Health Care

Members of Health Care Program met in on December 8, 2017. Program Director Jonathan Gruber, Massachusetts Institute of Technology and NBER organized the meeting. These researchers' papers were presented and discussed:

Joshua L. Krieger, Harvard Business School; Danielle Li, MIT and NBER; and Dimitris Papanikolaou, Northwestern University and NBER

Developing Novel Drugs

Krieger, Li, and Papanikolaou analyze firms' decisions to invest in incremental and radical innovation, focusing specifically on pharmaceutical research. They develop a new measure of drug novelty that is based on the chemical similarity between new drug candidates and existing drugs. The researchers show that drug candidates that they identify as ex-ante novel are riskier investments, in the sense that they are subsequently less likely to be approved by the FDA. However, conditional on approval, novel candidates are, on average, more valuable -- they are more clinically effective; have higher patent citations; lead to more revenue and to higher stock market value. Using variation in the expansion of Medicare prescription drug coverage, the researchers show that firms respond to a plausibly exogenous cash flow shock by developing more molecularly novel drug compounds. This pattern suggests that, at the margin, novel drugs are perceived to be as more valuable ex-ante investments than me-too drugs.

Liran Einav, Stanford University and NBER; Amy Finkelstein, Massachusetts Institute of Technology and NBER; and Pietro Tebaldi, the University of Chicago

Risk Adjustment vs. Subsidies in the Design of Health Insurance Exchanges

Elena Prager, Northwestern University

Consumer Responsiveness to Simple Health Care Prices: Evidence From Tiered Hospital Networks

Prager shows that consumers price-shop for health care when they can easily assess out-of-pocket prices. Health care cost containment efforts increasingly incentivize price-shopping, despite recent evidence that this does not steer consumers toward lower-priced care. Prager shows that consumers price-shop in the highly simplified price information environment of health insurance plans with tiered hospital networks. These consumers observe a single predictable, well-defined price that applies to a broad range of services within each of at most three tiers of hospitals. The expected partial-equilibrium savings from tiered networks are on the order of 8–15% of baseline spending after three years of operation. The savings are large enough to both compensate for consumer welfare losses and raise insurer profits.

David Dranove and Christopher Ody, Northwestern University, and Amanda Starc, Northwestern University and NBER

A Dose of Managed Care: Controlling Drug Spending in Medicaid (NBER Working Paper No. 23956)

Effectively designed market mechanisms may reduce growth in health care spending. Dranove, Ody, and Starc study the impact of privatizing the delivery of Medicaid drug benefits on drug spending. Exploiting granular data that allow the researchers to examine drug utilization, they find that drug spending would fall by 22.4 percent if the drug benefit was fully administered by Medicaid Managed Care Organizations (MCOs), largely through lower point-of-sale prices and greater generic usage. The effects are driven by MCOs' ability to design drug benefits and steer consumers toward lower cost drugs and pharmacies. MCOs do not appear to skimp on performance, either by reducing overall drug consumption as measured by prescriptions per enrollee or reducing utilization of drugs that offset other medical spending.

Steve Cicala, the University of Chicago and NBER; Ethan Lieber, the University of Notre Dame; and Victoria R. Marone, Northwestern University

Cost of Service Regulation in U.S. Health Care: Minimum Medical Loss Ratios (NBER Working Paper No. 23353)

A health insurer's Medical Loss Ratio (MLR) is the share of premiums spent on medical claims. As part of the goal of reducing the cost of health care coverage, the Affordable Care Act introduced minimum MLR provisions for all health insurance sold in fully-insured commercial markets as of 2011, thereby explicitly capping insurer profit margins, but not levels. This cap was binding for many insurers, with over $1 billion of rebates paid in the first year of implementation. Cicala, Lieber, and Marone model this constraint imposed upon a monopolistic insurer, and derive distortions analogous to those created under cost of service regulation. They test the implications of the model empirically using administrative data from 2005{2013, with insurers persistently above the minimum MLR threshold serving as the control group in a difference-in-difference design. The researchers find that rather than resulting in reduced premiums, insurer claims increased nearly one-for-one with distance below the regulatory threshold: 7% in the individual market, and 2% in the group market.

Leora Friedberg, the University of Virginia; Wenliang Hou, Center for Retirement Research at Boston College; Wei Sun, Renmin University; and Anthony Webb, the New School

Lapses in Long-Term Care Insurance

About a quarter of long-term care insurance (LTCI) policy holders aged 65 let their policies lapse prior to death, forfeiting all benefits. Friedberg, Hou, Sun, and Webb find that lapse rates are substantially higher among the cognitively impaired in the Health and Retirement Study. This generates a pernicious form of dynamic advantageous selection, as the cognitively impaired are more likely to use care. Simulations show that an inappropriate asset drawdown path further increases the individual welfare cost of unanticipated lapses. Meanwhile, the researchers find evidence of a significant but very small role for either strategic or financial motives for lapsing.

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