Unbiased Analysis of Today's Healthcare Issues

2016 ASSA: Effect of guaranteed issue and community rating on health insurance premiums

Written By: Jason Shafrin - Jan• 10•16

How should insurance be regulated? Should insurance plans be able to price premiums based on health conditions? The drawbacks of this approach is that it is not equitable as sicker patients will pay higher premiums. Should all people pay the same cost? Although more equitable, using a single price would incentivize healthy people to avoid buying insurance as the cost will be more likely to be higher than the cost.

At the 2016 ASSA meetings, Vilsa Curto presents “Pricing Regulations in Medigap” to examine how differences in Medigap regulation affects premiums and market composition. Medigap covers the cost sharing portions of Medicare including about $1000 inpatient deductible and 20% coinsurance for Part B cost and other costs. She examines a ban on differential pricing (i.e., community rating ) and a ban on rejections (i.e., guaranteed issue). For Medigap, when patients turn age 65 they all can purchase Medigap insurance at the same cost. However, some states also impose a single cost with guaranteed renewal. Other states ban differential pricing and also do not allow patients to be rejected based on their health status.  Many of these state-level Medigap insurance regulations were imposed in the 1990s.

Vilsa Curto compares regions in similar ZIP codes located on either side of a state boundary where there are different Medigap regulations. She finds that a ban on differential pricing leads to cross-subsidization from young to old. THe youngest pay $240 more annually.  A ban on rejections (i.e., guaranteed issue) and single pricing makes premiums higher for all individuals. Whereas a ban on differential pricing undoes consumer incentives to buy insurance early among younger individuals, a ban on differential pricing and rejections undoes consumer incentives to buy insurance early among all consumers.  Further, the increase in premiums among the young is $640 if both guaranteed issue and community rating are in place.

2016 ASSA: How does expanding Medicaid eligibility affect take-up and health care spending?

Written By: Jason Shafrin - Jan• 07•16

Typically, answering this question is difficult as the Medicaid program varies across states and even within states. What Amanda Kowalski and co-authors do in a paper she presented at the 2016 ASSA is collect data on the variation in Medicaid eligibility across states, across demographic groups, and across time from the inception of Medicaid in 1965 to the present.

The authors fine that a 10 percent increase in Medicaid eligibility in a state increases take-up by 1.52%. This factor likely varies by state, over time and by demographic groups, but on average, we see that about 85% of patients don’t take-up Medicaid when offered. Additionally, the authors find that:

Using all legislative variation in our calculator, we find that insurance explains about 20 percent of the overall growth in total health care spending from 1964 to the present.


The authors also find that Medicaid expansions to adults increase health spending much more than for children. It is unclear whether this effect is because children are generally less sick than adults on average (particularly the mean adult rather than the median adult) or because demand for health care for children is more inelastic compared to health care for adults.

ASSA 2016: How do high-deductible health plans affect spending levels?

Written By: Jason Shafrin - Jan• 07•16

Are high deductible health plans (HDHP) the holy grail for reducing cost? If so, how do consumers go about reducing cost, by reducing all utilization or shopping around for better prices? This is the research question that Ben Handel presented at 2016 ASSA meetings. He uses data from a large firm with 35,000-60,000 employees and 100,000-200,000 lives that went from largely a PPO plan to an HDHP for almost all its workers.

The study–titled “What Does a Deductible Do? The Impact of Cost-Sharing on Health Care Prices, Quantities, and Spending Dynamics“–finds that HDHPs did significantly reduce cost. Annual cost fell by 12-14% reduction of health care spending. Further, even the sickest individuals—those who were very likely to meet the out-of-pocket maximum in the given year—reduced cost.

How did the consumers reduce price? Did they shop around or just reduce cost. The study finds that cost changed because:

  • Provider price changes: +1.2%,
  • Consumer price shopping: +3.6%
  • Consumer quantity reductions: -17.9%
  • Quantity substations: -2.2%

In summary, producers increased prices by a standard amount. Consumers were bad price shoppers in that they went to higher cost providers (conditional on a given CPT code). It is unclear if this is due to the opacity of health care prices, the sensitivity of talking about price with your doctor, whether consumers believe cost is positively correlated with quality, or some other factors.  Cost saving was due almost entirely to reduced quantity of care and doing cheaper treatment versions of available care.

The sickest consumers even reduced the quantity of services by 20%, even though they were likely to meet the out of pocket maximum.  Most of this savings, however, occurs in months where patients began the month under the out-of-pocket maximum; in month’s where the out-of-pocket maximum had been reached, however, there is not cost reduction.

2016 ASSA: How does consumer inattention affect pricing?

Written By: Jason Shafrin - Jan• 06•16

Why do Medicare patients choose to stay in their current Part D prescription drug plan or switch to another? Are they rational actors maximizing their their financial benefit or do other factors play a role.

A paper by Kate Ho and co-authors (NBER WP version) presented at the 2016 ASSA meetings find the switch rates are fairly low on average. However, a few factors increase the rate of switches.   First, if the patient’s own plan increases premiums, patients are more likely to switch plans. Second, if the patient’s own plan changes coverage benefits—specifically change in deductibles and reduced coverage—switch rates also increase. Third, an acute health shock also increase the likelihood of switching plans.

Note that these effects are present even after accounting for premium levels. Higher premiums do predict plan choice, but changes in the beneficiary’s own coverage have a much larger

Eliminating the gap coverage has equivalent effect on demand as an increase in premiums of $252, and increase of deductibles of $915, or an increase of $1211 chronic total out-of-pocket cost. In other words, consumers are almost 4 times as sensitive to changes in premiums as deductibles and almost five times as sensitive to premiums as total out-of-pocket cost.

If patients choose plans rationally, they could save $1358 over a three year period. If this “inattention” factor was removed, but held premiums (but not cost sharing) constant, patients could save $170. Finally, if we removed inattention and allow premiums to adjust, consumers would save $601 through selecting better plans.

The findings of this study are very interesting and highlight that consumers basically keep the current plan unless they have reasons to switch such as changes to premiums, cost sharing, or health status. The policy implications of this paper, however, are limited. Patient attention is costly and thus patient’s trade off optimizing cost sharing with the psychic cost of attention. Further, Part D brand loyalty can also explain the stickiness of consumer choice, which may not be a bad thing if loyalty is correlated with quality.

ASSA 2016: Effect of Medigap on Medicare spending

Written By: Jason Shafrin - Jan• 04•16

Although most elderly are covered by Medicare, elderly patients face significant cost sharing. For instance, skilled nursing facilities stays are free for the first 20 days, cost $137.50 per day for days 21-100, and patients must pay out of pocket after 100 days. For Part B cost, patients must pay 20% of all costs. Further, Medicare patients also have significant cost sharing for inpatient stays.

However, many patients purchase Medigap gap to cover Medicare cost sharing. Early literature suggests that Medigap increases spending 15-25%. A presentation by Kate Bundorf at the 2016 ASSA meetings titled “The Effects of Medigap Supplemental Insurance on Health Care Spending Among Disabled Medicare Beneficiaries” aims to update this 2001 study using a regression discontinuity design looking at Medicare beneficiaries who qualify for coverage based on a disability. The discontinuity occurs because disabled beneficiaries do not receive guaranteed issue insurance, but once patients “age into” Medicare at age 65, they can receive guaranteed issue and open enrollment. Some states, however, mandate guaranteed issue for Medigap programs and the data do not show an increase in Medigap update after age 65 hinting that increased Medigap enrollment is due to easier underwriting at age 65.

Using this approach, the authors find that Part B spending increases due to Medigap but Part A declines. Looking a bit deeper, the healthier 3 quartiles actually increase spending for both Part A and B. For the highest-risk disabled beneficiaries, however, there are large decreases in Part A (i.e., hospital) cost. Thus, for most people, the moral hazard effect will increase cost, but for the sickest patients, there are large offsets in terms of lower Part A costs.

ASSA 2016: Measuring the benefit of statin use

Written By: Jason Shafrin - Jan• 03•16

The United States Preventive Services Task Force (USPSTF) recommends that patients take an aspirin per day to prevent myocardial infarction and ischemic stroke.   At a presentation at the 2016 ASSA meetings, Étienne Gaudette presented results from a study measuring the benefit of implementing the USPSTF recommendation. They find that that there are significant health gains from increased aspirin use. They use data from the Health and Retirement Study (HRS) and NHANES data to simulate the impact of increased use of aspirin using the Future Elderly Model (FEM). Using evidence from the literature, they find that increased use of aspirin would decrease the number of heart attacks and strokes. There are some risks, however. Aspirin thins the blood which will increases the risk of bleeding. Balancing these two offsetting factors, the authors find significant improvement in life expectancy and modest improvements in healthy life expectancy. Further, taking an aspirin a day is highly cost effective.

However, few patients take aspirin.   Why would this be the case? Étienne Gaudette argues that there are a number of potential reasons. First is patient preferences. It could be the cases that few patients want to take a pill every day, despite the health benefits. In this case, it would be optimal (from the patient’s perspective) to not take aspiring despite the health benefits.  Second, patients may not be informed of the true benefit of aspirin.  In this case, a public health campaign to inform patients of the potential benefit would be needed. Third, patients may have “irrational” or hyperbolic preferences, whereby they do not fully take into account the benefits of future health benefits.  In this case, programs to instill habit formation may be helpful.  All three explanations are plausible, but all result in different policy prescriptions.

Happy 2016!

Written By: Jason Shafrin - Jan• 01•16

Starting off 2016 with some humor:

Economists put decimal points in their forecasts to show that they have a sense of humour

  • William Gilmore Simms, on forecasts

2015 Year in review

Written By: Jason Shafrin - Dec• 31•15

My review of 2015 year in review posts from a variety of sources.  Enjoy.


Are “Focused Factories” a good idea?

Written By: Jason Shafrin - Dec• 29•15

In recent years, there has a been a trend towards patient-centered care focusing on caring for a patient holistically.  For instance, a NEJM perspective piece by Porter states:

Accountability for value should be shared among the providers involved. Thus, rather than “focused factories” concentrating on narrow groups of interventions, we need integrated practice units that are accountable for the total care for a medical condition and its complications.

Clearly, integrated care has benefits, particularly for geriatric patients with multiple chronic conditions. If providers do not talk to one another, a medication to confront on of the patient’s illnesses may exacerbate the others.

However, “focused factories” do have their merit. Economists generally believe that increased specialization leads to improved outcomes.  For instance, patients would not want a primary care doctor treating their lung cancer. There clearly is also a benefit in physician and provider specialization.

A key issue in the supply of health care services to patients going forward will be to balance the need for viewing patient’s health status in a holistic fashion while allowing for provider specialize in treating specific ailments.


Average prevalence of “sickness”

Written By: Jason Shafrin - Dec• 28•15

Despite the large number of illnesses defined by the International Statistical Classification of Diseases and Related Health Problems (ICD) disease coding system, health systems need to know how many encounters they are likely to experience each month. One gauge for this is the prevalence of sickness in the population. A paper by White et al. (1961) estimates this figure as follow:

Data from this survey for a four-year period (1946-1947 to 1949-1950) show variations in the mean monthly sickness rates with age, sex and season between extremes of 51 and 89 per 100 adults (sixteen years of age and over), as shown in Table 1. The annual mean monthly rates are rather constant at about 68, sug- gesting that in a broad-based population survey, 68 adults out of every 100, in an average month, will experience at least one episode of ill health or injury that they can recall at the end of that month.

The authors also investigate the typical number of physician visits, hopsitalizations, and referrals to academic medical centers. They find that:

In summary, it appears that within an average month in Great Britain or the United States, for every 1000 adults (sixteen years of age and over) in the population, about 750 will experience what they recognize and recall as an episode of illness or injury. Two hundred and fifty of the 750 will consult a physician at least once during that month. Nine of the 250 will be hospitalized, 5 will be referred to another physician, and 1 will be sent to a university medical center within that month. Expressed in other terms, 0.75 of the adult population experience sickness each month, 0.25 consult a physician, 0.009 are hospitalized, 0.005 are referred to another physician,and 0.001 are referred to a university medical center. In an average month, 0.009/0.75, or 0.012, of the “sick” adults in the community, are seen on hospital wards, and 0.001/0.75, 0.004, are seen at university medical centers.