Health Care Program Meeting

March 12, 2010
Jonathan Gruber, Organizer

Eric Helland, McKenna College; Darius N. Lakdawalla University of Southern California and NBER; Anup Malani, University of Chicago and NBER; and Seth Seabury, Rand Corporation
Tort Liability and the Market for Prescription Drugs

A series of recent Supreme Court cases examining the relationship between the Food and Drug Administration's (FDA) regulation of a drug and the authority of states to impose tort liability on that drug have triggered a policy debate over the value of imposing product liability on pharmaceutical drug companies. There is very little empirical research on the costs and benefits of tort suits against drug companies. Helland, Lakdawalla, Malani, and Seabury model "failure-to-warn" lawsuits. The theory examines the production, pricing, and safety disclosure decisions of firms selling drugs when exposed to liability risk. In equilibrium, firms with low-risk drugs will choose to disclose the safety risks of their drugs while those with high-risk drugs will choose to withdraw from the market. Firms with middle-risk drugs will conceal their drugs' side effects. The researchers also find that liability rules increase price, but have ambiguous effects on drug utilization. Significantly, the theory demonstrates that if liability increases utilization, it is likely that it increases consumer and social welfare on the margin. Second, the researchers test the predictions of their model using data on utilization, adverse events, and pricing in the pharmaceutical industry. Their empirical strategy relies upon drugs' differential exposure, through the location of their sales, to punitive damage caps. Different drugs are sold in different states. Drugs sold disproportionately in states that have caps will face lower liability than other drugs. This variation is combined with the timing of cap adoption to implement a difference-in-difference design to identify the effects of liability on equilibrium variables. Using this strategy, they find that tighter liability standards lead to higher prices and higher utilization. This suggests that, on balance, liability improves consumer and social welfare. They also find that tighter liability rules reduce adverse safety events associated with prescription drugs. Using the price and adverse event results, they estimate that society pays $2.75 million per statistical life saved by tort liability.

Jacob Glazer, Boston University; and Thomas G. McGuire, Harvard University
Gold and Silver Health Plans: Accommodating Demand Heterogeneity in Managed Competition

New regulation of health insurance markets creates multiple levels of health plans, with designations like "Gold" and "Silver". The underlying rationale for the heavy-metal approach to insurance regulation is that heterogeneity in demand for health care is not only attributable to health status (sick demand more than the healthy) but also to other, "taste" related factors (rich demand more than the poor). Glazer and McGuire model managed competition with demand heterogeneity to consider plan payment and enrollee premium policies in relation to efficiency (net consumer benefit) and fairness (the European concept of "solidarity"). Specifically, they study how to implement a "Silver" and "Gold" health plan efficiently and fairly in a managed competition context. They show that there are sharp tradeoffs between efficiency and fairness. When health plans cannot or may not (because of regulation) base premiums on any factors affecting demand, enrollees do not choose the efficient plan. When taste (for example, income) can be used as a basis of payment, a simple tax can achieve both efficiency and fairness. When only health status (and not taste) can be used as a basis of payment, health status-based taxes and subsidies are required and efficiency only can be achieved with a modified version of fairness, referred to here as "weak solidarity." An overriding conclusion is that the regulation of premiums for both the basic and the higher level plans is necessary for efficiency.

Tomas Philipson, University of Chicago and NBER; and Anirban Basu, University of Chicago and NBER
The Impact of Comparative Effectiveness Research on Health and Health Care Spending

Public subsidization of technology assessments in general, and Comparative Effectiveness Research (CER) in particular, has received considerable attention as a tool to simultaneously improve patient health and lower the cost of health care. However, little conceptual and empirical understanding exists concerning the quantitative impact of public technology assessments such as CER. Basu and Philipson analyze the impact of CER on health and medical care spending interpreting CER to shift the demand for some treatments at the expense of others. They trace the spending and health implications of such demand shifts in private as well as subsidized health care markets. In contrast to current wisdom, their analysis implies that CER may well increase spending and adversely affect patient health, particularly when treatment effects are heterogeneous across patients. They simulate these economic effects for anti-psychotics that are among the largest drug classes of the U.S. Medicaid program and for which CER has been conducted by means of the CATIE trial in 1999. Using conservative estimates, they find that if Medicaid had eliminated coverage for the least cost-effective treatments of the CATIE trial, then under homogeneous effects, it would have saved about 90 percent of the $1.3B Medicaid class sales annually in non-elderly adult patient with schizophrenia. However, taking into account the observed heterogeneity in treatment effects, it would incur a loss of health valued annually at about 98 percent of class spending and thus a net loss of about 8 percent of annual class spending.

David Chan, MIT; and Jonathan Gruber, MIT and NBER
Charging Low-income Families for Health Insurance: How Does It Impact Choices?

As health care reform moves forward in the United States, one common feature of virtually all proposals is expanded coverage for low-income populations, not through a traditional public insurance model but rather through a "defined contribution exchange" mechanism. Under this approach, low-income individuals have a choice of a number of options for their insurance coverage. Individuals receive a subsidy to purchase insurance that was tied to the lowest-cost plan (or some index of low-cost plans) and pay some part of the difference if they chose a more expensive plan.

This major departure from the traditional free/single-choice public payer model raises a number of important questions related to firm behavior and competition, adverse selection, and welfare, but the key initial question is: How do low-income consumers respond to differences prices across plans? If price sensitivity is low, for example, then choice is less likely to lead to cost-reducing competition among plans. If price sensitivity is very much related to enrollee health, then it suggests that plans that have different prices may also enroll patients of different levels of health, leading to adverse selection in which only sicker patients remain in more expensive plans (Cutler and Reber, 1998). Chan and Gruber study the plan choice of low-income enrollees in Massachusetts' Commonwealth Care program, which was established as part of the state’s health reform in April, 2006. Enrollees in Commonwealth Care were given a choice of up to four Medicaid Managed Care Organizations (MMCOs) from which they could receive their coverage. For about half of enrollees (those below the poverty line), this decision had no financial implications. But for the remainder, enrollees were charged not only a base contribution rate, but the differential cost of their plan choice over the lowest-cost plan in their area. The financial implications of this decision were non-trivial; the average differential in 2007 between the non-lowest-cost plan and the lowest-cost plan across areas and income groups was $18.83/month, and the maximum was $116/month.

Cory Capps, Bates White LLC.; Dennis W. Carlton, University of Chicago and NBER; and Guy David, University of Pennsylvania
Antitrust Treatment of Nonprofits: Should Hospitals Receive Special Care?

Nonprofit institutions are required to provide socially beneficial activities in exchange for an exemption from taxation. When nonprofits rely heavily on revenue, as opposed to donations, the interaction between competition and the ability to finance such socially beneficial activities may be important, and hence create a tension between the favored treatment of nonprofits under the tax code and their treatment under the antitrust laws. In essence, the antitrust laws, which are designed to promote competition, may undercut the policy rationale for granting tax exemptions to nonprofits. Specifically, the inability to charge some consumers a high price may deprive a nonprofit altruist of the ability to subsidize the consumption of those who would otherwise have inefficiently low levels of care, such as the poor. For this reason, some have suggested that a different antitrust standard be used when evaluating the mergers of nonprofit hospitals than when evaluating mergers of for profit firms. Capps, Carlton, and David analyze a 2001-7 panel of data on pricing, competition, and charity care provision by for-profit, nonprofit, and government hospitals in California to determine whether hospitals that face less competition provide more benefits to their communities. Their results offer little support for the proposition that nonprofit hospitals with more market power use the resulting additional profits to cross-subsidize care for the uninsured. In the cases where a positive relationship between concentration and provision of charity care emerges, this relationship is not specific to nonprofit hospitals.

Tomas Philipson, University of Chicago and NBER; Seth Seabury, RAND; Lee Lockwood, University of Chicago; Dana Goldman, University of Southern California and NBER; and Darius N. Lakdawalla, University of Southern California and NBER
Regional Variations in Health Care: The Role of Private Markets

There is considerable evidence pointing to large regional variations in health care utilization and spending without corresponding improvements in patient outcomes. Since this evidence largely comes from the Medicare program, however, it is not clear whether these findings generalize to the private health care sector. Public agencies have weaker incentives than private payers to eliminate any cost-inefficiencies associated with these regional differences. Goldman, Lakdawalla, Lockwood, Philipson, and Seabury provide a theoretical and empirical analysis of regional variations in the public and private sectors. They first show that the incentives for cost control in the private sector drive differences in utilization and spending between the two sectors and across regions. They use individual-level data for patients with heart disease in Medicare and in a large sample of private claims to estimate and compare the regional variations in each. Their main finding is that regional variations are more prounounced in the public sector than in the private sector, particularly with regards to utilization. They also find that regional variation contributes surprisingly little to the total variation in utilization and spending across patients. They discuss the policy implications of these findings, such as whether Medicare's administrative costs are too low, the likely effects of a "public option" versus expanding Medicare Advantage, and the value of comparative effectiveness research in reducing variations.

Louise Sheiner, Federal Reserve Board
Geographic Variation in Health Spending: Is Medicare a Good Proxy?

Conventional wisdom from the Dartmouth Atlas project suggests that the wide variation in Medicare spending across geographic areas is attributable mostly to differences in practice styles. Sheiner reexamines this question using state-level data on Medicare spending. She finds that a good part of the variation in Medicare spending is attributable to characteristics of the population that are likely to affect the need for medical care, rather than differences in practice styles. She also shows that, while states do differ on measures of "social capital", these differences are closely correlated with differences in the health of the population. Thus any relationship between "social capital" and health spending is difficult to interpret. Sheiner examines how geographic variation in spending on the non-elderly compares with Medicare variation. She finds little relationship between the variaion in Medicare spending and spending on the non-elderly, whether she uses the CMS state health accounts or private health insurance premiums to measure non-elderly health spending. Taken together, these results cast doubt on the view that differences in Medicare spending mainly represent differences in practice styles, and also suggest that researchers need to be quite cautious in relating features of a state’s entire health care system to state Medicare spending.