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Health Care program meeting.

The NBER's Program on Health Care met in Cambridge on May 5. NBER Research Associate Douglas O. Staiger of Dartmouth College organized this program:

Amitabh Chandra, Harvard University and NBER; Jonathan Gruber, MIT and NBER; and Robin McKnight, University of Oregon and NBER, "Medical Price Sensitivity and Optimal Health Insurance for the Elderly"

Sean Nicholson, Cornell University and NBER; Andrew Epstein, Yale University; and Jonathan Ketcham, Arizona State University, "Specialization and Sorting in the Obstetrics Market"

Tomas J. Philipson, University of Chicago and NBER, and Anupam B. Jena, University of Chicago, "Surplus Appropriation from R&D and Health Care Technology Assessment Procedures"

Leemore Dafny, Northwestern University and NBER, and David Dranove, Northwestern University, "Regulatory Exploitation and the Market for Corporate Control"

Avi Dor, Case Western Reserve University and NBER, and William Encinosa, AHRQ, "Does Cost-Sharing Affect Compliance? Insurance and the Market for Prescription Drugs"

David M. Curler, Harvard University and NBER, and Angus S. Deaton and Adriana Lleras-Muney, Princeton University and NBER, "The Determinants of Mortality"(NBER Working Paper No. 11963)

As private insurers and the government attempt to constrain elderly medical spending in the coming years, a first-order consideration is the price sensitivity of the medical consumption of the elderly. For the non-elderly, the famous RAND Health Insurance Experiment (HIE) addressed the question of the sensitivity of medical consumption to its price, but RAND did not include the elderly in its HIE. The purpose of Gruber, Chandra, and McKnight's paper is to remedy this deficiency by studying a major set of copayment changes in a modern, managed care environment. The California Public Employees Retirement System (CalPERS) enacted a series of substantial copayment increases for both active employees and retirees, first for the state's PPO plans, and then for its HMO plans. The result was a staggered set of copayment changes that allow these authors to carefully evaluate the impact on the medical care utilization of the elderly. To evaluate these policy changes, the authors have compiled a comprehensive database of all medical claims for those enrolled continuously in several of the CalPERS plans. They find that both physician office visits and prescription drug utilization are price sensitive among the elderly, although the elasticities are modest, as with the RAND HIE. Unlike the HIE, however, this paper finds significant "offset" effects in terms of increased hospital utilization in response to the combination of higher copayments for physicians and prescription drugs. The most chronically ill individuals are equally responsive to copay increases in terms of their reduced use of physician care or prescription drugs, but there are much larger offset effects for these populations, so that there is little net gain from higher copayments for that group. This suggests that copayment increases targeted to health would be part of an optimal health insurance arrangement for the elderly.

The welfare implications of variations in how physicians treat patients depend on whether patients have different optimal treatments and are treated by physicians who are likely to provide those optimal treatments. Epstein, Ketcham, and Nicholson examine the extent to which expecting mothers direct themselves, or are directed to, particular physicians based on their preferences for physicians' treatment styles and the patients' health conditions. The authors capitalize on the largely random assignment to weekdays of weekend patients because of physicians' call schedules and the concentration of induced deliveries and scheduled c-sections, both opportunities for a patient to choose her physician. Using Florida and New York discharge data from 1999 to 2004 linked to information on physician practices, the authors find that one-third of the variation in treatment styles across physicians is attributable to patient-physician matching on unobserved characteristics, which implies that a considerable part of the variation in medical treatment rates may enhance welfare. In one-third of the group practices, certain physicians specialize in treating weekday patients with relatively high observed risk and others with relatively low observed risk, and there is more than twice as much variation across physicians within a practice in patients' observed health than one would expect if weekday patients were randomly assigned.

Given the rapid growth in health care spending that is often attributed to technological change, many private and public institutions are grappling with how to best assess and adopt new health care technologies. The leading technology adoption criteria proposed in theory and used in practice involve so called "cost-effectiveness" measures. However, little is known about the dynamic efficiency implications of such criteria, in particular how they influence the R and D investments that make technologies available in the first place. Philipson and Jena argue that such criteria implicitly concern maximizing consumer surplus, which many times is consistent with maximizing static efficiency after an innovation has been developed. Dynamic efficiency, however, concerns aligning the social costs and benefits of R and D and is therefore determined by how much of the social surplus from the new technology is appropriated as producer surplus. The authors analyze the relationship between cost-effectiveness measures and the degree of surplus appropriation by innovators driving dynamic efficiency. They illustrate how to estimate the two for the new HIV/ AIDS therapies that entered the market after the late 1980s and find that only 5 percent of the social surplus is appropriated by innovators. They show how this finding can be generalized to other existing cost-effectiveness estimates by deriving how those estimates identify innovator appropriation for a set of studies of over 200 drugs. They find that these studies implicitly support a low degree of appropriation as well. Despite the high annual cost of drugs to patients, very low shares of social surplus may go to innovators, which may imply that cost-effectiveness is too high in a dynamic efficiency sense.

Dafny and Dranove evaluate the possibility that a failure to exploit regulatory loopholes could motivate corporate takeovers. They use the U.S. hospital industry in 1985-96 as a case study. A 1988 change in Medicare rules widened a pre-existing loophole in the Medicare payment system, presenting hospitals with an opportunity to increase operating margins by 5 or more percentage points simply by "upcoding" patients to more lucrative codes. The authors find that "room to upcode" is a statistically and economically significant predictor of for-profit but not of not-for-profit acquisitions in the period immediately following this policy change. They also find that hospitals acquired by for-profit systems subsequently upcoded more than a sample of similar hospitals that were not acquired, as identified by propensity scores. These results suggest that firms that do not fully exploit regulatory loopholes are vulnerable to takeover.

Insurance for prescription drugs is characterized by two regimes: flat copayments and variable coinsurance. Dot and Encinosa develop a simple model to show that patient compliance is lower under coinsurance because of uncertainty in cost sharing. Empirically, the authors derive comparable models for compliance behavior in the two regimes. Using claims data from nine large firms, they focus on diabetes, a common chronic condition that leads to severe complications when inappropriately treated. In the coinsurance model, an increase in the coinsurance rate from 20 to 75 percents results in the share of persons who never comply to increase by nearly 10 percent and reduces the share of fully compliant persons by almost 25 percent. In the co-payment model, an increase in the copayment from $6 to $10 results in a 6.2 percent increase in the share of never-compilers, and a concomitant 9 percent reduction in the share of full compliers. Similar results hold when the level of cost-sharing is held constant across regimes. While non-compliance reduces expenditures on prescription drugs, it may also lead to increases in indirect medical costs attributable to avertable complications. Using available aggregate estimates of the cost of diabetic complications, the authors calculate that the $6-$10 increase in copayment would have the direct effect of reducing national drug spending for diabetes by $125 million. However, the increase in non-compliance rates is expected to increase the rate of diabetic complications, resulting in an additional $360 million in treatment costs. These results suggest that both private payers and public payers may be able to reduce overall medical costs by switching from coinsurance to copayments in prescription drug plans.

Mortality rates have fallen dramatically over time, starting in a few countries in the eighteenth century, and continuing to fall today. In just the past century, life expectancy has increased by over 30 years. At the same time, mortality rates remain much higher in poor countries, with a difference in life expectancy between rich and poor countries too of about 30 years. This difference persists despite the remarkable progress in health improvement in the last half century, at least until the HIV/AIDS pandemic. In both the time-series and the cross-section data, there is a strong correlation between income per capita and mortality rates, a correlation that also exists within countries, where richer, better-educated people live longer. Cutler, Deaton, and Lleras-Muney review the determinants of these patterns: over history, over countries, and across groups within countries. While there is no consensus about the causal mechanisms, they tentatively identify the application of scientific advance and technical progress (some of which is induced by income and facilitated by education) as the ultimate determinant of health. Such an explanation allows a consistent interpretation of the historical, cross-country, and within-country evidence. They downplay direct causal mechanisms running from income to health.
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Title Annotation:Bureau News
Publication:NBER Reporter
Date:Jun 22, 2006
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