Friday, October 24, 2014

Lest we forget: The fall of East Germany, 1989

I was in Leipzig, Germany this last week.  Twenty five years ago, in September and October 1989, Leipzig was the center of demonstrations that were pivotal in tearing down the Berlin Wall and to the downfall of the East German state, the DDR -- Deutsche Demokratische Republik.

In the last two months, in Leipzig and throughout Germany, there have been many events commemorating those events of 25 years ago.  How momentous those events were!  I was in East Germany in 1984 when it was still communist.  It was just amazing to me to see firsthand the lack of freedoms, both political and economic.  I was shocked by actually seeing police with dogs looking under the train with mirrors -- as we were leaving the East.  In 1990 I visited the Berlin Wall -- what was left of it -- and saw the beginning of freedom for the East.

Leipzig today is a tremendous city, beautiful and well on its way to rebuilding its reputation as a marketplace for Germany and indeed for all of Europe.

And look how quickly we forget.  I read the news pretty thoroughly, and I don't remember seeing a single story in the US press in the last two months about those events 25 years ago.

Here is a nice film clip from Die Deutsche Welle about the demonstrations in Leipzig in October, 1989 and the brave men who filmed the events from a church and then smuggled the tapes out to the West.  Remember...no internet back then, so the East Germans had effectively shut down any news about large scale demonstrations.

http://www.dw.de/secret-heroes-on-the-rooftops-of-leipzig/av-17969031

Sunday, October 05, 2014

Why should "preventive care" in health care and cars be free?

The Affordable Care Act mandates that certain preventive care -- well visits, annual checkups, certain bloodtests and screenings -- be made free to anyone covered by insurance.

As an economist, I usually cringe at such policies, as a basic principle of economics is that insurance is meant to cover large and infrequent events.  My usual response to covering things like annual checkups is, "Do we have insurance for oil changes on our cars?"  Incurring the transaction costs of insurance in paying for routine care just seems senseless.

But then I started noticing that some auto manufacturers in fact provide for free maintenance care for new cars -- see here for BMW's plan for example.

Why would new cars come with free maintenance?  What might be the reasons for this, and might we learn something about free preventive health care in thinking this through for cars?

A few things come to my mind as to why BMW and other car manufacturers might offer free maintenance.  I put analogous explanations for free preventive care in italics alongside.

1.  Consumers don't bear the full cost of not maintaining vehicles.  There is some truth to this, certainly a lot of truth for leased vehicles.  Even for owned vehicles, the used car market classically suffers from adverse selection, making well-maintained vehicles sell for low prices that reflect the average quality of all cars.  The manufacturers have an interest in maintaining the value of used cars, so they optimally lower the price of maintenance. This explanation should have less weight to the extent that the maintenance being considered is easily documented.  In health care, the analogy would be that people will have insurance for large ticket illnesses, so the incentive to pay even a little for preventive care is lessened.  Also Medicare in later life means that we have less incentive to take care of ourselves now.

2.  Consumers face monopoly prices from dealerships for maintenance, so the manufacturers negotiate on behalf of new-car buyers.  I like this explanation, as I always feel that the car dealers exploit both their local monopoly power and any power they have from giving "authorized warranty" coverage.  The analogy to health care is self evident, with monopoly pricing (price exceeding marginal cost) by providers being common.  Insurers have incentive to bargain with providers to give preventive care at the lowest possible price when the insurers bear the cost.

3.  It is all a marketing ploy, with consumers overestimating the value of free maintenance care.  I think there might be some truth to this one too.  Car manufacturers know how little maintenance a new car really needs; consumers overestimate that and therefore over-respond to offers of free maintenance.  The analogy in health care is that we should have seen insurers offering free preventive care without being forced to (and I think we did).  

4.  A last one, not my favorite, which is that consumers are irrational and skip maintenance even when the value of the maintenance exceeds its cost.  As always, we have to look on both sides of the coin:  I agree that consumers make mistakes, but why do we think they will under-maintain rather than over-maintain?  I know lots of people who change their oil way too frequently.  In health care, my guess is that most analysts would say that consumers will irrationally take too little health care if they have to pay for routine care.

5.  This is a good one:  free maintenance is a way to get consumers into the dealerships so they can be sold additional services ("we changed your oil but what you really need are new shocks").  This depends on consumers not figuring out the game entirely, although again information asymmetries make it possible.  I especially like the analogy to health care here:  come in for your free check-up and let's see what else you need.  Blood tests, scans, ....?

Bottom line?  I think that in health care we give away too much preventive care.  Point 5 above is an especially good one.  Not addressed by any of the points above is another big concern of mine, which is that free care perpetuates a belief that all health care "should" be free to all.

Saturday, August 02, 2014

Transition from ICD9 to ICD10 Codes: Strategic effect on reimbursements?

This fall, the US government requires pretty much all health care providers to transition from the old set of codes for medical diagnoses, known as ICD9, to a new larger set of codes, ICD10.  According to the Center for Medicare and Medicaid Services, ICD10 allows for 7 digits while ICD9 allowed only for 5.

So under the new system, we could have up to 9,999,999 different codes while under the old there was only the possibility for 99,999 -- and as the ICD10 is alphanumeric, this is an understatement.  I guess however they never maxed out on usage of the total possibilities, as the article referenced below says ICD9 had only 13,000 distinct codes while ICD10 will have only 68,000.  Quite a difference to be sure, and still room to grow.  CMS provides a fact sheet if you want to learn a bit more.

The key thing is that these diagnostic codes are used for billing purposes.  Submit a code to Medicare, and you get the payment associated with that code.

Naturally the pundits are having a grand time with this one.  Here are the "16 most absurd ICD10 codes."  Here are just a couple:

  • W55.41XA: Bitten by pig, initial encounter​.
  • W220.2XD: Walked into lamppost, subsequent encounter. 
  • Y93.D: V91.07XD: Burn due to water-skis on fire, subsequent encounter​.
  • W61.12XA: Struck by macaw, initial encounter. 
These actually seem too bizarre to be true, but who knows.

Anyway, I have a serious question:  How will the move to a more-granular coding system affect billings?

What I have in mind here is thinking about the hospitals as trying to maximize their revenues given the procedures they did to a patient -- strategic coding of procedures to maximize revenue.  (I am actually on some email list that sends me announcements for seminars to teach me how to code "properly," so strategic coding is certainly not a crazy idea.)

I expect that many first answers would be that a more accurate (more granular) coding system would reduce billings.  Why -- I don't really know.  More precision avoids mis-classification.  Sure, but what is the effect on revenue?

My knee-jerk reaction is that billings will likely increase. Why?  Well, suppose there was an old ICD9 code that had some average reimbursement attached to it, say $1000.  Now there are two subcodes for that old diagnosis, and the reimbursement for one code is $500 while the other is $1500.  These payments were set on the thinking that half of the old diagnoses were of one new type while the other half were of the other new type.  Assuming there is some wiggle room in the new codes (coding systems, like contracts generally, cannot delineate every possible outcome) the hospitals will shift whatever procedures they can into the higher rate category.  So while there was an even split of sub-diagnoses in the population, there will be some strategic over-billing that happens.

This is admittedly incomplete, for we have to think of the whole coding system, and we have to specify a bit more about who knows what and what the constraints are.

Another way to think about it is to go in reverse:  Suppose we reduce the number of codes, and take an extreme case of going down to just one code (capitation, sort of!).  Then if there was any strategic overbilling going on previously, going to one code has to reduce the total reimbursements, it would seem.  A single code is actually more accurate, as we get the true average rather than an average biased by strategic coding.

This might be an interesting project to work on.  There was a Rand study in 2004 that looked at the transition to ICD10 but it doesn't really take this perspective.  

Wednesday, July 23, 2014

And yet another ACA decision...

Two appeals courts looked at the issue of subsidies on Federal exchanges under ACA and both issued decisions yesterday.  The DC circuit decision is covered in my post below, the Virginia circuit ruled in favor of the government:  See this story in the LA Times.

The Administration has announced its intent to ask the DC circuit to rehear the case, with the full set of judges rather than just a three-judge panel.  That would seem a reasonable thing to do, and could well remove the split between two appeals courts that would call for the Supreme Court to step in.  But as Jonathan Adler points out at the Volokh Conspiracy, the full rehearing is not a sure thing and there are other pending cases in other circuits.  The Supremes might get another shot at ACA yet.

Tuesday, July 22, 2014

And another ACA decision...

The United States Court of Appeals, DC circuit, this morning issued a decision that cuts to the heart of the Affordable Care Act...deciding that subsidies for insurance purchase are only valid for state-run exchanges.  More than 30 states have let the Federal government set up and run their insurance exchanges; these are the states that will be affected if the decision is held up.

This will be challenged in many ways, and personally I find it hard to believe it will stand, but who knows.  Recall that many thought the initial case against ACA, on the basis of it being an unconstitutional regulation of commerce, was scoffed at by many.

I will have to read the decision carefully to see what the judges said.  In the meantime, I attach here a link to the opinion (WSJ), and also a link to a post by Jonathan Adler at The Volokh Conspiracy.


Tuesday, July 01, 2014

Another ACA Supreme Decision: Burwell v. Hobby Lobby

The latest Affordable Care Act Supreme Court decision makes people line up pretty clearly on one side or another.  Here are a few observations on the case, with the first two points being on some good economic issues that were addressed.

  1.  Supporters (amici) of the Health and Human Services position made the argument that Hobby Lobby could just drop insurance coverage for its employees if it objected to providing the required birth control coverage. Since the penalty of $2,000 per person is less than the cost of providing insurance, this would be an easy way for Hobby Lobby to avoid the problem, supposedly.  The majority put this one to bed quite elegantly by pointing out (page 34 of the opinion) that benefits such as health care are part of employees' overall compensation, so that dropping such a benefit will have implications for either employment or the level of cash wages.  The majority even make the subtle points that health insurance is likely to be of greater value than cash because it is done on a pretax basis and because the individual coverage market is not very efficient. These are great points, which get to the heart of a bigger question:  Should and will employers drop health care coverage, and what will the employer mandate do for the level of employment?
  2. Another interesting point is the alternative that the majority says is probably feasible for Hobby Lobby and that has been actually set up by HHS to let religious nonprofits get out from under the birth control coverage requirement (see the opinion, pages 9-10, for discussion).  HHS permits insurers of employers who want an exemption from the birth control coverage requirement to pull such coverage out of the main health plan but then to offer it separately and to not charge the employees anything for the coverage.  Interesting, the claim is that the insurers will be happy to do this, rather than not offer the coverage at all, as the cost of the coverage will be less than the savings in health care expenses as fewer women go through pregnancy.   But what about self-insured employers -- there, putting the burden of coverage onto a third party administrator (TPA) is simply a cost to them; any savings from less childbirth goes to the employer.  Ah, HHS has a solution to that, which is to reduce the fee that such TPAs pay under another part of the ACA.  Boy, this is getting complicated!
  3. It was fun to see Dartmouth College mentioned in Ruth Bader Ginsburg's dissent!  I will let the curious reader find that.
  4. In arguing that for-profit corporations should not be excluded from having rights under the Religious Freedom Restoration Act (RFRA, the statute at the heart of the dispute here), the majority points out how many for-profit corporations now pursue objectives other than pure value-maximization for shareholders (opinion, page 23).  Touche!  Their point here is that for-profit companies can pursue many objectives, such as reducing carbon emissions or giving to charity, even when these cost the company and its owners profits.  "If for-profit corporations may pursue such worthy objectives, there is no apparent reason why they may not further religious objectives as well."  So all that work by some activists to allow corporations to escape from the evil trap of pure profit maximization has come back to haunt them.  Ah, poetic justice.
  5. My position overall?  I am swayed by the logical consistency in thinking that the word person in the RFRA includes natural persons as well as nonprofit and for-profit corporations.  There is no logical way to say that it excludes some kinds of corporations or business organizations but not others.  The owners of Hobby Lobby are a family, it is an extremely closely-held business, and if Congress passes a law giving people the right to express religion free from undue regulatory interference (RFRA) then it applies to the family's corporation.  Plus, there are other ways to deal with what may well be a sound public policy issue -- the desire to give all women access to many forms of birth control.  Put that out in the open, through some general mechanism, rather than forcing it onto the employers.
  6. I do find Justice Ginsburg's dissent informative.  This quote by her really defines, I think, the difference between her and the majority:  "In the Court's view, RFRA demands accommodation of a for-profit corporations religious beliefs no matter the impact that accommodation may have on third parties who do not share the corporation owners' religious faith -- in these cases thousands of women employed by Hobby Lobby and Conestoga or dependents of persons those  corporations employ."  That gets to the heart of it.  Justice Ginsburg would interpret all the language and issues in favor of the women employees; the majority sides with the owners of the business.   

Wednesday, November 27, 2013

Another Obamacare Delay Announced -- Day Before Thanksgiving!

I do feel angry when the government or companies announce important things either on Fridays or before a major holiday.  Where's the honesty in that?

Here's the latest example of such shenanigans.  The SHOP exchanges, one of the potentially better parts of Obamacare, will now be delayed for an entire year.  And when is this announced?  When most people are either traveling, shopping, or just daydreaming about eating turkey.

SHOP, in case you aren't aware, stands for Small Business Health Options Exchange.  The idea is to give employees of small business employers and employees a more efficient way to provide and shop for health care coverage.  This is the second setback for SHOP already.

I suspect that all available government resources are devoted to the consumer-facing health exchanges, as they are getting most of the bad publicity.  SHOP and the back-office programming for risk mitigation and insurer payments are no doubt on the back burner.  Too bad, as small business insurance was one of the problem areas of the old system.