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Just a distraction

25*30 = 750

104/750 = 13.9%

For those more conversant in the “disincentives of enforcement” literature than I, can you back into the Rational Expectation of Enforcement Practices that would lead nearly 14% of a population to conclude it is maximizing utility?

And, given your calculation, what would that say about the Management Practices of the organization?

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Did Part D Work?

Mark Duggan and Fiona Scott Morton published a paper at NBER with this general conclusion:

Using data on product-specific prices and quantities sold in each year in the U.S., our findings indicate that Part D substantially lowered the average price and increased the total utilization of prescription drugs by Medicare recipients. Our results further suggest that the magnitude of these average effects varies across drugs as predicted by economic theory.

Even though they were only using one year’s worth of data—or perhaps because of it—they concluded that the program has been a success for the most common drugs. I posted this list at MU, but it bears repeating here:

Lipitor, Zocor, Prevacid, Nexium, Zoloft, Epogen, Celebrex, Zyprexa, Neurontin, Procrit, Effexor, Advair, Paxil, Norvasc, Pravachol, Plavix, Allegra, Wellbutrin, Oxycontin, Fosamax, Vioxx, Singulair, Protonix, Actos, Ortho, Aciphex

Duggan and Scott Morton also found that—for the “small subset of ‘protected’ therapeutic classes” that all providers were required to carry—the Part D prices to consumers actually rose. The authors explain this as a standard of economic theory:

According to Part D regulations, there are six “protected” therapeutic classes in which PDPs must be less aggressive with their formularies than in other therapeutic areas. All products in the HIV, anti-cancer, anticonvulsant, immunosuppressant, antipsychotic, and antidepressant categories must be included in all Part D formularies. While a PDP cannot exclude any drug in these categories, it can create financial incentives or administrative hurdles to affect a patient’s choice of drug….We do not know whether the restrictions applied to these classes have a measurable impact on the behavior of PDPs because in the first year of the program it was not clear how much CMS would oversee formularies. If restrictions are binding, their effect will be to reduce Part D’s effect on the substitutability among drugs (lower [gamma-sub-g]) and therefore reduce the PDP’s ability to extract manufacturer discounts.

English version: without being able to threaten to exclude a drug from coverage, and not being certain about whether they would be permitted to classify a drug as more expensive than a counterpart under their specific plan, the drug companies could not bargain effectively with drug manufacturers.

Which makes perfect sense, until you consider that the price to Medicare recipients of those drugs went up.

Imagine the negotiations. “You charge $1,000 for that drug.” “Yes, but for you, $1,005.” “Done.”

Duggan and Scott Morton do present some caveats

To the extent that plans become more or less successful at negotiating prices in future years, the results may of course change. Secondly, we are unable to measure any ex post rebates which PDPs may have been able to negotiate and which affect net prices to PDPs. Such rebates do not appear on the invoice, which is the source of IMS data, and might be causing prices to be even lower than those measured here. If rebates are present, our estimates are a lower bound to the price reductions achieved by PDPs.

Translation: Some PDPs may be making more money than we think at the current levels.

The other rebates that we do not measure are Medicaid rebates paid by manufacturers to the Medicaid program. Dual eligibles’ pharmaceutical purchases under Medicaid automatically generated this rebate. Once dual eligibles move into Medicare Part D plans, their pharmaceutical purchases occur at different prices, which is what we document here, but they no longer trigger automatic rebates. Any study of the total cost of Part D to the government would want to consider both sets of rebates.

Translation: While the PDPs may have earned more, the government may have spent more (rebates not received).

The last two possible results would be similar to those expected by many economists who looked at the form of Part D, where the largest buyer (the Government) was prevented from using its buying power, but obligated to foot the bill for private companies that, individually and probably even collectively, would not be able to negotiate with the same influence.

More worrisome than that this conclusion should be expected is what might be expected to happen if the PDPs were rational. Again, this would come from standard economic theory, though it is not discussed explicitly by Duggan and Scott Morton.

To be direct about it, the PDPs in Medicare Part D each has a steep learning curve, effectively creating a switching cost for the consumer. That, in turn, will enable each PDP to retain its consumer base, even while increasing the prices it charges.

Health Economists especially are fond of talking about the “full cost” of something. If it would take me twenty or thirty hours to select a replacement PDP, the that “cost” will keep me from switching, even if I end up paying a few dollars more for a prescriptions.

Contrast this with, say, automobile insurance. The terms are all similar, and I can spend “15 minutes” getting a quote from GEICO (or three or four from Progressive) that I know is essentially the same coverage as my current provider.

I may not know how well the insurer will respond to me, and I may not know if they can provide the other policies I need (home, life, etc.), so there may be minor externalities (e.g., having to write different checks at different times to different insurers for different policies). But there will be nothing on the order of the switching costs currently associated with Medicare Part D.

Duggan and Scott Morton have done a service in indicating that Part D has gotten more people using more drugs.* And they have so far shown that economic theory appears to be holding in a real-life situation.

If economic theory continues to hold, we should expect that profit margins will grow over time, in reaction to the high switching costs that are built into the program.

We can hope that will not be so, but Mark Duggan and Fiona Scott Morton have not indicated that would be the way to bet.

*This is also the lesson of the Massachusetts universal health plan, but that’s for another post, though I note that the differing reactions to the two situations from some of the think tanks is interesting in itself.

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Blaming the Badly Allocated for Choices Not Necessarily Their Own

Tom’s working on explaining Savings 101, so this is specifically to deal with the “issue with” retirement accounts.

Via Lawrence G. Lux, we find the A.P. (and maybe the NYT) highlighting a “study” by an investment management firm that “discovers” problems with the way people manage their 401(k)s:

Some of the diversification problems stemmed from concentrated holdings of company stock. Experts urge savers to hold no more than 10 percent to 15 percent of their accounts in company stock, pointing out that they could sustain significant losses if the company runs into trouble or goes bankrupt.

The Financial Engines study found that among savers eligible to receive company stock, more than one-third had more than 20 percent of their holdings in the company’s shares. Some older workers had more than half their holdings in company stock, and workers with salaries under $25,000 also held a disproportionate amount of company stock, the study found.

On the level of savings, the study found that just 7 percent of 401(k) participants were saving the maximum allowed.

Much of that is common sense. (Think Enron: the time when your company stock will be least value to you also will be the time you may need to borrow against your retirement account.)

Some of it, likely, is the way the plans are offered. (Again, think Enron.) Public companies tend to offer their stock as part of a “retirement plan,” and many “investors” are told to invest in “what you know.”

However, the absurd claim in the lede of the AP piece (“Despite extensive efforts to educate workers about saving for retirement”) is belied by two realities. One is noted by Lux:

Look, Maw, those damned Kids don’t know how to manage their (401)k Funds. When are they going to learn that they have to spend 20 hrs. per Week evaluating good potential Investments. Listen to them complain that they don’t have the time–between raising children and working a 50-hour Workweek. (italics removed)

the other comes from anyone who knows a bit of history and remembers that pensions have been historically underfunded (or raided) by management. If trained money managers couldn’t do a good job in the Glory Days of Defined Benefit (and, make no mistake, a literal reading of economic theory would lead anyone to believe those were the glory days), then expecting people who do not specialize in managing money to allocate “appropriately” should be, on the face of it, absurd.

Finally, some of the problem likely is due to constraint optimization issues. (Short version: You can only save what you don’t have to spend.) Let us rewrite this paragraph:

Nearly two-thirds of those earning less than $25,000 a year don’t contribute enough to get the full company match, the study found. But 24 percent of those earning $50,000 to $75,000 a year and 12 percent of those earning more than $100,000 a year didn’t get the full match, either.

as

Only slgihtly more than one-third of those earning less than $25,000 a year have enough disposable income to get the full company match, the study found. Meanwhile, 76 percent of those earning $50,000 to $75,000 a year and 88 percent of those earning more than $100,000 a year were able to qualify for the full match.

But that makes it clear, as divorced one like Bush noted in a comment to vtcodger’s post:

You don’t invest in the market until you have money you can afford to lose.

And a lot more people making $50,000-plus-a-year have money they can afford to lose than those making less than $25,000 p.a. Which is what the data shows.

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Semi-Tech Interlude: External Wikipedia Links

I mentioned this at Marginal Utility, but agree with rdan that it’s worth mentioning to the (somewhat larger) AngryBear readership.

Kathryn Cramer has done some work with Wikipedia’s External Links tool. The results are interesting, and I suspect the more tech-savvy (or persistent) than I will be able to leverage the work.

Discuss amongst yourselves.

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Dave Johnson at Seeing the Forest Gives the Lie to the "Hillary is destroying the party" meme

He’s more of an optimist than I am—but that isn’t difficult.

Then again, he is also well aware that, were Hillary to drop out today, it wouldn’t be all peaches and cream from now until after the nominations are in place.

People are saying that Hillary is “race-baiting” because she mentioned “blue-collar whites.” Save the racist accusations for what’s coming — because it surely IS coming….

It is the old way, and it worked for a long time, and it stopped working and the 50-state strategy is what we need now. But is isn’t racist and isn’t intended to divide us. Is going after “soccer moms” or “NASCAR dads” as a demographic voting block a sexist tactic? Yes and no, but it isn’t intended to divide. She is just saying that voting patterns show that she is bringing in more of certain groups — and confirming her unfortunate entrenchment in the old-style “big state” view.

Let’s talk about real racism. Look at what has already started from the right. We already have seen them using “boy” and “darkest Africa.” As November approaches you will be hearing about “our women.” There will be stuff about how Obama wants the While House so he can lure in white wives of important Senators, etc. There will be a lot of “us” vs “them.” And much, much worse. Believe me, much, MUCH worse. THAT is when you want to talk about people using racism as a campaign tactic. And when that happens you really don’t want the right saying “well that’s what you said about Hillary, too.” [boldface and italics his]

As I noted at Thomas Palley’s blog a few days ago, “If Obama can’t take punches from the HRC campaign, he’s got no chance of doing so against the professionals of Ari Fleis[c]her and the RNC.” And while many appear to believe that the Dems could run anyone with a personality this side of Harry Reid after eight years of Bush-league rule, it’s a long way to November. And the more Hillary-punches Obama can take, the better off he’ll be when the real goons, not just Rocky Balboa, start swinging.

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Two Things Someone Else Needs to Discuss

Since I’m trying to cut a 24-page paper down closer to 15 today, I’ll leave the Heavy Lifting to other. But two things probably should be discussed (or at least noted) here:

  1. Brad DeLong appears (to me) to confuse perceiving a move from Democratic Republic to Empire—and therefore away from any Competitive Advantage for the past 100-ish years—with conspiracy theory. But I may just be reacting to his headline.
  2. Tim Duy (at Mark Thoma’s place) refuses to jump into the briar patch:

    Increasingly, society views the purchase of a home as primarily an investment, not for the service it provides (don’t even get me started on this topic).

    Someone needs to get him started. Or continue from Tom’s previous AB post.

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Price Discovery (First of a Series)

I want to talk about something of which I know nothing: Wireless Internet Access.

We spent the weekend in pgl-land (NYC), at a friend’s apartment. Since he’s a rather prominent computer graphics designer, I assumed, incorrectly, that he would have some form of Internet access at home.*

So I did what I always do: opened the laptop and searched for an available wireless access point.

At no time were there less than 15 indicated. And while most of these were “Security-Enabled,” I get the impression that either (1) that has become the default setting for service in the past few years or (2) enough people have been persuaded by the FUD campaigns of MSFT and others that they read that part of the instruction manual.**

I had kids to distract, so access to barbie.com or dailynoggin was important. That is, I would have been willing to pay a few dollars for a weekend’s worth of access, or some equivalent thereof. If there were a market available.

And, probably, at least a few of those 15 or so router-owners—badger or linksys or 5AMews—would have been willing to make a few dollars providing some of their excess capacity to my 54.0Mbps laptop. If there were a market available.

But there wasn’t.

Or, more likely, there was, but the effort wasn’t worth it. One of the key aspects of economic analysis is the assumption that markets (1) clear [both buyer and seller voluntarily agree on a price] and (2) are efficient [everyone involved in the market has all the information they need to make a rational decision on what the clearing price is/will be].

In the real world, investment banks spend millions of dollars to attain that “efficiency.”*** Nor is anyone of the illusion that the terms of all transactions are completely voluntary on both sides. But those are variations on the model, and the markets created from or supported by them, while not an economic ideal, can be analyzed as variations.

What happens when there just is not a market?

In the case here, I have no way of knowing who the local providers are or, more importantly, where they are. Badger could be my next-door neighbor, or two floors away and at the other end of the building. So I would have to spend time

  1. knocking on doors, interrupting people (including some who have no capability themselves; there are many more than 15 apartments in the building),
  2. having discussions with some people who might have non-economic reasons not to agree to permit me access (including FUD),
  3. (c) finding people who really do use all of their capacity,****
  4. finding people who could provide access but with whom I cannot agree on a clearing price, and
  5. either
    1. finally, finding someone with whom I can come to a market agreement or
    2. giving up and depending either on unguarded WAPs or finding an alternative.

In all scenarios, even 5(2), I have spent some portion of time, possibly significant, that must be included in the Full Cost of the Search.

Which is probably why there is not an active secondary market in Wireless Internet Access in the United States.

The consequences of this specific example are left as an exercise. The consequences of the problems with Price Discovery are To Be Continued.

UPDATE: Felix Salmon wonders about the need for price discovery in commercial WiFi:

If I’m looking for a wi-fi network, it’s easy to see which ones are encrypted and which are open. But of the open networks, it’s impossible to see which ones are genuinely open and which ones will take you only to a sign-on page which asks for a credit card number and which often doesn’t work….A network which purports to offer free wi-fi should do just that: firewalled wi-fi should look different somehow.

*No DVD player, VCR, or television, either; not a keeping-the-kids-busy-without-touching-things place.

**I am convinced that it’s not out of actual knowledge because several of the “secure” networks were still named linksys, Apple Network ######, or similar. It may not be true, but it is the way to bet.

***As cactus noted, the EMH is of dubious value if there is a significant disconnect between the alignments of the financial markets and those of “main street.” But let’s pretend it works for the normal “markets” model.

****Highly unlikely, for reasons to be discussed in another post.

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