February 28, 2014
Jonathan Gruber, MIT, Organizer

Darius Lakdawalla, University of Southern California and NBER; Anup Malani, University of Chicago and NBER; and Julian Reif, University of Illinois

The Insurance Value of Medical Innovation*

Jeffrey Clemens, University of California at San Diego and NBER, and Joshua Gottlieb, University of British Columbia

Bargaining in the Shadow of a Giant: Medicare's Influence on Private Payment Systems (NBER Working Paper 19503)

Clemens and Gottlieb analyze Medicare's influence on private payments for physicians' services. Using a large administrative change in surgical relative to medical reimbursements, they find that private prices follow Medicare's lead. A one dollar change in Medicare's relative payments moves private payments by $1.20. Results are similar when Medicare alters overall reimbursement levels. Medicare thus strongly influences both relative valuations and aggregate expenditures. Medicare's price transmission is strongest when physician groups are numerous and competitive. Transaction and bargaining costs may lead the development of payment systems to suffer from a classic coordination problem. Improvements in Medicare's payment models may therefore be public goods.

Marika Cabral, University of Texas at Austin and NBER, and Neale Mahoney, University of Chicago

Externalities and Taxation of Supplemental Insurance: A Study of Medicare and Medigap (NBER Working Paper 19787)*

Most health insurance policies use cost sharing to reduce excess utilization. The purchase of supplemental insurance can blunt the impact of this cost sharing, potentially increasing utilization and exerting a negative externality on the primary insurance provider. Cabral and Mahoney estimate the effect of private Medigap supplemental insurance on public Medicare spending using Medigap premium discontinuities in local medical markets that span state boundaries. Using administrative data on the universe of Medicare beneficiaries, they estimate that Medigap increases an individual's Medicare spending by 22.2 percent. The authors find that the take-up of Medigap is price sensitive with an estimated demand elasticity of –1.8. Using these estimates, they calculate that a 15 percent tax on Medigap premiums would generate combined tax revenue and cost savings of $12.9 billion annually. A Pigouvian tax would generate combined annual savings of $31.6 billion.

Liran Einav, Stanford University and NBER; Amy Finkelstein, MIT and NBER; Ray Kluender, MIT; and Paul Schrimpf, University of British Columbia

Beyond Statistics: The Economic Content of Risk Scores*

In recent years, the increased use of "big data" and statistical techniques to score potential transactions has transformed the operation of insurance and credit markets. In this paper, Einav, Finkelstein, Kluender, and Schrimpf observe that these widely used scores are statistical objects that constitute a one-dimensional summary of a potentially much richer heterogeneity, some of which may be endogenous to the specific context in which they are applied. The authors demonstrate this point empirically using rich data from the Medicare Part D prescription drug insurance program. They show that the "risk scores" which are designed to predict an individual's drug spending and are used by Medicare to customize reimbursement rates to private insurers do not distinguish between two different sources of spending: underlying health, and responsiveness of drug spending to the insurance contract. However, naturally these two determinants of spending have very different implications when trying to predict counterfactual spending under alternative contracts. As a result, the authors illustrate that once the theoretical framework is enriched to allow individuals to have heterogeneous behavioral responses to the contract, strategic incentives for cream skimming still exist, even in the presence of "perfect" risk scoring under a given contract.

Jill Horwitz, University of California Los Angeles and NBER, and Daniel Polsky, University of Pennsylvania

Challenges to Regulatory Decentralization: Lessons from State Health Technology Regulation (NBER Working Paper 19801)

Policymakers often prefer decentralized regulation to central planning because decentralization allows them to better reflect the views of local residents, encourage experimentation, and evaluate various regulatory approaches. However, these advantages can be undermined when the regulations of one government are affected by those of another. To examine the implications of such externalities, Horwitz and Polsky consider the case of state certificate-of-need (CON) laws which require providers within the state to obtain licenses before adopting various types of health care technology. In particular, the authors analyze the cross-border effects of these laws on the number and location of magnetic resonance imaging providers. They find a large effect on the location of providers near borders between unregulated and regulated states. These results provide examples of some of the limitations of using states as policy laboratories as well as the ability of states to use state laws to reflect their local preferences. The results may also help explain conflicting studies on whether and why CON regulation may have failed to control costs and quantity.

* This paper was a part of a joint session with the Insurance Working Group Meeting

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