No, that is not a mistake in the title, although if you google Arkansas Compromise many of the results have to do with the Missouri Compromise.
The Arkansas compromise on the Medicaid expansion under Obamacare (happy 3rd birthday by the way) is discussed here. What a neat idea -- my hat off to Gov. Mike Beebe of Arkansas. Most state Medicaid programs are run by the state, and you can imagine how efficient and consumer-friendly that is. Even more important, most state Medicaid programs pay suppliers much lower than private insurers and Medicare. The Arkansas compromise will allow the state to expand its Medicaid program by simply pushing low income people onto the Arkansas health exchanges and subsidizing their purchase of insurance. This is precisely how non-Medicaid individuals will buy health insurance once the exchanges get going in all states. What could be easier?
The winners from this compromise are several --if it were to expand to other states. The insurance companies gain, as they have more customers for their exchange-based products. This might be offset a bit by the loss of business from states who were subcontracting their Medicaid business directly to one insurer. Hospitals and other health care suppliers are huge beneficiaries, as the insurers' reimbursement for exchange-based insurance will generally be much higher than states' Medicaid reimbursement rates. For hospitals this is very important. Medicaid beneficiaries most likely gain, as exchange-based insurance is almost certain to be better than Medicaid, with perhaps the exception that there could be some copays and deductibles with exchange insurance (unless Federal rules will prohibit that). And more providers will be willing to accept Medicaid patients under this compromise.
So who loses?
The general taxpayer, of course. The higher reimbursements to providers will definitely increase the cost of expanding Medicaid. If this takes off, the Congressional Budget Office will have to redo its budget forecasts...
Saturday, March 23, 2013
Wednesday, March 20, 2013
A Tale of Two Trends
I find it interesting to see how scientists and pundits are playing two different trends, one of global temperature and the other of US health spending.
The trend in each of these is important. For global temperature, there are of course models that would indicate global temperature should be increasing with atmospheric CO2 concentrations; with health spending, the underlying theory is less developed, but the implications of changes in health care costs for US government spending and deficits are immense.
For each issue -- global temperature and health spending -- the most recent data observations give rise to speculation on changes in the underlying trend. For instance, here is a headline on health spending, from this Bloomberg story:
And here is a chart from the Altarum Institute showing the data:
Meanwhile on the global temperature issue, we have all kinds of headlines on whether global warming has "stopped" in the last 15 or so years. Here is one example of a headline, from the Guardian in the UK:
And here is just one diagram with some relevant global temperature data. The source for this is the Real Climate blog: Note the colored lines are different measures of actual temperature, while the black line is a forecast from a certain set of models.
Of course, the key point in all of this is that we have to consider the background variation in the time series in question before we can conclude anything meaningful about a statistically significant change. The Real Climate chart makes some headway on that front, with confidence intervals around their model forecast. I won't agree immediately that that method clears up the issue completely, but at least it recognizes the important fact of variability. As to health care spending, there is also a lot of background variation, and I have seen very little on any statistical inference about changes.
However, I will go out on some ice and make an observation: The liberal media has been all over the "marked slowdown" in health care costs as if it is for-sure a real change, while they are all over the "slowdown in global climate change" as either an artifact of starting point or as statistically insignificant.
I think the truth on both is closer to "it's too early to tell."
The trend in each of these is important. For global temperature, there are of course models that would indicate global temperature should be increasing with atmospheric CO2 concentrations; with health spending, the underlying theory is less developed, but the implications of changes in health care costs for US government spending and deficits are immense.
For each issue -- global temperature and health spending -- the most recent data observations give rise to speculation on changes in the underlying trend. For instance, here is a headline on health spending, from this Bloomberg story:
Meanwhile on the global temperature issue, we have all kinds of headlines on whether global warming has "stopped" in the last 15 or so years. Here is one example of a headline, from the Guardian in the UK:
However, I will go out on some ice and make an observation: The liberal media has been all over the "marked slowdown" in health care costs as if it is for-sure a real change, while they are all over the "slowdown in global climate change" as either an artifact of starting point or as statistically insignificant.
I think the truth on both is closer to "it's too early to tell."
Tuesday, March 19, 2013
Why are Cyprus Banks in Trouble?
In all the talk about the Cyprus situation, very little is mentioned about why the banks are in such trouble. Sure, they have a huge amount of deposits relative to GDP...but where were those deposits invested? There must have been (recent) losses to cause the insolvency of the country's banking system.
What is the source of the losses?
Hmmm....who wants to bet the losses are based on the haircuts that non-government owners of Greek bonds had to take back in 2012 as part of the second Greek rescue package.
So we are still seeing the follow-on effects of the Greek crisis. Question is if the knock-on effects are weakening or strengthening.
What is the source of the losses?
Hmmm....who wants to bet the losses are based on the haircuts that non-government owners of Greek bonds had to take back in 2012 as part of the second Greek rescue package.
So we are still seeing the follow-on effects of the Greek crisis. Question is if the knock-on effects are weakening or strengthening.
Sunday, March 17, 2013
How to Create Runs on Banks
Saturday morning, the EU finance ministers decided that the island country of Cyprus would have to appropriate a significant portion of savers' deposits in return for 10 billion euro of bailout money. The appropriation will occur via a 9.9% tax on deposits in excess of 100,000 euro and 6.7% on smaller accounts. The levy will have to be affirmed by Cyprus' parliament, which will begin debate Monday. This has all happened over the weekend; see here for more.
Naturally ATM machines were hit hard over the weekend, although it seems that this behavior is too late -- the tax will already be withheld from withdrawals. Many people of course ran to the banks a bit earlier and got all their funds out. It will be interesting to see how far back the government will reach -- will there be a deadline of, say, March 1 so that anyone who took funds out before then is left whole?
You can see how arbitrary this is going to become. That is the nature of a bank run -- those who get their money out first stay whole; those who delay lose.
The incentives will be clear, no matter how much the EU says this will not create a precedent. The sanctity of bank deposits will clearly be in question if this policy is ratified.
I wonder what the capital structure of Cyprus banks looks like? There must be public debt and there certainly is (or was) equity. As a matter of good principle, I would want to wipe out equity and public bondholders before I touch deposits. The whole idea of deposits is that they are among the least risky financial assets (and usually pay rates of interest in accordance with their low risk!).
Naturally ATM machines were hit hard over the weekend, although it seems that this behavior is too late -- the tax will already be withheld from withdrawals. Many people of course ran to the banks a bit earlier and got all their funds out. It will be interesting to see how far back the government will reach -- will there be a deadline of, say, March 1 so that anyone who took funds out before then is left whole?
You can see how arbitrary this is going to become. That is the nature of a bank run -- those who get their money out first stay whole; those who delay lose.
The incentives will be clear, no matter how much the EU says this will not create a precedent. The sanctity of bank deposits will clearly be in question if this policy is ratified.
I wonder what the capital structure of Cyprus banks looks like? There must be public debt and there certainly is (or was) equity. As a matter of good principle, I would want to wipe out equity and public bondholders before I touch deposits. The whole idea of deposits is that they are among the least risky financial assets (and usually pay rates of interest in accordance with their low risk!).
Friday, March 15, 2013
Climate Change Education in Business Schools
I was at a workshop at the National Academy of Science this week, with the topic being how business schools address climate change in their curricula.
Website is here; there should be video of the sessions up at some point.
It's an interesting question and there were many good people on the panels and in the audience.
I tried to make two points during my remarks: One, must keep in mind all the other issues that we want to educate our students about, i.e., there is an opportunity cost to spending time on climate change; and two, in order to broach climate change in an appropriately rigorous fashion, we need to first cover many basics of economics and public policy.
The issue of opportunity cost is very real, and in my position I see those costs all the time. First consider the core (required) curriculum. Should climate change occupy a (more) significant role there? (Note that at Tuck, there is one full session on externality in the Managerial Economics course, with climate change serving as the application; and the ManEc profs then join in the Global Economics course later in the year for a session on the global trade implications of cap and trade or a carbon tax. But right now, many schools are debating having a yet stronger role for global topics in the core. This will take up time, faculty, and financial resources, especially if an in-country experiential route is chosen. Other topics also are prime candidates for core positioning: ethics, entrepreneurship, leadership. Meanwhile many subjects that have typically been in the core have either been cut back or taken out entirely -- statistics, managerial accounting, decision analysis...
Opportunity cost also arises in the elective (typically second-year) curriculum. I just got done teaching a new energy economics course, at the request of students. What is more important, an energy econ course or a course in climate change? There is also demand/need for elective courses in health care, education, entrepreneurship, technology...
My second point was the need to have fundamentals covered well if we are going to talk seriously about climate change in courses. The basic economics of externality, optimal amount of emissions, and alternative control policies is not easy; one session on this means "drinking from the fire hose" treatment. Then layer on top of this the fact that climate change costs and benefits accrue over time, so that discounting and intergenerational equity issues have to play a role.
Meanwhile, if topics such as climate change enter the core, some fundamentals get squeezed out. What we could be left with is superficial coverage of everything.
One other point about the NAS workshop, very much related to the above comments: Most of the people there believed very strongly that climate change is not only serious from an environmental impact standpoint, but they also believed that it is quite obvious that we need to do a lot about it -- in the public and private sectors. But when you get a bunch of folks with the same mindset, there isn't much consideration of other issues and opportunity costs -- all the attention is on climate change. There isn't much clearer example of a "silo," something which most people are eager to criticize. I think the goal of business schools should be to turn out leaders who are adept at leading the organizations of the future, keeping in mind all the possible problems and issues that those organizations might face. Climate change is but one.
Website is here; there should be video of the sessions up at some point.
It's an interesting question and there were many good people on the panels and in the audience.
I tried to make two points during my remarks: One, must keep in mind all the other issues that we want to educate our students about, i.e., there is an opportunity cost to spending time on climate change; and two, in order to broach climate change in an appropriately rigorous fashion, we need to first cover many basics of economics and public policy.
The issue of opportunity cost is very real, and in my position I see those costs all the time. First consider the core (required) curriculum. Should climate change occupy a (more) significant role there? (Note that at Tuck, there is one full session on externality in the Managerial Economics course, with climate change serving as the application; and the ManEc profs then join in the Global Economics course later in the year for a session on the global trade implications of cap and trade or a carbon tax. But right now, many schools are debating having a yet stronger role for global topics in the core. This will take up time, faculty, and financial resources, especially if an in-country experiential route is chosen. Other topics also are prime candidates for core positioning: ethics, entrepreneurship, leadership. Meanwhile many subjects that have typically been in the core have either been cut back or taken out entirely -- statistics, managerial accounting, decision analysis...
Opportunity cost also arises in the elective (typically second-year) curriculum. I just got done teaching a new energy economics course, at the request of students. What is more important, an energy econ course or a course in climate change? There is also demand/need for elective courses in health care, education, entrepreneurship, technology...
My second point was the need to have fundamentals covered well if we are going to talk seriously about climate change in courses. The basic economics of externality, optimal amount of emissions, and alternative control policies is not easy; one session on this means "drinking from the fire hose" treatment. Then layer on top of this the fact that climate change costs and benefits accrue over time, so that discounting and intergenerational equity issues have to play a role.
Meanwhile, if topics such as climate change enter the core, some fundamentals get squeezed out. What we could be left with is superficial coverage of everything.
One other point about the NAS workshop, very much related to the above comments: Most of the people there believed very strongly that climate change is not only serious from an environmental impact standpoint, but they also believed that it is quite obvious that we need to do a lot about it -- in the public and private sectors. But when you get a bunch of folks with the same mindset, there isn't much consideration of other issues and opportunity costs -- all the attention is on climate change. There isn't much clearer example of a "silo," something which most people are eager to criticize. I think the goal of business schools should be to turn out leaders who are adept at leading the organizations of the future, keeping in mind all the possible problems and issues that those organizations might face. Climate change is but one.
Saturday, March 02, 2013
The Coming New "Doc Fix" in Medicaid
As we know, the Affordable Care Act standardizes Medicaid across the states, with a great expansion of coverage for most states. The Federal government has promised to cover all the additional cost of this expansion for the first three years (2014-2016) and then phase down to 90% by 2020.
Many questions exist around this expansion. My current one involves the payments that individual states will make under their Medicaid plans to doctors and hospitals ("providers").
Currently, each state sets its own Medicaid reimbursement schedule. This is generally pretty complicated, but is similar in form to Federal Medicare practices -- but not similar in level of reimbursement. For NH, if you want to read about the system, go here. I believe it is safe to say that most states Medicaid systems reimburse providers at less than Medicare rates on average...and definitely less than most private insurers would pay for the same services. But there has been significant variation in provider reimbursements across states.
So here is the specific question. If ACA mandates expansion of Medicaid coverage, does it continue the practice of states setting their own provider reimbursement rates?
Generally the answer is yes, but with one pretty large exception -- reimbursement for primary care services. ACA requires states accepting the Medicaid expansion to reimburse primary care services at Medicare rates, with any additional cost being picked up by the Federal governement. For a brief description of this part of ACA, see this. Much more detail can be found. I have seen one estimate of the cost at the Federal level to be around $6 billion annually.
Ah, but here is the kicker and relation to the title of my post: this requirement and in particular that the Federal government will pay for the higher rates only applies for two years!
The phrase "doc fix" refers to a law about ten years ago that was supposed to cut Medicare reimbursement rates to providers by a certain amount each year that the rate of increase in total Medicare expenses was too high. Starting immediately, Congress overrode the mandated increase. By now, there is around a 30% cumulative cut that is due, and each year Congress has to pass a law (the "doc fix") that keeps that cut from going into force.
Anyone besides me worry that we are going to get into a "Medicaid doc fix" situation?
Look forward: For two years, any Medicaid service that can be legally lumped into the "primary care" category is going to be paid at the relatively lucrative Medicare rates. But in two years, states like NH are going to go back to the old rate schedule. Really?
Many questions exist around this expansion. My current one involves the payments that individual states will make under their Medicaid plans to doctors and hospitals ("providers").
Currently, each state sets its own Medicaid reimbursement schedule. This is generally pretty complicated, but is similar in form to Federal Medicare practices -- but not similar in level of reimbursement. For NH, if you want to read about the system, go here. I believe it is safe to say that most states Medicaid systems reimburse providers at less than Medicare rates on average...and definitely less than most private insurers would pay for the same services. But there has been significant variation in provider reimbursements across states.
So here is the specific question. If ACA mandates expansion of Medicaid coverage, does it continue the practice of states setting their own provider reimbursement rates?
Generally the answer is yes, but with one pretty large exception -- reimbursement for primary care services. ACA requires states accepting the Medicaid expansion to reimburse primary care services at Medicare rates, with any additional cost being picked up by the Federal governement. For a brief description of this part of ACA, see this. Much more detail can be found. I have seen one estimate of the cost at the Federal level to be around $6 billion annually.
Ah, but here is the kicker and relation to the title of my post: this requirement and in particular that the Federal government will pay for the higher rates only applies for two years!
The phrase "doc fix" refers to a law about ten years ago that was supposed to cut Medicare reimbursement rates to providers by a certain amount each year that the rate of increase in total Medicare expenses was too high. Starting immediately, Congress overrode the mandated increase. By now, there is around a 30% cumulative cut that is due, and each year Congress has to pass a law (the "doc fix") that keeps that cut from going into force.
Anyone besides me worry that we are going to get into a "Medicaid doc fix" situation?
Look forward: For two years, any Medicaid service that can be legally lumped into the "primary care" category is going to be paid at the relatively lucrative Medicare rates. But in two years, states like NH are going to go back to the old rate schedule. Really?
Friday, December 28, 2012
Number of laws passed as a measure of Congress' productivity?
From the WSJ today:
Damn, only 146 bills.
And the fat lady hasn't begun to sing quite yet. We might yet get a tax increase without any spending cuts. Imagine, the automatic spending cuts set to kick in are $110 billion...on a GDP of $15 trillion. I will save you the math...that is less than 1%.
Note added: The cuts of $110 billion are only 1% of GDP, which is relevant when thinking about the (possible!) impact on spending and hence GDP. The cuts are a bit more than 4% of the total Federal budget, and of course more than 4% of discretionary spending. Still, to refer to the cuts as "draconian" as is customary, seems a bit of an exaggeration...especially when the Federal government is clearly living beyond its mean.
Following the tea-party wave in the 2010 election, the 112th Congress looks set to be the least productive in recent history. By the end of November, the House had passed 146 bills over the previous two years, by far the smallest number for any Congress since 1948. The Senate passed fewer bills in 2012 than in any year since at least 1992.
Damn, only 146 bills.
And the fat lady hasn't begun to sing quite yet. We might yet get a tax increase without any spending cuts. Imagine, the automatic spending cuts set to kick in are $110 billion...on a GDP of $15 trillion. I will save you the math...that is less than 1%.
Note added: The cuts of $110 billion are only 1% of GDP, which is relevant when thinking about the (possible!) impact on spending and hence GDP. The cuts are a bit more than 4% of the total Federal budget, and of course more than 4% of discretionary spending. Still, to refer to the cuts as "draconian" as is customary, seems a bit of an exaggeration...especially when the Federal government is clearly living beyond its mean.
Wednesday, December 26, 2012
The optimal safety net depends on the heterogeneity of the population?
Comparisons between heterogeneous countries like the US versus Sweden or Finland have always bothered me. It seems intuitive that all kinds of public policy should optimally depend on the degree of heterogeneity in the underlying population. A more homogeneous population should be able to provide a better safety net, for example, because there will be less of an incentive problem in providing a minimum level of welfare. Here is an attempt to formalize that intuition. I suppose this has been done before. I don't have the math worked out entirely but it seems right...
Let individuals in the population be defined by a parameter a, which we will think of the individual's ability to create wealth in the market economy. (I do not presume a negative connotation here. This is a very narrow definition of ability -- the ability to create wealth in the market economy. Great artists might not have much ability by this definition!) More precisely, each individual has a function
W = W(E | a)
where W is wealth, a is an individual-specific parameter, and E is effort.
We will assume that dW/dE = a
and let a be normally distributed.
Every individual will have an increasing disutility of effort, but this is the same for everyone.
Each individual will in the market economy choose her optimal level of effort and therefore her optimal level of wealth. The optimum occurs where the marginal disutility of effort equals the marginal effect of effort on wealth, which is given by a. With marginal disutility of effort increasing, it will be the case that individuals with higher a choose higher levels of wealth. This makes sense. If an individual has the capability to create more wealth, they will choose to do so. This is the essential heterogeneity I am dealing with.
Now bring in public policy in the sense of a minimum safety net level of wealth, S, or a subsidy that would be available to anyone who has less wealth than S.
If there is no disutility associated with receiving the safety net subsidy, then a rational individual should compare the wealth less disutility they would achieve in the market economy to S and choose whatever is greater. Since individuals with higher a choose higher wealth, there will be some critical level of the ability parameter, let's denote it a*, below which it will be optimal to elect the subsidy and above which it will be optimal to engage in the market economy.
The final step is to think about how public policy sets S. There must be some value associated with equity, letting the less able achieve a minimum level of net wealth. The cost of achieving equity, however, is the loss of effort from individuals who choose the subsidy. As the base subsidy S increases, several marginal effects occur: One, the marginal value of increased equity falls, because individuals getting the subsidy are increasingly well off. Two, the marginal wealth loss increases as more-able individuals drop out of the market economy. Wealth loss has to be a negative. And third, as S increases, we move along the normal curve and experience an increasing slope of that density. This last point is critical, as it addresses the issue of heterogeneity. I assume that S is further than one standard deviation less than the mean of a. Since the inflection point of the normal is at one SD away from the mean, that means we are in the range of increasing slope. So as S increases in that range, more individuals are caught up, and more wealth is lost even if marginal ability were not increasing.
The optimal S, S*, has to balance the marginal benefits of greater equity against the marginal cost of wealth loss. Remember that with S* there is also an implied a*. Individuals with ability below a* take the subsidy; individuals above a* participate in the market economy.
Here is a picture of two normals. The tighter one represents a more homogeneous society to begin with (Finland, Sweden). The less tight one we can think of the US.
Now remember we are far to the left on these densities, where the slope is increasing in a (which is on the horizontal axis).
Here is where it starts getting a little tricky, and I will have to check the math by getting the derivative of the normal density as a function of the standard deviation.
But suppose that S* for the tighter distribution, the more homogeneous population, implies an a* right about where the density curve in the picture above ends. Then go up to the density for the less homogeneous population, the wider normal curve. Note that the slope of that curve will be greater than for the other curve -- essentially we are closer to the inflection point, where the slope reaches a maximum.
If the slope of the density for the more heterogeneous population is greater, that means that the marginal cost of increasing S is also greater, for we are picking up more of the population.
All the other marginal effects are the same, for we are at the same level of a.
A higher marginal cost of S means that the more heterogeneous population would optimally choose an S*, and an a*, less than that of the more homogeneous population.
The optimal safety net depends on the heterogeneity of the population?
Let individuals in the population be defined by a parameter a, which we will think of the individual's ability to create wealth in the market economy. (I do not presume a negative connotation here. This is a very narrow definition of ability -- the ability to create wealth in the market economy. Great artists might not have much ability by this definition!) More precisely, each individual has a function
W = W(E | a)
where W is wealth, a is an individual-specific parameter, and E is effort.
We will assume that dW/dE = a
and let a be normally distributed.
Every individual will have an increasing disutility of effort, but this is the same for everyone.
Each individual will in the market economy choose her optimal level of effort and therefore her optimal level of wealth. The optimum occurs where the marginal disutility of effort equals the marginal effect of effort on wealth, which is given by a. With marginal disutility of effort increasing, it will be the case that individuals with higher a choose higher levels of wealth. This makes sense. If an individual has the capability to create more wealth, they will choose to do so. This is the essential heterogeneity I am dealing with.
Now bring in public policy in the sense of a minimum safety net level of wealth, S, or a subsidy that would be available to anyone who has less wealth than S.
If there is no disutility associated with receiving the safety net subsidy, then a rational individual should compare the wealth less disutility they would achieve in the market economy to S and choose whatever is greater. Since individuals with higher a choose higher wealth, there will be some critical level of the ability parameter, let's denote it a*, below which it will be optimal to elect the subsidy and above which it will be optimal to engage in the market economy.
The final step is to think about how public policy sets S. There must be some value associated with equity, letting the less able achieve a minimum level of net wealth. The cost of achieving equity, however, is the loss of effort from individuals who choose the subsidy. As the base subsidy S increases, several marginal effects occur: One, the marginal value of increased equity falls, because individuals getting the subsidy are increasingly well off. Two, the marginal wealth loss increases as more-able individuals drop out of the market economy. Wealth loss has to be a negative. And third, as S increases, we move along the normal curve and experience an increasing slope of that density. This last point is critical, as it addresses the issue of heterogeneity. I assume that S is further than one standard deviation less than the mean of a. Since the inflection point of the normal is at one SD away from the mean, that means we are in the range of increasing slope. So as S increases in that range, more individuals are caught up, and more wealth is lost even if marginal ability were not increasing.
The optimal S, S*, has to balance the marginal benefits of greater equity against the marginal cost of wealth loss. Remember that with S* there is also an implied a*. Individuals with ability below a* take the subsidy; individuals above a* participate in the market economy.
Here is a picture of two normals. The tighter one represents a more homogeneous society to begin with (Finland, Sweden). The less tight one we can think of the US.
Here is where it starts getting a little tricky, and I will have to check the math by getting the derivative of the normal density as a function of the standard deviation.
But suppose that S* for the tighter distribution, the more homogeneous population, implies an a* right about where the density curve in the picture above ends. Then go up to the density for the less homogeneous population, the wider normal curve. Note that the slope of that curve will be greater than for the other curve -- essentially we are closer to the inflection point, where the slope reaches a maximum.
If the slope of the density for the more heterogeneous population is greater, that means that the marginal cost of increasing S is also greater, for we are picking up more of the population.
All the other marginal effects are the same, for we are at the same level of a.
A higher marginal cost of S means that the more heterogeneous population would optimally choose an S*, and an a*, less than that of the more homogeneous population.
The optimal safety net depends on the heterogeneity of the population?
Tuesday, December 25, 2012
Medicare Advantage auctions: Asking too much?
When I teach about auctions, I like to ask students: What does an auction accomplish, or put differently, what social roles does an auction play?
I point to two major roles: An auction determines an allocation -- who gets the good being sold, or who is chosen to produce -- and it also determines a price. Two very important things: allocation and price.
In Medicare -- a confused and confusing policy area if there ever was one!-- auctions are used in both Medicare Part D (prescription drug coverage) and Medicare Advantage (private Medicare plans).
I am concerned that some policy proposals for Medicare Advantage (MA) are asking too much from an auction, for they add a third role: determining the subsidy level for subscibers. This is a complicated issue, requiring auction theory that is at the frontier. But I think the intuition is pretty clear. Also, while I will focus on MA here, similar issues arise with Part D plans, albeit somewhat less so because of the way those rules are set.
In a nutshell, here is the way MA plans work now. Private insurers submit bids to provide health coverage for those over 65, with bids submitted on a county basis. Folks who qualify for Medicare can either take the standard government-issue Medicare or opt into one of the private MA plans. The private plans are paid by the government a subsidy amount equal to the average per person cost of that county's standard Medicare plan. If the plan bids more than that, the enrollees in that plan pay the difference between the subsidy and the bid. If a plan bids less than the subsidy, then enrollees don't pay anything but the plan has to rebate the difference to enrollees as either cash or extra benefits (I do need to verify the specifics of this, but for now I don't think it is crucial). Importantly, enrollees select which MA plan they want, so choice is a key part of the process.
So this is fine. The auctions do two things, as above. They determine which of the private plans provide service (allocation) and they determine a price (the price paid by enrollees).
Note that the subsidy is determined exogenously from the auction -- the average per person cost of standard Medicare. Granted, there might be some endogeneity here, as the cost of the local Medicare plan depends on who opts into MA plans...but that seems of second order importance.
However, some policy proposals (see Alice Rivlin, for example) will add a third role to MA auctions, that of determining the subsidy. The typical idea is to set the subsidy at the second-lowest bid of the private insurers.
The first order logic of this is great. Set the subsidy at that level, and you can be sure that at least two plans will be willing to offer coverage at that subsidy amount. Even more important, instead of having the MA subsidy set through a political process, it is set in a market mechanism. What could sound better than that?
Here is my concern, arising from the effect that setting the subsidy in the auction will have on strategic bidding behavior. (Let's be clear that strategic bidding behavior should be expected, that is, insurers will not just put bids in that equal their expected cost, even if that is what the government asks for. Insurers will put in bids that maximize their expected profit.)
The issue is that by putting in a higher bid, an insurer has a reasonable expectation that it will increase the subsidy (if the bidder happens to be the second lowest bid). This will increase the subsidy to enrollees and make it less likely that the insurer's bid will result in a net payment by the enrollees. Also, as the subsidy increases, more people will opt into the MA plan arena. Seems pretty clear to me that this will result in higher bids.
Amplification of this problem arises because is in MA plans, there is not a standard package of benefits. By adding benefits, and putting in a higher bid reflecting the higher cost of that expanded package, an insurer minimizes any competitive effect of being a high bidder in the auction while still having a reasonable expectation that the subsidy will be increased.
As all bidders do this, the entire distribution of bids shifts higher. Studies that have been done on the cost savings from basing the subsidy on the second lowest bid are obviously wrong, as that second lowest bid is going to be higher.
The idea is not that different from shifting from a second-price sealed bid auction to a first-price selaed bid auction (standard auction where something is being SOLD to bidders). It would seem that taking the highest bid as the price in an auction would clearly be better than taking the second highest. But as the rules change from second-highest to highest, we have to expect that bidders will lower their bids. I always ask students: What do you think is greater -- the second highest out of a distribution, or the first highest out of a lower distribution?
I point to two major roles: An auction determines an allocation -- who gets the good being sold, or who is chosen to produce -- and it also determines a price. Two very important things: allocation and price.
In Medicare -- a confused and confusing policy area if there ever was one!-- auctions are used in both Medicare Part D (prescription drug coverage) and Medicare Advantage (private Medicare plans).
I am concerned that some policy proposals for Medicare Advantage (MA) are asking too much from an auction, for they add a third role: determining the subsidy level for subscibers. This is a complicated issue, requiring auction theory that is at the frontier. But I think the intuition is pretty clear. Also, while I will focus on MA here, similar issues arise with Part D plans, albeit somewhat less so because of the way those rules are set.
In a nutshell, here is the way MA plans work now. Private insurers submit bids to provide health coverage for those over 65, with bids submitted on a county basis. Folks who qualify for Medicare can either take the standard government-issue Medicare or opt into one of the private MA plans. The private plans are paid by the government a subsidy amount equal to the average per person cost of that county's standard Medicare plan. If the plan bids more than that, the enrollees in that plan pay the difference between the subsidy and the bid. If a plan bids less than the subsidy, then enrollees don't pay anything but the plan has to rebate the difference to enrollees as either cash or extra benefits (I do need to verify the specifics of this, but for now I don't think it is crucial). Importantly, enrollees select which MA plan they want, so choice is a key part of the process.
So this is fine. The auctions do two things, as above. They determine which of the private plans provide service (allocation) and they determine a price (the price paid by enrollees).
Note that the subsidy is determined exogenously from the auction -- the average per person cost of standard Medicare. Granted, there might be some endogeneity here, as the cost of the local Medicare plan depends on who opts into MA plans...but that seems of second order importance.
However, some policy proposals (see Alice Rivlin, for example) will add a third role to MA auctions, that of determining the subsidy. The typical idea is to set the subsidy at the second-lowest bid of the private insurers.
The first order logic of this is great. Set the subsidy at that level, and you can be sure that at least two plans will be willing to offer coverage at that subsidy amount. Even more important, instead of having the MA subsidy set through a political process, it is set in a market mechanism. What could sound better than that?
Here is my concern, arising from the effect that setting the subsidy in the auction will have on strategic bidding behavior. (Let's be clear that strategic bidding behavior should be expected, that is, insurers will not just put bids in that equal their expected cost, even if that is what the government asks for. Insurers will put in bids that maximize their expected profit.)
The issue is that by putting in a higher bid, an insurer has a reasonable expectation that it will increase the subsidy (if the bidder happens to be the second lowest bid). This will increase the subsidy to enrollees and make it less likely that the insurer's bid will result in a net payment by the enrollees. Also, as the subsidy increases, more people will opt into the MA plan arena. Seems pretty clear to me that this will result in higher bids.
Amplification of this problem arises because is in MA plans, there is not a standard package of benefits. By adding benefits, and putting in a higher bid reflecting the higher cost of that expanded package, an insurer minimizes any competitive effect of being a high bidder in the auction while still having a reasonable expectation that the subsidy will be increased.
As all bidders do this, the entire distribution of bids shifts higher. Studies that have been done on the cost savings from basing the subsidy on the second lowest bid are obviously wrong, as that second lowest bid is going to be higher.
The idea is not that different from shifting from a second-price sealed bid auction to a first-price selaed bid auction (standard auction where something is being SOLD to bidders). It would seem that taking the highest bid as the price in an auction would clearly be better than taking the second highest. But as the rules change from second-highest to highest, we have to expect that bidders will lower their bids. I always ask students: What do you think is greater -- the second highest out of a distribution, or the first highest out of a lower distribution?
Friday, December 21, 2012
Just for the record: Federal spending
Sorry for the small font on this -- the table is from here if you want to see original. I added the last line, percent growth year on year.
Three main points to note: First, the 18% increase in total federal outlays from 2008 to 2009, on top of a 9% increase 2007 to 2008, both of which were stimulus to a great extent. Second, since then, there is only one year when nominal spending went down, by 2% from 2009 to 2010. And third, overall between 2007 and 2012, nominal Federal outlays are up 39%.
In previous posts, I noted my fear that stimulus spending would become permanent. Here is a quick graph of the outlays from 2007-12.
House Republicans Deal a Bad Hand to Democrats?
Speaker Boehner pulled his "Plan B" bill from the House Thursday evening, saying there were not enough votes to pass it. This bill would have preserved the current tax rates for those under $1 million in income, allowing tax rates to rise on those above.
Pundits are crying the end of the world, which coincidentally coincides with the predictions of the ancient Mayans.
The end of the world as we know it is not nigh. I actually give the advantage now to the forces in favor of smaller government, as in less spending and lower taxes.
Look at it this way. Any deal has to win approval of a majority in the House. My working assumption is that the Republicans will hold together (but see the * endnote below). Thus, any deal needs approval of almost all Republicans. Think of the Republicans as being lined up on a continuum, from very conservative (lower taxes, lower spending) to more moderate (willing to accept higher taxes, higher spending). Boehner's failure defines the conservative side of the spectrum in regard to the minimum deal it is willing to accept and the risks it is willing to endure. With this clarity, the center of gravity in the Republican continuum has shifted to the conservative side.
Suppose I was negotiating with two people, one very demanding and one less so. The more demanding person just committed himself to blowing his head off if he doesn't get his way. I would say that the center of gravity shifted to the very demanding side of the spectrum.
The conservative Republicans are willing to risk going over the cliff, and I think they are correct in accepting that risk. My belief is that "the cliff" is not anything like truly going over a cliff. There will be some unfortunate consequences, especially in regard to the Alternative Minimum Tax and Medicare rates for doctors (the media are not focusing on the Medicare implications, but the so-called Doc Fix needs to be voted this year or Medicare payments to docs will fall). Taxes will go up, which to be honest I don't see as a disaster either.
If I am right in that the cliff is not a disaster, the Democrats lose much of their negotiating power in the new year. That power right now is fueled by media-supported claims of economic apocalypse. If Jan. 1 comes with no deal, and life goes on, how does the Democrat position look? There will be some cries of pain, yes, but blame will be equally spread -- and if there is any justice, most folks will blame the leader, ie., President Obama, for failing to negotiate a deal. Thus, in the new year, the balance of power shifts to the conservative side, with a better prospect of getting more spending cuts and a better mix on the revenue side.
*Endnote. It is possible that the Republicans will not hold together in the House. If Obama and Reid craft a deal in the Senate, could that attract all the Democrats in the House and just enough Republicans to pass? Possible, but unlikely...unless the deal is attractive enough on the "less spending and taxes" dimension.
Pundits are crying the end of the world, which coincidentally coincides with the predictions of the ancient Mayans.
The end of the world as we know it is not nigh. I actually give the advantage now to the forces in favor of smaller government, as in less spending and lower taxes.
Look at it this way. Any deal has to win approval of a majority in the House. My working assumption is that the Republicans will hold together (but see the * endnote below). Thus, any deal needs approval of almost all Republicans. Think of the Republicans as being lined up on a continuum, from very conservative (lower taxes, lower spending) to more moderate (willing to accept higher taxes, higher spending). Boehner's failure defines the conservative side of the spectrum in regard to the minimum deal it is willing to accept and the risks it is willing to endure. With this clarity, the center of gravity in the Republican continuum has shifted to the conservative side.
Suppose I was negotiating with two people, one very demanding and one less so. The more demanding person just committed himself to blowing his head off if he doesn't get his way. I would say that the center of gravity shifted to the very demanding side of the spectrum.
The conservative Republicans are willing to risk going over the cliff, and I think they are correct in accepting that risk. My belief is that "the cliff" is not anything like truly going over a cliff. There will be some unfortunate consequences, especially in regard to the Alternative Minimum Tax and Medicare rates for doctors (the media are not focusing on the Medicare implications, but the so-called Doc Fix needs to be voted this year or Medicare payments to docs will fall). Taxes will go up, which to be honest I don't see as a disaster either.
*Endnote. It is possible that the Republicans will not hold together in the House. If Obama and Reid craft a deal in the Senate, could that attract all the Democrats in the House and just enough Republicans to pass? Possible, but unlikely...unless the deal is attractive enough on the "less spending and taxes" dimension.
Sunday, November 18, 2012
More Competition for Hospitals
Here is a great development that shines a bright light on the issue of competition in health care: The Surgery Center of Oklahoma. An article by Jim Epstein in Reason alerted me to this.
In a nutshell, the (for-profit) Surgery Center was started by a group of surgeons to provide an alternative to surgery within hospitals. They have a focus on transparent, all-inclusive prices for various surgeries, from knee repair to hernias and even bunion removal. You can see their prices right on the website -- an adenoidectomy for instance costs $2695, all-in.
The Center appeals to a variety of patients, in particular those with high deductible plans and to self-insuring employers, who can direct their employees to the Center and thereby save money.
Oklahoma, it turns out, did away with their Certificate of Need law, making it easy for such a business to enter the market (funny that the common abbreviation for Certificate of Need is CON).
So, here are a few questions to ponder:
Are businesses like the Surgery Center cost-increasing or decreasing? Is this just more surgeons looking for business, so that by the phenomenon of supplier-induced demand we will just end up with even more surgeries (that don't really need to be done)?
Isn't this just adding more costs to our health care system --look at the nice building they have, and think of all the equipment inside?
Aren't centers like this just cherry picking the paying patients, leaving the uninsured to be treated at hospitals?
Won't this mean that existing hospitals in Oklahoma will have to raise their prices, since they have to continue to exist and they still have to cover the uninsured?
How far can the "unbundling" of hospitals go? How strong are the economies of scope for hospitals?
Do CON laws prevent competition from raising costs of health care or do they stifle cost-reducing innovations?
In a nutshell, the (for-profit) Surgery Center was started by a group of surgeons to provide an alternative to surgery within hospitals. They have a focus on transparent, all-inclusive prices for various surgeries, from knee repair to hernias and even bunion removal. You can see their prices right on the website -- an adenoidectomy for instance costs $2695, all-in.
The Center appeals to a variety of patients, in particular those with high deductible plans and to self-insuring employers, who can direct their employees to the Center and thereby save money.
Oklahoma, it turns out, did away with their Certificate of Need law, making it easy for such a business to enter the market (funny that the common abbreviation for Certificate of Need is CON).
So, here are a few questions to ponder:
Are businesses like the Surgery Center cost-increasing or decreasing? Is this just more surgeons looking for business, so that by the phenomenon of supplier-induced demand we will just end up with even more surgeries (that don't really need to be done)?
Isn't this just adding more costs to our health care system --look at the nice building they have, and think of all the equipment inside?
Aren't centers like this just cherry picking the paying patients, leaving the uninsured to be treated at hospitals?
Won't this mean that existing hospitals in Oklahoma will have to raise their prices, since they have to continue to exist and they still have to cover the uninsured?
How far can the "unbundling" of hospitals go? How strong are the economies of scope for hospitals?
Do CON laws prevent competition from raising costs of health care or do they stifle cost-reducing innovations?
Wednesday, October 31, 2012
Competition in Health Care: Medicare Part D
As part of my ongoing project to chronicle the working of competition in health care, I note this latest article in the American Economic Review.
Medicare Part D is the prescription drug coverage program for senior citizens in the US. Those eligible choose a plan from competing (yes, competing!) insurers.
Here is the abstract of the article and a paragraph from the conclusion. I will emphasize this one sentence in particular: "Our results add to the accumulating evidence that Part D represents a successful implementation of a market-based approach to deliver a large-scale entitlement program..."
Medicare Part D is the prescription drug coverage program for senior citizens in the US. Those eligible choose a plan from competing (yes, competing!) insurers.
Here is the abstract of the article and a paragraph from the conclusion. I will emphasize this one sentence in particular: "Our results add to the accumulating evidence that Part D represents a successful implementation of a market-based approach to deliver a large-scale entitlement program..."
Selection in GM's Pension Buyout?
General Motors has offered about 42,000 of its white collar employees a lump sum buyout from their pension plans. The employees were offered either to keep the monthly pension payment they were entitled to or a lump sum, with the lump sum being set at an actuarially fair level: present value of the stream of benefits, using a unisex life expectancy. The latter is required by law.
Just this week, GM reported that about 1/3 of the eligible folks opted for the lump sum. See this Chicago Tribune article for details.
Now, wouldn't it be neat to see the gender breakdown of those taking the lumpsum as compared to the gender mix in the eligible pool? Since women live longer than men on average, and the lumpsum had to be set using average life expectancy across men and women, women should take the pension stream and men should take the lump sum (ceteris paribus, of course).
Just this week, GM reported that about 1/3 of the eligible folks opted for the lump sum. See this Chicago Tribune article for details.
Now, wouldn't it be neat to see the gender breakdown of those taking the lumpsum as compared to the gender mix in the eligible pool? Since women live longer than men on average, and the lumpsum had to be set using average life expectancy across men and women, women should take the pension stream and men should take the lump sum (ceteris paribus, of course).
Saturday, September 22, 2012
Interesting Experiments in Health Plans
One of my colleagues proposed some time ago that health insurance should be more like true indemnity insurance, wherein you just get a lump sum of cash if you have a health care need. The idea is that the patient would then shop around for the best care -- best defined by the patient's weighting of cost and quality. Broken leg -- that might yield $5,000. Of course, there are myriad issues here: a new kind of moral hazard; monitoring the quality of care providers chosen by patients; the difficulty in determining a reasonable payment for complex cases; contingency payments for unexpected complications, etc.
Now it turns out that such experiments are going on. The most recent issue of Health Affairs includes this article, "Payers Test Reference Pricing and Centers of Excellence to Steer Patients to Low-Price and High-Quality Providers," by Robinson and Macpherson. Calpers, the California public employees system, pays $30,000 to insureds for a knee or hip replacement, with any excess over that the responsibility of the patient. Safeway, the grocery company, pays $1500 for a colonoscopy, after they observed almost 10-fold variation in colonoscopy prices.
Many pharmaceutical plans already use this reference pricing concept for drugs, giving a patient only the amount that a "reference"drug would cost.
The potential for savings here is quite large. As I pointed out in a class the other day, there are static and dynamic effects. The static effect is the one-time cost savings by having patients choose a lower cost provider. The dynamic effect arises when the entity losing business realizes that and lowers price, or when a supplier sees that their demand is now more elastic, and by offering lower prices they can attract business from new patients.
But note the free-rider problem inherent in this: Safeway's innovation will create lower prices for all buyers, to the extent that the dynamic effect of competition kicks in. Safeway pays all the cost of the innovation but accrues only part of the benefit.
Now it turns out that such experiments are going on. The most recent issue of Health Affairs includes this article, "Payers Test Reference Pricing and Centers of Excellence to Steer Patients to Low-Price and High-Quality Providers," by Robinson and Macpherson. Calpers, the California public employees system, pays $30,000 to insureds for a knee or hip replacement, with any excess over that the responsibility of the patient. Safeway, the grocery company, pays $1500 for a colonoscopy, after they observed almost 10-fold variation in colonoscopy prices.
Many pharmaceutical plans already use this reference pricing concept for drugs, giving a patient only the amount that a "reference"drug would cost.
The potential for savings here is quite large. As I pointed out in a class the other day, there are static and dynamic effects. The static effect is the one-time cost savings by having patients choose a lower cost provider. The dynamic effect arises when the entity losing business realizes that and lowers price, or when a supplier sees that their demand is now more elastic, and by offering lower prices they can attract business from new patients.
But note the free-rider problem inherent in this: Safeway's innovation will create lower prices for all buyers, to the extent that the dynamic effect of competition kicks in. Safeway pays all the cost of the innovation but accrues only part of the benefit.
Saturday, August 18, 2012
Setting Voucher Levels or Setting Supplier Reimbursement Rates?
One issue in the Medicare debate that I have not seen anyone address concerns the political economy of setting voucher levels versus setting supplier reimbursement rates.
The Ryan plan would set a level of "premium support"-- think of it as a voucher -- which seniors would use to buy their health plan. While the Ryan plan might have in mind a path for the voucher amount each year in the future, the actual level is of course going to be up to the Congress at the time.
Current Medicare sets thousands of individual prices at which hospitals and docs are reimbursed -- the notorious fee-for-service regime. Each year, at least ostensibly, the Federal government, through the Centers for Medicaid and Medicare Services, determines all these prices. Under ACA, it is true, there is some incentive to move away from fee for service to bundled payments -- payment for treating a disease condition over a period of time -- or even to capitation, whereby an entity such as an Accountable Care Organization will be paid for maintaining the health of a whole population. Even in these cases, there will still be a lot of individual prices being determined. Fee for service is not going to entirely disappear.
In order to say which regime will be less generous to Medicare beneficiaries, it is necessary to address the political economy of setting the different prices. Will the political process really be able to hold the voucher level below the average cost of a senior buying a reasonable health plan on the open market? How does the political process deal with the setting of individual doctors' reimbursement rates?
I won't pretend to have done a full analysis of this. But I think the visibility of the voucher and its sufficiency will be a key issue, and those who say that the voucher will be set at too-low levels need to think twice. Seniors are a powerful political lobby. Meanwhile on the other side, there is the invisibility of all the individual suppliers' prices, and the power of the American Medical Association. The so-called "doc fix" where a previous cut in doctors' reimbursement rates has been put off year after year suggests the nature of the problems in setting individual payment rates.
The issue reminds me of Stigler's paper "The Theory of Oligopoly." Is it more conducive to collusion to having many small buyers or a few large buyers? Stigler argued many small buyers is more conducive to collusion, as a seller will not risk defecting from a collusive agreement for just a small increase in sales: "It follows that oligopolistic collusion will often be effective against small buyers even when it is ineffective against large buyers."
The Ryan plan would set a level of "premium support"-- think of it as a voucher -- which seniors would use to buy their health plan. While the Ryan plan might have in mind a path for the voucher amount each year in the future, the actual level is of course going to be up to the Congress at the time.
Current Medicare sets thousands of individual prices at which hospitals and docs are reimbursed -- the notorious fee-for-service regime. Each year, at least ostensibly, the Federal government, through the Centers for Medicaid and Medicare Services, determines all these prices. Under ACA, it is true, there is some incentive to move away from fee for service to bundled payments -- payment for treating a disease condition over a period of time -- or even to capitation, whereby an entity such as an Accountable Care Organization will be paid for maintaining the health of a whole population. Even in these cases, there will still be a lot of individual prices being determined. Fee for service is not going to entirely disappear.
In order to say which regime will be less generous to Medicare beneficiaries, it is necessary to address the political economy of setting the different prices. Will the political process really be able to hold the voucher level below the average cost of a senior buying a reasonable health plan on the open market? How does the political process deal with the setting of individual doctors' reimbursement rates?
I won't pretend to have done a full analysis of this. But I think the visibility of the voucher and its sufficiency will be a key issue, and those who say that the voucher will be set at too-low levels need to think twice. Seniors are a powerful political lobby. Meanwhile on the other side, there is the invisibility of all the individual suppliers' prices, and the power of the American Medical Association. The so-called "doc fix" where a previous cut in doctors' reimbursement rates has been put off year after year suggests the nature of the problems in setting individual payment rates.
The issue reminds me of Stigler's paper "The Theory of Oligopoly." Is it more conducive to collusion to having many small buyers or a few large buyers? Stigler argued many small buyers is more conducive to collusion, as a seller will not risk defecting from a collusive agreement for just a small increase in sales: "It follows that oligopolistic collusion will often be effective against small buyers even when it is ineffective against large buyers."
Some Honesty in the Medicare Debate, Finally
In the Washington Post, Ezra Klein has an interview of Rep. Chris van Hollen, who sits with Rep. Paul Ryan on the House Budget Committee. The interview is here. Klein does an admirable job of keeping the discussion on an even rational basis.
As one example, many opponents of the Ryan "premium support plan" claim that it cuts Medicare benefits, while the Affordable Care Act did not cut benefits. See for instance Eugene Robinson in the WaPo who says this:
"The Affordable Care Act, otherwise known as Obamacare, slows the rate of growth of payments to Medicare service providers by more than $700 billion over a decade. But no impact is felt by seniors themselves, whose benefits and costs remain the same."
Sarah Kliff, in an otherwise very informative post, makes a statement that is very similar:
"It’s worth noting that there’s one area these cuts don’t touch: Medicare benefits. The Affordable Care Act rolls back payment rates for hospitals and insurers. It does not, however, change the basket of benefits that patients have access to."
Now current Medicare does not pay anything directly to beneficiaries; the beneficiaries visit hospitals and doctors, who are paid directly by Medicare. ACA does cut payments to doctors, hospitals, and some private insurers, and Kliff's otherwise fine post details quite well what those cuts are (they are very complex). To say that ACA's cuts to doctors, hospitals, and private insurance companies (who provide supplemental Medicare insurance) are not cuts to benefits is really semantics. Taken to an extreme, ACA could have cut doctors' reimbursement rates to Medicaid rates (extremely low, that is) and the ACA sympathizers would still be saying "but we didn't cut any benefits."
Getting back to the Klein interview of Rep. van Hollen, there is this exchange. I like Klein's question more than van Hollen's answer, which doesn't really address the question (though he does have a valid point on what ACA attempts to do).
As one example, many opponents of the Ryan "premium support plan" claim that it cuts Medicare benefits, while the Affordable Care Act did not cut benefits. See for instance Eugene Robinson in the WaPo who says this:
"The Affordable Care Act, otherwise known as Obamacare, slows the rate of growth of payments to Medicare service providers by more than $700 billion over a decade. But no impact is felt by seniors themselves, whose benefits and costs remain the same."
Sarah Kliff, in an otherwise very informative post, makes a statement that is very similar:
"It’s worth noting that there’s one area these cuts don’t touch: Medicare benefits. The Affordable Care Act rolls back payment rates for hospitals and insurers. It does not, however, change the basket of benefits that patients have access to."
Now current Medicare does not pay anything directly to beneficiaries; the beneficiaries visit hospitals and doctors, who are paid directly by Medicare. ACA does cut payments to doctors, hospitals, and some private insurers, and Kliff's otherwise fine post details quite well what those cuts are (they are very complex). To say that ACA's cuts to doctors, hospitals, and private insurance companies (who provide supplemental Medicare insurance) are not cuts to benefits is really semantics. Taken to an extreme, ACA could have cut doctors' reimbursement rates to Medicaid rates (extremely low, that is) and the ACA sympathizers would still be saying "but we didn't cut any benefits."
Getting back to the Klein interview of Rep. van Hollen, there is this exchange. I like Klein's question more than van Hollen's answer, which doesn't really address the question (though he does have a valid point on what ACA attempts to do).
EK: Until now, I think that insofar as folks knew anything about the Medicare debate, they probably thought that Republicans had a plan to cut Medicare spending, but it was a bit cruel, and Democrats were completely unwilling to touch Medicare spending at all. I think we’re starting to get closer to the truth here, which is that both parties have very different visions for how to cut Medicare spending. But one thing the Democrats like to say is that they’re just cutting providers, not beneficiaries. But providers often pass their costs along to beneficiaries, either by making them pay more or giving them worse service. So how real is that distinction?
CVH: Obviously, if you were just to do across-the-board, arbitrary cuts, that would be the case, but the whole idea behind Obamacare is to change the incentive structure behind Medicare so the payments to providers focus on the value of care rather than the volume of care.So, for example, before the Affordable Care Act was passed, hospitals would get reimbursed every time a patient was readmitted to a hospital even if they were readmitted continuously for the same underlying condition. Hospitals had no financial incentive to coordinate the care of the condition once the beneficiary left the hospital. We’re now changing the model so hospitals don’t get reimbursed every time the patient gets readmitted. Now they’ll get readmitted for managing that underlying condition. There’s also a major initiative underway to better coordinate care for dual-eligibles, people both on Medicare and Medicaid, who are a small portion of the population but a very high percentage of the costs. There are lots of misaligned incentives between the Medicare and the Medicaid program, and we’re working on them.
Sunday, August 12, 2012
Employment Effects of Medicaid Expansion
In thinking about the effects of ACA on employment, I have neglected the effect of the Medicaid expansion.
Overall there are a multitude of effects of ACA on the supply and demand for labor (that framework of course being my model of choice for the analysis). On the demand side, we should expect that the employer mandate in the ACA -- provide acceptable insurance or pay a fee -- should decrease the demand for labor. Offsetting this negative effect on demand is an increase in the supply of labor, reflecting the value that employees get from the mandated coverage. As a first approximation, these two effects would perfectly cancel out, causing the money wage to fall and employment overall stay constant, but that is only a first approximation. It should be expected that the value of the insurance to the employee is less than the cost to the employer, as many employers are observed to not offer insurance. Also, there is the small problem that with very low wage employees, the money wage cannot fall so with demand being the binding constraint employment will fall.
A confounding effect here is caused by the subsidies offered to employees who buy insurance on state exchanges -- in some cases, the subsidy will be worth more to the employee than the fine that the employer will have to pay if their employees avail themselves of a subsidy (there are tax effects here too that I will ignore for now).
These are the effects that most analysts seem to take into account when looking at the effects of ACA on employer-sponsored insurance, see for this Urban Institute article or this article by Holz-Eakin and Smith.
But for the effect of ACA on employment, one more variable is important, and that is the expansion of Medicaid coverage. Right now, of course, Medicaid coverage in many states is quite meager, with able-bodied adults often if not typically ineligible. With the new Medicaid coverage, adults will be covered by Medicaid if income is below 133% of the Federal poverty level. In comparing the decision to be unemployed pre-ACA, the cost of health insurance (or the cost of not having it) would have loomed large. Post-ACA, the difference between the cost of insurance if unemployed is zero (Medicaid coverage) as it is if employed (subsidized or employer sponsored). This seems like it would be a rather large impact on the supply of labor -- reducing it, as one of the major costs of being unemployed has fallen dramatically.
Overall there are a multitude of effects of ACA on the supply and demand for labor (that framework of course being my model of choice for the analysis). On the demand side, we should expect that the employer mandate in the ACA -- provide acceptable insurance or pay a fee -- should decrease the demand for labor. Offsetting this negative effect on demand is an increase in the supply of labor, reflecting the value that employees get from the mandated coverage. As a first approximation, these two effects would perfectly cancel out, causing the money wage to fall and employment overall stay constant, but that is only a first approximation. It should be expected that the value of the insurance to the employee is less than the cost to the employer, as many employers are observed to not offer insurance. Also, there is the small problem that with very low wage employees, the money wage cannot fall so with demand being the binding constraint employment will fall.
A confounding effect here is caused by the subsidies offered to employees who buy insurance on state exchanges -- in some cases, the subsidy will be worth more to the employee than the fine that the employer will have to pay if their employees avail themselves of a subsidy (there are tax effects here too that I will ignore for now).
These are the effects that most analysts seem to take into account when looking at the effects of ACA on employer-sponsored insurance, see for this Urban Institute article or this article by Holz-Eakin and Smith.
But for the effect of ACA on employment, one more variable is important, and that is the expansion of Medicaid coverage. Right now, of course, Medicaid coverage in many states is quite meager, with able-bodied adults often if not typically ineligible. With the new Medicaid coverage, adults will be covered by Medicaid if income is below 133% of the Federal poverty level. In comparing the decision to be unemployed pre-ACA, the cost of health insurance (or the cost of not having it) would have loomed large. Post-ACA, the difference between the cost of insurance if unemployed is zero (Medicaid coverage) as it is if employed (subsidized or employer sponsored). This seems like it would be a rather large impact on the supply of labor -- reducing it, as one of the major costs of being unemployed has fallen dramatically.
Friday, June 29, 2012
More on Taxes vs. Penalties in ACA
I do have to say that my post below was pretty much on target, although I really did not think that the decision would be made on the basis of whether the mandate can be interpreted as a tax.
On the whole, I am not disappointed with the Supreme Court decision. I think that Roberts and his majority colleagues did what I would want them to do and what they should do: Not look for way to find that the ACA is unconstitutional, but look to see if there is a way to rule it constitutional. Innocent until proven guilty. Roberts says this in a different way, when he discusses the point that if a law can be read in more than one way, the Court needs to read it in the most constitutionally favorable way. The Commerce Clause limitations were even strengthened, and the idea that laws like this have to be recognized as taxes will make the political process more transparent.
The ACA is also not a terrible base from which to build, if certain things were to be modified. I would really like to see us sever health insurance from employment, and while the ACA does provide a platform for that to happen -- the exchanges, and the beginning of taxation of health benefits -- it does not go nearly far enough.
But there is one more ethical question, related to my Apr. 4 post below. Roberts actually created a third option in addition to the two that I had: Scheme C: A mandate to buy insurance, with a tax penalty to be paid if the mandate is not followed. However, "...the mandate is not a legal command...(p.32, Opinion) and "...if someone chooses to pay rather than obtain health insurance, they have fully complied with the law...(p.37) Is there an ethical difference between Scheme C and Scheme A, the mandate and penalty? Seems pretty clear to me that there is. According to Roberts, I can skip insurance simply pay the fine, and feel no qualms about doing so. I don't have "..all the attendant consequences of being branded a criminal..."
I do worry that we are creating a precedent here, by creating a law with the word "shall" in it, and then saying that you can break that law and simply pay the penalty and be off the hook, including according to Roberts avoiding any "social stigma." So when the government says I shall do other things, such as parking in no parking zones, can I just pay the fine and be off the hook, legally and socially?
On the whole, I am not disappointed with the Supreme Court decision. I think that Roberts and his majority colleagues did what I would want them to do and what they should do: Not look for way to find that the ACA is unconstitutional, but look to see if there is a way to rule it constitutional. Innocent until proven guilty. Roberts says this in a different way, when he discusses the point that if a law can be read in more than one way, the Court needs to read it in the most constitutionally favorable way. The Commerce Clause limitations were even strengthened, and the idea that laws like this have to be recognized as taxes will make the political process more transparent.
The ACA is also not a terrible base from which to build, if certain things were to be modified. I would really like to see us sever health insurance from employment, and while the ACA does provide a platform for that to happen -- the exchanges, and the beginning of taxation of health benefits -- it does not go nearly far enough.
But there is one more ethical question, related to my Apr. 4 post below. Roberts actually created a third option in addition to the two that I had: Scheme C: A mandate to buy insurance, with a tax penalty to be paid if the mandate is not followed. However, "...the mandate is not a legal command...(p.32, Opinion) and "...if someone chooses to pay rather than obtain health insurance, they have fully complied with the law...(p.37) Is there an ethical difference between Scheme C and Scheme A, the mandate and penalty? Seems pretty clear to me that there is. According to Roberts, I can skip insurance simply pay the fine, and feel no qualms about doing so. I don't have "..all the attendant consequences of being branded a criminal..."
I do worry that we are creating a precedent here, by creating a law with the word "shall" in it, and then saying that you can break that law and simply pay the penalty and be off the hook, including according to Roberts avoiding any "social stigma." So when the government says I shall do other things, such as parking in no parking zones, can I just pay the fine and be off the hook, legally and socially?
Subscribe to:
Posts (Atom)