This is not the case however.  In a bad economy with private insurance, workers lose coverage when they lose their jobs.  If they do decide to purchase a nongroup health insurance plan, they will likely choose a less expensive plan.  Thus a bad economy effects individuals similarly with and without government provided health insurance; with fewer resources to go around everyone must cut medical expenditures irrespective of whether there is a government-provided health plan.  

The difference between the less generous insurance benefits is who decides on the cuts.  In a free market plan, individuals decide for themselves how much insurance to buy.  However, for some individuals who lose their jobs, health insurance will be unaffordable.  On the other hand, bureaucrats determine what will be cut in a government health plan.  

Democrats will argue that mediocre insurance for all is better than great insurance for some and none for others.  Republicans will claim that a government-run healthcare system will necessarily lead to mediocre insurance coverage in any bad economy. Further, legal immigrants may not be eligible for Commonwealth Care in order to save money.  Thus, there will still be individuals without insurance.

Who perspective do you think is right?

Southern California is in the midst of a drought.  What is the city doing to conserve water?  They are resorting to new rules and ‘water cops‘.

• Apartments, Condos and Businesses can water: Monday, Wednesday & Friday
• Homes with odd-numbered addresses can water: Sunday, Tuesday & Thursday
• Homes with even-numbered addresses can water: Saturday, Monday & Wednesday
• Apartments, Condos and Businesses can water: Monday, Wednesday & Friday
• On your watering day, you may only water before 10 a.m. or after 6 p.m.
• Landscape irrigation using sprinklers is limited to no more than ten minutes maximum per watering station per assigned day.

Isn’t there an easier way?  Of course.  The answer is to raise the price of using water.  I’ve broached this idea in two previous posts.   Charging more for water (especially during a drought) will accomplish the same goal as these arcane rules set out to do: reduce water demand.

Watering at night or early in the morning saves water because less water evaporates at this time of day. If water is more expensive, people will voluntarily water early or late in the day to save water.  Further, a higher price of water compel people to 1) water less and 2) plant vegetation that requires less water such as succulents.  This way people will water when they please, but will water less often and with less water.

Economists believe that getting prices right will lead to efficient market allocation; in the case of water conservation, economists are almost certainly correct.

• How to save money: Don’t make doctors get a bachelor’s degree.
• Do we have too much medical care?  ”…35 to  45 percent of prescriptions may have no effect on the disease for which they are prescribed and that as little as 10 percent of diseases are significantly influenced by modern treatment.”
• Dennis Berry supports a more free market approach with first dollar coverage only for the very poor.  There would be mandatory “stop-loss insurance at different deductible levels depending on income.”
• Eliminating adverse selection:  ”In both the individual and group market arena, we must do away with underwriting based on claim history  and medical conditions.
  In both the individual and group market arena, we must do away with underwriting based on claim history 
  and medical conditions.”
• Is a two-tiered system the way to go?

And finally Niccolo Macchiavelli states why changes is difficult.

• “There is nothing more difficult to carry out nor more doubtful of success nor more dangerous to manage than to introduce a new system of things; for the introducer has as his enemies all those who benefit from the old system, and lukewarm defenders in all those who would benefit from the new system.”

Cato Institute Senior Fellow Michael Tanner is not a big fan of some health care reforms that are being proposed.  He reviews recent health reform proposals in his Obamacare article.  I review a few of his arguments below.

• Employer Mandate.  Tanner believes employer mandates are a bad idea and I wholeheartedly agree.  Large firms can efficiently offer health insurance and will continue to do so to attract employees.  For small firms, however, they do not have the scale to efficiently offer health insurance.  The employer mandate would stifle small business growth and put a drag on the economy.  An economics experiment also showed employer mandates will adversely affect small businesses.
• Individual Mandate.  One reason for the individual mandate is that the cost of the uninsured is passed on to the insured through higher premiums or higher taxes.  Tanner, however, notes that “uncompensated care…[costs] as much as $40.7 billion per year, with 85 percent of that cost borne by federal, state, and local governments.  But…the United States currently spends roughly $2.4 trillion annually on health care, …[which] amounts to about 1.7 percent of the total U.S. health care spending. Other estimates put it slightly higher, at 3–5 percent.”  So an individual mandate will not greatly reduce costs.  Secondly, enforcing an individual mandate will be difficult.  Massachusetts instituted an individual mandate in 2005, but 200,000 people still remained uninsured.  Strict enforcement of an individual mandate will be costly to administer and will mostly go after poor people who couldn’t afford health insurance to begin with.  
• Cost-effectiveness programs.  The stimulus packaged authorized “$1.1 billion for the federal Agency for Healthcare Research and Quality to conduct a ‘comparative-effectiveness research program.’”  Is this a good idea?  Tanner argues that Americans don’t want the government deciding what type of care they can get.  But of course, private insurance companies decide what type of care their enrollees can get all the time.  If there is a government health insurance plan, investing in cost-effectiveness research reduces the chance that taxpayer funds are wasted.  Of course, if you want to pay for a procedure out of pocket, you would be allowed to do this yourself.  Tanner claims that government cost-effectiveness research could crowd out cost-effectiveness research by private insurers.  However, the government is more likely than private health plans to share its findings publicly; since information is a public good, government cost-effectiveness research is welfare improving.

Source: Tanner, Michael D. (2009) “Obamacare to Come: Seven Bad Ideas for Health Care Reform” Cato Institute Policy Analysis no. 638.

Conditional Cash Transfer (CCT) programs have become very popular among development economists.  This programs pay poor families to have their children attend school and/or get vaccinated.  Some of the larger programs include Bolsa Família in Brazil and Oportunidades in Mexico.  

Should economists support CCTs that pay the poor to get vaccinated?  This depends on 2 factors: 1) are these program effective and 2) what are the unintended consequences of implementing CCT.  Let us review both issues.

CCT program effectiveness

Barham and Maluccio (2009) review some of the studies on CCTs and vaccination rates.

• Mexico.  ”Barham et al. (2007) examine the effect of the Mexican CCT program, Oportunidades, in rural areas using data from a randomized experiment…They find small average program effects, on the order of 3 percentage points, and argue that this is due to high coverage rates (above 90%) before the program. They also find…larger effects for those children whose mothers were less educated or who lived further away from a health facility.”
• Honduras. “Morris et al. (2004) examine the impact of a conditional voucher program in rural Honduras, also using a randomized experiment. They find small significant increases for the first dose of DPT and no effect for MCV, but do not investigate DPT3 or sub-population effects.”
• Nicaragua. Barham and Maluccio (2009) investigate the Red de Protección Social (RPS) CCT which began in 2000.  They find that ”the program led to large increases in vaccination coverage…Effects were particularly large for those sub-populations that are traditionally harder to reach children who live further away from a health facility or whose mothers are less educated. In terms of achieving eradication, on-time vaccination coverage in the treatment group was close to or greater than 95% for BCG, OPV3 and DPT3 by 2002, whereas it remained below 90% for the country as a whole for OPV3 and DPT3.”

Overall, it does seem that paying individuals does increase vaccination rates.

Unintended Consequences

Below is a list of some of the unintended consequences of CCTs:

• Weakening the formal sector and stifling tax revenues.  Usually, only poor individuals are eligible for these conditional cash transfers.  This program structure gives poor individuals an incentive to either underreport income or to avoid participating in the formal sector workforce.
• Using CCTs for political means.  Politicians may vary the CCT by municipality to get votes.  Populist candidates will advocate raising the level of the cash transfer to attract the votes of the poor.  
• Corruption.  Whenever government officials are handing out cash, one has to worry that some portion of program funds land in the pockets of program administrators.  
• Weakening of the social contract.  Many individuals may get vaccines to protect their children, but also to protect the health of one’s neighbor.  Gneezy and Rustichini (2000) found that fining parents who are late to pick up their children from school actually increased tardiness.  Similarly, the long term effect of paying people to get vaccines may reduce citizen’s motivation to get their children vaccinate in the absence of payment.
• Effect on Government Credibility in the cash of a deadly vaccine.  Earlier this month, I blogged about how the rush to produce a flu vaccine in 1976 actually lead to dozens of deaths.  If the government uses a CCT to convince individuals to take an unsafe vaccine, the political backlash will be overwhelming.  Poor citizens may lose faith in a number of other well-intentioned government initiatives.

Conclusion

So what do you think?  Are conditional cash payments to increase vaccination coverage a good strategy?

In a letter to President Obama today, AdvaMed, AHIP, AHA, AMA, Pharma, and SEIU all claimed that they would save the country $2 trillion.  Saving, however, is a relative term.  The goal is to reduce the rate health care expense growth by 1.5%.  Thus, this is not a true savings in the typical sense of the word, but a goal to have health care costs grow less than expected.  How do this consortium of “private sector stakeholders” attempt to  accomplish this savings?  Below are proposed solutions and my response.  

• Administrative simplification, standardization, and transparency that supports effective markets.  This would certainly make the health care system more efficient.  Much time and money is wasted arbitrating what procedures and services are and are not covered.  However, some health care administrative spending is useful; it makes sure that wasteful health care services are not paid for.  Further, in 2004, only 7.3% of health care spending was attributable to administrative costs (Borger et al. Health Affairs 2006).  Even cutting administrative costs in half will not solve the problem of high insurance premiums.
• Reducing over-use and under-use of health care by aligning quality and efficiency incentives among providers.  This gets to the heart of the matter.  My “Operating on Commission” paper shows that the manner in which physicians are compensated has dramatic effects on surgery rates.  While choosing optimal levels of care would vastly improve health care quality and reduce cost, it is extremely difficult to do in practice.  How does one define over/under-use?  Should a 40 year old male get surgery to repair an ACL injury?  This will not impair his ability function, but will affect his ability to play sports.  Should insurance cover this?  If we want to reduce health care costs, will have have to make some difficult choices and cut benefit generosity significantly.
• Encouraging coordinated care and adherence to evidence-based best practices and therapies. Coordinated care and more frequent use of evidence-based medicine should increase quality.  Fewer mistakes can lead to fewer hospitalizations and thus less care.  As always, the devil is in the details.  How is care to be coordinated?  Will there be nation-wide electronic medical records?  Large, centralized health providers–such as Kaiser Permanente–are good at implementing evidenced-based medicine. It is more difficult, however, for physicians in small group practices to keep up with the latest techniques.  Large, centralized health plans are the best way to implement evidence-based medicine, but concentrating health care in the hands of a few insurers could decrease competition and raise premiums.
• Reducing the cost of doing business by addressing cost drivers in each sector and through common sense improvements in care delivery models, health information technology, workforce deployment and development, and regulatory reforms. I’m not exactly sure what this means.  It basically means, make healthcare better, but not specifics are involved.
• Reform should include a specific focus on obesity prevention.  Decreasing obesity will help improve health and quality of life overall.  However, I do not believe that this should be accomplished at the cost of individual liberty to choose what to eat and how much to exercise.  Further, reducing obesity may actually increase health care costs (since obese people die sooner).

Why have “physicians, hospitals, other health care workers, payors, suppliers, manufacturers, and organized labor” come together now?  Although they claim they want to cut costs, it is in the interest of most of these stakeholders to increase cost.  Michael Cannon notes that “Lobbyists never advocate less revenue for their members.  Ever.  If they did, they would be fired and replaced with new lobbyists.”  Cannon claims the lobbyists are writing the letter because they want universal health insurance.  It could also be the case, that these groups fear the advent of a government-run health insurance system that would compete with private insurers.  

Whatever the case may be, these associations are providing no guarantees of anything.  They say they’ll cut costs by $2 trillion, but what if they don’t?  Nothing will happen. They may argue that government projections underestimated certain factors.  Health care spending may decelerate on its own even if these groups do not change their behavior.  In fact, with the economic slowdown, medical costs will likely decrease as workers lose insurance coverage when they lose their job.  

In essence, what did the letter to Obama say: a lot of cheerleading, not a lot of action.

Brazil’s Bolsa Família program has been help up as one of the great social welfare programs.  It has been a model for Mexico’s own Oportunidades social welfare program.  

The Wilson Quarterly reports that the 44 million poor Brazilians who participate in this program receive payments of up to $104 a month for sending their children to school, getting them vaccinated, and sending them to health clinics.  These are large amounts since these families on average earn less than $73 month.  It has been shown that the program has increased vaccination rates and school attendance. 

However, the Bolsa Família program may not be as inocuous as it seems.  Anothony Hall (2008) documents that these grants have been used in some areas to buy votes.  Further, spending on Bolsa Família has crowded out other social spending programs.  For instance, federal spending on basic sanitation and housing fell in real terms by 46% between 2002 and 2004.  Finally, the Bolsa Família may draw people towards working in the informal sector.  Formal sector employment may make a family ineligible for the Bolsa Família grants.  São Paulo’s informal sector doubled in size (to 51%) between 1991 and 2004.  

• “Brazil’s Bold Experiment” Wilson Quarterly, Spring 2009, pp. 85-86.

The book Cadillac Desert discusses the development of dams, aquaducts, and irrigation canals to slake the thirst of cities and farmers in the Western U.S..  While these projects did eventually deliver the water they promised, they did so at huge costs to taxpayers.  In the words of former congressmen Robert W. Edgar:

“The old-boy network comes to you,” says Edgar, who was elected to the House of Representatives in 1974, at the age of thirty-one.  ”They say, ‘You’ve got a water project in your district?  You want one? Let us take care of it for you.’  Then they come around a few months later and get their pound of flesh.  You actually risk very little by going along.  You get a lot of money thrown into your district for a project that few of your constituents oppose.  In return, you vote for a lot of projects your constituents don’t know or care about.  Not many of my constituents are going to base their vote for or against me on whether or not I supported Stonewall Jackson Dam in West Virginia.  Then everyone wonders why we’re running such big federal deficits, and they cut the social programs, which must be the culprit.”

• Robert W. Edgar, U.S. Congressman from 1975 to 1987.

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.

Last month, I blogged about allowing a government-sponsored health plan to compete with private insurers.  Joe Paduda gives one argument in favor of a public health insurer that any economist would love: increased competition.  

“The reality today is that almost every market is already dominated by a very few health plans, so much so that in most markets, there really is very little market competition amongst health plans…In 96% of markets, at least one insurer has share higher than 30%; in almost two-thirds of the markets, at one insurer has share greater than 50%.”

Could a public health plan actually increase competition?

Markets win.

• Meloso D,  Copic J, and Bossaerts P. (2009) “Promoting Intellectual Discovery: Patents Versus Markets” Science” Vol. 323. no. 5919, pp. 1335 – 1339.

HIV is a huge health issue around the world and especially in sub-Saharan Africa.  Many American NGOs have promoted abstinence programs as a way to prevent the spread of HIV/AIDS.  However, most evidence finds that this approach has been ineffective.

An NBER working paper by Dupas (2009) adds more support that abstinence programs do not work.  In the paper, the author used a

“…randomized fi…eld experiment involving 328 primary schools to compare the effects of providing abstinence-only versus detailed HIV risk information on teenage sexual behavior. Half of the schools, randomly selected, received teacher training on the national HIV/AIDS curriculum, which focuses on abstinence until marriage, but does not discuss risk reduction strategies (such as condom use or selection of safer partners). In 71 schools, randomly selected after stratifying by teacher training status, an information campaign provided teenagers with information on the prevalence of HIV disaggregated by age and gender group (the relative risks information campaign).”

The authors finds that the abstinence program had no effect on pregnancy rates.  However, the “risk reduction” educational program decreased the probability a girl had started childbearing within a year by 28%.  The decreased pregnancy rates were not, however, due to less frequent sexual activity.  Instead, teenage girls switched their sexual partners from older partners to teenage boys in their age cohort.

This leads to the finding that teenage girls are having the same amount of sex, teenage boys are having more sex, but pregnancies are decreasing.  Why is this?

The author explains that when teenage girls have sex with teenage boys, “…teenage girls report higher rates of condom use, presumably in order to avoid pregnancy with resource-constrained teenagers.”  It is also possible that teenage girls can more easily convince boys of their same age to wear a condom whereas it may be more difficult to convince older men to use a condom.

Thus, we see that these “relative risk” educational programs do not decrease sexual activity on the extensive margin (teenage girls are having the same amount of sex), but do decrease risky behaviors on the intensive margin (more condom use when teenage girls have sex with people of their same age).

• Pascaline Dupas (2009) “Do Teenagers Respond to HIV Risk Information? Evidence from a Field Experiment in Kenya,” NBER WP #14707.

Regarding my post on Monday, Obama’s stimulus package–a.k.a. the American Recovery and Reinvestment Act (ARRA)–includes 1.1 billion dollars for clinical comparative effectiveness research.

According to the American Academy of Family Physicians (AAFP), ARRA “allocates $1.1 billion for comparative clinical effectiveness research, including $300 million for the Agency for Healthcare Research and Quality and $400 million each for HHS and NIH to conduct this research.”

Yes,  Dr. Peter Schuck (Professor, Yale Law School):

• “…juries in different states make different decisions on the same drug–hardly a recipe for the uniformity and predictability to which manufacturers should be entitled. A jury’s flaws are inherent in its design. In contrast, the FDA’s flaws–and they are many–can at least be remedied by Congress, to which it is highly accountable.“

No, Merrill Goozner (Journalist, GoozNews):

• “The jury system may be an imperfect solution to this flawed regulatory system, but sometimes it is the only option…the FDA over many decades has been denied the resources it needs to do its job properly. In the past decade, it has been run by political appointees like former drug industry counsel Dan Troy, who nakedly used public office to advance the interests of his former clients. When regulation fails, the states’ civil justice system — including the right to a jury trial — remains a vital backstop.”

All health services researches know that comparative-effectiveness research is a vital link towards improving quality and decreasing cost.  Comparative effectiveness examines different medical treatments and evaluates which are the most cost effective.  The UK’s NICE (National Institute for Health and Clinical Excellence) publishes clinical appraisals regarding which treatments the NHS should cover.

Should the U.S. create a NICE-style government agency to conduct comparative effectiveness research?  Few researchers doubt that comparative effectiveness research is needed.  The question is whether it should be provided by the government.

Pro

Comparative effectiveness research is a public good.  Information is a non-rivalrous good (when I learn something that does not stop you from learning it).  Once the best treatment for each disease is established, it is difficult (but possible) to exclude individuals.  Because comparative effectiveness research is a public good the government would seem to have a large role to play.  Further, the government may be a more unbiased researcher than would be the case if private insurance companies conducted comparative effectiveness research.

Even if the government decided to continue funding a comparative effectiveness agency such as AHRQ, this does not preclude the private sector or academia from conducting their own research.

Con

Michael Cannon makes a strong argument against a centralized NICE-style government body.  Most convincingly, he states that  ”If a government agency produces unwelcome research, those groups will spend vast sums on lobbying campaigns and political contributions to discredit or defund the agency.”  If AHCPR’s history (now AHRQ) is any indication, it will be difficult for a government-funded body to publish controversial findings.  Health Affairs reports that when AHCPR found limited health benefits to back surgery, back surgeons “found sympathetic ears among House Republicans.” AHCPR’s funding was cut by 21% due to lobbying by back surgeons and medical device manufacturer Sofamor Danek.

If the government does not do a good job, could the private sector?  The answer is likely yes.  Cannon suggests that prepaid group plans (PGPs) such as Kaiser Permanente would be in the best position to conduct the comparative effectiveness analysis.  ”PGPs therefore boost the production of a nonexcludable good (comparative effectiveness information) by bundling it with an excludable good (reputation).”

Although expanding AHRQ’s role does not preclude private sector health plans from conducting their own research, spending on AHRQ will likely crowd-out private health plan comparative-effectiveness research.

Conclusion

Should there be an agency similar to NICE in the U.S. Michael Cannon makes a compelling argument that the answer is no, but he does this in a fantasy world where he forms American institutions from scratch.  Private sector insurance companies would be more likely to conduct comparative effectiveness research if:

1. Medicare was eliminated.  Seniors could instead receive vouchers to purchase their own private health care.  When people shop for their own insurance and pay for the marginal insurance premium dollar out of their own pocket, this will increase demand for cost effectiveness research.
2. Medical licensing (but not certification) standards were eliminated.  This way, insurance companies could take advantage of using more cost-effective labor such as nurse practitioners and physicians assistants.  ”According to professor of health policy Jonathan Weiner, nonphysician  clinicians comprise 14 percent of primary  care providers nationally, but 17 percent at Kaiser Permanente and 25 percent at Group Health.”

If these two changes were instituted, then I agree that a government-run comparative effectiveness organization would be unnecessary.  However, this is not the world we live in.   Medicare’s budget for 2009 was $420 billion.  In this world, I believe that there should be a government cost-effectiveness agency in order to monitor Medicare’s the cost-effectiveness of Medicare spending.   Further, government funding for medical research is needed whether or not Medicare exists.

Thus, I see two feasible options: (1) Eliminate Medicare, subsidize health insurance through vouchers, and leave the cost-effectiveness research to private health plans; and (2) Keep Medicare and expand funding of a government-run comparative-effectiveness body (such as AHRQ).

• Michael Cannon (2009) “A Better Way to Generate and Use Comparative Effectiveness Research” Feb 6, 2009, Cato Institute Policy Analysis brief # 632.
• Bradford H. Gray, Michael K. Gusmano, and Sara R. Collins (2003) “AHCPR And The Changing Politics Of Health Services Research” Health Affairs, Web Exclusive: 25 June 2003.
• Steinbrook, Robert (2008) “Saying No Isn’t NICE — The Travails of Britain’s National Institute for Health and Clinical Excellence” NEJM, 359(19):1977-1981.

Does Social Security work?  By that, I mean does giving elderly individuals a government pension increase their level of income, the amount of goods the can consume, or even their happiness?

An NBER working paper by Baker, Gruber and Milligan (2009) tries to answer this question in the Canadian setting.

Background

Currently, Canadian income transfer programs to seniors make up 2.3% of GDP, but this figure is expect to rise to 3.2% of GDP by 2030.  Unlike Social Security in the U.S., the pay-as-you-go (PAYGO) component of the Canadian Social Security System if fairly small.  Further, population growth in Canada is higher than in Europe making the old-age income transfer programs more solvent.

The Old Age Security (OAS) program is the oldest elderly income transfer program in Canada.  It was enacted in 1952.  Currently, “the monthly benefit paid to individuals who fully satisfied the residency requirement was $479.83.   This benefit is clawed back from higher income pensioners at a 15 percent rate, starting at incomes of $60,806 (2005).  Benefits are full indexed to the CPI and fully taxable under the Income Tax Act.”

The Guaranteed Income Supplement (GIS) is a means-tested income supplement for elderly individuals with low income.  Benefits are taxed back at a 50% rate.  The current enefit is between $370 and $570.  

The Canadian Pension Plan (CPP) and Quebec Pension Plan (QPP) are finance by contributions from employers and employees.  Individuals pay a 4.95% tax on earnings from $35,00 to $41,100 and benefits are based on a measure of average earnings over the individual’s working life.  Participants can claim benefits at age 60, but the benefit level is increased by 0.5% per month if the benefits are claimed at an older age.

Data

 The authors aim to investigate how changes in the programs described above affect the income, consumption and happiness level of individuals in different birth cohorts. These measures are taken from survey data from Statistics Canada.  Income data comes from the Survey of Consumer Finances (1971-1997) and the Survey of Labor and Income Dynamics (1998-2002).  Consumption data comes from the Family Expenditure Survey (1969-1996) and the Survey of Household Spending (1997-2002).  Happiness is measured by the General Social Survey.

• For more details on the Canadian Social Security System, see my post from 4 July 2006.

Methodology

If there are time trends in elderly income and consumption, how does one identify the impact of the Canadian Social Security?  The authors use changes in Canadian Social Security legislation to identify this impact.  The regression methodology has 3 specifications:

1. Regress actual retirement benefits on the dependent variables (income, consumption and happiness).
2. Partial Simulation. In this approach, the authors hold constant the earnings, capital income, and family status of the individual, but allow the retirement age to vary.  Benefits are based on a fixed earnings histories across all birth cohorts, not actual earnings.
3. Full Simulation.  In this case, earnings, capital income, family status, and retirement age are held constant and the authors calculate simulated benefits levels based on an average earnings histories and retirement ages across all cohorts.

Results

In general, the authors find that a higher Social Security benefit increases elderly income.  In the full simulation and when simulated benefits are used as an instrument for actual benefits, Social Security income benefits increase elderly income benefits dollar-for-dollar.  Further, elderly income poverty decreased significantly when more generous benefits were enacted; the authors claim that 96% of the reduction in elderly poverty is due to these added benefits.  However, in the partial simulation methodology, the authors find that a $1 increase in benefits leads to only a $0.55 cent increase in elderly income, thus indicating significant crowd-out.  

For consumption, the authors also find that more generous income benefits increase elderly consumption levels, but not dollar for dollar.  A $1 increase in benefits leads to a $0.66-$0.80 increase in consumption, thus indicating some crowd-out.  Unlike for the case of elderly income poverty, more generous Social Security benefits did not affect consumption poverty.  Thus, it may be the case that poor elderly individuals have other sources of consumption (e.g., purchase by family members, unreported income gifts from family members, unreported labor income) that may offset lower government supplied income benefits. 

“For the very happy question, we see no sign of a statistically significant relationship between benefits and being very happy.  On the other hand, there is some evidence of a decrease in reports of being unhappy or very unhappy with higher benefits in the reduced form results, but not in the IV results.”

Healthcare Economist’s Take

This paper indicates that more generous income benefits do increase income and consumption for the elderly.  Social Security benefits create more crowd-out in the case of consumption than income.  It is likely that consumption is a better indicator of well-being, especially since elderly savings is very low (i.e., the elderly are generally spending down their assets than building them up).  While income poverty declined due to these income benefits, consumption poverty did not.  Overall, I would say that these program do help increase elderly well-being, but likely not dollar for dollar.  As the authors note, this paper only looks at the benefits of Social Security without taking into account the costs of raising a significant amount of revenue to pay for these government program.

I will not comment on the happiness measure.  Although many people may think it is the government’s job to make individuals happier, I believe that happiness is determined on an individual level and often based on things the government can’t control (e.g., do you get along with your spouse, has their been a death in the family).  Further, happiness is often measured by comparing your emotional feelings against some status quo.  Thus, a poor family would be very happy to have their income increased to $80,000, but a millionaire would be very disappointed.  

I think this paper makes an important contribution showing that government old age income benefits do increase income and consumption, even if there is some crowd out on the consumption side.  The question for me is less whether or not there should be some government benefit, but more about how generous it should be and whether it should serve only the poor or all elderly.

• Baker, Gruber and Milligan (2009) ”Retirement Income Security and Well-Being in Canada,” NBER Working Paper #14667.

Joe Paduda of Managed Care Matters has a two great posts on Medicare’s new payment structure.  

The first post reports how exactly Medicare is changing its reimbursement for medical services.  ”It looks like reimbursement for cognitive services – the 99xxx codes for readers expert in CPT-4s…office visits and similar services for others – will be increased while payments for surgeries, imaging, and other ‘procedures’ will be reduced.”

The question remains, will these changes stick?  For years, policy experts have advised CMS to increase primary care compensation and decrease specialist compensation.  However, specialists are a smaller, more cohesive group.  This facilitates the formation of compelling lobbies for specialists.  Mr. Paduda accurately predicts that these Medicare reimbursement changes will create a “loud, violent, and ugly” political backlash from specialists.

In the second post, Mr. Paduda reveals some insight as to how Medicare reimbursement changes will affect Medical care contracting in the short- and long-term.

While President Obama’s speech to Congress had many components, I’m going to focus on those related to health care.  I will also comment on the Republican response.

OBAMA ADDRESS

I applaud the President for specifically addressing the need for health care reform.

“…we can no longer afford to put health care reform on hold. We can’t afford to do it.”

Of course, Obama applauded his the health care changes made already (i.e., expanding SCHIP eligibility, and extending COBRA benefits).

The President mentioned the high cost of health care.  Health insurance premiums put a burden on small businesses.  Small businesses have smaller pooling groups and thus have higher average premiums than for large firms.  Further, if one employee gets has a catastrophic illness, this will have a large impact on health insurance costs for small businesses, but not for large.  Obama also mentions that many people file for bankruptcy due to large medical bills.

So what is Obama going to do about it?  Does he claim he can cure cancer?  Actually, yes.

“Our recovery plan will invest in electronic health records and new technology that will reduce errors, bring down costs, ensure privacy, and save lives.  It will launch a new effort to conquer a disease that has touched the life of nearly every American, including me, by seeking a cure for cancer in our time…and it makes the largest investment ever in preventive care, because that’s one of the best ways to keep our people healthy and our costs under control.”

Let’s look at Obama’s 3 suggestions:

• EMR:  Electronic medical records (EMR) are of course a good thing.  The question is one of implementation.  If the government establishes one standard for electronic medical records, this will create a unified platform that can be used by all health care providers.   Sharing information across providers is essential.  However, there are privacy issues to be managed whenever a database is centralized.  Further, mandating one EMR standard will hinder the ability of innovators to improve the quality of the EMR.
• Preventive Care.  Preventive care is generally a good thing, but I do not believe this is an important health reform issue.  First, preventive care will not reduce costs significantly and may even increase costs.  The Congressional Budget Office states that any gains from reducing obesity would be concentrated in the short and intermediate period “because some of the savings will be offset by increased longevity and the cost of disease that are most prevalent during old age.”  Secondly, if individuals are not getting preventive care and it is not saving money, then this does not seem to be a public policy issue.  An exception may be vaccines; however, since poor patients who can not pay for vaccines can get subsidized or free vaccines, the problem is one of education, not of health insurance.
• Cure Cancer.  This idea will enrage the pro-cancer lobby.

Although President Obama realizes that “we must also address the growing cost in Medicare and Social Security,” he does not address how this will be done.

REPUBLICAN RESPONSE

Gov. Bobby Jindal’s comments related to health reform were the following:

“To strengthen our economy, we also need to address the crisis in health care. Republicans believe in a simple principle: No American should have to worry about losing their health care coverage, period. We stand for universal access to affordable health care coverage.

What we oppose is universal government-run health care. Health care decisions should be made by doctors and patients, not by government bureaucrats…if we put aside partisan politics and work together, we can make our system of private medicine affordable and accessible for every one of our citizens.”

Gov. Jindal theme was this: the government will help pay for your health insurance premiums, but does not support a single payer plan.  Although Gov. Jindal was vague, the Republican worldview might support a voucher system.  In a voucher system, individuals receive subsidies to buy private health insurance based on their income and illness level.  I believe that Republicans would oppose the creation of a public health insurance plan that could compete with private insurers (see 24 Feb 2009 post).

SUMMARY

Like most speeches, the Obama Address and Republican Response were long on rhetoric and short on details.  As all policy wonks know:

“Le bon Dieu est dans le détail” (God is in the details)

Gustave Flaubert

“If you do not have insurance you can choose to enroll in the new public plan, which will offer benefits similar to what every federal employee and member of Congress gets. Or you can choose private plan options…” Barack Obama.com

Should the government develop a health plan that would compete with private health plans?  Thomas Rice thinks this is a good idea.  In his Health Economics editorial, Rice believes that the government’s market power and lower administrative expenses will lead to lower health insurance costs.  He claims that “Government should have a strong role in providing coverage to those who are currently uninsured or who have meager coverage, and a government-sponsored option that competes against the current array of private insurers is an excellent way to start.”

I am not opposed to having a public health insurance plan competing with the private health insurance plans.  However, there are some issues that need to be dealt with:

• Budget Constraints.  Although the government may be able to charge lower health care premiums than private health insurers could, why is this the case?  If this is because  public health insurance is more efficient due to economies of scale, than this is great.  If they charge lower premiums however because they do not have a firm budget constraint, then this is a problem.  If public health insurers can unfairly compete by running a deficit every year, then this will not only drive private health insurers out of business, it will also saddle future generations with a large tax burden.
• Public School Problem.  Individuals who want to send their children to private school face a stark disincentive to do so. If they sent their children to public school, the only cost is the taxes they must pay.  If they want to send their children to private school, they must not only pay the taxes for the public school, but most also pay private school tuition.  Similarly, if a public health insurance plan is made available, individuals should not get this for free.  If there is a subsidy for public health insurance (e.g., based on income or health risk) then private health insurers should also be able to receive this subsidy.  This will create a more level playing field.  
• Risk Adjustment.  How will the public health insurance plan price premiums?  If the public plan is community rated, but the private plans are rated on an individual basis, all the sickest individuals will gravitate to the public plan. This will drive up medical costs for the government insurer.
• History.  Rice notes that “the Federal Employee Health Benefits Program…provides access to private health insurance plans to over eight million federal employees and dependents. Although the program has provided good coverage at a reasonable cost, historically it has been plagued by the same issues as other consortia of private insurance: difficulties in controlling costs, and selection bias.”

As I mentioned, I am not opposed to having a government-run health insurance plan.  However, we must realize that this in and of itself is not a cure-all for the health care problems facing the U.S.

One health risk factor often overlooked in this blog is going to war.  Veterans from the wars in Iraq and Afghanistan frequently return home with traumatic brain injury from roadside bombs, post-traumatic stress disorder (PTSD),  and other injuries.  

Marketplace chronicles the problems veterans experience trying to collect military benefits after returning to civilian life.  The article reports that it can be difficult for Veterans to claim indemnity benefits.  

Soldiers given a military disability rating below 30 percent get a one-time severance payment instead of life-long medical benefits for the whole family. Kerry Baker — with the Disabled American Veterans — says the army cherry-picks lesser injuries when applying its disability standards. In military-speak, disabilities are referred to as “unfitting conditions.” That’s any injury that prevents soldiers from performing their duties.

Further, getting medical care at the VA is difficult during wartime.  The VA has a “backlog for disability claims is in the hundreds of thousands.”

The human and financial cost from war does not end at the close of combat.  These issues will linger on for years to come.

Some of the biggest public health problems involve the use of drugs in alcohol.  Individuals use drugs and alcohol because they receive some psychic benefit.  However, this has a cost to their own health and often the health of others (e.g., drunk driving, increased homicide rates).  Whether or not the government should be involved in convincing people not to drink, smoke or take drugs is one question.  Another is whether it actually effective.

A paper by Hornik et al. (AJPH 2008) examines the effect of the National Youth Anti-Drug Media Campaign between 1999 and 2004.  The paper finds that ad campaigns like “Soccer: My Anti-Drug” generally had no effect on drug or alcohol use.  However, the campaign did seem to slightly increase marijuana use.  

Why does advertising not work?  Most people already know about the health costs of drugs, alcohol and smoking.  Thus, advertisements do not serve to change the public perception.  Any government who wants to start a advertising campaign against trans fat in order to reduce obesity must contend with the fact that most people already know which food are and are not good for them.  Thus, this type of advertisement likely has little impact.

Should public health officials just give up on stopping people from using drugs and alcohol?  Maybe not entirely.

The Economist cites the health benefits of Mikhail Gorbachev’s anti-booze campaign.  ”Mr Gorbachev’s anti-booze campaign—although hugely unpopular—raised life expectancy by fully three years between 1985 and 1987. After 1992 the state monopoly on alcohol (and health checks on its quality) collapsed. As anybody who lived in Russia at the time will recall, the effect was spectacular—and catastrophic. Death rates returned to their long-term trend.”

• Hornik R, Jacobsohn L, Orwin R, Piesse A, Kalton G. (2008) “Effects of the National Youth Anti-Drug Media Campaign on youths.”  2008 Dec;98(12):2229-36. Epub 2008 Oct 15.
• Hat tip: Penn Gazette.

Why did the British decide to have the government pay for health care?  Are they socialists by nature?  Were they just ahead of their time?  Did some lobbyist win the favor of government?

Actually, it was done out of practicality.  World War II shifted the provision of health care from the private to the public sector.  As Atul Gawande explains in the New Yorker:

“ …in the days before war was declared, the British government oversaw an immense evacuation; three and a half million people moved out of the cities and into the countryside. The government had to arrange transport and lodging for those in need, along with supervision, food, and schooling for hundreds of thousands of children whose parents had stayed behind to join in the war effort. It also had to insure that medical services were in place—both in the receiving regions, whose populations had exploded, and in the cities, where up to two million war-injured civilians and returning servicemen were anticipated.

As a matter of wartime necessity, the government began a national Emergency Medical Service to supplement the local services. Within a period of months, sometimes weeks, it built or expanded hundreds of hospitals. It conducted a survey of the existing hospitals and discovered that essential services were either missing or severely inadequate—laboratories, X-ray facilities, ambulances, care for fractures and burns and head injuries. The Ministry of Health was forced to upgrade and, ultimately, to operate these services itself.”

Like many “temporary” government programs, this one had sticking power.  

“By 1945, when the National Health Service was proposed, it had become evident that a national system of health coverage was not only necessary but also largely already in place—with nationally run hospitals, salaried doctors, and free care for everyone. So, while the ideal of universal coverage was spurred by those horror stories, the particular system that emerged in Britain was not the product of socialist ideology or a deliberate policy process in which all the theoretical options were weighed. It was, instead, an almost conservative creation: a program that built on a tested, practical means of providing adequate health care for everyone, while protecting the existing services that people depended upon every day. No other major country has adopted the British system—not because it didn’t work but because other countries came to universalize health care under entirely different circumstances.”

Based on this evidence, Dr. Gawande gives a profound insight.  Any health care reform necessarily will be built out of the existing health infrastructure.  This is true both for individuals who want more or less government involvement.  The U.S. has significant experience with private health insurance and expanding private health insurance would not be difficult.  Expanding public insurance would also be feasible through expansions of the V.A., Medicare, or Medicaid systems.  

Whatever reform path we choose, we must take into account the capabilities and infrastructure already in place when we propose these reforms.  

No country designs their health care system from scratch.

Most physicians, public health officials and economists believe that most individuals do not receive sufficient levels of preventive care.  Only half of American adults receive all recommended screening and preventive care.

The Partnership for Prevention has a plan to increase preventive care utilization. The organization proposes introducing:

“..federally funded insurance programs [that] would provide highly cost-effective clinical preventive services with no deductibles or co-pays, while Congress would provide incentives to states, health care providers and employers to deliver such services. Meanwhile, a stand-alone revenue source would be established to fund state and local efforts to create healthy environments and promote healthy lifestyles, while a Public Health Advisory Commission would be created to recommend how that funding should be allocated.”

Is this a good idea?  There are benefits to this plan.  Individuals without health insurance would have access to some of these preventive measures.  The Vaccines for Children (VFC) program currently provides free vaccines to poor children, and this program has generally been seen as a success.

Overall, however, I do not endorse this plan.  Here is why:

• Cost effectiveness: The idea is being presented as a cost saving initiative.  While effective preventive care can increase longevity and improve the quality of life, it often increases health care costs.
• Carve-out problem.  Enacting a universal, government provided health care system may be a good or bad thing depending out your point of view.  However, a limited, carve-out program for preventive care will be…well…limited.  Let us say the prevention health plan covers mammograms.  If an uninsured individual receives a mammogram using the proposed program and finds a cancerous tumor what is the next step?  The prevention health program will not cover surgery so the uninsured individual will be left with bad news and, if they are poor, few options to treat the disease.  This will lead to…
• Coverage creep.  In the example above, I anticipate an outcry for individuals from uninsured individuals who have breast cancer.  They will lead to an expansion of coverage to treatments that are less-cost effective.  Physicians will lobby to have certain treatments included in this national prevention health plan.  Thus, what may start out as a health plan which only targets cost-effective treatments, will likely expand into other areas.  For instance, the $700 billion bailout was targeted for financial firms only.  Unsurprisingly, politically powerful sectors (e.g., the auto industry) have been lobbying for their share of the pie.
• Cost shifting.  Private insurance companies who currently offer preventive services will not be able to shift their costs to the public sector.  A profit-maximizing strategy is to shift as much cost to the public sector as possible.  Thus, insurance companies will try to categorize as much medical as possible under a “prevention-eligible” diagnostic code.
• Paternalism.  The plan will also pay for health care targeted to reduce tobacco and alcohol use, improve the patient’s diet and increase the patient’s physical inactivity.  Most people know that using less drugs, exercising more and eating less will improve longevity.  I personally do not think that it is the government’s job to tell you how to live your life.  If you want a shorter life filled with more cheesecake, that should be left up to the individual.

Wisconsin’s Medicaid plan covers children from 0-5 years old whose parents have income below 150% of the poverty line.  Sixty percent of Massachusetts residence receive coverage through their employer compared to 53% nationwide.  Forty-six percent of Californian firms with less than 50 employees offer health insurance compared to the national average of 43%.

How did I know these facts?  Am I a genius?

No, I used the State Coverage Initiatives website provided by the Robert Wood Johnson Foundation.  The website has a nice summary of each state’s SCHIP, Medicaid eligibility rules and well as graphs showing where individuals do (or don’t) receive insurance coverage.

• State Coverage Initiatives: statecoverage.org.

In the Health Care Blog, Robert Laszewski suberbly analyzes Congressional Budget Office (CBO)’s two papers.  His key points are that 1) there is no silver bullet and 2) “really controlling costs will be very hard and will require some courageous and politically problematic actions.”

I would point out other highlights, but the post is so good I highly recommend reading it yourself.

How would you like to run a major city?  With the economic economic slowdown, would you raise taxes?  If so, on what?  If you would cut spending, what programs would you cut?

The City of Los Angeles has a survey that let’s you decide allocate the taxpayers dollars.  More information can be found at the L.A. Times.

At the turn of the century, the football (soccer) club Real Madrid began collecting some of the most famous players in the world. Termed los Galácticos by the media, the team included a stockpile all-world players such as Figo, Zidane, Ronaldo, Beckham, Michael Owen, Roberto Carlos, and Raúl.  

It seems Presdient-Elect Obama is trying to form his own team of Galácticos.   Obama has assembled an economic team with impressive resumes: Lawrence Summers (Harvard Ph.D., former Harvard president), Peter Orzag (London School of Economics, Ph.D.), Christina Romer (M.I.T, Ph.D.), Paul Volcker (Harvard, LSE, former Fed Reserve President).

Does this ensure success?   Not necessarily.  David Halberstam’s book, The Best and the Brightest, reveals that President Kennedy’s team of extremely intelligent, well-educated individuals still managed to make poor decisions during the Vietnam War.

On the other hand, Obama is also following President Lincoln’s “Team of Rivals” model.  Lincoln choose William H. Seward, Salmon P. Chase, and Edward Bates for cabinet positions even though each of them opposed his nominations.  Similarly, Obama has choosen Democratic rival Hilary Clinton as secretary of State, and has allowed Bush-appointee Robert Gates to continue as Secretary of Defense.

Will Obama’s choices for cabinet positions lead help lead the United States on the path to peace on prosperity?  Hopefully, they will at least do better than los Galácticos.

For many illnesses, Medicare pays physicians a lump sum for the entire episode of care.  This is known at the prospect payment system (PPS).  But how does Medicare determine the payment amount?  How should Medicare determine the payment amount?

Medicare generally looks at 1) what treatments are generally used on average to treat a patient with this disease, 2) what treatments are used to treat patients with disease of varying severity, and 3) how much does each type of treatment cost.  Then they add up the costs and give the docs one lump sum payment.

The difficult part is determining the treatments that should be used.

Dennis Cotter writes in the Health Affairs blog about Medicare’s reimbursement decisions regarding the PPS for end-stage renal disease (ESRD).  Cotter found that Medicare is much more likely to use historical, patient utilization data to determine the treatments included in the PPS rather than the treatments that should be used.  Cotter talks about the case of  erythropoiesis-stimulating agents (ESAs), a drug used to treat ESRD.  ESAs are billable separately from the PPS, giving docs an incentive to use higher quantities of ESAs.  n fact, “Large for-profit chain facilities used larger dose adjustments and targeted higher hematocrit levels compared to smaller nonprofit units.” 

How does Medicare determine how much of these separately billable ESA prescriptions is allowable?Historical data is often used because it is the status quo.  Using the status quo doesn’t upset pharmaceutical companies or compel docs to change their practice patterns.  However, using the status quo may mean wasting significant amounts of health care dollars.  Currently, ESA spending costs Medicare $2.5 billion.  If Medicare only reimbursed physicians for using the correct amount ESAs–rather than the historical amounts–the $2.5 billion could be reduced by 53%.

As Health Access California reminds us, tough economic times are often when sweeping government policies are enacted.    President-elect Obama has some tough choices to make.  Should he expand existing government programs to help those who are hurt by the economic crisis?  Or should he scale back these government programs to show some fiscal responsibility?  Or is starting a universal health insurance plan a good idea?

A NEJM editorial states that “The expansion of health care to large populations is expensive, and presidents may need to quiet their inner economists.”  If policymakers quiet their inner economist, not only will I be out of a job, but health care will get a lot more expensive.  Joe Paduda agrees that a focus on cost-effective medical care is paramount.  Paduda claims that not focusing on cost has made Medicare Part D ‘a disaster.’

“On a national scale, the program is a disaster. The ultimate liability for Part D is $8 trillion, a liability that is unfunded. This is what we can expect if Congress passes and President Obama signs into law national health reform that does not aggressively, and forcefully, address cost – a deficit explosion that will make the cost of the current bailouts look like lunch money.”

What does the Healthcare Economist recommend?  Listen to your inner economist!

The Economist reports that Argentina has recently passed “a law to nationalise the country’s private pension system.”  Is this a good thing?

With the stock market in the tank, many individuals yearn for the security of a government-funded retirement plans compared to private, individual investments in stocks and bonds.  However, public pensions may not be so safe after all.

An NBER working paper by Novy-Marx and Rauh finds that public pension funds run by the states in the U.S. are significantly underfunded.  

“We conservatively predict a 50% chance of aggregate underfunding greater than $750 billion and a 25% chance of at least $1.75 trillion (in 2005 dollars). Adjusting for risk, the true intergenerational transfer is substantially larger. Insuring both taxpayers against funding deficits and plan participants against benefit reductions would cost almost $2 trillion today, even though governments portray state pensions as almost fully funded.”

As a San Diego resident, I know first hand how the government can mess up public pensions.  San Diego was named “Enron by the Sea” because underfunding the public pension system has created an enormous deficit.  City attorney Mike Aguirre is considering having San Diego declare bankruptcy because of the huge shortfall.

• Novy-Marx R, Rauh R (2008) “The Intergenerational Transfer of Public Pension Promises” NBER WP #14343.

Health economists and policymakers have lots of ideas of how to improve the health care system.  Yet few of these reforms are implemented.  Why?

Max Hotopf of Healthcare Europa tries to answer this question in the context of Europe’s attempts at healthcare reform.  Below are some of his arguments and my comments.

1. Decentralization. “In most European countries healthcare policy is effectively left in the hands of regional authorities. Finland takes this to the extreme with primary and secondary care delegated to over 400 municipalities, each with 5,000 to 10,000 people.”  Mr. Hotopf claims that this decentralization makes it difficult to implement health care reform.  I wholeheartedly agree with Mr. Hotopf that decentralization makes implementing wholesale healthcare reforms more difficult.  However, I do not necessarily imply that the solution is centralization.  Generally, most economists have found that more decentralized control of government-run institutions is best.  Individuals generally have higher satisfaction with government institutions on a local level than on a national level.  Although these local bodies may suffer from diseconomies of scale, decentralized systems have better information about the needs of their local constituents.  Thus, fixing the “problem” of decentralization will likely create more problems than it solves.
2. What the public will accept/elections.  Healthcare Europa states that the European public is often against any high profile privatization in the health care system. Further, changes in the political climate can easily derail reform efforts.  For instance, “in the Czech republic, the social democrats took power this month and are utterly opposed to any sort of private healthcare. The privatisation programme in Slovakia has been slung into reverse.”  Despite this fact, I doubt that abandoning democracy for a government of experts is a good idea [Anyone who thinks a government of experts is always good should read The Best and the Brightest about the U.S. involvement in Vietnam.]
3. Professional bodies have a lot of political power and can overturn reforms.  ”The British Medical Association regularly scuppers government policy, such as the move towards larger polyclinics. It is two years since the Greek courts ruled that stipulations that a doctor has to own over 50% of any diagnostics lab are contrary to EU law. Yet, thanks to pressure from doctors, the Ministry of Health has constantly stalled any attempt to change the law.”  Here I completely agree with Healthcare Europa.

 
The blog post does leave us with some sage advice: “Unless you have an intimate understanding of how private healthcare operators will behave in any situation, you will fail to come up with programmes which will harness their energy and appetite for change.”

“Peter Orszag, director of the Congressional Budget Office, estimates that 5 percent of the nation’s gross domestic product-—$700 billion per year –goes to tests and procedures that do not actually improve health outcomes…The unreasonably high cost of health care in the United States is a deeply entrenched problem that must be attacked at its root.”

This quotation comes from a Progressive Policy Institute (PPI) report.  There is little doubt that much of health care is unnecessary or at least is not worthwhile in the cost-benefit sense.  However, how do we fix this problem?  PPI has some suggestions which the Healthcare Economist will scrutinize.

1. Prospective Payment.  Currently, a majority of physicians are paid on a fee-for-service basis.  This encourages physicians to work harder (they get paid more for doing more services), but also encourages them to recommend unnecessary treatments to patients.  My own research finds that when specialists are paid on a fee-for-service basis, surgery rates increase 78% compared to when they are paid on a capitation or salaried basis.  Using a prospective payment system would give physicians an incentive to under-provide services.  Further, insurance companies could collect rents by enrolling only healthier patients so that the cost of care would be less for these individuals.  Prospective payment could work for specific diagnoses (as in the DRG system), but one must worry about DRG creep.  Also, if there is a high variance in the cost of treating a specific disease, than a fee-for-service compensation may be superior.   While the prospective payment system does have appeal in cutting costs, it could reduce patient access to medical care as well.
2. Let individuals choose their own plan. This proposition has great appeal for those who favor consumer choice.  Everyone likes choice.  However, issues of adverse selection can negate any welfare gains from additional choice.  High risk individuals have a hard time getting insurance and if they do the price is often unaffordable.  PPI suggests setting a up a local area purchasing pool to counteract the issues of adverse selection. I am not exactly sure how the PPI proposal would be implemented (do insurance companies charge a fixed rate for all individuals enrolled? do they adjust premium by age or sex?)  Would enrollment in this pooling mechanism be mandatory?  If so, this could drive down costs and significantly reduces issues of adverse selection.  However, mandatory enrollment in the pool could also reduce consumer choice.
3. Create a “Health Fed”.  ”A Health Fed, as former Sen. Tom Daschle has proposed, would set national goals for health-care spending and patient outcomes based on the potential gains for integrated care.”  This I think is a horrible idea.  Having the federal government try to reduce costs and improve quality at such a high level is likely to be expensive and counter-productive.  Spending money on medical is not a bad thing; good health is one of the items individuals value most in life.   Thus, if the federal government set medical spending limits, this could lead to rationing.  What we want to happen is to reduce medical spending for unnecessary or wasteful medical procedures.  I don’t think a “Health Fed” would be very helpful in accomplishing this goal.

Readers Digest has a nice piece on how universal health insurance is working out for people in Massachusetts.  ”Massachusetts put into practice the health care solution everyone is arguing about. Here’s how it works and what it means for the rest of us.”

Health insurance require that all individuals buy health insurance.  Most voters views on an individual mandate depend on how you frame the question.  If you ask voters: “Should everyone buy health insurance?”  Most people will say yes.

If you ask “Should the government compel all ndividuals to buy health insurance regardless of the cost?”  Then the response is much less positive.

Michael Cannon of the Cato Institute is against individual health insurance mandates.  Whether you are for or against them, Mr. Cannon make some valid points concerning the drawbacks of health insurance mandates in his “Perspectives on an Individual Mandate” article.  Below are some of the highlights.

• An individual mandate ≠ universal coverage: Even if there is an individual mandate, many individuals will still forego insurance coverage. Currently, Massachusetts has an insurance mandate, but there are still uninsured individuals.
• Reduced Choice.  Let us say you are a typical middle class worker.  You 401(k) just took a nose-dive, and your job may be at risk as your company’s sales drop in the weakened economy.  Do you use your limited savings for rent, utilities, school books for your kids or health insurance?  While this is a tough choice, it is one that families would no longer be able to make on their own.  A mandate would compel them to buy insurance.

The Health08.org website has a great tool to give voters a side-by-side comparison of John McCain and Barack Obama’s stance on a variety of health care issues.  For some commentary on each of the candidates health care reform proposals see my post on Obama vs. McCain health care policies.

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.

Should the Treasury bail out Fannie and Freddie?  A recent Economist article gives a level-headed solution: nationalize and then dismantle them.

Most libertarians would say that Fannie and Freddie should fail.  Having these two giant players collapse, however, add dynamite to an already explosive mortgage finance market.  Thus, the short term solution must be to bail out these two entities and nationalize the assets.  Sending Fannie and Freddie a financial lifeline to benefit private shareholders, however, does not make sense and is not fair to taxpayers.  In the words to the Economist, “That is capitalism at its worst: it means shareholders and executives reap the profits, but the taxpayer bears the losses.”

In the long term, a housing market without Fannie or Freddie is likely in the U.S.’s best interest.  Taxpayers won’t be on the hook to bail out private shareholders and the mortgage finance market will likely be more competitive.

“The two Leviathans have squeezed private firms into the riskiest ends of the mortgage market, such as subprime lending. They have not brought sharply lower mortgage rates to America.  Europe, where mortgage markets are fully private, is no worse-off.”

Thus, I whole-heartedly agree with the Economist’s prescription: nationalization and dismantlement is the the best route.

Barack Obama and John McCain both believe that they know how to improve the American health care system. A policy brief by Michael Tanner has nice summary of the two candidates policies. I will review some of this paper today.

Obama’s general health care policy

Obama goal is to expand government provided health care and create a form of “managed competition” originally developed by Alain Einthoven. Obama supports expanding SCHIP and Medicaid eligibility. Although Obama does not support a health insurance mandate for adults, he does support a mandate for children and young adults (any one 25 or under). Obama’s goal to increase health care access, he would support a “pay-or-play” mandate. All but the smallest employers would be required to provide health insurance; those who didn’t would be compelled to pay into a national fund covering these uninsured workers. The mandate would likely require a minimum benefits package. Overall, Obama is pushing towards more government provided health care and more regulation.
McCain’s general health care policy

Compared to Obama, McCain is generally against more government participation and regulation. Instead of moving the U.S. to larger risk pools (e.g., government insurance, employer insurance) that are more severely regulated, McCain want to move the U.S. towards more individually provided health insurance. McCain’s main policy initiative is a $2,500 health insurance refundable tax credit for individuals ($5000 for families). The goal is to make health insurance more affordable, but make individuals incur the full cost of “better” health insurance at the margin. McCain is also considering risk-rating these vouchers so that individuals with severe health problems will receive a larger voucher. McCain would also allow individuals to buy health insurance from any state.

Side-by-side comparison

Commentary

So whose health insurance plan is better? If you are in favor of more government involvement in health care, you should support Obama. In the Audacity of Hope, Obama states that “the market alone cannot solve our health care woes–in part because the market has proven incapable of creating large enough insurance pools to keep costs to individuals affordable, in part because health care is not like other products or services (when your child gets sick, you don’t go shopping for the best bargain).” While Obama’s proposals will decrease insurance choice, increase regulation, and increase public funding of healthcare, Obama’s proposals are likely more progressive than McCains and will create larger risk pools. Obama’s plan is likely much more expensive. Further, an employer mandate may lead to higher unemployment levels (see Baicker and Levy paper).
If you are in favor of less government involvement, McCain is your man. McCain rejects “coercion and the use of state power to mandate care, coverage or costs.” The voucher system is similar to the one proposed by Victor Fuchs, and fairly similar to the Swiss managed competition system. A shift to individual–rather than employer-provided–health insurance accompanied by a decrease in regulation should: 1) reduce health insurance costs, 2) increase employment relative to Obama’s plan, 3) give insurance companies the incentive to create innovative products, 4) give workers more choice of their health insurance plan, and 5) be more fiscally sound for the government.

On the other hand, McCain’s plan will be more regressive and can adversely affect the ability of individuals with pre-existing conditions to buy health insurance (unless risk rating the voucher payment occurs). The McCain plan can only be successful if risk pooling can occur on the individual level. This is happening in Switzerland, but in Switzerland there is a standard benefit package which makes shopping for insurance coverage easier.
Additional Comment

Both candidates have proposals with respect to improving how medical care is delivered. Increased preventive care, EMR, and P4P are all popular measures. However, the NEJM states “Our findings suggest that the broad generalizations made by many presidential candidates can be misleading. These statements convey the message that substantial resources can be saved through prevention. Although some preventive measures do save money, the vast majority reviewed in the health economics literature do not.” The ability of any President to directly affect the quality of medical care provided to the patient is likely small. P4P initiatives are good in theory, but since most of medical care involves unmeasurable outcomes, or outcomes which depend on multiple causal factors (e.g., the quality of medical care, baseline patient health, patient behaviors), it is very difficult to implement them on a large scale.

Merrill Goozner of GoozNews has an interesting interview with Richard Ebright, a chemistry professor at Rutgers University.  The two discuss the Bruce Ivins, anthrax, and bioterrorism.  A few poignant excerpts.

• Ebright: “We’ve spent $57 billion in biodefense since 2001. The annual budget for NIH is only $30 billion. The spending has been disproportionate to the level of threat.”
• Ebright: “There are now 14,000 individuals authorized to handle bioweapons materials.”

Goozner also gets some answers about who benefited from the anthrax attacks of 2001.

• Ebright: “The administration has milked this for all it is worth by allowing the misperception to remain that this was an external attack, possibly from Iraq…The vaccine industry, particularly BioPort and its successors, have exploited this misperception.”

The New York Times Magazine has an interesting article about reclaimed water (”A Tall, Cool Drink of…Sewage“).  Reclaimed water is basically toilet water which has been recycled to the point where it is safe to drink.  In many dry areas–such as my home of Southern California–the water supply is dwindling.  To counter this, San Diego County is building the Western hemisphere’s largest desalination plant.  Orange County, however, has decided to build a sewage-treatment plant near Fountain Valley to increase the supply of water available for OC residents.

Although there is a psycological aversion to water made from sewage, reclaimed water has been shown to be safer than bottled water.

“Yes, the water entering the sewage-treatment plant in Fountain Valley is 100 percent wastewater and has a T.D.S. — a measure of water purity, T.D.S. stands for total dissolved solids and refers to the amount of trace elements in the water — of 1,000 parts per million. But after microfiltration and reverse osmosis, the T.D.S. is down to 30. (Poland Spring water has a T.D.S. of between 35 and 46.) By contrast, the ‘raw’ water in the Anaheim basins has a T.D.S. of 600.”

This is why “environmentalists, river advocates and California surfers — the sort of people who harbor few illusions about the purity of our rivers and oceans — generally favor water recycling.”

What happens to seized drug money? According to the Economist, in Montgomery County, Texas the sized drug money was used to fund the beer and liquor needs of the district attorney at their local county fair. The funds were also used to purchase a margarita machine.

Looks like seized illegal drugs were used to fund legal drug use (alcohol).

A recent paper by Kitchener et al. (HSR 2008) investigates the actions of one nursing home chain to find how they maximized their profits. The authors find that Sun Healthcare Inc. employed three strategies to maximize shareholder value:

1. rapid growth through debt-financed mergers;
2. labor cost constraint through low nurse staffing levels; and
3. a model of corporate governance that views sanctions for fraud and poor quality as a cost of business.

Should the government impose a minimum nurse/patient ratio in order that quality care continues?

Most libertarians abhor almost any form of regulation, but the case of the nursing homes may be an exception. The “customers” of nursing home care are elderly patients who–by definition–are in some way not able to take care of themselves. Thus, if the patient is treated poorly, it may be nearly impossible for them to change facilities or often it is even difficult for the elderly individual to communicate to their relatives that their care level is poor. The Kitchener paper found that one nursing home chain is sacrificing quality by using low nursing staffing level; should the government mandate a minimum nursing staffing level for nursing homes?

I would argue that they should not. While nurses are of course one of the most–if not the most–important input which affects the quality of nursing home care, regulating inputs is not ideal. This regulation will likely stifle innovation. If new technologies are developed–such as a digital scale monitoring device mentioned in Akshay Kapur’s blog–it may be possible to substitute capital (technology) for labor (nurses) and achieve better medical care for lower costs.

Should nursing homes be exempt from regulation? On this point, I believe that there should be some regulation. The government must continue to monitor nursing home quality and register complaints. Nursing homes with low quality scores or who abuse patients should not receive Medicare or Medicaid patients.

It is important for the government to play a role in helping those who cannot help themselves; yet the government should not mandate how nursing homes should run their business, but instead insure that some minimum quality of care threshold is met.

• Martin Kitchener, Janis O’Meara, Ab Brody, Hyang Yuol Lee, Charlene Harrington (2008) “Shareholder Value and the Performance of a Large Nursing Home Chain” Health Services Research, Volume 43 Issue 3 Page 1062-1084.

Forbes reports that “California is perpetually portrayed as suffering from a shortage of water. Case in point: Gov. Arnold Schwarzenegger recently declared a statewide drought, telling citizens to prepare for rationing.”  As any economist would tell you, the solution to the water shortage problem is simple: raise the price of water.

The largest culprits of receiving subsidized water are California farmers.  As the San Francisco Chronicle reports (”Big Farms…“), some farm districts received water at a price which was 2% of price paid by Los Angeles residents.

Creating a market for water free of government subsidies will eliminate water shortages in California.

The N.Y. Times reports (”Concerned about costs…“) that Congress is trying to impose new restrictions on physician-owned, for-profit hospitals. The legislators fear that these hospitals 1) drive up costs and 2) provide poor quality.

Legislators worry that when physicians own the hospital, they may have more of an incentive to order more procedures to increase their profits. If this is true, I am not sure that physician owned hospitals are the problem, it may be the case that Medicare or insurance companies need to change how they compensate physicians in these hospitals.

The second case is also of dubious merit. It was shown in a previous post that ambulatory surgery centers and hospital outpatient departments have similar quality levels. It is true that ambulatory surgery centers generally have a healthier patient base, but treating healthier patients in a lower cost setting is not necessarily a bad thing. It is true that many of these physician-owned hospitals not equipped to handle complications requiring emergency care, but if the complications are lower, then the cost savings may be worth not having the emergency care equipment.

Of course, not all physician-owned hospitals will be subject to these new restrictions. Lobbyists have convinced politicians that facilities such as Aurora BayCare Medical Center in Green Bay, Wisconsin and Wenatchee Valley Medical Center in Wenatchee, Washington should be exempt from these restrictions.

Michael C. Burgess a Texas Republican and an obstetrician-gynecologist states that “This is a free country…If you want to invest in a hospital, if you are willing to put personal capital at risk, you should not be forbidden to do so just because you are a doctor.”

A recent paper in the May 2008 edition of the Journal of Health Economics by Carpentera and Stehr finds that mandatory seat belt laws save lives.

“…we find consistent evidence that state mandatory seatbelt laws – particularly those permitting primary enforcement – significantly increased seatbelt use among high school age youths by 45–80%, primarily at the extensive margin. Unlike previous research for adults, however, we find evidence against the selective recruitment hypothesis: seatbelt laws had consistently larger effects on those most likely to be involved in traffic accidents (drinkers, alcohol-involved drivers). We also find that mandatory seatbelt laws significantly reduced traffic fatalities and serious injuries resulting from fatal crashes by 8 and 9%, respectively. Our results suggest that if all states had primary enforcement seatbelt laws then regular youth seatbelt use would be nearly universal and youth fatalities would fall by about 120 per year.”

So should we implement mandatory seat belt laws? From the evidence in their paper, Carpentera and Stehr believe so. However, is this issue truly so clear cut?

One question is whether or not mandatory seat belt laws really caused increased seat belt use. Did the seat belt laws cause increased seat belt use or did increased seat belt use lead to the increased popularity and passage of a law?

This paper is important in that it quantifies the benefits of the mandatory seat belt laws, but does not quantify the costs. What is the cost of enforcement in terms of 1) time law enforcement must dedicate to seat belt policing instead of “real” police work? and 2) the cost to the justice system and work absences due to the adjudication or appeals process for seat belt violation, and 3) the violation of a person’s individual freedom to choose to not wear a seatbelt. In this case, there is no externality to not wearing a seat belt; the person harmed from not wearing a seat belt is that person themselves. A libertarian would be strictly against a mandatory seat belt law. Nevertheless, a compelling argument can be made that minors do not use an optimal decision-making process when deciding whether or not to wear a seat belt.

Do I support a mandatory seat belt law? No.

I believe that parents should help to convince their child to use seat belts and that it is possible that schools should educate children on the benefits of using a seat belt. However, using police resources to fine individuals who do not wear seat belts seems to be a waste of resources. If mandatory seat belt laws are not enforced, then this would free up police resources, but also would weaken the impact of mandatory seat belt laws.

Seat belt save lives. But I think parents and schools–not the government–are the best institutions to spread this message.

• Christopher S. Carpentera and Mark Stehr (2008) “The effects of mandatory seatbelt laws on seatbelt use, motor vehicle fatalities, and crash-related injuries among youths“, Journal of Health Economics, Volume 27, Issue 3, Pages 642-662.

As mentioned in previous posts, most health insurance in the France public health care system involves significant copayments. While this helps to reduce the moral hazard problem, it may prevent poor individuals from utilizing the care they need. In 2000, France introduced free complementary health insurance plan which covers most out-of-pocket payments for the poorest 10% of French residents. Did this policy change increase utilization?

This is the question analyzed by Grignon, Perronnin and Lavis (2008). The authors note that three groups are effected by this change. This first is the very poor who already paid very few copays due to the existing means tested program (Aide Médicale Générale). The second group of individuals who were eligible for the complementary insurance program previously had commercial insurance, which in France is often used to finance the copayments of the national health insurance system. For the first two groups, we would expect little change in medical utilization. The third group, however, had no commercial or means tested complementary insurance and thus becoming eligible for the new French program likely will have a significant impact on access to care.

Results

The authors do not find a strong positive effect of being eligible for the the free complementary insurance plan, but this is likely because 87% of the sample was previously eligible for means tested benefits. There was some evidence that the utilization of specialist care did increase for the population eligible for the free complementary insurance program. Individuals who enrolled voluntarily into the free plan had significantly higher probability of using all types of care.

The authors summarize their findings concerning the increased utilization of those previously not covered as follows:

“This impact of the free plan on health-care utilization of those previously not covered has three causes: (1) a true price elasticity of demand for health care among the poor: faced with a lower (indeed zero) price, individuals use more care, mostly specialist visits and drugs than when faced with a variety of co-payments averaging 23%; (2) pent-up demand: the change in utilization among those previously not covered reflects the slope of their demand as well as the stock of past unmet needs and can therefore overestimate the longer-run elasticity of demand; and (3) enrolment bias: those who voluntarily enroll may be those who expect to use health care more. “

• Michel Grignon, Marc Perronnin, John N. Lavis (2008) “Does free complementary health insurance help the poor to access health care? Evidence from France,” Health Economics, Volume 17, Issue 2 (p 203-219)

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

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

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

Empirical Results

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

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

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

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

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

This is a radical approach, but will it work?

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/

An Annals of Internal Medicine survey sheds some light on physicians opinions regarding universal health care. Overall 59% of physicians support national health insurance and 32% oppose it. Support for national health insurance increased 10 percentage points since 2002 (49%). Unsurprisingly, surgical subspecialties, anesthesiologists, and radiologists, were the only specialities where more than half of respondents did not support universal health care.

Any economist would not be surprised by these findings. Primary care is not highly compensated now and universal health care would likely not alter this. Further, primary care would likely simplify the world of primary care: there would either be one insurance company (as in the case of government provided care), or it would likely be clearer which treatments would be covered. Further, since there would be no uninsured, the primary care doctors would not have to provide any uncompensated care.

For specialists, however, it is likely that national health insurance will reduce compensation for physicians. Some procedures may not be covered, or will be reimbursed at lower rates. More referral restrictions and likely rationing of care would lead to lower profits for specialists.

Even physicians are divided about whether or not national health insurance is a good idea.

GoozNews has more information on the article.

Eric Crampton argues against the paternalistic view some economists have taken in a recent editorial in Health Economics. Here’s an excerpt:

“Of course, most economists would disagree vehemently [that taxing unhealthy behaviors is a good thing]. Raising taxes does tend to reduce consumption and, where consumption generates large negative externalities (costs borne by uninvolved parties) can even be efficient: Pigovean taxes (taxes proportionate to those external costs) can push us closer to socially-optimal outcomes. But, there is no inefficiency caused by people choosing to live lifestyles they view as preferable despite the health costs.

If I decide to enjoy a shorter life rather than eek out a miserable existence without wonderfully-marbled steaks, a beer or several, or even the occasional cigar, zero inefficiency is induced thereby.

…what evidence there is suggests that to the extent smoking induces a “fiscal externality,” the sign of the effect is wrong: smokers pay more in cigarette taxes than they ever cost the public purse. They die earlier of cheaper diseases and collect less in superannuation than do non-smokers. And, as a 10% increase in cigarette taxes correlates with a 2% increase in obesity, one wonders whether increased cigarette taxes consequently require further increases in taxes on fatty foods.

Crampton supports the idea of “De gustibus non est disputandum,” we should not criticize individuals’ preferences.

“‘Libertarian paternalism’, ‘optimal paternalism’ and ‘cautious paternalism’ have been promulgated by prominent economists.” A recent Health Economics editorial by Jody L. Sindelar contradicts the economist conventional wisdom that correcting externalities, providing information and protecting youths are the only role for the government in the health policy arena.

I agree with Sindelar that making general economic theory more flexible to the practicalities of the real world is important. For instance, she cites the effectiveness of the PROGRESA program in Mexico. The program has been so sucessful that it has been adopted in New York City. The authors also cite the fact that small conditional cash payments conditional on drug abstinence have also been effective in help those addicted to drugs quit their habit.

Nevertheless, we must be careful how much believe the government should manipulate our lives. Sindelar claims that smoking, alcohol and drug abuse, and overeating all are examples of irrational behavior. While these activities are harmful, many people do enjoy having a cigarette, getting intoxicated, or eating copious amounts of desserts and the decision to smoke, drink, overeat or use drugs is likely not irrational. I do not believe that these activities should be taxed or prohibited just because they are harmful to the individual. Only if they lead to harm in other individuals (i.e.: externalties, such as second hand smoke, drunk driving, etc.) would specific tax be merited.

In my view, I do not believe that all government action is bad. Yet, I believe that the burden of proof should be that government action is truly beneficial. In the criminal court, people are “innocent until proven guilty.” In the public policy arena, there should be no government action, unless the government action has been proven beyond a reasonable doubt to be effective.

• JL Sindelar (2008) “Paying for performance: the power of incentives over habits.” Health Economics, 17(4): 449-451.

Last Friday I was the keynote speaker for the Pinal County (Arizona) Health Care Delivery System – 2008 Conference. The conference had an interesting mix of speakers (see agenda).

Speakers included Lisa Garcia, the Assistant County Manager of Health and Human Services, two academics from the University of Arizona (Gary Hart and Keith Joiner), and the CEO of a local community college (Dennis Jenkins). Also, CEOs of three hospitals (Casa Grande, Banner Ironwood, Northwest Medical Center Oro Valley), representatives from Blue Cross Blue Shield Arizona and the Director of the Arizona Medicaid and SCHIP program (AHCCCS) also presented.

My talk was titled “Health Care Economics: An Introduction.” The power point presentation is available here. The other speakers presentations are available here.

In Mexico there is a government program named Oportunidades which gives families cash payments if their children go to school, get vaccinated, and have regular health checkups.  The program has been a success and similar conditional cash transfers (CCTs) programs are being run in Nicaragua, Brazil and New York City.

New York City?  Should the NYC government pay for local children to go to school?  On the one hand, this will likely increase school attendance and decrease the number of drop outs.  On the other hand, the government is paying residents to do certain actions which seems to be a very paternalistic attitude.

The Economist  reports (”When bribery pays…“) that CCTs have been used in other settings as well:

Offering cash to change long-term bad habits, such as smoking or over-eating, has not worked. But disbursements tied to short-term transactions, such as getting drug addicts to take treatments for tuberculosis or depressed patients to see their psychiatrists, have already shown promise.

While paying children to go to school is not in and of itself a bad idea, I am concerned that the government will continue to pay people to do things that it thinks are in its best interest.  If we want to decrease inequality in society, it would be much better to increase cash transfers to the poor and allow them to decide for themselves what they should do with the money.

Many reform advocates have claimed that the federal government should mandate a package of insurance benefits that all private and public health insurers would be legally compelled to provide. Switzerland is one country in which the government defines a what the insurance benefit will be for all standard health insurers. The National Coalition on Health Care also proposes “…requiring insurers to establish explicitly separate premiums for the core benefit package.” Is having the federal or state government mandate a minimum benefit package a good idea?

Cons

Most neo-classical economists would say that having the government mandate an insurance package is a bad idea. Regulation restricts choice. If consumers would prefer an insurance company to cover mental illness and another person would prefer their insurance company have more generous coverage for cancer treatment, then it would be welfare destroying to eliminate the individual’s choice. Even if regulators were able to determine an ‘optimal’ benefit package–even a benefit package deemed optimal for society is unlikely to be optimal for each individual–this optimality could only be achieved in a static setting. When new medical technologies and procedures became available would they be adopted? Adopting unproven medical technologies may not increase quality of care, but would increase the cost of premiums. Adopting technologies too late will harm the sick patients who could benefit from these advances.

Another issue is who would be deciding which procedures are included. Whether it is Congress or a medical “Federal Reserve,” these groups would be influenced by lobbying from the AMA, pharmaceutical companies, and patient interest groups. Further, Congressmen will have their own favorite diseases that they will include in the basic coverage plan, even when funding coverage for these diseases may not be as beneficial as for other diseases.

Pros

One benefit of the standardized medical package is that people would better be able to comparison shop. Currently, it is nearly impossible to determine what your insurance company covers unless you are an expert. With a mandated core benefit package, insurance companies would only be able to compete on the dimensions of price, service, and reputation. They would be no competition with regards to which procedures were covered. Also, this would help to attenuate the problem of adverse selection. Many insurers currently do not offer generous coverage since they know by doing so, they will attract the sickest individuals and likely decrease their profits.

Further with a standard benefit package there should be lower legal costs for both the insurance companies and patients. With a clear core benefit package, litigation would not be eliminated but it would certainly be curtailed since much of the payment ambiguity would be cleared up.

Supplemental Insurance

Regardless of whether or not you prefer a minimum insurance benefit, the government should allow supplementary insurance markets to exist. In this way, those who prefer more generous coverage could purchase additional insurance. Further, it is likely that supplemental insurance would be the first-adopters of new technology and could provide a testing group as to whether or not a new medical treatment should eventually be included into the core benefit package.

If you were offered an actuarially fair lump-sum payment, would you give up half of your Social Security benefits? This is the question asked by Brown, Casey and Mitchell in their 2008 NBER working paper.

Overall, about 60% of respondents from the HRS data set preferred the lump-sum payment. The authors find the following individuals are more likely to prefer a lump-sum payment over the annuity:

• those with shorter expected longevity or who are in poor health,
• those with more education,
• those with less financial sophistication conditional on education,
• those who believe Social Security benefits will be cut.

Predictably, individuals who think they live longer will choose the annuity since they will get paid over a longer period of time. We also see that those who believe that there is significant political risk (i.e., Social Security benefits will be cut) are more likely to choose the lump-sum benefits.

Men aged between 63 and 67 have only 5% of their assets in private annuities. People have claimed that this was due to one of the following reasons:

• Adverse selection leads to high load factors on annuities, making them a poor value.
• Because they are made up of a fixed payment, Annuities are subject to inflation risk.
• Social Security may be a substitute for private insurance annuities.

The study finds evidence to contradict all three of these hypotheses. Social security benefits are actuarially fair, and inflation-adjusted. If people really benefited from Social Security annuities, than they should be hesitant to give up this stream of payments. Yet three of five people still would prefer a lump sum payment over the Social Security annuity, a type of annuity that offers significant advantages over those offered in the private market.

Maybe Social Security isn’t as valuable as once thought.

• Brown JR, Casey MD, Mitchell, OS. 2008. “Who Values the Social Security Annuity? New Evidence on the Annuity Puzzle,”NBER WP #13800.

“In 1988, the first year for which data are available, there were fewer than 14,000 patients waiting for a kidney transplant and about 7,000 deceased-donor kidneys. Today, the waiting list has grown more than fivefold — an increase fueled partly by higher rates of diabetes — but the number of deceased-donor kidneys has only inched up. ”

There is a serious kidney shortage in the U.S.  Any economist can tell you that shortages generally occur from either a natural disaster or when the government imposes a below market price on a commodity.  In this case, the government has said that one can not sell organs; thus the market price for a kidney is set to zero.   Could a market for kidneys solve this problem?

The Wall Street Journal has a pair of interesting articles (”Kidney Shortage…” and “A Market for Kidneys?“) on whether or not we should have a kidney market.  Julio Elias of the University of Buffalo comes out in favor while Alvin Roth of Harvard University is against.  Dr. Elias makes a case based on economic theory:

“The current system of live organ transplants resembles an autarkic economy in which patients in need of an organ transplant are constrained to the organs available in the pool of friends and relatives. The kidney exchange system developed by Al and others is a barter system, and clearly will provide an improvement over the current system.

But a general conclusion of economics is that barter is an inferior system when compared to a money system, since barter requires the coincidence of wants. With the use of computers, and a national registry, multilateral barter is a good possibility, but still less efficient than using general purchasing power; i.e., a market. The main disadvantages of the kidney exchange system are the limitations that only kidneys from relatives and friends can be used and that the exchange must happen at the same time. A market-based exchange does not have such serious limitations.”

Dr. Roth believes that creating a market is politically infeasible and socially repugnant.  Although he does not reject the merits of an organ market, he does say that more practical steps–such as an organ exchange or making all individuals organ donors upon death unless they explicitly opt out–will currently be more politically feasible.

“There would be more live-donor transplants if everyone who wanted to donate a kidney to someone could do so, but a healthy person’s kidney is often incompatible with his or her intended donor. So, one way economists have helped is in helping organize kidney exchanges, which allow incompatible patient-donor pairs to exchange with other such pairs. “

 What do you think?

According to optimal tax theory, taxes should be highest on relatively inelastic activities.  For instance, most men work full-time and and the tax rate does not affect this.  On the other hand, it has been should that the labor supply of women is much more sensitive to wages and income tax rates.  If we follow the conclusions from the optimal taxation literature we should tax men more than women.

This is what Harvard economists Alberto Alesina and Andrea Ichino propose (see Vox EU).  The Free exchange blog as well as Gilles Saint-Paul of the Toulouse School of Economics, however, are more sensible and reject this proposition.  Free exchange concludes on a particularly interesting point:

“…The economist’s idealised utilitarian social planner does not take seriously the costs incurred by the conflicts that will flare up when some are made ‘more equal than others’.  Perhaps liberal constitutions prominently feature equality before the law for a good reason: official non-discrimination works as a truce, a way of keeping the social peace.“

Merrill Goozner has an interesting post (”Unfair and Unbalanced Wonkery on Mandates“) arguing that insurance mandates aren’t good policy (I agree with him on this).

For the record: I’m opposed to mandates for two reasons. First and foremost, they’re bad politics. Americans don’t like to be told to do anything. They especially don’t like unfunded mandates.

That leads to point two. Without sufficient taxes on businesses that don’t provide insurance to their employees and/or significant savings from health care cost control (not likely given the opposition of insurance companies, drug companies, hospitals, doctors, and other providers in the system), mandates will result in inadequate plans for the uninsured — catastrophic plans that still leave the newly insured at the emergency room door for basic care and without preventive services. Higher taxes are a prescription for political failure. Lousy plans maintain the status quo in public health. Some choice.

The rest of the Goozner post argues that a single payer system is not socialized medicine. While it is true that physicians are not directly employed by the government in a single payer system, since the government is paying all physicians salaries–especially if the physician has not outside options to receive payment from another source–I would say that a single payer system is de facto socialized medicine.

According to CNN, the FBI “is expected to announce in coming days the awarding of a $1 billion, 10-year contract to help create the database that will compile an array of biometric information — from palm prints to eye scans.” Maybe this will increase security, but will the government take advantage of this knowledge?

“People who don’t think mistakes are going to be made I don’t think fly enough,” said [ACLU Technology and Liberty Project director Barry] Steinhardt.

He said thousands of mistakes have been made with the use of the so-called no-fly lists at airports — and that giving law enforcement widespread data collection techniques should cause major privacy alarms.

“There are real consequences to people,” Steinhardt said

Government provided health insurance may have advantages, but one of the drawbacks are that these programs are expensive.  According to the Boston Globe (”Subsidized care plan’s cost to double“), the cost of the Commonwealth Care program will increase from $158 million in 2007 to 1.35 billion by 2011 mostly due to increased enrollment.  Enrollment is expected to increase 39% per year over this time period while the cost per person is estimated to increase 23% per year.

Who will pay for this?  Massachusetts solution is to ask for $1.5 billion from the federal government (i.e.: taxpayers from other states will help finance this plan) to cover costs during the next 3 years.

“[T]he [Massachusetts] governor’s spokesman, Joseph Landolfi, said, ‘It is clear that paying for healthcare reform will pose a much greater fiscal challenge than was anticipated by the previous administration.’ “

Many of the Democratic candidates support having employers provide insurance for their employees with the threat of a fine or tax if an employer decides not to comply. This of course will increase the cost of an employee for firms. If employees truly value the health insurance, then the cost of insurance can be passed on to the employee through lower wages.

This cannot happen, however, if you are a low-wage worker whose wage is at or near the minimum wage. This is, of course, because employers can not pay wages below the minimum. Thus, a “Pay or Play” mandate may reduce employment for the lowest skilled workers. A paper by Baicker and Levy examines this issue.

The authors find the following:

“The authors calculate the average cost of a health insurance plan to be about $9,000 for family coverage during their sample period, or $3.66 per hour for a full-time worker. Assuming that a mandate required employers to provide coverage similar to the average plan and to pay 80 percent of premiums, wages would need to fall by $3 per hour to fully offset the cost of the mandate.

The authors estimate that one-third of all uninsured workers, or 5.5 million U.S. private sector workers, have earnings within $3 of the minimum wage.

…the authors estimate that the implied increase in compensation resulting from the mandate would cause 224,000 workers to lose their jobs. The affected workers would be disproportionately low education, minority, and female.”

From the NBER Fall 2007 Bulletin on Aging and Health.

So you’re a Republican and you don’t know who to vote for. Which of the Republican candidates has the best plan for health care reform? This is what I will discuss today.

If you are a Democrat, please read my “Guide to the Democratic Candidates” yesterday.

Similarities

Almost all the Republican candidate are in agreement on the following issues:

• Do not expand SCHIP.
• No insurance mandate, although Mitt Romney did provide over an insurance mandate while he was governor of Massachusetts.
• Decrease Regulation. Most Republican candidate voiced support for an individual’s ability to buy insurance from out-of-state providers and to simplify state and federal insurance regulations. All the candidates would give states more freedom to come up with innovative health care solutions.
• Medical Malpractice award caps. Almost all the candidates, with the exception of Ron Paul, support caps on the amount of money that can be awarded through medical malpractice. This should drive down the cost of malpractice insurance.

Differences:

A chart will be helpful here (ordered from most to least votes in Iowa caucus).

The Republican candidates seem much more satisfied with the status quo than the Democrats. Philosophically, Republicans want to put more health care decisions into the hands of consumers. Thus, most candidates support making individually-purchased health insurance tax deductible with the exception of Fred Thompson. Rudy Giuliani would allow a standard tax deduction of $15,000 for families and $7,500 for individuals.

Huckabee, Romney, McCain and Giuliani would all give poor individuals subsidies to purchase health insurance, but none claim that they will end Medicaid. Likely, they would offer low income families the option of purchasing health insurance with a subsidy or possibly the ability to opt out of Medicaid. Thompson and Paul do not support these subsidies.

One would think that free-market Republicans would support the right to import drugs, but only McCain and Paul believed this was a good idea.

Health savings accounts (HSAs) were very popular as well. Many candidates supported allowing the creation of an HSA without having a high-deductible health plan (HDHP). Romney and Thompson did not explicitly support this idea, but they were not against it either.

Healthcare Economist’s Take

Most Republican candidates believe that less–not more–government involvement is the best way to cure what ails the healthcare system. While I am sympathetic to this line of thought, pure political ideology will not improve the healthcare system.

Huckabee calls for a “complete overhaul” of the health care system but only does not really offer concrete solutions. His plan to increase HSAs is widely shared by almost all of the candidates. I am not sure why HSAs are a good idea. They limit the liquidity of consumers income. This means that only individuals with large savings (i.e.: the rich) will be able to take advantage of HSAs while the liquidity constrained poor will need to have their money available for food, utilities, gas clothes and shelter and will not be able to benefit from HSAs.

Despite significant health care reforms in Massachusetts, Romney’s national health care reform plans are meager: make health care expenses and insurance premiums–including nongroup policies–tax deductible.

Thompson’s health care plan is basically to be content with the status quo.

McCain gives the most detailed healthcare plan. Like Barak Obama, he wants to create national standards for measuring and recording treatments and outcomes. He also supports clinics in retail outlets (e.g.: Minute Clinics) and the expansion of the role of nurse practitioners and physician assistants, and a $2,500 tax credit ($5,000 for families) to increase incentives for insurance coverage.

Ron Paul is the most radical candidate. He wants reduce the role insurers–especially HMOs—play in the financing of healthcare. He wants patients to be responsible for paying the first dollar of health care. Despite his qualifications as a physician, Paul does not offer very creative solutions to the healthcare problem. While he is a libertarian, he does not propose any limits on Medicare or Medicaid and in fact wants to expand government coverage to include alternative medicines.

While McCain supports a tax credit, Giuliani supports a tax deduction of $15,000 Family, $7500 health insurance deduction. This helps those with a higher marginal tax rate more (i.e.: the rich) and the poorest individuals who don’t pay tax will not even benefit from this legislation. Giuliani does advocate a Health Insurance Credit for the poor as well and poor individuals could use these funds–as well as funds from Medicaid or their employer–to purchase private health insurance.  Any social program that gives money to the poor and then tells them how to spend it–on this case on health care–must be compared against a simple government cash transfer program.

The Healthcare Economist Democratic Pick: McCAIN

While little separates the Republican candidates in terms of their view on health care reform, I would support John McCain.  I am strongly in favor of importing pharmaceuticals from other countries and innovative medical delivery systems such as the Minute Clinics.  McCain supports both of these initiatives.  Also, McCain has a $2500 tax credit ($5000 for families) for all Americans and this will help to eliminate the bias toward employer-sponsored health insurance. 

Rudy Giuliani has a very similar health care reform proposal as McCain, but does not support the importation of pharmaceuticals from developed countries.  Further, Giuliani’s tax deduction is regressive compared to the McCain tax credit which is a more proportional subsidy for everyone (although Giuliani does offer a Health Insurance Credit for the poor).  I am partial to Ron Paul’s libertarian leanings on many issues, but trying to eliminate third party payers is not a feasible solution to the healthcare crisis, especially when catastrophic illnesses are so expensive.

Candidates’ Statement on the Health Care Issue

• Giuliani
• Huckabee
• McCain
• Paul
• Romney
• Thompson.

So you’re a Democrat and you don’t know who to vote for. Which of the Democratic candidates has the best plan for health care reform? This is what I will discuss today.

If you are a Republican, please read my “Guide to the Republican Candidates” tomorrow.

Similarities

All of the Democratic candidates support the following actions:

• Expanding SCHIP/Medicaid to cover more of America’s uninsured.
• Providing more subsidies for households who can not afford health care.
• Providing a minimum standardized insurance benefit package. For instance, both the Clinton and Obama websites claim that insurance benefit packages will be similar to those offered through the Federal Employees Health Benefits Program (FEHBP). This is the plan members of Congress have.
• None of the candidates has proposed to end the tax deductible status of employer-provided health insurance.
• All support guaranteed issue (i.e.: The right to purchase insurance without physical examination; the present and past physical condition of the applicant are not considered.).
• Although none of the candidates’ websites explicitly state this, all must raise taxes to finance these expanding benefits.
• All three will offer employers the choice of providing health insurance for employees or contributing a percentage of their payroll towards the costs of the national plan.

Differences

A chart may be helpful here:

• Clinton and Edwards both support insurance mandates. Obama is trying to expand coverage to more and more people but is not mandating coverage.
• Edwards proposes the creation of a regional purchasing system which he names “Health Care Markets.” This system will be available for all individuals who do not have employer provided insurance. According to the Edwards website “non-profit purchasing pools that offer a choice of competing insurance plans. At least one plan would be a public program based upon Medicare.” The Obama and Clinton plans aim for more government regulation as well as the offering of public health insurance to individuals, but do not involve regional purchasing.
• Obama states that he would allow the importation of pharmaceuticals from developed nations. I have not seen where the other two candidates stand on this issue.

Healthcare Economist’s Take

Electing a Democratic president will likely move us closer towards a universal health system. Subsidizing health care will help poor individuals afford the care they need. I like the egalitarian approach of Democrats but this type of system will be expensive.

Many of the candidates propose that the federal government will reimburse employer health plans for a portion of the catastrophic costs they incur above a threshold. This may decrease insurance companies incentive to provide inexpensive preventive care. For instance, insurance companies have a large incentive to provide beta blockers to reduce heart attacks, but if the federal government will pay for most hospitalizations, than the incentive to provide this care diminishes.

While there is no one optimal standard for insurance benefits, standardizing insurance benefits can help eliminate some of the patient-third payer confusion of what will actually be reimbursed. It will also help stop the insurance company practice of denying claims to increase profits.

The one drawback to this system is that it is expensive. Taxes will have to be raised. Although the candidates talk generally about preventive care and EMR, without having individuals bear a significant share of the marginal costs of medical care, medical spending will like increase significantly.

The Healthcare Economist Democratic Pick: OBAMA

If you are a Democrat and are voting solely based on a health care reform agenda, I endorse Obama. Obama does not mandate insurance coverage. Instead, he is trying to make care more affordable without telling individuals how to spend their money. Further, I whole-heartedly agree that patients should be able to buy prescription drugs from developed countries. Obama’s goal is to expand coverage which still allowing significant choice. The Edwards plan is one step away from nationalized health care.

Obama also has an explicit proposal to create and fund an “independent institute to guide re­views and research on comparative effectiveness.” Although the government may not be the best mechanism for this, disseminating medical ‘best practice’ methods is vital to improving medical quality.

The Obama plan will be expensive and either taxes will have to be increased, or spending must be cut elsewhere. Still, Obama is the best Democratic option.

Candidates’ Statement on the Health Care Issue

• Clinton
• Edwards
• Obama

Tomorrow: Guide to the Republican Candidates

Libertarians often complain that the government intrudes too much in our lives.  Nanny State, a book by Denver Post columnist David Harsanyi, claims that the government is regulating what we do to an extent that it is becoming a surrogate parent.  “Why are we allowing politicians, bureaucrats, and social activists to dictate what we eat, where we smoke, how much we drink or what we watch and read?” (source: Power Line).  If you believe the diatribes of these delusional government-haters, pretty soon the government will be monitoring how clean our room is!

Well, looks like the government is not going that far just yet.  Right now, Uncle Sam only cares about how neat our carry-on bags are.  According to in article (’Holiday airline travelers urged to chuck carry-on clutter‘) in the USA Today,  “the Transportation Security Administration (TSA) today launches a campaign urging travelers to eliminate clutter in carry-on bags. Pack in layers. Keep items neat. Messy travelers could spend more time in line if their carry-ons are cluttered because such bags are more likely to be pulled aside and searched by hand, TSA spokeswoman Ellen Howe says.”

Are messy people more likely to be terrorists?  If so, any TSA officer who might have inspected my bedroom when I was 10 years old would have believed that I was Osama bin Laden himself.

The Food and Drug Administration is one of the most important government agencies. The FDA has an interesting history and below I will review some important dates.

• 1938 Federal Food, Drug and Cosmetic Act. This law was enacted after the drug Elixer Sulfanilamide killed over 100 people. Firms were required to submit new drugs to the FDA. “If the FDA was not convinced of a drug’s safety then it had 180 days from the receipt of the application to block the drug’s introduction into the market.” The law required that drugs have an appropriate label for safe use.
• 1951 Durham-Humphrey Amendment. The amendment divided the drug world into prescription and over-the-counter drugs. Patients using over-the-counter drugs did not need a physicians prescription.
• 1962 Kefauver Amendments. These amendments removed the 180 day limit. Further, the law required not only that new drugs be safe, but also that they are effective. The FDA also gained control of all drug testing in the U.S.
• 1992 Prescription Drug User Fee Act. Due to lengthy approval times, this law allowed the FDA to charge drug companies user fees in order to receive guarantees on review times.

Presently, there are 4 phases that a drug must go through in order to gain FDA approval.

• Phase I. These are smaller (20-80 participants), clinical trials which determine a drug’s safety and pharmacologic properties among healthy volunteers.
• Phase II. This phase tests a drug’s efficacy and optimal dosage. Typically 100-300 individuals are enrolled and these volunteers have the disease which the drug is supposed to treat.
• Phase III. The third phase is very similar to phase 2, except that the study is much larger. Often there are over 1000 participants in these trials. A drug can receive approval from the FDA if Phase III proves successful.
• Phase IV. This is the least formal stage. It involves post-market surveillance. Often the FDA will request that the pharmaceutical company conducts a study to determine the long term safety of the drug.

A paper by Philipson and Sun (2007) looks at whether having the FDA and product liability is an efficient use of societal resources. If the FDA approves a drug as safe, then why would there be product liability? The chance of an enormous lawsuit will only lead to higher drug prices as companies have to find a way to fund lawyers and damage awarded during lawsuits. “For example, firms seldom do more clinical testing than what the FDA requires, which suggests that at least for this investment in safety, product liability may sometimes duplicate the role of the FDA.” If the drug companies will not preform more clinical trials, having a product liability system will only add the cost of drugs.

One issue not taken into account is one of fairness. If an individual is harmed by an unsafe drug, without a product liability system they will not be compensated. Further, if we believe that individuals harmed by the drug have more medical expenses (from drug complications) and thus lower income, it is possible that an efficiency argument could be made by which product liability redistributes income from those with lower marginal utility of income to those with higher marginal utilities of income. Since I am not in favor of having the courts decide cases based on issues of income inequality, I think the fairness is the most compelling argument for a product liability system.

• Philipson TJ, Sun E (2007) “Is the Food and Drug Administration Safe and Effective” NBER WP #13561.

Local governments provide a variety of services which are highly valued by their residents. From police protection to waste disposal, from snow plowing to utility meter reading, the local government is charged with providing the infrastructure necessary for a smooth functioning economy and a high level quality of life. But should local governments outsource these tasks to the private sector or provide the services themselves?

This is the question analyzed in an NBER working paper by Jonathan Levin and Steven Tadelis (earlier draft for free available here). On the one hand, using government provision is often inefficient due to the low incentives faced by city employees. On the other hand, cost relating to specifying and implementing performance requirements of a private supplier may also create inefficiencies. The authors claim the following:

• “If contracting difficulty m increases, the principal will be more likely to use an employment contract, while the optimal quality may increase or decrease. If the importance of quality s increases, the principal will be more likely to use an employment contract, and optimal quality will increase.

Services where quality or performance is difficult to measure are poor candidates for privatization. According to the authors’ data, the most difficult service to contract are police services, drug/alcohol treatment programs, inspection/code enforcement and fire prevention. The services where quality is easily seen are waste collection, utility meter reading, vehicle towing, and operation of recreation facilities.

Data

The authors use information from 1043 cities from the International City/County Management Association’s (ICMA’s) 1997 and 2002 Service Delivery surveys. Supplementary information is provided by the U.S. Census. To better understand which services are easily contractible, the authors conducted a survey of 23 city managers.

The authors use a multinomial logit regression in order to investigate which factors influence the probability that a city will privatize a given service.

Results

Here is what the authors concluded from their data:

1. Cities are more likely to privatize services for which it is easier to specify, enforce or adjust performance standard.
2. Cities are more likely to privatize services for which sensitivity to quality is low. As city residents are the final consumers of services, and city administrators are ultimately accountable to residents, this suggests that privatization should be less likely for those services where city residents are more likely to react to quality problems.
3. Smaller and rural cities may be less responsive to contracting difficulties. For instance, if the city simply does not have the capacity to provide the service, then they will privatize. On the other hand, if there are no business which will provide the desired service, then they local government may have to do it in-house.
4. The authors claim that city managers who have had experience working with private contractors are more likely to have fewer difficulties working with private firms and thus are more likely to privatize. While the learning argument is somewhat convincing, empirical, this may simply be the result that some cities are more ideologically in favor of privatization and others prefer more socialized services.
5. Cities run by mayors may be less likely to privatize services as compared to cities run by managers. The authors claim that politicians (mayors) may be are more responsive to quality in order to please their constituents but may care less about the cost.
6. Cities with strong government unions will be less likely to privatize.
7. If financial constraints cause administrators to focus more on economic considerations, then debt-constrained cities would be more responsive to contracting difficulties.

Extension

According to this model, it is difficult to tell whether or not medical care should be provided publicly or privately. Quality or performance is extremely difficult to judge and thus contracting based on performance (i.e.: P4P) is destined to fail. If a person dies after a surgery, is that the surgeons fault or was the person just in critical health? This may lead individuals to think that public provision is ideal. However, having a public sector surgeon who is less motivated and cares less about their reputation may lead to inefficiencies.

For vaccinations, quality is easy to judge–people are either vaccinated or they are not. This may lead individuals to think that vaccinations should be privatized to save money. However, it is difficult to contract the number of individuals who are vaccinated. For instance, if firms were paid based on the number of people they vaccinate they may have an incentive to vaccinate individuals even when they should not receive them (if they are sick and should not receive the vaccine until they recover) or the firm could inflate the number of people vaccinated by fraud.

Thus, whether or not medical services should be public or private is not so simple, and a case-by-case analysis may be needed.

A press release from Senator Ron Wyden sent to me at 7am this morning states the following:

Working to enhance screening and prevention of childhood type 2 diabetes, U.S Senator Ron Wyden (D-OR) today announced that an amendment giving states $15 million to combat the disease has been included in the final conference version of the State Children’s Health Insurance Program bill (S-CHIP).  Wyden is the amendment’s sponsor.  The S-CHIP conference report passed the Senate yesterday evening and will now be sent to the President for his consideration.
 
“This amendment gives states the power to develop creative solutions to the closely related problems of childhood obesity and type 2 diabetes in children,â€? said Wyden.  “Children who develop type 2 diabetes are saddled with health problems for life.  By investing in prevention, we can not only save lives, we can make a greater impact with less money.â€?

Sounds like a great program…but is it really?  The question is, do we want federal politicians legislating medical care?  Certain politicians, often with the best of intentions in mind, will have a pet disease at which they will want to throw money.  Type 2 diabetes is a serious problem.  However, it is the most pressing issue?  Are there other medical problems that need funding more urgently?  Would providing funding for other medical conditions result in a bigger marginal improvement in health outcomes?

Without looking at this situation holistically, a federal health spending budget is put together in a piecemeal fashion.  Diseases which receive more media attention or have stricken relatives of politicians will likely receive more funding even if this is not the best use of our tax dollars.

Along the same lines, in 2004 California approved $3 billion for stem-cell research (see MSNBC article).  While stem cell research funds are certainly needed, $3 billion may be excessive.  Directing so much cash to one cause may siphon off research funds for other worthy diseases.

What are the major differences between medicine and public health? What challenges do public health officials frequently ignore?

On Tuesday, I attended a seminar by Dr. Richard Schieber. Dr. Schieber was a practicing pediatrician, however for the last fifteen years he has worked as a medical epidemiologist for the CDC.

One of the major challenges facing the CDC is how to translate public health medical recommendations down to the clinical level. According to Schuster et al. (1998), little of public health care recommendations are preformed in the clinical setting. “Simple averages from a number of studies indicate that 50 percent of people received recommended preventive care; 70 percent, recommended acute care;… 60 percent, recommended chronic care.”

Why are these numbers so low? Well, public health officials have many recommendations. What if a physician is confronted with a patient who has diabetes and is also obese and a smoker. Will they be able to fulfill all the recommendations in the 15-20 minute time slot they have with their patient? Likely not.

A study by Yarnall et al. (2003) finds that “To fully satisfy the USPSTF [US Preventative Services Task Force] recommendations, 1773 hours of a physician’s annual time, or 7.4 hours per working day, is needed for the provision of preventive services. ”

Dr. Schrieber’s main point of the talk is that recommendations in and of themselves are not very useful. They must be “translated” so they are useful and feasible for both the medical provider and the patient. Further, public health programs should be measured by outcomes, not by processes.

Finally, some of the talk was spent on differences between public health and medicine. Some of these differences are listed below.

Why do the Orthodox Jews have so much political power in Israel? Why are third parties in the U.S. so weak? These phenomenon can be explained by the Banzhof power index. The index is calculated as follows. Let us look at the Israeli election in 2003 for the Knesset. Here are the voting results of the top 3 parties:

In the Knesset, the parties must form a coalitions which has at least a majority of the seats. In the case above, a majority would consist of a coalition with at least 30 seats. The Banzhof power index tells us the Shas (religious) party is equally powerful as the Likud (conservative) and Labour (liberal) parties even though the Shah party has less than half the number of seats as the Likud. Let us look at all the winning coalitions:

Likud-Labor; Likud-Shas; Labor-Shas; Likud-Labor-Shas

There are 4 possible coalitions. The groups which are pivotal are underlined in each coalition. We see that each group is pivotal 2 times, and thus each has a Banzhof power index of 2/6=1/3. This is why the religious parties in Israel are so powerful even though they receive a much lower percentage of the vote.

Why is this not a problem in the U.S? In the U.S. no coalitions need to be formed. A candidate must win a majority of electoral college votes and if they do not then there is a run off. The benefit of this system is that small third parties do not become more powerful than they deserve. On the other hand, however, the concerns of third party voters are often ignored due to the American election rules.

A pair of interesting essays are available at Cato-Unbound.

Robin Hanson argues that the best way to help patients is to cut U.S. medical spending in half.  He argues that there has been little evidence that increasing medical spending increases health outcomes.  The best evidence comes from the RAND Health Insurance Experiment.  The RAND HIE showed that “For the five general health measures, we could detect no significant positive effect of free care for persons who differed by income … and by initial health status.â€?  Dr. Hanson’s solution is to “cut would be our government and corporate subsidies for medicine, including direct payments, tax exemptions, and regulatory requirements.”

David Cutler responds by worrying that Hanson’s demand side approach will compel patients to reduce unnecessary medical care (good!)  but also reduce the amount of preventative and other care (bad!).  For instance, patients may not buy prescription drugs to treat a disease if they are forced to pay for them out of pocket.  If the patient becomes ill after not taking the drugs and needs surgery, the insurer will then pay for the operation.  This is not an efficient use of resources.  Dr. Cutler believes health care costs could be cut almost 50% with the implementation of “information technology, reduced errors, investment in disease management, or generation of comparative effectiveness information.”  Finally, Cutler believes medicine is not as inadequate as Hanson claims, citing advances in post-heart attack treatment.

While almost all economists will argue that a single payer health care system is inefficient, many economists support the idea on redistributive ground. Taxing the young and healthy–either directly through taxes or by forcing them to buy non-actuarially fair insurance–and giving the money to pay for the medical care for the old and sick seems like the morally correct path upon which to proceed.

Megan McArdle of Asymetrical Information (now on The Atlantic Monthly website) has a series of posts (original post, “The morality of health care finance,” “Another bad argument…“) which questions this line of reasoning. She ponders whether or not the class of old and sick people, as a whole, are a more deserving class than the young and healthy. Ms. McArdle claims that the old and sick are a less deserving class. Here’s why:

• The old and sick are less needy than the young and healthy. “They have more assets and less poverty than any other group.”
• The old and sick are more fortunate than the young and healthy. Some of the young and healthy will not live to old age, whereas the old and sick have had the blessing of living a long time.

McArdle indirectly mentions the moral hazard of having a single payer insurance system; if you know someone else will foot the bill for your medical costs, you may decide to live a less healthy life style.

Some of Ms. McArdle’s critics argue that the young and healthy will someday be old and sick, and thus under a veil of ignorance argument, a single payer system is morally correct. This is similar to the PAYGO system that we have now for the social security system. Young workers pay for old sick people. One problem is demographic risk; if there are many old, sick people and few young healthy workers, the tax rates on the young will be extremely high. Further, one could avoid all these inter-generational transfers if each individual saved while they were young in order to finance their health care expenditures/insurance premiums when they are old.

The final blog concludes by wondering why “…Warren Buffet is entitled to have his prescriptions paid for by my dry cleaner simply because Warren Buffet happens to be in worse health”

The true benefits of a single payer system is that it provides a form of premium insurance. When individuals become sick, their health insurance company will pay for their care…for 1 year. Then, when the individual has to renew their policy, unless they have a group insurance plan, their insurance premiums will rise to reflect the greater expected medical expenditure level. This problem could be solved by having consumers choose long-term insurance contracts. Long-term insurance contracts, however, limit competition, since patients can not switch insurance plans if they received poor service.

There are many problems with the market for health insurance. I am not sure whether a single payer system is the answer or not, but Ms. McArdle’s arguments against the morality of a single payer system definitely add some doubt to claims that a single payer system is needed on moral grounds.

The International Herald Tribune reports that U.S. pain medicine use has increased 88%. Is that a good thing?

Many people will rush to claim that these figures show how pain medication is being abused in the United States (see Brett Favre or Rush Limbaugh). Others will claim that big Pharma’s advertising is leading people to purchase medication they don’t really need. “Spending on drug marketing has gone from $11 billion (€8.2 billion) in 1997 to nearly $30 billion (€22.4 billion) in 2005.”

On the other hand, increasing use of pain medication may be due to treatment philosophy changes. “Doctors who once advised patients that pain is part of the healing process began reversing course in the early 1980s; most now see pain management as an important ingredient in overcoming illness.”

Also, as the population ages, more and more people will need pain medication. According to the U.S. Census Bureau, the number of people over age 65 is projected to increase by 19 million people between 2000 and 2020.

The Healthcare Economist’s Recommendation

So what should be done? Do we need a crackdown on physicians who prescribe painkillers? I don’t think so. Doctors should abandon pain medicine prescription to their chronically ill patients for fear of jail time or government prosecution. The NY Times ran a story two months ago which chronicled how Dr. Ronald McIver was put in jail for over-prescribing pain medication to his chronically ill patients.

Loosening regulations will likely increase the amount of pain killers used for recreational purposes. Nevertheless, would increasing the difficulty for your grandmother to get some relief from her chronic illness be worth the tradeoff of marginally decreasing recreational pain killer usage of people who choose to do so out of their own volition? I’ll side with increasing my grandmother’s freedom to choose painkillers over restricting the freedom of recreational drug users every time.

Below is a summary of some of the interesting points in the lecture of Mathias Kifman.

Gouveia model

This is a topping up political economy model. First, we have individuals who get utility from consumption and health care. There are two types: high risk π_h and low risk π_l. There are also two incomes, y_i: rich y_r and poor y_p. Individuals have the following utility function:

• max u(c) + π_iv(h)
• c=y_i-Πt(y)g
• h=g

Π is equal to the average risk of the population. The first order condition is:

• u’Πt(y_i)+π_iv’

The comparative statics show that dg/dπ_i is positive (sicker people prefer more government health care), but the sign of dg/dy is unknown. Rich sick people prefer to have some government provided insurance since they can purchase the insurance at a lower rate, but since progressive or proportional taxation finances the system, they dislike the redistribution aspects of this program.

Topping up
We now allow individuals to buy additional medical care, m, even after paying for the public insurance program. For instance, if the government covers 5 doctors visits per year, and individual can buy additional insurance to pay for additional visits. Here, our model is:

• max u(c) + &pi_i;v(h)
• c=y_i-Πt(y)g-πm_i
• h=g+m

The first order condition for the choice of m is:

• -u’(y_i-Πt(y_i)g-πm)+v’(g+m)=0

The comparative statics reveal the following:

• dm/dg is negative. More public health insurance will reduce the quantity of private health insurance purchased. This makes perfect sense since in the model public and private health insurance are perfect substitutes.
• dm/dy is positive. Richer people have higher demand for all goods so it is sensible that they wish to purchase more private health insurance.
• dm/dπ_i is negative. Sicker people purchase less private health insurance since the price of private health insurance is based on their risk level. Thus, high risks pay much more for private health insurance than low risks, while in public health insurance the price of health insurance is based on income rather than risk level.

Opting out vs. Topping up
While the topping up model shown above gives a compelling arguement for allowing private health insurance to be purchased in addition to some basic level of public health insurance, one can not always ‘top up’ with medical care. For instance, individuals may wish to avoid public health services altogether in order to avoid waiting list or in order to meet with higher quality doctors. Dr. Kifmann notes the following:

• If the quality of public services is low, the typical individual prefers private services. Increasing public services (and raising taxes) decreases utility as long as private services are consumed.
• Once quality is sufficiently high, however, individuals prefer public services. Increasing the quality of public health further can make individuals better off until their preferred qualitz is reached

Of course, it is difficult to ensure quality in a government monopolized system where there is no competition.

Political Economy
The political economy analysis reveals an ‘ends against the middle’ phenomenom. Individuals poorer than the median voter and the wealthiest voters prefer lower services. The poor have a high marginal utility of income and would rather spend their money on themselves rather than a public health care system, while the rich dislike the redistributionary aspect of social health insurance. The middle class, however, generally supports public health insurance. Thus, if the middle class makes up a large proportion of your society, it is more likely that government provided health insurance will be approved by the median voter.

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.

The Washington Post (”Senate likely to Back…“) reports that the Senate will support a plan to remove the legislative barriers against the importation of pharmaceuticals from other countries.   According to the article:

“The provision would allow consumers to buy prescription drugs from Canada and permit commercial distributors to obtain them from Canada, Japan, Austria, Switzerland and other European Union nations, … Imported drugs would have to be FDA-approved, manufactured in facilities inspected by the FDA and carry documentation about the chain of custody of the drugs.”

While importing drugs from low cost countries is a sensible means to reduce health care cost without decreasing quality, the Health Affairs blog (”…striking the right balance…“) reports that the government is considering strengthening the FDA’s regulatory authority.  Stricter FDA regulation may reduce American’s ability to import pharmaceuticals from other countries or increase the cost of importation.

Overall, however, I believe that loosening pharmaceutical trade restrictions is a step in the right direction.

“…in a similar way, the slow growth of the coloring industry in the U.S. before the First World War was largely due to patent protection: most patents were held by the large German companies, such as Bayer, BASF, Hoechst and IG Farben. The chemical industry in the US was so underdeveloped, that during the First World War the U.S. was forced to import dies from Germany via submarines to bypass the British blockade.”

There is a very interesting book titled Against Intellectual Monopoly by Michele Boldrin and David K. Levine which was brought to my attention by the author of the Behavioral Trader blog. In the book, the authors build their argument that patent protection is either wholly unnecessary or at the least too broad. Chapter 9 of the book review the pharmaceutical industry and today I will review of few of the authors main points.

The beginning portion of the chapter shows that there has been large cross-country variation in patent protection over time, and that the evidence shows that countries with patent protection are not more innovative than those without patent protection. For instance, Italy had limited or no patent protection for pharmaceuticals until 1978, and before that time was considered the leading manufacturer of generics. Between 1961-1980, Italy discovered 9.3% of the world’s new active chemical compounds, but between 1980-1983, Italy had only discovered 7.5% of the world’s new chemical compounds, despite the fact that Italian scientist now operated in a patent protection system. In recent years, India has claimed the title of the leading manufacturer of generics. In the “Prizes or patents” post, I mention the Chaudhuri, Goldberger and Jai article which finds that instituting mechanisms to enforce foreign patents in the Indian market would reduce welfare in the anti-bacterials segment by $305 million.

Innovation Chains

Innovation chains is a concept that patents prevent innovation by disallowing other firms from building on the work of others. For instance, a patent can be good for one pharmaceutical company, but not for others. While patents confer monopoly rights to the inventor, they preclude other companies from developing new drugs. For instance, the chief scientific officer at Bristol Myers Squib told the New York Times that:

“there were ‘more than 50 proteins possibly involved in cancer that the company was not working on because the patent holders either would not allow it or were demanding unreasonable royalties.’”

Corruption

Because patents create rent-seeking behavior, corruption , lobbying and bribery are common in the pharmaceutical industry. Many pharmaceutical firms have pleaded guilty to criminal charges of fraud for inducing physicians to bill the government for some drugs that the company gave the doctors for free. For those who do not believe that rent-seeking is rampant in the pharmaceutical industry, just listen to Sharon Levine:

“[Pharmaceutical] Companies today have found that the return on investment for legal tactics is a lot higher than the return on investment for R&D,” says Sharon Levine, the associate executive director of the HMO Kaiser Permanente. “Consumers today are paying an inordinate premium under the guise of the creating the stream of innovation in the future. But it’s actually funding lawyers.”

Where do useful drugs come from?

When the British Medical Journal revealed its list of the top 15 medical innovations, only 2 were obtained during a research project motivated by the desire for a patent. None of the CDC’s list of top 10 medical achievements of the past century had been patented when it was introduced. The authors note that private industry only pays for about 1/3 of biomedical R&D, while government institutions such as the NIH fund much of the rest. Boldrin and Levine propose the following solution so that pharmaceutical companies can recoup their large expense to preform clinical trials:

“Clinical trials are the step in the process of developing a new drug during which information is produced about the effect of a given chemical compound on a large sample of humans. The cost of distributing and absorbing this information being low, and the cost of acquiring it being high, it has a strong public good component. There is also no reason, either of by way of economic efficiency or equity, why this should be paid for by the pharmaceutical firms developing the new drug – indeed, as they will be first to market they have a strong conflict of interest. The cost of clinical trials cost would better paid from the public purse, for example, by competitive and peer-reviewed NIH grants. At which point patents on drugs would no longer have any reason to exist.”

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.

In the Proceedings of the National Academy of Sciences (PNAS), there is an interesting article about public health interventions to combat influenza epidemics. These nonpharmaceutical interventions (NPIs) include closure of schools, churches, and theaters. The authors find the following results:

“…cities in which multiple interventions were implemented at an early phase of the epidemic had peak death rates 50% lower than those that did not and had less-steep epidemic curves. Cities in which multiple interventions were implemented at an early phase of the epidemic also showed a trend toward lower cumulative excess mortality, but the difference was smaller (20%) and less statistically significant than that for peak death rates…These findings support the hypothesis that rapid implementation of multiple NPIs can significantly reduce influenza transmission, but that viral spread will be renewed upon relaxation of such measures.”

One issue to note is that the influenza epidemic hit first in East Coast cities such as Philadelphia. These cities were often slow to adopt NPIs. On the other hand, Midwestern cities such as St. Louis were hit with the epidemic weeks later. The Midwestern cities were able to learn from the experiences cities on the eastern seaboard and thus adopt more stringent interventions.

The Economist’s Free Exchange blog has some interesting commentary on income inequality and health (”Healthy, wealthy and wise“).  The post talks about Angus Deaton’s Spring 2003 NBER Reporter Commentary.  In the Reporter, Mr. Deaton states the following:

• “[In a study by Christina Paxon and I], We focused on the idea that health is determined by an individual’s income relative to other members of a reference group whose membership typically is unobserved by the analyst. Even if income inequality has no direct effect on health, the fact that the reference groups are not observed means that the slope of the relationship between health and income depends on the ratio of the between-to-within group components of income inequality. For example, if doctors’ health depends on the income of other doctors, and economists’ health on the income of other economists, then the health-to-income relationship in the pooled data will flatten if the average incomes of the two groups pulls apart.³ Among birth cohorts there is a strong protective effect of income on mortality; the elasticity of mortality rates with respect to income is approximately -0.5.”

Deaton also summarizes a working paper by Anne Case (”Does money protect health status?“) which looks at data from South Africa.  “Her work finds evidence of a large causal effect of income on health status — working at least in part through sanitation and living standards, in part through nutritional status, and in part through the reduction of psychosocial stress…Governments interested in improving health status may find the provision of cash benefits to be one of the most effective policy tools available to them. And cash provides a yardstick against which other health interventions can be measured.”

One problem with cash rather than in kind benefits is that there is more potential for corruption when cash benefits are handed out.  Cash, however, gives individuals more choice regarding how to use one’s limited resources and also can reduce the transaction costs of administering in-kind governmental transfers.

Tyler Cowen has interesting piece in The New York Times (”Abolishing the Middlemen…“) in which he states that a single-payer system’s cost savings from the reduced administrative and overhead cost may be illusory. The article’s arguments are sound and are similar to the one’s I made in the post titled “Medicare’s (true) Administrative Costs.”

The Economist’s View blog has some rebuttal comments from Paul Krugman. Tim Worstall’s blog makes the point that even if there are low administrative costs for government health insurance, one must take into account the deadweight loss which is incurred in order to raise the money (through taxes) to finance a single-payer system.

Overall, I think we could in theory design a superior single-payer system to that of the private market. I am skeptical, however, that a single-payer system will work in reality in the long-run for the following reasons:

1. No competition. Competition breeds innovation and new ideas. Mr. Cowen makes the point that “Private insurance…provided earlier access to prescription drugs — an expensive yet effective form of medical care — for 20 years or more before Medicare did. The competition among private insurers may appear wasteful, but over time it stimulates better and more complete coverage.” Without the threat of competition, it is likely that single-payer systems will lag in terms of innovation.
2. Government Bureaucrats. Is having government bureaucrats making medical allocation decisions worse than having private sector insurance company bureaucrats making medical allocation decisions? I would say probably so. Individuals with political connections will always receive top care when government bureaucrats make decisions; on the other hand, private sector bureaucrats will generally give treatment to anyone who can pay the insurance premiums they require.
3. Consumers have less choice. If the government mandates that individuals have a specific level of government-financed insurance, this will reduce an individual’s scope of choice between consumption of medical services (or health insurance), consumption of other goods and savings.

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.”

Ever wonder what exactly are your Congressional representatives’ views on health care? A new website from Research!America and Parade look into just this question. Currently, their ‘Your Congress. Your Health.‘ website is asking members of the public to vote on which health issues/questions they want to be asked of their representatives. According to the website, “the questions with the most public response (a la Idol) will be presented to Congress in early April in a questionnaire and Congress’ responses on these issues will go up on the website in mid-May.”

In the future, this website will be a valuable tool for voters who want to know where politician’s views on health care lie.

There was an interesting post on the Economist’s Free Exchange blog regarding the Health Insurance voucher debate (A veto for…).   The  post contains a critique of a healthcare voucher plan put forth by Ezekiel Emmanuel and Victor Fuchs in The New Republic.  The pros and cons of the plan are certainly interesting but the blog’s author makes an even more universal point when commenting on government pricing.  The author specifically examines the case where private health insurance plans would be paid (via a voucher) for providing a basic level of health insurance to private individuals.  The value of the voucher, however, would depend on the health level of the individual patient.  Can the government accurately price this underlying health risk?  The author claims that this is doubtful and one of two scenarios will result:

1. “The government will generally underprice, in which case insurance companies will compete to make themselves as unattractive as possible to sick people through their mix of benefits and customer service.  (If there is no mix, then why have even this ersatz competition?)
2. The government will generally overprice, in which case insurance companies will compete to make themselves as attractive as possible to sick people.  I assume that this will be done through encouragements to overdiagnose and overtreat, which will cause costs to skyrocket.”

I have recently been receiving some comments suggesting that one way to cut health care costs would be to reduce CEO pay. Would cutting CEO pay be beneficial to society?

Ideologically, I believe that markets—and not the government—should determine wages of all workers. If the U.S. government were to put a cap on CEO pay, there would likely be a ‘brain drain.’ Top-tier managers would leave the U.S. for other OECD countries where salaries were not capped in order to maximize their annual salary. Further, if only selective industries were to have caps on CEO pay, how would the government decide which industries’ CEOs need to have their pay regulated? Would lobbyists be able to bribe politicians in order to keep an industry off the CEO cap list?

Some people argue that health care is unique and merits special consideration. The argument for special consideration is usually based on the fact that health care is a ‘need’ good or that since the government is financing much of healthcare spending in the U.S., CEOs should not be profiting off John Q. Public.

Despite my general aversion to government regulation of salaries, I decided to do some calculations to see how limiting CEO pay would affect healthcare costs. Healthcare Economist reported on UnitedHealth Group CEO William McGuire’s $125 million worth of compensation in 2005 (and his subsequent stepping down from the position). This figure should be seen as the right tail of the health insurance CEO compensation distribution. If the U.S. government was to limit health plan CEO salaries to $5 million dollars and if the health insurance company decided to pass the savings on to consumers (rather than investors), this would result in approximately a $120 million savings to consumers. On its website, UnitedHealth Group states that it “serves more than 50 million Americans.” Thus the amount of cost savings per person enrolled in UnitedHealth Group would be less than $3.

With this over-simplified analysis, I conclude that CEO compensation is not the main driver of costs in the health care sector and regulating CEO pay—while likely cathartic for those fed up with high health care costs—will not make medical care services any less expensive for the average consumer.

The Century Foundation has a very interesting debate on health care reform (transcript). Below I have cited some of the more interesting points.

• ERISA. Jacob Hacker, professor of political science at Yale, claims that states attempts at health care reform may be limited by the Employees Retirement Income Security Act (ERISA) of 1974. According to Wikipedia, “ERISA Section 514 preempts all state laws that ‘relate to any employee benefit plan,’ with certain enumerated exceptions.”
• Will providing universal health care attract low-income individuals are be a boon to a state’s economy? According to Jonathan Cohn, editor of the New Republic, “When it comes to, say, welfare, states that make their benefits generous run the risk of becoming a magnet for low-income residents, who (in theory) end up draining state coffers. But establishing statewide universal health care could (again, in theory) have all sorts of salutary economic effects. If a scheme actually eases the burden on business, for instance, it could attract more employers, create more jobs, and create a virtuous cycle of growth.“
• Is employer-provided insurance a good thing? The general consensus of the debate was that the U.S. should abandon employer provided insurance in the long-run; most Westernized countries in Europe (with the exception of Germany) do not base health insurance around the employer. Some of the forum participants worried about an adequate risk-pooling substitute if universal coverage was not implemented. Ezra Klein of The American Prospect proposed a community rating scheme. He also stated that “There’s no more unjust, inefficient, absurd, or perverse feature to our system than its tie to employment.” On the other hand, Jonathan Oberlander of the UNC department of Medicine stated “To paraphrase Churchill, employer-based insurance is the worst option for providing health insurance, except for all the others.”
• Cost containment. Henry Aaron of the Brookings Institute claimed that “Universal coverage is a precondition for cost control, not the other way around. Only if all people are covered can regulatory measures exercise effective leverage on providers to hold down spending without creating intolerable incentives to deny care to weak payers—that is, the uninsured.” While universal coverage can reduce cost using a single payer system, it generally does so by restricting consumer choice and stymieing medical innovation. Pursuing a solitary goal of cost containment will not maximize society’s welfare in my opinion.
• Health Care ceilings and floors. Should all individuals receive a minimum health care level (a floor)? Should individuals be able to purchase more comprehensive insurance than is offered by a government’s universal health care plan? Requiring catastrophic health insurance may induce poor individuals to avoid precautionary health services and thus may be more expensive in the long run. On the other hand, having insurance pay for all health costs creates a serious moral hazard problem. Ezra Klein wisely states: “In my ideal world, a national health service would cover basic services and private insurance—subsidized for those who need it—would cover above the limit. Like in France, a high floor and no ceiling is the way to go (by contrast, America has neither ceiling nor floor, and Canada has a high floor and low ceiling).”
• Innovation. One problem with a single payer system is that it will stymie innovation. For instance, Leif Wellington Haase at the Century Foundation asserts, “In theory, private plans ought to have more flexibility to introduce new benefits, coordinate care, measure results, keep down costs, and promote information technology. The managed care ‘revolution’ of the 1990s produced some examples. Kaiser Permanente, the giant California-based HMO, is light years ahead in introducing practical uses of information technology and care coordination. In other countries, the existence of private insurance is a valuable safety valve for people who want to buy upâ€? from the government’s universal coverage plan. But most efforts by private insurers seem long on public relations and short on reality. The Veteran’s Administration and, increasingly, Medicare have been taking the lead on quality and care coordination.”

Defining sprawl is difficult. Los Angeles is generally seen to be a leader in sprawl, but in fact Los Angeles is the most densely populated urban area in the U.S; Portland is seen as a model of reducing urban sprawl, but sprawl increased by 25,000 acres in Portland between 1980 and 1990. While population growth certainly affects the rate of increase of urban sprawl, cities such as Detroit, Pittsburgh, Milwaukee, Cleveland, New York, Buffalo and Dayton all lost population between 1970 and 1990, but experienced significant sprawl.

Despite the fact that many newspapers and blogs rail against urban sprawl, Americans are continuing to move to the suburbs. Larger houses, bigger yards, and lower housing prices are some of the attractive features of suburban life. Critic of urban sprawl denounce suburbanites for a variety of reasons: from increased automobile pollution to creating “cookie-cutter” communities.

A spate of recent studies on urban sprawl and health may give critics of urban sprawl another point of contention. An article in Science News (”Weighing In on City Planning“) looks at a handful of these studies. Using a recent move from Atlanta to Vancouver, Lawrence Frank poses the hypothesis that more dense areas increase walking-time and decrease car-commuting time. Those who walk more and drive less are generally more healthy individuals. Cross-sectional evidence seems to show that this is the case.

Economist Matthew Turner argues otherwise. He proposed that individuals who have less active life styles migrate to the suburbs and those who enjoy walking move to urban areas. Thus, Frank’s finding of increased health in dense urban areas could be due to sorting. Using panel data, Turner measures the change in health level of individuals who move from urban to suburban areas (and vice versa) and finds that the move has no effect on health.

A final study by Frank concludes that “no matter how much people like or dislike being active, they are more active when they live in compact, walkable areas than when they live in sprawling neighborhoods.” Frank says that this “demonstrates that both preferences and the neighborhood in which people live impact their behavior.”

• Also see a Reason magazine review of Lawrence Frank’s latest book – Urban Sprawl and Public Health: Designing, Planning and Building for Healthy Communities.

The future of Social Security is in question. Even Federal Reserve chairman Ben Bernanke warns of the rapidly approaching Social Security “fiscal crisis.”. Individuals at the beginning or middle of their prime working years are unsure of how large (or small) their Social Security benefits will be when they retire.

An NBER working paper by Gomes, Kotlikoff and Viceira (WP #12859) aims to calculate the cost of this uncertainty due to government indecision regarding Social Security benefits. Below I describe the model the authors derive, briefly explain the empirical section of the paper and state their conclusions.

Model

Individuals have constant relative risk aversion (CRRA) utility functions of the form:

• U=C^1-γ(1-γ)^-1 (1)

The agents learn at time L whether the social security benefits they will receive in retirement will be large, B, or small, b. A_L are the assets accumulated at time L. T represents the last year of one’s life and R represents the year of retirement. Optimal consumption is given by:

• A_L+B(T-R)=C_B(T-L), with a large retirement benefit; and (2a)
• A_L+b(T-R)=C_b(T-L), with a small retirement benefit. (2b)
• A_L+=A₀-CL (3)

Expected Utility and first order conditions are given by:

• EU= (1-γ)^-1{ C^1-γL + (T-L)[pC_B^1-γ + (1-p)C_b^1-γ] } (4)
• FOC: C^-γ= + pC_B^-γ + (1-p)C_b^-γ (5)

One can solve equations (2a) and (2b) for C_B and C_b respectively, plug equations (2a), (2b) and (3) into (4), and take the derivative with respect to C to arrive at equation (5). The authors aim to estimate how the agents’ expected utility changes when the date (L) when the government reveals the whether the benefit level is high (B) or low (b) changes. More formally, the authors find that ¶EU/¶L < 0 when the individual is risk averse (i.e.: γ>1). In words, expected utility decreases when the date the individual is informed of the social security benefits is moved further into the future.
The authors model income as a concave, quadratic function of age which has an error term which is MA(1) with probability π and ln(0.1)»-2.3 with probability (1-π). Thus, income is hump-shaped throughout one’s lifetime with some persistence in the idiosyncratic error term. Also, there is some probability of a negative income shock, which can be thought of as the probability an agent loses their job. The individual invests their savings optimally at each age, dividing their assets between stocks and a risk-free asset.

The authors then calibrate their model using parameter estimates from other sources. The authors conclude that the excess burden of government indecision can be as high as 0.6 percent of the agent’s economic resources. Individuals who are a) more risk averse, b) have more income uncertainty, c) face a larger cut in benefits or d) have higher marginal tax rates are the subpopulations most adversely affected by the government indecision.

While I am usually skeptical of life-cycle model papers which predict the future using calibration and do not feel the author’s estimates are very precise, it is important to realize that increased uncertainty due to delays in social security reform can lead to suboptimal asset allocation and consumption decisions by individuals planning for retirement.

What is do be done regarding the long waits for those needing a donated organ to save their life? As expected, economists recommend market creation as the solution. Freakonomics authors Stephen J. Dubner and Steven D. Levitt argue in the New York Times (”Flesh Trade“) that the creation of a market for organs makes sense.

Gary Becker and Julio Jorge Elias argued in a recent paper that “monetary incentives would increase the supply of organs for transplant sufficiently to eliminate the very large queues in organ markets, and the suffering and deaths of many of those waiting, without increasing the total cost of transplant surgery by more than 12 percent.”

What is more novel is that Canadian Public Health professor Abdallah S. Daar has published a paper in Nature which also advocates an organ market (”The case for a regulated system of living kidney sales“). He uses Iran as a model:

Paid transplants are currently available only to those who can afford them—except in Iran. The Iranian model of state-sponsored, transparent, noncommercial, middleman-free kidney transplantation, whereby donors are paid by a government-sponsored agency, has eliminated the waiting list completely—making Iran the only country in the world to have done so. All patients—rich, poor, educated, uneducated—receive transplants in well-run, scrutinized hospitals. The results are known; the system is transparent, discussed and continuously improved. Iranian transplant surgeons, who would have been ostracized a few years ago, are now invited to major international conferences and their findings are published in peer-reviewed journals.

Mr. Daar does not believe in a completely unregulated free market sale of organs, but does worry that the 5–7-year wait for a cadaveric organ is creating a black market. Transplant tourism is growing. For instance “Overseas Medical Services in Calgary will organize a transplantation from a living donor in Pakistan for CAD$32,000.” (see also CBC article).

Other alternatives to the market system include the Spanish presumed consent method: individuals are automatically enrolled in an organ donation program after their death unless they decide to opt out of the program (”Opt in or opt out“). Another interesting article regarding organ donation (”What is a kidney worth“) comes from the Christian Science Monitor.

Should the new motto for organ donors be: give the gift of life profit from the gift of life?

Every year Transparency International puts out a Corruption Perceptions Index ranking each country’s corruption level. The index is constructed from a survey of various resident and non-resident country experts as well as business leaders (see methodology here). The 2006 Corruption Perceptions Index gives us one clear conclusion: there is a lot of corruption in the world. The World Bank claims that over $1 trillion are paid in bribes each year.

On the Marketplace Morning Report, a Transparency International worker Nancy Boswell claimed that infrastructure projects such as bridges and power stations are often used by corrupt leaders to embezzle funds.

Nancy Boswell: “Those programs are of such magnitude that they afford a better opportunity for major bribes. And so many leaders may go for an infrastructure project rather than smaller projects for education and health. “

Where did the U.S. place in the rankings? They were the 20th least corrupt country in the world out of the 163 surveyed.

Least Corrupt Countries: Finland, Iceland New Zealand, Denmark, Singapore

Most Corrupt Countries: Haiti, Myanmar, Iraq, Guinea, Sudan

Medicaid currently accounts for roughly 50% of all nursing home expenditures and 70% of all bed days.  The government mandates that nursing homes provide a uniform level of quality to all residents, regardless of the payer type.  Yet one may ask: does this mandate hold in reality?  Nursing homes may have an incentive to segregate private insurance patients and Medicaid patients.  If private insurance patients demand a higher quality of care and their insurance pays more to the nursing homes, one would expect them to receive a higher quality of care than Medicaid patients.  For instance, Gottesman (Am J Public Health 1974) finds that as the number of public-pay residents increases, the frequency of care by staff members diminished.  Troyer (Medical Care 2004) found large cross-facility differences in mortality for Medicaid and private-paying residents in Florida, but this finding was not robust to including facility fixed effects. 

David Grabowski, Jon Gruber, and Joseph Angelelli’s 2006 NBER working paper (”Nursing home quality as a public good“) aims to explain these findings by investigating whether or not the nursing home is a public good.  Using a CMS nursing home quality repository of data–which was mandated by the OBRA 1987–the authors were able to access twelve process and outcome variables based on nursing home quality over time.  The data allow the authors to run the following regressions:

1. General OLS: This specification uses two types of dependent variables.  The first are health outcome variables (eg: urinary tract infections, depression, presence of a fall) and the second group are outcome variables attributed to poor quality of care (eg: presence of a physical restraint, use of an indwelling catheter, bedfast, use of a feeding tube).  These outcome variables are regressed on dummies for the types of insurance, a vector of patient characteristics, a vector of nursing home specific characteristics, and time dummies.
2. OLS + nursing home fixed effects: This is the same specification as (1) but includes a vector of nursing home dummies.
3. OLS + patient fixed effects: From specification (2), a vector of patient dummy variables replaces the nursing home fixed effects.

One worry is that negative health shocks may increase a persons medical costs and thus ‘force’ the person onto Medicaid.  If this was true, one would erroneously conclude that Medicaid patients were worse off due to their insurance type, when in reality we have a case of reverse causality.  Grabowski, et al. look into this possibility and find that once patient fixed effects are included in the regression there does not seem to be any selection into Medicaid based on observable health attributes.  The authors also look at cross-state differences in Medicaid nursing home payment rates.  If Medicaid was much stingier in one state than another and nursing homes were not a public good, we would expect to see these states have the largest difference in quality between Medicaid and private insurance patients.  The conclusion reached from these tests finds that the nursing home is a public good; there was no finding of differential quality between Medicaid and non-Medicaid patients within the same facility. 

Grabowski, David; Gruber, Jon; Angelelli, Joseph; (2006) “Nursing home quality as a public good” NBER Working Paper #12361.

How do you measure the level of corruption in a nation?  Transparency International uses a Perceptions Index to rank the corruption of each nation.  The problem with this index is that it does not give the true corruption of officials, but the resulting corruption from a mix of personal corruption and the effective enforcement of laws.  For instance, government officials in ‘country A’ may be very corrupt and in ‘country B’ the officials may only be somewhat corrupt.  However, if ‘country A’ has strict enforcement of corruption laws, the resulting graft may be lower than ‘country B’ if the later has lax enforcement of its laws.

On NPR’s Marketplace (my favorite radio show), Tim Hartford reviews an NBER working paper by Fisman and Miguel (2006) which uses Diplomatic parking tickets in New York to solve this problem.  In the interview, Mr. Hartford introduces the premise of the paper:

“So you just look at all the diplomats from all the embassies, you see how many parking violations they racked up. You see whether they ever bothered to pay them and, bingo, suddenly you have a measure of personal morality divided up country by country.”

The key point here is that since enforcement of parking laws on diplomats is effectively zero, we have a controlled experiment of which countries are corrupt.  This estimate is made in a setting where the level of law enforcement is the same for each country.  Mr. Hartford gives the results of the study:

“I’m afraid it’s not good news for the view that all humans are created equal. Because ambassadors from the countries that habitually come up as most corrupt, like Chad or Bangladesh, they were also the ambassadors who were committing the largest number of parking violations. So, Chad and Bangladesh, which had very small embassies, not very many staff, they still managed to rack up over eight years 2,500 parking violations. Which is a lot. Then you compare them with, say, the Scandinavians who always come down very low on the scale of corruption . . . All the Scandinavian embassies, which were much bigger, between them managed to rack up 12 parking violations…”

So is there a solution to the problem of corruption?  Mr. Hartford says the paper does give us some hope at the end.

“There was the Clinton-Schumer Amendment in 2002. It meant that, OK, you couldn’t fine people for committing parking violations. But you could, and you would, tow their cars. And you would actually deduct the parking fines from each country’s allocation of foreign aid. So they really started to take a stand on this.

And guess what? Personal morality matters, but enforcing the law matters, too. Because when the amendment was passed, all of these parking violations, by all of these ambassadors, immediately fell by 90 percent. So there is hope for improving the world and stamping out corruption after all.”

On August 29th, 2006 there will be a book forum discussing The Crisis of Abundance by Arnold Kling.  While I have not yet read this book, I do respect Mr. Kling’s work and am anxious to see him discuss his views in this type of setting.  The book made the top 10 list of the National Chamber Foundation (the educational arm of the U.S. Chamber of Commerce).  Also attending the forum will be Michael Cannon, director of Health Policy Studies at the Cato Institute; Jason Furman, a Visiting Scholar at NYU; and Sebastian Mallaby, Editorial Writer and Columnist for the Washington Post.  For those not in Washington, D.C. area, the conference will be available online as well. 

The conference takes place on August 29th at noon ET.  For more specifics, click here.

Below is an excerpt from chapter one of Crisis of Abundance:

My guess is that 30 years ago, a patient with similar symptoms would have been treated “empirically,â€? a term doctors use to describe a situation for which they do not have a precise diagnosis and treatment, so that instead they must use guesswork. A layman’s synonym for treated empirically would be “trial and error.â€? In this case, the patient might have been sent home with an antibiotic and perhaps a prescription for Prednisone, a steroid used to reduce inflammation. There would have been nothing else to do. In 1975, computerized medical imaging technology was new and exotic, with limited applications.

In contrast, in 2005, over the course of a few days Quixote was given a computed tomography (CT) scan, referred to a specialist, sent to a different hospital, referred to a specialty clinic, seen by a battery of specialists there, and given yet another CT scan. Ultimately, however, she was sent home, as she might have been 30 years ago, with an antibiotic, Prednisone, and no firm diagnosis.

Compared with 30 years ago, Quixote received more services, in the form of specialist consultations and high-tech diagnostics. However, the ultimate treatment and outcome were no different. This does not mean that medicine is no better today than it was a generation ago. The CT scans and specialist consultations could have turned out differently. They might have been critically important, depending on her actual condition. Under some circumstances, treating Quixote empirically with an antibiotic and Prednisone could have been a mistake, perhaps costing some or all of her sight in one eye.

Such is modern medicine in the United States. Doctors are able to take extra precautions. They can use more specialized knowledge and better technology to try to pin down the diagnosis. They can perform tests to rule out improbable but dangerous conditions. But only in a minority of cases does the outcome deviate from what would have been the case 30 years ago.

An interview with Arnold Kling is also available at TCS Daily (”To much of a good thing?“).

While advances by physicians and new medical technologies often make for front page news, public health interventions have likely been the major cause of the significant health improvements throughout history.  For instance, creating a system of waste disposal and maintaining clean water has greatly increased the expected longevity of urban residents.  The 14th century Black Death in Europe was likely caused by bacteria carried by rodent-borne fleas; burning specific areas of the city greatly help to stop the spread of the disease since it removed rodent infestations.  John Snow identified polluted water as the cause of a 1854 cholera outbreak in London.

In contemporary America, our public health interventions are world class and we have nothing to worry about…right?   Not according to the National Resources Defense Council.  Medical News Today reports that beach closings increased 5% compared to last year.  The NRDC believes these closings are likely due to human and animal waste; the organization is suing the EPA in order to compel it to enforce more stringent clean water laws.  The Chicago Tribune reports (”Beach closings…“) that bacteria from sea gull waste in Lake Michigan beaches has lead to numerous closings.  And in San Diego, the Healthcare Economist is frequently annoyed that he is not able to surf due to beach closings.  After even moderate precipitation, pollution from all over San Diego flows into the ocean and thus beaches are often closed.  I hope a cost-effective solution will be found to clean our nation’s precious beaches.

Economist Tyler Cowen of George Mason University has an interesting paper (”Avian Flu: What should be done“) on the optimal policy to combat avian flu.  Below, I cite a few of the more interesting points from his executive summary:

• Prepare social norms and emergency procedures which would limit or delay the spread of a pandemic. Regular hand washing, and other beneficial public customs, may save more lives than a Tamiflu stockpile
• Decentralize our supplies of anti-virals and treat timely distribution as more important than simply creating a stockpile.
•  Make economic preparations to ensure the continuity of food and power supplies. The relevant “choke pointsâ€? may include the check clearing system and the use of mass transit to deliver food supply workers to their jobs.
• We should not rely on quarantines and mass isolations. Both tend to be counterproductive and could spread rather than limit a pandemic.
• We should not obsess over avian flu at the expense of other medical issues. The next pandemic or public health crisis could come from any number of sources. By focusing on local preparedness and decentralized responses, this plan is robust to surprise and will also prove useful for responding to terrorism or natural catastrophes.

In the mid to late 1990s, there was a large backlash against HMOs due to the perception that the “HMO cares more about saving money than it does about them.” People feared that HMO would drop coverage of services which they valued.

In this month’s NBER working paper edition, Yu-Chu Shen (2006) looks answer two questions related to this topic:

1. Does the degree of HMO penetration in a MSA increase the likelihood that a hospital will drop some of its services?
2. Does the percentage of for-profit HMO enrollment increase the likelihood that a hospital will drop some of its services?

Shen divides hospital services into two groups. The first consist of safety net services such as having an emergency department, a trauma center, HIV/AIDS services, and substance abuse services. The second group of services are safety net services which are generally profitable. Examples of this group are maternity care, birthing rooms, child wellness services, women health centers and sports medicine.

Using a hazard function (specifically the Cox proportional hazard model), Shen tests his hypothesis using dummies for low, medium and high HMO penetration and then repeats the procedure for low, medium and high dummies for the percentage of HMO enrollment which have for-profit HMOs.

In his results, Shen does not find any consistent trend in the abandonment of services, with the exception that in the 2000-2003 period it seems that areas with high level of HMO penetration dropped profitable services less frequently than low HMO penetration areas. Social pressure may be the reason there were few major difference in the hazard rates of dropping unprofitable safety net services between Shen’s categories. The study did find that government ownership is associated with a lower hazard of shutting down unprofitable services. Large hospitals and teaching hospitals have a lower hazard rate of shutting down any service.

Many outlets in the popular press have been heralding the reduction of the budget deficit as a sign of good times on the horizon for the U.S. economy.  The Washington Times (”Economic sunshine“) credits President Bush’s economic policies–in particular his tax cut–as the source for the economic growth which is driving the increased tax receipts.  Former Secretary of Labor Robert Reich (”President’s Economy on Parade“) is quick to point out that there is still a $280 to $300 billion deficit.  Reich says the current administration tax revenues are “still running $100 billion less than what the White House projected five years ago when it sold its tax cuts.”

Economist Jim Hamilton is less impressed with either argument (”Is the surge in tax receipts truly extraordinary?“).  In his blog, he believe that supply-side economics did not cause the surge in tax collections and that it is unlikely that there is a trend towards greatly increasing tax receipts (as a percentage of GDP) in the foreseeable future.  Using a GARCH model, Hamilton believes that the 2006 first quarter results are simply a statistical anomaly. 

On Gary Becker and Richard Posner’s blog, there is a spirited debate regarding whether or not we should privatize roads in the United States.  The two focus on Indiana’s recent decision to sell the rights to collect tolls on the Indiana toll road to a Spanish-Australian consortium for $3.85 billion.  The Pittsburgh Post-Gazette reports in a recent article that “Indiana drivers and interstate truckers were almost uniformly against what the state has done.”

Some points made by Gary Becker:

• “A very important part of this argument is that technological progress is faster with private monopolies than with public monopolies.”
• “Due to economies of scale, it may not be efficient, for example, to have another highway built across Indiana to compete against the Indiana toll road”
• Becker notes that a state government’s receive lump sum payments from private firms in exchange for the right to collect tolls on the road.  He does not, however, note that since most politicians are only in office for a limited time, the politicians will often go on a spending spree instead of smoothing spending patterns over many years.  This is likely not in the public interest.

Posner responds:

• “Private companies are more efficient than public ones, at least in the limited sense of economizing on costs.”  Posner does note that often this can lead private monopolies to reduce maintenence on roads.
• Posner, like Becker, worry that the private monopoly will set tolls at monopoly rates.  “Drivers who do not have good alternatives to using the Indiana Toll Road can be made to pay tolls that exceed wear and tear, congestion effects, social costs of pollution, and other costs of the road, engendering inefficient substitutions by drivers unwilling to pay those tolls.” Posner does note that the private company cannot raise tolls until 2010, so this may be less of a concern in the Indiana case.

Living in Southern California, I believe that charging tolls on freeways will 1) reduce congestion, 2) decrease smog and 3) make cities denser.  The public outcry would likely be great, but in the long run tolls would be good for the area.  Should the tolls be administered by public or private monopolies?  Some of the pros and cons are listed above, but as always, your comments are appreciated.

In many cases, the government will mandate that employers provide benefits in lieu of having the government provide the benefit themselves. One example is that the U.S. government mandates that firms purchase Worker’s Compensation insurance. Are these mandated benefits a more or less effective form of social insurance than direct government provision?

Summers (1989) claims that in certain cases, the mandated benefits are welfare improving in comparison to public provision. There are two main reasons for this. First, compelling employers to provide a benefit gives workers a wider choice of benefits–through worker choice of employer or employer-employee negotiation–than if a program was administered by the government. Secondly, the mandated benefits may result in a lower deadweight loss than if the government imposed a general tax and used the funds to finance the benefit. For instance, mandated workers compensation may reduce labor demand by firms (since this is an added cost), but may increase labor supply by workers if they want the benefit. If employees value the benefit at cost, the resulting equilibrium will result in the same level of employment but with the full cost reflected in a lower wages. On the other hand, workers generally do not increase labor supply in response to general taxes to fund public programs since they do not see a direct link between the tax and any benefit they may receive.

Gruber (1994) tests whether or not mandated maternity benefits are captured in lower wages for the affected group. The author claims that if there is not a shifting of the maternity insurance cost to employees, either the employees do not value the benefit or there are wage rigidities impeding wage reductions. He uses variation in state laws between 1975 and 1978 as well as the Pregnancy Discrimination Act (PDA) passed in 1978 by the federal government to identify any wage reduction. A difference-in-difference-in-difference (DDD) is used where the treatment group are married females between 20 and 40 years of age, and the control group is made up of all individuals over 40 years old as well as single males between 20 and 40 years old. Gruber estimates the before and after impact of state and federal laws on these two groups. He then compares the DD results between states where the laws were passed and states where no law was passed to calculate the DDD estimate. Employing a variety of specifications, Gruber finds that the cost of the mandated maternity benefit is fully reflected in lower wages for the ‘treatment’ groups. If we extrapolate this to a proposal which would mandate provision of health insurance by employers, one would expect the cost of the mandated health insurance to be fully reflected in lower wages.

Summers (1989) does note that there are a few problems with mandated benefits. First, they only help those who are employed. Secondly, if there are wage rigidities, then the cost of the benefit can not be reflected in wages and thus, unemployment may result. Finally, with mandated benefits the government is not able to pursue redistributional goals.

Summers (1989), “Some simple economics of mandated benefits,” American Economic Review, 79, pp. 177-184.

Gruber (1994), “The incidence of mandated maternity benefits,” American Economic Review, 84(3), pp. 622-641.

In 1996, the Personal Responsibility and Work Opportunity Act (PRWORA) brought ‘workfare’ into the spotlight.  In addition to replacing the old AFDC program with the new TANF (Temporary Aid to Needy Families), the law required welfare recipients to work or to look for work in order to receive benefits.  This was not the first time in history work requirements have been instituted.  In England, the Poor Law of 1834 granted poor relief through residence in a workhouse.  In 18th century France charity workshops were the means by which poverty relief was granted.  Is workfare good public policy?

Besley and Coate (1992) aim to answer this question theoretically by creating a simple economic model.  They assume two types of people: type ‘a_l‘ are low wage earners and type ‘a_h‘ are high wage workers with an hourly wage of a_l and a_h respectively.  The authors aim to institute a poverty elimination program {b,c} where b is the benefit individuals receive and c is the cost in terms of a work requirement.  The poverty line is at ‘z‘.  Workers earn a*[l(a)-c], where l(a) is the labor supply of the individual.  The goal of the policymaker is to minimize the cost while ensuring that all individuals consume at least ‘z‘.  If income generating abilities are observable, that it is easy to see that the policy is to give [z-y(0,a_l)] to low ability workers and nothing to high ability workers.

What if worker ability is unobservable?  There are two options.  In the first case, we can give both workers [z-y(0,a_l)].  In the other, the work requirement can be used as a screening device so that only low ability individuals will apply for the welfare package {b,c}.  The benefit package will be set [b=z-y(c',a_l); c=c'] so that the high ability individuals will not pretend to be low ability because they benefit (b) is not worth wasting their more valuable time doing (c) hours of workfare. 

One final item of note is that workfare can be used as a deterrent.  It is possible that individuals will not make human capital investments (in education, etc.) if welfare exists since they will be able to consume ‘z‘ regardless of their productivity.  If we impose a high work requirement, a young individual may decide to invest in human capital in order consume more than z and also spend less time in non-productive labor (c).

This model is very simple, but does elucidate workfare’s importance potential as a screening mechanism.  Having the work requirement (c) be entirely non-productive is an inessential assumption but does simplify the analysis.  This argument does not take into account from the possibility of ‘tagging‘ individuals [see Akerlof (AER '78)] which may be efficient more effective.  If we can observe some immutable characteristics which we know lead to low earnings potential (such as being disabled, mentally challenged, etc.), the directing funds to these individuals does not distort work incentives.  Tagging is usually imperfect and does add to the administrative costs of running the welfare program. 

Besley and Coate (1992) “Workfare versus welfare: Incentive arguments for work requirements in poverty-alleviation programs” American Economic Review, 82(1) pp. 249-261.

Is a welfare system a welfare improving?  On the one hand, this form of social insurance gives money to those who have come upon rough times, facing low income and unemployment.  On the other hand, giving individuals money conditional on not having low income gives these same people an incentive not to work.  The field of economics can help policy makers by measuring the benefits individuals receive from the program and also calculating the work disincentives.  Most of the economics literature has focused on the cost of the welfare system and one of these papers is the Lemieux and Milligam (2004).

In this paper, the authors look at the the Social Assistance (S.A.) program in Canada.  Prior to 1989, Quebec offered a monthly benefit of about $506 CDN to poor single males 30 years old and older but a benefit of only $185 CDN to those under the age of 30.  The authors hypothesize that 29 year-olds should work more than 30 year-olds solely due to this difference in benefits.  Using a regression discontinuity framework, the authors aim to test this empirically.

Using a variety of specifications and testing their results against other Canadian provinces, Lemieux and Milligan find that employment rates for 30 year olds in Quebec are 3-5% lower than their 29 year old counterparts.  Macro-economic conditions were similar in Quebec to the rest of the nation and their finding seem relatively robust.  Since the authors do not measure the benefit of the program, it is difficult to determine whether or not the Canadian S.A. program is worth the cost, but the authors’ evidence that welfare programs create employment disincentives is important.

Lemieux and Milligan (2004), “Incentive effects of social assistance: a regression discontinuity approach,” NBER WP 10541. 

“People generally don’t have a clue about what the health care they are consuming costs,” Michael O. Leavitt, the Secretary of Health and Human Services told reporters in a WebMD article (”Gov’t releases hospital prices“).  With a new initiative in hand, Mr. Leavitt hopes that consumer ignorance will soon dissipate.

Yesterday, officials at the Centers for Medicare and Medicaid Services (CMS) opened a new website (Health Care Consumer Initiatives) which lists prices hospitals typically charge for 30 popular medical services.  It also lists the prices Medicare pays for each service.  WebMd claims that the impetus for this change came directly from the executive office:

The release is part of a broader administration strategy for slowing rising health care costs. President Bush favors broader use of personal health savings accounts as a way to spur consumers to spend more of their own money on health expenses. He has pushed greater price and quality transparency as a way to foster competition among health providers for consumers’ dollars.

Those who have read this blog before know that the Healthcare Economist is always in favor of more information being released to the public.  Although I doubt providing the initiative will drive major changes in the medical services industry, it may force hospitals to reconsider their pricing policies and give consumers more bargaining power with their providers.

Recently, I wrote a post regarding the inefficiency of the Medical Malpractice system. Both Brennan, Sox and Burstin (1996) and Studdert, Mello and Brennan (2004) found that not only were there many frivolous suits brought to court, but even more prevalent was the phenomenon that individuals who suffered negligent care did not sue (only 3% of those negligently injured sued).

Some of the same researchers have followed up their prior articles with more evidence regarding the problems of the malpractice system. In the New Englad Journal of Medicine, Studdert, et al. (2006) examine a random sample of 1452 closed malpractice claims from five liability insurers (a summary can be found in Forbes). Some interesting findings are:

• For only 3% of claims were there no verifiable medical injuries. For 37% of the claims, however, did not involve medical errors.
• Compensation seemed to be relatively fairly allocated. Seventy-two percent of claims not associated with errors and 84% of claims not associated with injuries received no compensation.
• Seventy-three percent of injuries which were due to iatrogenic injuries did receive some compensation.
• Claims involving errors accounted for 78 percent of total administrative costs.
• Fifty-six percent of the claims received compensation, at an average of $485,348 (median: $206,400) per paid claim.

I believe the major conclusion they find is the following:

In monetary terms, the system’s overhead costs are exorbitant. The combination of defense costs and standard contingency fees charged by plaintiffs’ attorneys (35 percent of the indemnity payment) brought the total costs of litigating the claims in our sample to 54 percent of the compensation paid to plaintiffs. The fact that nearly 80 percent of these administrative expenses were absorbed in the resolution of claims that involved harmful errors suggests that moves to combat frivolous litigation will have a limited effect on total costs. Substantial savings depend on reforms that improve the system’s efficiency in the handling of reasonable claims for compensation.

+ SOURCE: Studdert, Mello, Gawande, Gandhi, Kachalia, Yoon, Puopolo, and Brennan, (2006); “Claims, Errors, and Compensation Payments in Medical Malpractice Litigation,” New England Journal of Medicine, 354 (19), pp. 2024-33

Currently the Social Security Disability Insurance (SSDI) program covers almost 8 million Americans. The program is designed to help those who need assistance the most: those who cannot work due to disability. These individuals are entitled to approximately $830 per month.

One feature of SSDI is that it has an implicit 100% tax on earnings. If an individual is on the SSDI rolls and makes somewhat of a recovery and is able to work part time, any earned income will reduce the person’s SSDI benefits dollar for dollar. Thus, these individuals have no incentive to work even if they make a recovery.

Benitez-Silva, Buchinsky and Rust (2006) estimate the impact of a reform in which those on SSDI could keep 50% of their earnings from part time work. For instance, if an individual made $200 in a month, his or her SSDI benefit would be reduced by only $100 to $730 instead of being reduced by $200 under the status quo.

One problem with this reform is that it may attract applicants to SSDI and increase the cost to the government. Since the reform would allow individuals to earn more money than the $830 cap, some individuals who are not disabled may fraudulently apply for the entitlement. The Congressional Budget Office (CBO) estimates that the reform would cost $410 million over five years and increase the number of individuals awarded benefits by 1.2%. The Social Security Administration (SSA) estimates are that the costs would be closer to $5.1 billion and SSDI rolls will increase by awards by 6.4%.

The authors of the study use Health and Retirement Survey (HRS) to conduct a more life-cycle simulation model. Taxes, social security benefits, application waiting times, continuing disability reviews (CDRs) are all incorporated into their model. They claim that 50% of all SSDI participants will eventually experience at least a partial recovery. Their major findings are as follows:

• After the reform, SSDI awards will increase 2.2%. Other estimates: 1.2% (CBO) and 6.4% (SSA)
• There will also be a modest increase in disability awards, rolls, and expected discounted costs.
• For those who are on SSDI, pre-tax income would increase 9.3% over the status quo.
• Currently, only 9.5% of all workers decide to return to work while on SSDI. These individuals can return to work either by leaving SSDI or working for 9 months under the Ticket to Work program (TWP). Participation in TWP, however, increases the probability of a disability review. After the reform–and assuming a constant disability review rate for those working–48.9% of individuals will return to work at some point while on SSDI. This does not mean that 50% of the individuals are not truly disabled, but that 50% of the individuals will have the ability at some point in time to return to (usually) part time work.

The authors conclude that the welfare benefits of the reform to those on SSDI will more than offset the induced entry costs to society from having more applicants to the program. The authors give this program the thumbs up.

Benitez-Silva, Buchinsky, Rust, (2006) “Induced Entry Effects of a $1 for $2 Offset in SSDI Benefits“

The popular press has been decrying the existence of large numbers of Americans without medical insurance. From Indiana to Wisconsin to California, politicians are looking for a means–such as government provided health insurance–to give more residents medical insurance. Economists, however, generally speak out against the provision of private goods by the government.

An interesting solution was proposed by Pauly Herring and Song (2002) in which individuals would receive a $1000 refundable tax credit if they (or their employers) purchased health insurance. The study focuses on single individuals using the 1996-97 Community Tracking Survey (CTS). Using the eHealthInsurance.com website, they were able to calculate the premiums each individual in the CTS survey would pay if they were currently applying for insurance. The authors assumed participants would choose the lower priced options and thus calculated the premiums owed at the 10th and 25th quartiles for a variety of deductible amounts.

Results

• They found that using this credit, approximately 20% of all individuals who had previously purchased individual insurance would pay zero net premiums after applying the credit.
• Assuming an Arrow-Pratt absolute risk aversion coefficient of 0.00095, Pauly, et al. are able to calculate a reservation price for each person, using an expected utility framework. They find that of all the currently uninsured individuals in the sample, 77%-85% would take up the insurance.
• The 85% number, may be overly optimistic. The calculated reservation price is actually greater than the absolute premium for 23% of the sample, and thus the authors settle on 60%-65% as a more conservative estimate. The lower take-up rate may be due to the fact that most poor individuals are able to receive charity care at no cost, and thus have less of an incentive to purchase insurance at some non-zero cost.
• According to Health Affairs, maintaining the tax-exempt status of employer-provided group insurance cost taxpayers $188.5 billion in foregone revenue in 2004. If we implemented the voucher system where single households received a $1000 credit and family households received a $2000 credit, the cost to taxpayers would be only $142.9 billion assuming all individuals received the credit (calculations made using US Census population projections p. 18). This does not even take into account the cost reductions from decreased Medicaid and/or Medicare usage.
• One issue to worry about with this proposal is fraud. Will people falsely report that they have insurance in order to receive the credit? I would assume this wold occur, but the prevalence can not be predicted.

Pauly, Herring, and Song (2002) “Tax Credits, the Distribution of Subsidized Health Insurance Premiums and the Uninsured” Forum for Health Economics and Policy, Vol 5(5).

The problems with the Medical Malpractice system in the US have been well-documented. President Bush has presented proposals to cap punitive damages in malpractice litigation. Other others have decried the fact that despite a large number of negligence cases each year, very few patients bring suit to court. Below are two studies which should give the reader a more informed perception of how malpractice law functions in the United States today.

This first study is by Brennan, Sox and Burstin (1996). These authors find that iatrogenic injuries in New York account for 3.7% of all hospitalizations and negligent iatrogenic injuries account for 1.0% of hospitalizations. Below is their data for the number of people filing suits:

A second report by Studdert, Mello and Brennan (2004) confirm some of the Brennan, et al.’s findings. Citing a Medical Insurance Feasibility Study, 4.6% of all hospitalizations in California involved iatrogenic injury and 0.8% of all hospitalizations involved negligent iatrogenic injuries. These numbers are similar to the 3.7% and 1.0% which Brennan, et. al. estimate.

There are three issues here which I would like to touch on.

The first is that despite conventional wisdom that physician are nearly infallible, 3-5% of all hospitalizations are due to doctor error. One of the greatest risks facing the American medical system is…well…the American medical system. The easiest and most effective way to decrease the error rate is to integrate Information Technology (IT) into the medical field. The Healthcare IT Guy has some good suggestions.

Malpractice suits are not common. Less than 3% of people who receive negligent physician care actually sue. One must note that it is difficult for a patient to determine if negligence has occurred. ‘Do I feel sick because the treatment is not working or is this the doctor’s fault?’

Although only one in a thousand people who receive no medically induced injury sue, these ‘no injury’ cases make up over half of the malpractice caseload.

Brennan, Sox, Burstin (1996) “Relation Between Negligent Adverse Events and the Outcomes of Medical-Malpractice Litigation” New England Journal of Medicine Vol 335 (26).

According to U.S. Department of Health and Human Services, over 1% of all children below the age of 12 were victims of maltreatment in 2004. Child abuse cases appear frequently on the news and it is truly a sad situation. Most people’s first reaction is that we need more stringent supervision of parents and the government should take kids away from abusive homes more frequently.

In the seminar I attended today, Joseph Doyle (”Child Protection and Child Outcomes: Measuring the Effects of Foster Care“) argues that in the case of Illinois, the government may be putting too many kids into foster care. Doyle has gotten access to the Illinois Department of Child and Family Services’ Child Abuse and Neglect Tracking System (CANTS) and has matched children in foster care with other data sources which track 1) delinquency, 2) teen pregnancy and 3) employment status and wages.

In his estimation, Doyle uses variation in an investigator’s propensity to send a child to foster care as an instrument for the likelihood a child is sent to foster care. More explicitly, the instrument is the investigator’s prior removal rate (the percentage of previous cases which he/she has sent to foster care. Since the cases are assigned in a cue to investigators (with the exception of children who are Spanish speakers) he has a quasi-experimental setup. He uses fixed effects as well for each (zip code*county*Spanish Speaking) cell.

Doyle finds that marginal child placed in foster care is 10%-20% more likely to be arrested, 10-20% more likely to become pregnant as a teenager, and 10% less likely to be working when they become an adult than the marginal child who was not placed in foster care. This does not mean that society should completely abandon the foster care system. Since severely abused children will be placed in foster care no matter which investigator is assigned and abuse free homes will never be assigned to foster care, Doyle’s coefficients only measure the impact of foster care on the marginal children. The above estimates represent a Local Average Treatment Effect (LATE). Abuse in foster care homes does occur and having the idealistic view that foster care is always a safe haven for these children may be naïve. The policy implication is that children should be assigned to foster care less frequently than is the current status quo in Illinois.

The poor can not afford health care. Health care costs rise above inflation year after year. Serious errors committed by hospitals and physicians are reported by the news media on a daily basis. How can we fix these problems? Can we rely on Uncle Sam to do what’s needed?

Will Wilkinson doubts that government intervention can solve the health care industry’s problems. Wilkinson is an analyst for the libertarian Cato Institute and in his “Health Care Fantasia” post on his blog, he aims for radical reform. His arguments are provocative to say the least.

Wilkinson advocates abolishing the FDA and stripping the AMA of its monopoly to certify all doctors. While I think this is extreme, we should reduce the stringency of FDA regulation. The FDA adds to the cost of drug development and increases the time between innovation and provision to the sick. Regarding, the AMA one thing one must keep in mind is that this is not an altruistic organization and mostly acts in the best interests of doctors. Reducing the AMA’s power would lead to more cost efficient provision of medical services. For instance, more procedures should be done by nurses and physicians assistants who earn less than doctors.

As expected, Wilkinson is a big fan of HSAs. He advocates that the US create a negative income tax (which I generally support) and the government would deposit a portion of the money into an HSA. I am not sure how this would lead to consumer driven insurance. If a poor person does not have enough money in the HSA for a procedure, will society deny them care? Politically this is infeasible. If we decided to put enough money aside for the poor in their HSA that they will not have to pay any money out of pocket, then this amounts to full insurance.

For uninsurable patients, Wilkinson advocates that the government provide a low quality alternative to private insurance which includes significant rationing. This is similar to what we have now with Medicaid, but instead of having the poor as its target population, it would focus on those with privately uninsurable conditions (the ‘health poor’). Compared to John Kerry’s proposal during his 2004 campaign was for the government to insure all citizens for catastrophic illness, Wilkinson’s proposal is less expensive, but also less favorable in terms of horizontal equity. Both the Wilkinson and Kerry systems for people with severe illnesses would include rationing decisions.

Katherine Baicker and Douglas Staiger (2004) have a working paper detailing how states often expropriate federal health care funds to use in their general budget. The paper shows that while federal dollars may not always reach the intended destination, these programs can still be somewhat effective in improving health outcomes.

DSH Program

Federal Medicaid Disproportionate Share Hospital (DSH) program attempts to assists hospitals whose patients are mostly Medicaid recipients or are uninsured. The program was created in 1986 and 1989 and gives extra funds to hospitals which serve these underprivileged communities. By 1998, the program had reached $16.5 billion, which represents 9% of all Medicaid payments to suppliers. Medicaid DSH payments are determined by individual states and matched by federal grants.

An example of what some states did is the following:

• The state would give $1 million to county hospitals. The federal government would then match this at the Federal Medical Assistance Percentage (FMAP) rate, which depends on the state’s wealth. After the state received the funds from the federal government, they levied a surcharge on the county hospital for $1 million, thus increasing hospital funding through the federal matching, but contributing nothing at the state level net of the surcharge.

Model

(1-h)pf(DSH)+hpf(DSH-IGT) – DSH(1-FMAP) + h(IGT)

pf(X) is the public health benefits from DSH payments, h is the proportion of hospitals which are publicly owned. This fact is important since state governments can only expropriate money from public hospitals. IGT stands for Intergovernmental Transfers which are the surcharge states impose on county hospitals. The first two terms represent the beneficial health outcomes at private and public hospitals respectively. DSH(1-FMAP) represents the state contribution and h(IGT) represents funds diverted back to the state.

The first order conditions are:

• pf’(DSH-IGT)=1; The marginal benefit of net payments to hospitals will equal 1
• pf’(DSH)=1-(FMAP/(1-h)); The marginal benefit of payments to private hospitals is set equal to the net marginal cost of these payments to the state

Which states are involved in ‘fiscal shenanigans’?

In order to find which states are involved in these fiscal shenanigans, Baicker and Staiger use three measures:

1. An Urban Institute survey of 34 states which explicitly asks questions regarding the prevalence of using IGT to expropriate funds in the DSH program.
2. DSH/(No. Medicaid, uninsured patients). States with a large amount of spending per poor patient is more likely to expropriate DSH funds.
3. The percentage of DSH dollars going to public hospitals. States cannot expropriate funds from private hospitals so this statistic also measures the likelihood states using IGT.

Calculating ‘Effective’ DSH funds

Since not all of the funds actually reach the hospitals, Baicker and Staiger calculate the amount of funds that effectively reach the hospitals. They use the following regression, where the ‘capture‘ variable represent one of the three proxies listed above for the propensity to expropriate funds, and ‘X’ is the change in certain state level variables.

• change IGT=b_0+b_1*(1-capture)*DSH + b_2*(capture)*DSH+B_3*X+e

Effect on Health Care Outcomes

Now Baicker and Staiger can how ‘effective’ DSH funds—the ones the hospitals actually receive—affect health outcomes against ‘ineffective’ DSH funds—the dollars the federal and state governments claim to have provided. While ‘effective’ and ‘ineffective’ DSH both reduced infant mortality and post-heart attack mortality, only effective DSH was statistically different from zero. Further, the point estimates for effective DSH were larger (in absolute value) than the ineffective DSH measures.

Conclusion

Using DSH funding, it costs $11 million dollars to save one baby’s life through reduced infant mortality and $12 million to save one adult’s life through reduced heart attack risk. These figures do not take into account that DSH funds are used to treat illnesses outside these two. Since a statistical life is often estimated to be valued between $6-$10 million, these funds may be well spent once we take into account that DSH treats other illnesses as well. Baicker and Staiger’s conclusion is that, while funds from targeted federal programs may not entirely go to their desired destination, they can still be effective means of implementing policy.

In November 2004, California passed Proposition 71 which allocated $3 billion over ten years to stem cell research. Many of my friends–especially those in the medical field–strongly supported the bill. While I support stem cell research, I do not approve of the referendum system by which this bill was enacted. Spending $3 billion on unproven research is excessive, and shows how referenda written by small interest groups will lead to extreme outcomes not advocated by the median voter.  The average voter may approve stem cell research but I doubt voters would agree to pay $100 per person just for stem cell research, when other programs such as vaccinations, Medicaid, etc. may warrant more money as well.

Today’s L. A. Times (”Faith in ‘Miracle Cures’ Is Fading in South Korea“) casts more doubt on whether the $3 billion of taxpayer money was well spent. South Korea’s claims of stem cells miraculously healing patients have been found be at best overblown and at worst false. Some comments from South Korean stem cell patients:

• “I was like an animal they used for testing,” said one patient.
• “They were telling us about one patient who was in a coma and then after the procedure she was climbing Mt. Halla,” said Choi Mi Ae, a 54-year-old liver patient, referring to the most famous peak on Cheju, an island off the southern coast. Choi said she was so convinced by claims of a cure that she almost removed her name from a waiting list for a liver transplant.  “If I had done that, I wouldn’t be alive today,” she said. “There was no effect from the procedure, nothing at all. I was lucky that six months later I was able to get a new liver.”
• “The bottom line is making money,” said an American who sought treatment in South Korea. “I think it is too much to ask anybody to spend $100,000 or more for stem cell therapy that is still really a clinical trial.”
• “They are selling desperate people a story that just one injection of stem cells will be like a magic pill to cure them,” said Lee Sang Ho, a biotechnology expert at Korea University in Seoul.

Do I think that stem cell research is futile?  Of course not.  The lessons to be taken away from this are:

1. ‘Magic Bullet’ health care solutions are few and far between.
2. The referenda system in California leads to excessive spending on niche programs.  If a stem cell bill went to the legislature, it probably would have passed but not for $3 billion.  Having a referenda, voters must choose between $3 billion and $0 for stem cell research.  I would guess most people have preferences for spending in between these two figures, but this is not an option.
3. Stem cell research may still lead to cures for diseases; medical advances take time and unfortunately patients need to be…well…patient.

Cornelius Suijk is a hero.  His family was one of the many Dutch Gentiles who secretly housed Jews during World War II.  After the war Mr. Suijk met with Otto Frank, Anne Frank’s father who lived in Switzerland.  Mr. Frank and Mr. Suijk became friends and eventually Mr. Suijk was charged with heading the Anne Frank House in Amsterdam.

On Wednesday night, I was privilidged to hear Mr. Suijk’s life story.  Let me assure you that is a very interesting one; but for this blog post I will confine my writings to his opinion on social insurance.  To paraphrase his message:

Before World War II, Germany was in ruin.  There was high unemployment, paper money was losing value rapidly, and economic growth was non-existent.  The poverty created an underclass of ‘losers’ in Germany.  When Hitler needed people to be loyal followers and not question his authority, his biggest supporters were these same ‘losers.’  Hitler gave them food, shelter and police training and return the underclass gave Hitler their loyalty.  Of course, the Holocaust could never have happened if those who opposed Hitler would have united and spoke out against injustice but these protest occurred too infrequently…

In the Netherlands, the price of gas is about $10/gallon.  There is a 78% federal tax on gas.  As a tax payer, one would be overwhelmingly against this tax.  The upper and middle class are paying too much for goods and the money the government raises goes to poor, many of whom are taking the state for the proverbial ‘ride.’  Nevertheless, the strong social insurance policy in Holland aims to support the neediest so they do not turn to evil and seek revenge on their countrymen as those in Germany did at the end of World War II.

Can a social safety net assure this great social turmoil?  In France, where social insurance is stronger than the US, but less generous than the Netherlands, riots erupted among poor Muslim immigrants in the fall of 2005.  This shows that there is no silver bullet to eliminating the possibility of social revolt, but we must pay attention to Cornelius Suijk’s lesson: a society that ignores the problems of its worst-off members does so at the risk of its own collapse.

Passed in 1978, Proposition 13 was a ballot initiative to amend the state constitution to limit property taxes to a 1% of a homes value. The amendment also capped the annual growth rate in property value assessment at 2% per year until the house is resold.

 

William Fischel (1989) argues in “Did Serrano Cause Proposition 13? â€? that an earlier court case was the true motivation for the reform. Serrano v. Preist (1971) was brought about because of concerns that rich areas had more funds to devote to their neighborhood’s schools. California was not a land of equal opportunity for all youngsters in the eyes of the court. The judges declared property tax finance of local schools to be unconstitutional and thus education funding was provided almost exclusively from the California general revenues.

 

While many economists would argue that taxes are distortionary and Proposition 13 was a positive development, the Tiebout model would beg to differ. Charles Tiebout recognized that when public goods are excludable and provided by a variety of jurisdictions, those with high preferences for the public good will live near others with the same preferences (and vice versa). Education is a perfect example of this. Those with kids tend to live in higher property taxed neighborhoods with better schools, while senior citizens prefer to live in areas with low property taxes and poor schools.

 

Since Serrano severed the tie between school spending and property taxes, rich families were in essence subsidizing the schools of the poor. Further, affluent neighborhoods could not increase taxes to pay for their own schools since Serrano made this action unconstitutional. Anecdotes exist of thousand dollar bake sales that parents used to get around Serrano but the prevalence of this phenomenon is unknown.

 

Nevertheless, Fischel claims that parents became frustrated that the link between taxes paid and their children’s school’s expenditure level was broken. This lead to the passage of Proposition 13 which significantly decreased the property tax levels for homeowners and landlords. Since the Tiebout model uses property taxes as the price for education and individuals can choose their desired educational consumption by selecting their neighborhood of residence, there existed a near competitive market before the Serrano passage. Fischel argues convincingly the Serrano decision lead to a Pareto inferior outcome in California.

In general, I am not in favor of health care which is controlled by the federal or state government.  I do not believe that the Canadian or British systems are the best methods to administer medical care to a nation’s citizens.  Below I will argue that equity concerns do not justify centralized health care, but a health insurance externalities argument may be persuasive.  I explain below.

Many politicians claim that providing free, government administered health care is beneficial to society on equity grounds.  While this is true, economists claim that if one hopes to equalize incomes (or welfare) across society, there are more efficient manners of accomplishing this.  People have different preferences for health insurance.  Some people are more or less risk averse; some have a higher probability of illness than others; and people vary in the type of insurance they would desire (HMOs, PPOs or conventional).  Giving the poor a lump sum payment equal to their share of Medicaid expenditures would allow them to best choose how to spend this money in order to maximize their welfare.  Assuming health insurance is a normal good, some of this money would be spent on health insurance and overall welfare would increase.

Would this happen in reality?

In the United States, hospitals will not deny care to any patients.  This is a generalization, but it is true that hospitals will not refuse to admit emergency care cases to the hospital.  Poor patients who know that they will receive treatment even if they do not have insurance; thus their incentives to purchase insurance will be small.  Since, society will not refuse care to the ill, the consumers (in the form of higher prices) or the taxpayers (in the form of taxes to cover these expenses) will have be left to pay their bill.  Also, those without insurance will be less likely to seek preventative care and thus the eventual cost of medical care for the indigent to taxpayers will be higher than if the impoverished were granted insurance in the first place. 

Vouchers may be a solution to this problem. This is the solution advocated by Ezekial Emanuel of the NIH and economist Victor Fuchs in their June 2005 Washington Monthly article (“Solved: …Why Universal Health Care Vouchers is the next big ideaâ€?). With vouchers, every US resident must purchase health insurance, but each receives a voucher towards the cost.  This would maintain competition among insurance companies, keep the provision of medical care out of the government’s hands, yet still ensure that all Americans were enrolled.  If one did not enroll in health insurance, they would lose the value of the voucher, and be in violation of the law. The vouchers should be set at a minimal level so that those who desire more comprehensive insurance could pay an amount above the voucher.  

One problem with the vouchers is that the price of individual insurance is much higher than that of group insurance.  Another is that of adverse selection.  Individuals with pre-existing conditions may not be able to afford health insurance even with the voucher.  Overall, vouchers remain an intriguing idea.