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?
Sunday, November 18, 2012
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?
Wednesday, April 04, 2012
Ethics of "Mandate+Penalty" vs. "Tax+Credit"
In regard to the debate on the individual mandate, some people have mentioned that the mandate+penalty scheme is equivalent to a scheme of levying a "health care responsibility tax" on everyone, and giving a tax credit for those who buy an acceptable insurance plan. See, for eg., Ezra Klein, Ed Kilgore and Justice Sotomayor:
"JUSTICE SOTOMAYOR: Could we have an exemption? Could the government say, everybody pays a shared health care responsibility payment to offset all the money that we are forced to spend on health care, we the government; but, anybody who has an insurance policy is exempt from that tax? Could the government do that?"
So here is my question. Is there an ethical difference between these two economically equivalent options:
Scheme A: A legal requirement for everyone to buy an insurance policy, with a penalty of $1000 for failure to do so.
Scheme B: A health care responsibility tax on everyone of $1000, with a tax credit of $1000 for anyone buying an insurance policy.
"JUSTICE SOTOMAYOR: Could we have an exemption? Could the government say, everybody pays a shared health care responsibility payment to offset all the money that we are forced to spend on health care, we the government; but, anybody who has an insurance policy is exempt from that tax? Could the government do that?"
So here is my question. Is there an ethical difference between these two economically equivalent options:
Scheme A: A legal requirement for everyone to buy an insurance policy, with a penalty of $1000 for failure to do so.
Scheme B: A health care responsibility tax on everyone of $1000, with a tax credit of $1000 for anyone buying an insurance policy.
Saturday, March 31, 2012
A Taxing Question on HSAs
Health Savings Accounts, or HSAs, are tax-advantaged savings accounts that are paired with a high deductible health plan (HDHP).
The idea is to take on a HDHP and put enough money into a MSA, so as to have money to pay for both expected and unexpected health care expenses.
Contributions to HSAs can be done via pretax earnings, thereby saving or at worst delaying the tax that otherwise would be paid (if withdrawn for nonmedical use after age 65, the non-earnings part of the distribution would be taxable). Earnings on contributions accumulate taxfree, even if withdrawn for nonmedical use after age 65.
So here is the question. Suppose someone is in an HDHP and puts the maximum amount, $3100, into their account. At the end of the year, they see that they have incurred $1000 of health care expenses, and begin to prepare a withdrawal from the HSA to repay themselves.
But...those funds in the HSA are earning taxfree returns. Suppose the individual has maxed out on all other tax-advantaged investment opportunities, such as their IRA.
Then why take any funds out of the HSA? The person should really just eat the health care expenses out of regular savings or income. Leave that HSA alone and let it accumulate taxfree!
The question then is: One might have thought ex ante that, with the HSA, the marginal cost of health care expenses would be lower by the marginal tax rate, that is, if the marginal tax rate is 30%, then the real cost of health care expenses will only be 70 cents per dollar incurred. But if one is behaving optimally, it seems that one should just put the maximum contribution into the HSA and leave it there for retirement...or for general living expenses, health care included, if any kind of cash flow situation develops.
So the cost of health care seems to be dollar for dollar, at the margin, just like for any other consumption. The fact that the HSA is funded with pretax dollars is just a gift from the government in general; it is not a means for lowering the marginal cost of health care.
This is different from Medical Reimbursement Accounts, which are funded with pretax dollars but cannot roll from year to year and do not earn returns. With MRAs, the money has to be spent on health care, and they do lower the marginal cost to the consumer of health care only.
Is this right? Will consumers see this pricing difference and behave differently with HSAs than MRAs -- purchasing less health care? My bet is yes: Come the end of the year, and people start thinking about withdrawing from their HSA to pay for health care, some of them will realize they are better just leaving the money there. Others will have used their HSA on a pay-as-you-go basis, since they come with a debit card sometimes. These people will be foregoing a very nice way to save tax free for retirement. Of course, many people are not currently maximizing their opportunities to save taxfree for a variety of reasons.
The idea is to take on a HDHP and put enough money into a MSA, so as to have money to pay for both expected and unexpected health care expenses.
Contributions to HSAs can be done via pretax earnings, thereby saving or at worst delaying the tax that otherwise would be paid (if withdrawn for nonmedical use after age 65, the non-earnings part of the distribution would be taxable). Earnings on contributions accumulate taxfree, even if withdrawn for nonmedical use after age 65.
So here is the question. Suppose someone is in an HDHP and puts the maximum amount, $3100, into their account. At the end of the year, they see that they have incurred $1000 of health care expenses, and begin to prepare a withdrawal from the HSA to repay themselves.
But...those funds in the HSA are earning taxfree returns. Suppose the individual has maxed out on all other tax-advantaged investment opportunities, such as their IRA.
Then why take any funds out of the HSA? The person should really just eat the health care expenses out of regular savings or income. Leave that HSA alone and let it accumulate taxfree!
The question then is: One might have thought ex ante that, with the HSA, the marginal cost of health care expenses would be lower by the marginal tax rate, that is, if the marginal tax rate is 30%, then the real cost of health care expenses will only be 70 cents per dollar incurred. But if one is behaving optimally, it seems that one should just put the maximum contribution into the HSA and leave it there for retirement...or for general living expenses, health care included, if any kind of cash flow situation develops.
So the cost of health care seems to be dollar for dollar, at the margin, just like for any other consumption. The fact that the HSA is funded with pretax dollars is just a gift from the government in general; it is not a means for lowering the marginal cost of health care.
This is different from Medical Reimbursement Accounts, which are funded with pretax dollars but cannot roll from year to year and do not earn returns. With MRAs, the money has to be spent on health care, and they do lower the marginal cost to the consumer of health care only.
Is this right? Will consumers see this pricing difference and behave differently with HSAs than MRAs -- purchasing less health care? My bet is yes: Come the end of the year, and people start thinking about withdrawing from their HSA to pay for health care, some of them will realize they are better just leaving the money there. Others will have used their HSA on a pay-as-you-go basis, since they come with a debit card sometimes. These people will be foregoing a very nice way to save tax free for retirement. Of course, many people are not currently maximizing their opportunities to save taxfree for a variety of reasons.
Tuesday, March 13, 2012
Is this the market working?
Here is a very interesting WSJ article involving customer claims to their money from the failure of MFGlobal.
Recall the basic situation: customers who held funds in accounts at MFGlobal have not been fully paid, and the money as of yet has not been located. It appears that in the flurry of MFGlobal's plunge into bankruptcy, those sacrosanct customer funds were mis-appropriated...but nothing has been proved yet.
Now comes a couple banks, Barclay's and Royal Bank of Scotland, offering to pay US customers of MFGlobal 91 cents on the dollar in return for the customer's claim against MF. Not too bad...those customers as of now have received 72 cents on the dollar from the bankruptcy process.
Why would the banks do this? Well, they or the investors on the other side think that 91 cents is a good price for the claim.
I wonder if there is a chance that the owner of the claim could get more than 100% -- maybe due to penalties.
My colleague Randall Thomas and I once wrote a paper where we discussed the sale of claims arising from class action lawsuits to the highest bidder. The advantage here, as with the MFGlobal situation, is that you will get a concentration of economic incentives to litigate the case efficiently.
Fascinating how markets work.
Recall the basic situation: customers who held funds in accounts at MFGlobal have not been fully paid, and the money as of yet has not been located. It appears that in the flurry of MFGlobal's plunge into bankruptcy, those sacrosanct customer funds were mis-appropriated...but nothing has been proved yet.
Now comes a couple banks, Barclay's and Royal Bank of Scotland, offering to pay US customers of MFGlobal 91 cents on the dollar in return for the customer's claim against MF. Not too bad...those customers as of now have received 72 cents on the dollar from the bankruptcy process.
Why would the banks do this? Well, they or the investors on the other side think that 91 cents is a good price for the claim.
I wonder if there is a chance that the owner of the claim could get more than 100% -- maybe due to penalties.
My colleague Randall Thomas and I once wrote a paper where we discussed the sale of claims arising from class action lawsuits to the highest bidder. The advantage here, as with the MFGlobal situation, is that you will get a concentration of economic incentives to litigate the case efficiently.
Fascinating how markets work.
Saturday, March 10, 2012
Is this insider trading?
A while back, my colleague John R. Lott Jr. and I wrote two papers around the same general topic, on the effect that one firm has on another firm through competitive actions and the implications for stock market prices.
For instance, we discussed what might happen if Firm A were to announce a decision to entry into Firm B's market. Without perfectly competitive markets, it should be expected that Firm A's decision would cause Firm B's market value to fall.
Knowing this, would it be profitable/feasible/legal for Firm A to trade in the securities of Firm B before making their announcement?
We looked into the legal aspects of this and concluded that it did not appear illegal, so long as the announcement were not fraudulent. Legality at least on insider trading grounds hinges on the managers of Firm A not having a fiduciary responsibility to Firm B. Of course, Firm A might restrict its employees from such trading (not sure why they would, but they could). But Firm A could instruct its pension fund, for instance, to short Firm B before the entry announcement.
We had trouble finding current examples of such behavior. Too bad, or the article would have gotten into an even better journal.
But now we have this Reuters article about Starbucks and Green Mountain Coffee. Quoting from the article:
For instance, we discussed what might happen if Firm A were to announce a decision to entry into Firm B's market. Without perfectly competitive markets, it should be expected that Firm A's decision would cause Firm B's market value to fall.
Knowing this, would it be profitable/feasible/legal for Firm A to trade in the securities of Firm B before making their announcement?
We looked into the legal aspects of this and concluded that it did not appear illegal, so long as the announcement were not fraudulent. Legality at least on insider trading grounds hinges on the managers of Firm A not having a fiduciary responsibility to Firm B. Of course, Firm A might restrict its employees from such trading (not sure why they would, but they could). But Firm A could instruct its pension fund, for instance, to short Firm B before the entry announcement.
We had trouble finding current examples of such behavior. Too bad, or the article would have gotten into an even better journal.
But now we have this Reuters article about Starbucks and Green Mountain Coffee. Quoting from the article:
A heavy burst of bearish option action in Green Mountain Coffee Roasters Inc in the hours before Starbucks announced plans to launch a single-cup coffee and espresso brewer has raised eyebrows among some option market participants.
"The level of aggressiveness that traders early on Thursday came for Green Mountain March downside puts was very suspicious," said Alan Thompson, options market maker at Timber Hill, a division of Interactive Brokers Group. "It raised our eyebrows."
"We expect that the regulators will take a deeper look at both Starbucks and Green Mountain ahead of (Thursday) night's announcement," Najarian said.
The U.S. Securities and Exchange Commission, which looks into unusual stock and options activity, declined to comment.
Post on Certificates of Need in Hospital Industry
I wrote a post last week for US News & World Report on the issue of certificates of need for new hospitals. It is available here.
In New Hampshire, a new specialty hospital, Cancer Treatment Centers of America, wants to bypass the usual Certificate of Need process. That has raised interesting questions on the role of competition in health care.
If anyone wants to read an academic paper on the topic, a very recent one is
Cutler, David M., Robert S. Huckman, and Jonathan T. Kolstad. 2010. "Input Constraints and the Efficiency of Entry: Lessons from Cardiac Surgery." American Economic Journal: Economic Policy, 2(1): 51–76.
In New Hampshire, a new specialty hospital, Cancer Treatment Centers of America, wants to bypass the usual Certificate of Need process. That has raised interesting questions on the role of competition in health care.
If anyone wants to read an academic paper on the topic, a very recent one is
Cutler, David M., Robert S. Huckman, and Jonathan T. Kolstad. 2010. "Input Constraints and the Efficiency of Entry: Lessons from Cardiac Surgery." American Economic Journal: Economic Policy, 2(1): 51–76.
Saturday, February 11, 2012
The Cost of Contraception: Make the Insurers Pay!
Faced with some serious outcry from the proposed regulation to make all employers offer free contraceptive services to employees, the Obama administration has come up with a clever answer: Actually, the employers don't have to provide the services, we will just make the employers' insurers cover the services, and of course with no cost to the employee.
Voila!
Wait, it gets even better. According to the Administration, this won't cost anyone anything! See this from the LA Times:
So I guess the insurers (and employers) must just be stupid for not already giving contraceptive services for free, since they reduce health costs by more than their price. This certainly starts warning bells buzzing in my head.
There are lots of subtleties here, but let me try this angle. Suppose we have an employer who is not self-insured and pays an insurance company to cover its employees. Suppose that like most plans, contraceptive services like the pill are covered, but employees must pay a copay. Suppose also that the administration is correct in that reduced health costs from using contraception (no births) offset exactly the cost of the contraception itself.
Beginning now, this insurer must cover contraceptive services for all employees, for FREE. But probably a huge number of the potential employees who might use contraceptives are already using them and paying for them. For these employees, what we call the inframarginal ones, the insurance company simply loses revenue. Any benefit in the form of reduced health cost is already being captured. For the truly marginal employees, the ones who were not using contraceptives before but will if they are free, the administration's logic is right and the insurance company would break even.
I suspect that the first group, the inframarginal employees who already use and pay for contraceptives, is much larger than the second group, so the insurance company will on net lose a lot of revenue. This will have to be made up somehow, through larger premiums.
The insurance companies have been largely silent through all this, which does not surprise me too much given how much political pressure they are already under. But see this Reuters story:
That Reuters article ends with this mention of the free lunch theory:
There are probably many medications that reduce health costs in excess of their own price. I would imagine that insulin, blood pressure medications and blood thinners are three great examples. Does this mean that they should all be offered in any insurance plan for free? Are employers and insurers just stupid for making us pay for these free lunches? No, of course not, for many reasons. An employer or insurer needs to somehow cover the overall cost of the plan by charging employees. Typically an efficient plan is going to recover costs through a variety of charges on different services, balancing things like elasticity of demand for those services against costs. There is also the important effect that if something is offered for free to consumers, producers face a very inelastic demand and are more likely to raise prices.
Voila!
Wait, it gets even better. According to the Administration, this won't cost anyone anything! See this from the LA Times:
Under the new plan, administration officials believe insurers will comply at no charge because the coverage may not actually cost them anything. Evidence suggests that providing birth control coverage reduces overall costs for health plans because birth control is much cheaper than pregnancy, according to administration officials and some health industry analysts.
So I guess the insurers (and employers) must just be stupid for not already giving contraceptive services for free, since they reduce health costs by more than their price. This certainly starts warning bells buzzing in my head.
There are lots of subtleties here, but let me try this angle. Suppose we have an employer who is not self-insured and pays an insurance company to cover its employees. Suppose that like most plans, contraceptive services like the pill are covered, but employees must pay a copay. Suppose also that the administration is correct in that reduced health costs from using contraception (no births) offset exactly the cost of the contraception itself.
Beginning now, this insurer must cover contraceptive services for all employees, for FREE. But probably a huge number of the potential employees who might use contraceptives are already using them and paying for them. For these employees, what we call the inframarginal ones, the insurance company simply loses revenue. Any benefit in the form of reduced health cost is already being captured. For the truly marginal employees, the ones who were not using contraceptives before but will if they are free, the administration's logic is right and the insurance company would break even.
I suspect that the first group, the inframarginal employees who already use and pay for contraceptives, is much larger than the second group, so the insurance company will on net lose a lot of revenue. This will have to be made up somehow, through larger premiums.
The insurance companies have been largely silent through all this, which does not surprise me too much given how much political pressure they are already under. But see this Reuters story:
"We are concerned about the precedent this proposed rule would set," said Robert Zirkelbach, spokesman for America's Health Insurance Plans, the industry's trade group. "As we learn more about how this rule would be operationalized, we will provide comments through the regulatory process."
Zirkelbach said insurers "have long offered contraceptive coverage to employers as part of comprehensive, preventive benefits that aim to improve patient health and reduce health care cost growth."
Employers who have signed on for such health plans in the past paid part of the cost of birth control prescriptions, while their employees also bore some of the expense through co-payments.
That Reuters article ends with this mention of the free lunch theory:
When asked about the insurer concerns, the White House cited a report from the U.S. Health and Human Services Department that estimates the costs of providing free birth control can be offset by reducing expenses associated with unintended pregnancies.
There are probably many medications that reduce health costs in excess of their own price. I would imagine that insulin, blood pressure medications and blood thinners are three great examples. Does this mean that they should all be offered in any insurance plan for free? Are employers and insurers just stupid for making us pay for these free lunches? No, of course not, for many reasons. An employer or insurer needs to somehow cover the overall cost of the plan by charging employees. Typically an efficient plan is going to recover costs through a variety of charges on different services, balancing things like elasticity of demand for those services against costs. There is also the important effect that if something is offered for free to consumers, producers face a very inelastic demand and are more likely to raise prices.
Tuesday, February 07, 2012
Tuition Increases and Expansion of Top Universities
Following on an argument I have been making for years, I wrote a post for US News and World Report arguing for expansion of class sizes at top universities. Top universities are the gates to much of the upper economic class in our society and I think they should be open wider.
The USNWR piece can be read here.
The USNWR piece can be read here.
Adverse Selection at the Supreme Court
The brief for the private respondents in the individual mandate case can be read here.
It's a good day for the concept of adverse selection on one hand-- I count twenty mentions, and they are not incidental.
On the other hand, the brief discounts the difficulty in countering adverse selection via relatively simple restrictions, such as limited enrollment periods and coverage-waiting periods.
I tend to agree that it should be possible, if one is willing to use penalties of meaningful impact, to have both must-issue clauses for insurance (so sick people cannot be refused coverage) and prices that are not "overly" based on risk. But there would have to be a cost to waiting until sick to get coverage -- worse coverage, higher prices.
It's a good day for the concept of adverse selection on one hand-- I count twenty mentions, and they are not incidental.
On the other hand, the brief discounts the difficulty in countering adverse selection via relatively simple restrictions, such as limited enrollment periods and coverage-waiting periods.
I tend to agree that it should be possible, if one is willing to use penalties of meaningful impact, to have both must-issue clauses for insurance (so sick people cannot be refused coverage) and prices that are not "overly" based on risk. But there would have to be a cost to waiting until sick to get coverage -- worse coverage, higher prices.
Thursday, December 29, 2011
Various European Central Bank Topics
Interesting things in Europe, where threats of various economic crises seem to have abated but not disappeared.
While Mario Draghi, the relatively new head of the European Central Bank, has been strident in saying that the ECB cannot be the lender of last resort to European governments, it seems that his actions are different from his words. Last week, the ECB opened up low interest (1%) three year loans to European banks in a "liquidity-providing operation" and banks promptly borrowed €489 billion. And this week, it was reported that the ECB's balance sheet had grown to €2.73 trillion, €553 billion higher than three months ago.
And as background, we have French President Sarkozy encouraging banks to run a "Sarkozy carry trade," that is, borrow from the ECB at 1% and invest it in sovereign government bonds that yield close to 7% (Italy). In fact, the ECB will even take those bonds as collateral on the loans! Not a bad deal if you can get it!
The expansion of the ECB balance sheet is of course from its lending program, among other things, and it represents an injection of high powered reserves into the European banking system. It seems to me to be quantitative easing, the new terminology for what we used to just call expansion of the money supply through open market operations.
By itself, this is not a bad thing, and in times of a liquidity crunch, such expansion is called for. However, there are some worries in the European situation. Are the loans to the European banks to help them with liquidity problems, or are the loans to the banks just a back-door way for the ECB to buy European government bonds? There certainly seems to have been an impact, as yields on Italian and Spanish bonds have fallen.
John Cochrane has a great editorial on many of these matters. Cochrane emphasizes how European banks have huge risks, as they have loaded up on sovereign bonds, and now they have even more incentive and ability to do so. And all this sovereign debt gets a zero weighting in the regulatory bank capital schema, meaning that it is considered risk-free!
To the extent that European banks run the Sarkozy carry trade, there is an interesting divergence between the US central bank policy and what the ECB is effectively doing. During the US credit crisis (post-Lehman) the Fed pumped up its balance sheet, partly through a policy of buying mortgage bonds issued by FannieMae and FreddieMac. This sounds similar to the ECB buying up bonds of Italy, Portugal and Spain. However, with the Fed and in the US, the bad practices that got us into the mess had ended -- the subprime market was shut, and even Freddie and Fannie tightened significantly their lending practices (so much so that it is too hard now for people to get a mortgage). In Europe, it is not yet clear that the government policies that got them into trouble have really been fixed. And the bonds sold by those governments are now on the balance sheet of the ECB.
While Mario Draghi, the relatively new head of the European Central Bank, has been strident in saying that the ECB cannot be the lender of last resort to European governments, it seems that his actions are different from his words. Last week, the ECB opened up low interest (1%) three year loans to European banks in a "liquidity-providing operation" and banks promptly borrowed €489 billion. And this week, it was reported that the ECB's balance sheet had grown to €2.73 trillion, €553 billion higher than three months ago.
And as background, we have French President Sarkozy encouraging banks to run a "Sarkozy carry trade," that is, borrow from the ECB at 1% and invest it in sovereign government bonds that yield close to 7% (Italy). In fact, the ECB will even take those bonds as collateral on the loans! Not a bad deal if you can get it!
The expansion of the ECB balance sheet is of course from its lending program, among other things, and it represents an injection of high powered reserves into the European banking system. It seems to me to be quantitative easing, the new terminology for what we used to just call expansion of the money supply through open market operations.
By itself, this is not a bad thing, and in times of a liquidity crunch, such expansion is called for. However, there are some worries in the European situation. Are the loans to the European banks to help them with liquidity problems, or are the loans to the banks just a back-door way for the ECB to buy European government bonds? There certainly seems to have been an impact, as yields on Italian and Spanish bonds have fallen.
John Cochrane has a great editorial on many of these matters. Cochrane emphasizes how European banks have huge risks, as they have loaded up on sovereign bonds, and now they have even more incentive and ability to do so. And all this sovereign debt gets a zero weighting in the regulatory bank capital schema, meaning that it is considered risk-free!
To the extent that European banks run the Sarkozy carry trade, there is an interesting divergence between the US central bank policy and what the ECB is effectively doing. During the US credit crisis (post-Lehman) the Fed pumped up its balance sheet, partly through a policy of buying mortgage bonds issued by FannieMae and FreddieMac. This sounds similar to the ECB buying up bonds of Italy, Portugal and Spain. However, with the Fed and in the US, the bad practices that got us into the mess had ended -- the subprime market was shut, and even Freddie and Fannie tightened significantly their lending practices (so much so that it is too hard now for people to get a mortgage). In Europe, it is not yet clear that the government policies that got them into trouble have really been fixed. And the bonds sold by those governments are now on the balance sheet of the ECB.
Sunday, December 18, 2011
Of Competition in Health Care, and Law Schools Too
Yesterday I wrote that not much had been said about the new Wyden/Ryan “defined contribution” plan for Medicare. I guess I had not searched enough, for later I came across this piece by Krugman, Ron Wyden, Useful Idiot and in it he references a posting by Ezra Klein, Competition Hasn't Worked in Health Care.
Krugman's title is certainly choice, but besides that, we have these additional tidbits:
Krugman also states as his first reason for why competition can't work in health care: "Patients by and large don’t have the information to evaluate medical treatments... and he attributes this, rightly, to Kenneth Arrow some time ago. I will return to this "lack of information" idea below.
Ezra Klein is a little less vitriolic, but his thesis is that competition has never worked in health care and he asks for examples. Klein suffers from the same limitation of Krugman, which is that he focuses on the role of competition in helping to hold costs down, rather than the more relevant question of whether competition helps produce a (cost, quality) package that is more preferred. Klein crosses the border sometimes, however, and is less careful than Krugman to say that he is only talking about the ability of competition to hold cost down.
But let me take a shot at some that have worked even just on the cost side: Any self-insured employer with any sense puts its third party administrator contract up for bid occasionally, and lets health plans compete on price and quality. Health plans actually worry a lot about trying to control cost and improve care. Take a look at some of the cost control plans by BC/BS in Massachusetts. Or look at the number of instances in the past several years where a health plan has cut a hospital out of its network because that hospital's costs were too high. In my neighborhood, a company spun out of work from researchers at The Dartmouth Institute, Health Dialog, was sold to Bupa, a private for-profit British company with health insurance interests, for $775 million. One of the goals of Health Dialog is to help patients make more-informed decisions, which will result in better quality of care and often in lower cost. Folks might not look at something like Health Dialog as part of competition, but it is: It was a for-profit startup, funded by venture capital, and sold in a competitive marketplace to a larger company. The number of for-profit health care startups in our economy is large, and many of them are focused on cost control as well as better quality. In Hanover, we just had Iora Health, a for-profit startup, announce that it will be opening a new kind of primary care facility. I know that the intent here is to not only improve the coordination of care, but also to reduce cost. This is competition! In a government-financed and government-provided system, would we get such innovation?
Klein tries to negate the idea that the competitive bidding process for Medicare Part D is not responsible for its good performance, but there is no way he is going to succeed at that...just as I cannot succeed at saying the bidding process is mostly responsible for the good performance. However, there is a competitive bidding process, it works in establishing prices and giving choice, and I do know that companies think very seriously about how to bid in these auctions (this from talking to people who have advised companies in the bidding process). Note that I am NOT saying there are not issues with Medicare Part D, especially in regard to its complexity and some specific faults of its bidding process.
Consumer choice and competition "works" not just in Medicare Part D but also in the Federal employees health plan (competing plans with consumer choice) and in many countries, particularly Switzerland, where citizens (under an individual mandate) choose privately offered health insurance plans. Does "works" necessarily mean lower costs? No, of course not -- in what marketplace or for what product or service do we care only about cost (some, sure, but none with the complexity and importance of health).
Other areas where competition has worked in health care, to produce lower costs and/or higher quality? Production and marketing of generic drugs? Drug competition generally...is it really from the good will of the pharma companies that we get less costly ways to produce drugs? How about even much of the competition between hospitals? Yes, there are stories about how competition between hospitals results in an arms race for advanced medical equipment, but even in my local area there is some competition (smaller hospitals) for certain services in the hospital market, and it gives local consumers a cheaper and different alternative to the big medical complex known as Dartmouth Hitchcock. Local private practice doctors also provide a competitive -- yes, competitive -- alternative to doctors employed by DH. In the Boston market, it is at least legitimate to raise the question of whether the merger of major hospitals into the Partners group caused a significant decline in competition and increased medical prices -- see here, for reference to the MA Attorney General report on prices in Boston.
I could actually go on for some time showing where competition works in health care. Even given the unfair tilt towards focusing only on cost reductions, it is easier to answer than I thought it might be.
The better question is what things would look like if we did not have competition at all, say with a single government financed, government provided health care system.
At the heart of Krugman's dislke for a defined contribution Medicare plan (and Klein's too, I think) is this idea that consumers are just not informed and rational enough to make good decisions.
Instead of arguing about that one directly, let me note this other story from the NYT this morning, on how the American Bar Association puts all kinds of accreditation standards onto law schools. The thrust of the article's thesis is that the ABA makes all law schools meet very high quality standards (such as the number of full time vs. parttime faculty) so that there are no cheap law school alternatives.
Ah, but what would happen if we loosed different kinds of lawyers onto the ill-informed, irrational citizens that inhabit Krugman's and Klein's world? Obviously, the public needs to be protected from competition:
Krugman's title is certainly choice, but besides that, we have these additional tidbits:
... Sen. Ron Wyden did indeed do a bad, bad thing in his joint proposal with Paul Ryan...So why would anyone who isn’t a right-wing ideologue propose that kind of degradation?Also, Krugman states that
Looking both within the United States and across countries, if you ask which systems are best at cost control, the ranking looks like this:The problem here is that Krugman is very careful to do his ranking only in regard to cost. The problem of Medicare is not just one of cost, although the public debate is focused on that. Everyone knows that there are consequences of holding down costs in the wrong way, for example, if the "doc fix" did not go into effect and doctors' reimbursements were to fall by 30%, there would be quality/access consequences. Even I have said that in the UK, with health care providers being employees of the government and all prices set by the government, you should be able to keep prices low. The problem of Medicare is one of providing high quality care at a cost that is politically acceptable. By framing the debate only around cost, Krugman simplifies things too much.
Government provision as well as financing (socialized medicine) > single payer > market competition
Krugman also states as his first reason for why competition can't work in health care: "Patients by and large don’t have the information to evaluate medical treatments... and he attributes this, rightly, to Kenneth Arrow some time ago. I will return to this "lack of information" idea below.
Ezra Klein is a little less vitriolic, but his thesis is that competition has never worked in health care and he asks for examples. Klein suffers from the same limitation of Krugman, which is that he focuses on the role of competition in helping to hold costs down, rather than the more relevant question of whether competition helps produce a (cost, quality) package that is more preferred. Klein crosses the border sometimes, however, and is less careful than Krugman to say that he is only talking about the ability of competition to hold cost down.
But let me take a shot at some that have worked even just on the cost side: Any self-insured employer with any sense puts its third party administrator contract up for bid occasionally, and lets health plans compete on price and quality. Health plans actually worry a lot about trying to control cost and improve care. Take a look at some of the cost control plans by BC/BS in Massachusetts. Or look at the number of instances in the past several years where a health plan has cut a hospital out of its network because that hospital's costs were too high. In my neighborhood, a company spun out of work from researchers at The Dartmouth Institute, Health Dialog, was sold to Bupa, a private for-profit British company with health insurance interests, for $775 million. One of the goals of Health Dialog is to help patients make more-informed decisions, which will result in better quality of care and often in lower cost. Folks might not look at something like Health Dialog as part of competition, but it is: It was a for-profit startup, funded by venture capital, and sold in a competitive marketplace to a larger company. The number of for-profit health care startups in our economy is large, and many of them are focused on cost control as well as better quality. In Hanover, we just had Iora Health, a for-profit startup, announce that it will be opening a new kind of primary care facility. I know that the intent here is to not only improve the coordination of care, but also to reduce cost. This is competition! In a government-financed and government-provided system, would we get such innovation?
Klein tries to negate the idea that the competitive bidding process for Medicare Part D is not responsible for its good performance, but there is no way he is going to succeed at that...just as I cannot succeed at saying the bidding process is mostly responsible for the good performance. However, there is a competitive bidding process, it works in establishing prices and giving choice, and I do know that companies think very seriously about how to bid in these auctions (this from talking to people who have advised companies in the bidding process). Note that I am NOT saying there are not issues with Medicare Part D, especially in regard to its complexity and some specific faults of its bidding process.
Consumer choice and competition "works" not just in Medicare Part D but also in the Federal employees health plan (competing plans with consumer choice) and in many countries, particularly Switzerland, where citizens (under an individual mandate) choose privately offered health insurance plans. Does "works" necessarily mean lower costs? No, of course not -- in what marketplace or for what product or service do we care only about cost (some, sure, but none with the complexity and importance of health).
Other areas where competition has worked in health care, to produce lower costs and/or higher quality? Production and marketing of generic drugs? Drug competition generally...is it really from the good will of the pharma companies that we get less costly ways to produce drugs? How about even much of the competition between hospitals? Yes, there are stories about how competition between hospitals results in an arms race for advanced medical equipment, but even in my local area there is some competition (smaller hospitals) for certain services in the hospital market, and it gives local consumers a cheaper and different alternative to the big medical complex known as Dartmouth Hitchcock. Local private practice doctors also provide a competitive -- yes, competitive -- alternative to doctors employed by DH. In the Boston market, it is at least legitimate to raise the question of whether the merger of major hospitals into the Partners group caused a significant decline in competition and increased medical prices -- see here, for reference to the MA Attorney General report on prices in Boston.
I could actually go on for some time showing where competition works in health care. Even given the unfair tilt towards focusing only on cost reductions, it is easier to answer than I thought it might be.
The better question is what things would look like if we did not have competition at all, say with a single government financed, government provided health care system.
At the heart of Krugman's dislke for a defined contribution Medicare plan (and Klein's too, I think) is this idea that consumers are just not informed and rational enough to make good decisions.
Instead of arguing about that one directly, let me note this other story from the NYT this morning, on how the American Bar Association puts all kinds of accreditation standards onto law schools. The thrust of the article's thesis is that the ABA makes all law schools meet very high quality standards (such as the number of full time vs. parttime faculty) so that there are no cheap law school alternatives.
Ah, but what would happen if we loosed different kinds of lawyers onto the ill-informed, irrational citizens that inhabit Krugman's and Klein's world? Obviously, the public needs to be protected from competition:
Members of the A.B.A. Section say the point of the standards is not to raise the cost of law school, or to limit competition. The point is to ensure that lawyers are well trained and that the public gets quality legal services.
”It’s pretty basic, and more or less the accreditation function that you’ll see for any profession,” says John O’Brien, chairman of the Section and dean of the New England School of Law. “You want to make certain that a school that is nationally approved is providing students with what they have a right to receive in terms of education. And at the other end you want to protect the public and make certain that graduates who offer themselves as qualified lawyers know what they’re doing.”
Saturday, December 17, 2011
The Wyden/Ryan Medicare Plan
Sen. Ron Wyden and Rep. Paul Ryan have a new plan for Medicare. It has gotten a surprisingly low amount of attention -- maybe the Republican primary is taking media precedence.
The proposal can be read here.
The main components of the plan are, in my order of interest/importance:
1. Seniors would choose their health coverage from competing plans on an exchange (the Medicare Exchange), similar to the way Medicare Part D works now. (Medicare Part D is prescription drug coverage. Companies wanting to offer drug coverage under the plan bid in regional markets and enrollees select their coverage from the offers made.) Plans would have to be approved, meaning that they would have to meet certain minimum standards of coverage.
2. The amount to be given to each enrollee as a subsidy for buying insurance would be determined by the auction. This subsidy would be either the second-lowest bid in the auction or the standard Medicare fee for service plan. See point 3 next.
3. One of the options would remain the standard Medicare fee for service option. This is not clear to me, but I guess the meaning is that the Federal government would have to put in a bid just like a private company. I am not sure what would prevent the government from always winning the auction, since they play with OPM (other people's money).
4. Exchanges would be on a regional basis, as for Medicare Part D.
5. If costs rose faster than 1% above nominal GDP growth, unspecified cost controls would kick in.
The idea deserves serious consideration. Moving Medicare toward a voucher/defined contribution plan makes a lot of sense to me. Such a change would get the government out of specifying how much providers are paid, leaving that to private insurers as is currently done (private insurers negotiate with hospitals and doctors to determine contract prices). Using a competitive bidding process to both select plans and to determine the subsidy amount seems to work well for Medicare Part D, so let's extend the model.
One of the interesting things will be if the subsidy is determined regionally or nationally. If done nationally, there will be some pain as enrollees in the high cost regions (see the Dartmouth Atlas) discover that their subsidy is not enough to buy any plan in that region. That would probably put more effective pressure on the high cost regions than anything the Center for Medicare and Medicaid seems able to do.
The proposal can be read here.
The main components of the plan are, in my order of interest/importance:
1. Seniors would choose their health coverage from competing plans on an exchange (the Medicare Exchange), similar to the way Medicare Part D works now. (Medicare Part D is prescription drug coverage. Companies wanting to offer drug coverage under the plan bid in regional markets and enrollees select their coverage from the offers made.) Plans would have to be approved, meaning that they would have to meet certain minimum standards of coverage.
2. The amount to be given to each enrollee as a subsidy for buying insurance would be determined by the auction. This subsidy would be either the second-lowest bid in the auction or the standard Medicare fee for service plan. See point 3 next.
3. One of the options would remain the standard Medicare fee for service option. This is not clear to me, but I guess the meaning is that the Federal government would have to put in a bid just like a private company. I am not sure what would prevent the government from always winning the auction, since they play with OPM (other people's money).
4. Exchanges would be on a regional basis, as for Medicare Part D.
5. If costs rose faster than 1% above nominal GDP growth, unspecified cost controls would kick in.
The idea deserves serious consideration. Moving Medicare toward a voucher/defined contribution plan makes a lot of sense to me. Such a change would get the government out of specifying how much providers are paid, leaving that to private insurers as is currently done (private insurers negotiate with hospitals and doctors to determine contract prices). Using a competitive bidding process to both select plans and to determine the subsidy amount seems to work well for Medicare Part D, so let's extend the model.
One of the interesting things will be if the subsidy is determined regionally or nationally. If done nationally, there will be some pain as enrollees in the high cost regions (see the Dartmouth Atlas) discover that their subsidy is not enough to buy any plan in that region. That would probably put more effective pressure on the high cost regions than anything the Center for Medicare and Medicaid seems able to do.
Wednesday, December 14, 2011
Al Gore's Manifesto for Sustainable Capitalism
Al Gore and David Blood wrote an editorial in the WSJ titled a "Manifesto for Sustainable Capitalism."
A fair amount of this is actually fine -- essentially an argument for including what are now externalities into the economic calculus of firms and consumers. That is sound economics and policy. Of course, what the level of the externality is, in dollar terms, for any specific environmental problem is always a key question. I like to ask what I view as a telling question: What do you think the carbon tax should be, on the basis of a barrel of oil or gallon of gas?
But of course I could not read an article by Al Gore without having some arguments. This quote:
The other thing that is a bit odd is the focus on long term value (I do like the metric of economic value, though). Yes, I do agree that there is at times too much focus on the short term. Examples abound. But to have one of the major actions proposed being an end to quarterly earnings reporting? That seems a stretch. Have they really thought out the unintended consequences of letting managers report only once or twice a year? I suppose my students might want grades to be issued only at the end of each year, yet I continue to push for grading at the end of each course.
A fair amount of this is actually fine -- essentially an argument for including what are now externalities into the economic calculus of firms and consumers. That is sound economics and policy. Of course, what the level of the externality is, in dollar terms, for any specific environmental problem is always a key question. I like to ask what I view as a telling question: What do you think the carbon tax should be, on the basis of a barrel of oil or gallon of gas?
But of course I could not read an article by Al Gore without having some arguments. This quote:
Before the crisis and since, we and others have called for a more responsible form of capitalism, what we call sustainable capitalism: a framework that seeks to maximize long-term economic value by reforming markets to address real needs while integrating environmental, social and governance (ESG) metrics throughout the decision-making process.does worry me. Two things: first, what exactly is a "real" need? Who determines that? Is my desire for a fast car a real need? How about my desire for imported Scottish salmon?
The other thing that is a bit odd is the focus on long term value (I do like the metric of economic value, though). Yes, I do agree that there is at times too much focus on the short term. Examples abound. But to have one of the major actions proposed being an end to quarterly earnings reporting? That seems a stretch. Have they really thought out the unintended consequences of letting managers report only once or twice a year? I suppose my students might want grades to be issued only at the end of each year, yet I continue to push for grading at the end of each course.
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