Relevant and even prescient commentary on news, politics and the economy.

McCain’s Health Plan: Tax Cut or Tax Hike, and To What End?

The Tax Foundation sent me an e-mail pointing me to Gerald Prante (who’s participated in our comments section in the past) taking Joe Klein to task for calling McCain’s proposed $5,000* refundable tax credit that would offset income tax on health insurance benefits “insufficient.”

Here’s what the McCain web site has to say:

While still having the option of employer-based coverage, every family will receive a direct refundable tax credit – effectively cash – of $2,500 for individuals and $5,000 for families to offset the cost of insurance. Families will be able to choose the insurance provider that suits them best and the money would be sent directly to the insurance provider. Those obtaining innovative insurance that costs less than the credit can deposit the remainder in expanded Health Savings Accounts.

The McCain campaign already deserves a few demerits for this representation of the plan. First, they don’t mention the tax increase that the health insurance credit offsets. Second, a credit that’s provided directly to insurers in lieu of (some) insurance premiums and then could be rolled over into an HSA if there’s something left over (which there won’t be for any family buying low-deductible health insurance) doesn’t sound much like it’s “effectively cash.”

Klein calls the McCain credit “insufficient” because it won’t pay the premium for typical employer-provided family coverage. (Analysis [PDF] of the plan by the Tax Policy Center indeed yields the result that the McCain plan would not provide for much insurance uptake among the currently-uninsured.) Prante claims that Klein doesn’t know the difference between a credit and a deduction, and provides a calculation purporting to show that the value of the deduction that McCain would repeal is less than the credit:

What [Klein] fails to understand is that the $5,000 value of the credit would be worth more than the current exclusion for almost any taxpayer. For example, a family in the 25% bracket would have its income tax before credits increase by .25 * 12,000 = $3,000. However, the family would be getting a $5,000 CREDIT that trumps the $3,000 extra in taxes from the elimination of the exclusion. Even… in the 35% bracket, the family having $12,000 in insurance would come out ahead.

End of story? Not quite.

In the quibble department, Prante assumes that the federal income tax exclusion can be repealed without state tax consequences. To the extent state income definitions follow the feds, state taxes would take away several hundred more dollars of the credit.

The big question is whether today’s $12,000 employer-sponsored plan would still be available for no more than $12,000. That depends on factors such as the employer exercising its “option” to continue to offer a group plan, and healthy members of the group resisting the incentives that the McCain plan provides to defect to the high-deductible insurance/HSA combination.

While McCain promotes the “option” of retaining existing coverage, the McCain plan’s incentives exacerbate “adverse selection death spiral” problems that particularly affect small groups under current policies. That is, increasing the price of insurance coverage on the margin would encourage the healthy and/or lucky-feeling to exit relatively expensive group plans, with the tax credit intended to encourage substituting the combination of a high-deductible individual plan and accompanying HSA. This leaves the comprehensive plans’ members sicker, or at least lossier, and drives up prices for remaining participants. (Repeat until the high price collapses the plan.) The Buchmueller et al. review of the McCain plan in Health Affairs mentions but does not quantify the potential effects of breaking up existing risk pools.

For employees sent to the individual market because employers drop group coverage, Buchmueller et al. suggest that insurance expenditures would increase markedly. They indicate that the typical $12,000 group policy for a family would cost roughly $2,000 more to obtain in the individual market (and note that many plans in the individual market have lower prices but much lower coverage).

In Prante’s calculation, the $12,000 policy costs someone in the 25% bracket $9000 after income tax. The $14,000 equivalent individual policy with the McCain family-level tax credit costs $9000 after income tax. So we’ve already exhausted the purported net benefit of the McCain tax credit for a family that wants to keep its coverage but is knocked out of the employer-sponsored group market. But the situation is actually worse than that, because shifting $9000 in compensation from benefits, which apparently the McCain plan would still exempt from payroll taxes, to wages subjects the compensation in lieu of benefits to payroll tax as well. This can increase taxes up to $1377 (at 15.3%) in this example, depending on where the hypothetical family’s wages stand with respect to the Social Security contribution and benefit base (currently $102,000).

Having recently seen the Tax Foundation concerned about Obama policies that would raise tax rates a few percentage points on high earners, it would be remiss of me to point out that the combined tax rates on wages paid in lieu of health benefits would be just as high for middle-class taxpayers under McCain’s health plan. That’s 25% for federal income tax, 5% or so for state taxes, and 15.3% for payroll taxes, 45.3% altogether, for compensation that current law and Obama policies would tax at 0%! (A new Tax Foundation issue brief on the subject which otherwise mostly invents a big number for the McCain plan’s reduction in the uninsured does at least acknowledge this in passing.) Since the McCain plan would, in the estimation of Buchmueller et al., shift millions of workers and their dependents to the individual market (representing 5 to about 15 percent of individuals covered under employer-sponsored plans; references in the article), the prospect of tax increases under the McCain plan is by no means vanishingly rare. Indeed, shifting people to the individual market is basically a feature of the plan, and not a bug — a part of the program is to de-link employment and health insurance and that’s a legitimate policy goal.

This also leaves the question of just why conservative health reformers think we need to impose what amounts (vs. current policy) to a Pigovian tax on health insurance. In the companion piece on the Obama plan by Antos et al. also in Health Affairs, there’s talk of “perverse incentives” under the current system but not a lot of beef beyond econ 101-style handwaving:

The following analysis reflects the authors’ concern that Senator Obama’s failure to address the perverse incentives in the U.S. health system will exacerbate the cost problem he has argued must be solved if we are to achieve anything close to universal coverage. Tax subsidies that promote first-dollar coverage have led consumers, health care providers, and suppliers to act as if any service that might yield some value, no matter how small, should be covered. Subsidized third-party payment has helped drive up health spending and, as demonstrated by the Dartmouth Atlas, sometimes has even led to poorer health outcomes. Realistic expectations about cost, value, and the outcomes that health care is likely to provide must be better understood by all parties.

An upshot of recent health-care cost-shifting between employers and employees is that “first-dollar” coverage is now rare. I’ve had true first-dollar coverage in the distant past, ain’t got it now, and couldn’t have it for a premium that would keep my small employer-sponsored group together. A main idea behind copayments and coinsurance is to avoid some obvious free-as-in-beer-goods problems by not covering the first dollar.

Moreover, they totally beg a central economic efficiency question: given the disconnection between health care prices and marginal costs, it’s far obvious that allocative efficiency is better served by exposing consumers to something like the list prices of routine services as opposed to the co-payments or co-insurance. (Exercises: What’s the marginal cost of a $150-list-price office visit where you spend 5 minutes with a nurse and 5 minutes with the doctor? Of a $1000 CT scan? The $200 month’s supply of an on-patent drug?) Explanation of benefits forms provide routine evidence that much or most of the price of various health-care services is markup.**

Of course, dynamic efficiency considerations mean that incremental cost constraints must be satisfied somehow — marginal cost prices wouldn’t be compensatory for the doctors, clinics, and hospitals. But efficiency-improving pricing arrangments that better align prices with marginal costs such as “two-part tariffs” (where customers pay a fixed charge plus variable usage-based charges; see e.g. your electric, gas, or [limited-usage] phone bill) can look a lot more like traditional insurance with what Antos et al. characterize as “modest” cost sharing than a high-deductible health plan plus an HSA. On this front, the conservative reform approach involves an unforgivable conflation of price and cost.***

Nor do some of the “perversions” sound all that perverse as features of private or social insurance. On Obama’s proposal to establish a federal reinsurance pool, Antos et al. write:

Even though employers would welcome the subsidy, the reinsurance does not reduce health care use or cost. Instead, the policy just shifts some of the cost to the federal budget and could even increase health care spending. Insurers and providers might be encouraged to provide more services to patients who were above the catastrophic threshold since the federal government was sharing in the cost.

The proposal could also lead to anomalous results. One neonatal intensive care stay could lead to federal catastrophic payments for an employer with younger employees (and lower health costs per employee), while an employer with older workers and much higher per employee costs might receive no subsidy for the costs of managing chronic conditions.

This is just about 180-degrees backwards. True, risk-spreading does not in itself reduce the cost of health care, but it does reduce the cost of health insurance, and reducing the cost of insurance helps promote efficient (multi-part) pricing of health care. Moreover, million-dollar NICU trips and the like are exactly the sort of losses for which reinsurance is appropriate. In the absence of adequate reinsurance, catastrophic losses are a death-spiral trigger, since especially small groups end up with huge premium increases leading to collapse of the plans one way or another. As for covering chronic conditions such as aging, the factoid that most of us would like to grow old and healthy, and be well-cared-for in the alternative, suggests a role for intergenerational transfer mechanisms for equitable distribution of the costs.

It might be argued that the reinsurance services could be provided privately, but what I’ve heard from people involved with such matters at local health insurers is that health care reinsurance isn’t a candidate for Marginal Revolution’s ‘markets in everything’ series.

Hoisted from our archives, here’s Kash from 2004 addressing the question of whether the reinsurance pool (also a Kerry proposal) would increase costs:

How would this national reinsurance pool help our nation’s health care problem? In a couple of ways. First and most obviously, it would simply reduce the cost to health insurers of providing health insurance, resulting in lower premiums. Part of this cost would be shifted to taxpayers, but as we shall see, the cost to taxpayers will be less than the savings reaped by people buying health insurance…

Think of it this way. Since the claims for one seriously ill person can easily reach $100,000 or more in a year (while most people’s claims are probably just in the hundreds of dollars), it’s much harder for an insurance company to predict what the aggregate health care costs will be of a group of 10 people compared to a group of 1,000 people. The law of large numbers means that you can pretty much rely on population averages when trying to guess how much health care the large group will need over the year; but for the small group, you either have to spend a lot of time and energy evaluating each of the 10 individuals to estimate each one’s likely health care needs for the coming year, or else you have to just take a chance. And insurance companies hate just taking chances.

The best estimates that I have seen by an economist of the effects of this reinsurance proposal are those by Kenneth Thorpe, professor at Emory’s school of public health. He estimates that the Kerry plan would reduce the variance of firms’ insurance claims by about 50 percent. This in turn will have two effects. It means that it will become dramatically cheaper for small firms to provide health insurance to their employees. Combined with the plan’s requirement that all participating firms offer health insurance to all employees, Thorpe estimates that about 3 million currently uninsured people will start receiving health insurance. This in turn will help to reduce the country’s overall health care costs by allowing more preventative care and early detection of health problems.

That is, since insurance costs depend on the variance of the losses, insufficient reinsurance implies higher risk premia paid to insurers, and those premia are big.

So McCain policies would raise taxes on lots of middle-class workers and dramatically increase marginal tax rates on some middle-class earnings regardless of the net benefits (something conservatives wring their hands over in other contexts), not obviously in service of aligning health care prices and marginal costs and without features that promote efficient risk-sharing. That’s changiness we shouldn’t believe in, my friends.


* For a family; individuals would get $2500. Observe that there’s a family insurance penalty in the plan, as family plan premiums are commonly more than double individual premiums.

** E.g., the negotiated price between my health plan and the UW hospital for my son’s emergency appendectomy last year was roughly 1/3 of list.

*** Yes, people use “cost” when they mean “price” colloquially all the time; the problem is not considering price/cost ratios carefully when arguing that one price promotes economic efficiency better than another.

Unintended Consequences of "Market-Based" Health Reforms

The essence of “market-based” health care “reforms” is that patients are exposed to the prices of the services that they receive (or are offered) and choose not to consume those with low perceived net benefits. With high-deductible health plans favored by conservative reformers, this means paying out of pocket for routine services. [*] This is a centerpiece of health care reform a la McCain, in the mild camouflage of “innovative insurance” and “expand[ed] benefits of health savings accounts.” [**] These plans already have been growing rapidly with a push from Bush and congressional Republican policies.

So how are they working out? In the S’trib’, Chen May Yee finds that market magic does not always include putting enough dollars in those pockets:

Once a month, doctors and staff at Edina [Minnesota] Sports Health & Wellness stay late to talk business…. Then there’s the topic nobody likes: which patients to drop because they aren’t paying their bills.

The clinic has been terminating an average of 16 patients a month. Most have high-deductible health plans and haven’t paid their bills for more than nine months…

Break-up letters from doctors are just one unintended consequence in the roll-out of high-deductible plans, the fastest-growing segment of the medical insurance market as traditional plans become ever more unaffordable.

Yee reports that the breakups happen in relatively special cases (e.g. small clinics that can’t afford to provide much uncompensated care) and information on the extent of the phenomenon is anecdotal. However, larger organizations are seeing increases in uncompensated care provided to the theoretically-insured:

Last year, [Hennepin County Medical Center] gave away $86 million in uncompensated care — $4 million, or 4.7 percent, to insured patients. This year, HCMC expects $90 million in uncompensated care, with 8.4 percent, or $7.5 million, from insured patients…

Fairview Health Services, Regions Hospital and HealthEast Care System also are seeing more unpaid bills from insured patients. Like HCMC, they’re nonprofit, with policies not to turn patients away.

I might suggest that a system is only so market-based when it relies on the public or (publicly-subsidized) nonprofit sectors to cover its failures. And for an added bonus, the system is not necessarily cheaper to administer:

Medical billing offices are working harder than ever. What used to be paid by insurance in a couple of weeks is now being stretched out to two- to six-month payment plans for patients, said Randi Tapio, chief executive of Medical Billing Professionals in St. Cloud, a firm that works with independent physician offices.

“We’re sending statements every month, calling them,” Tapio said. “Our costs go up.”

If a patient is uninsured, a clinic can ask for payment upfront or devise an early payment plan. But with insured patients, health plans require that clinics wait until after the service and the health plan determines who owes what. By then, the patient is out the door.

But never fear, improved bill-collection technology is here!

Recently, [a] clinic began asking patients having costly procedures such as surgeries to swipe a credit card upfront. An estimated amount is authorized but not charged until the health plan sends a letter saying what the patient owes…

HealthEast clinics are looking into check-in kiosks, like those at airports, where patients insert a credit card and are asked if they want to pay their co-pay.

“The thing is to be more intentional about collecting,” said Keith Rahn, who oversees HealthEast clinic billing.

The U.S. Chamber of Commerce has been running ‘issue ads’ telling Minnesotans that Sen. Norm Coleman has been working to keep government out of health care decisions. The credit-card companies, not so much.

[*] Which is to say, the premise of the system is that its biggest problem is overconsumption of routine care. In this regard, it runs against the current of some traditional health plans which have been reducing out-of-pocket shares for some expenditures (e.g. related to chronic conditions like diabetes) because their members are perceived as not being good at picking and paying for the higher-return care.

[**] Amusingly, while Obama issues pages generally link to more detailed briefing documents [PDF], a “Learn More About the McCain Health Care Reform Plan” link takes visitors to this page with a few bullet points and an auto-playing video ad, which in turn links back to the issues page for “the facts.”

Not Just Developing Countries

The most interesting presentation I saw at the AEA last January was Maccini and Yang’s discussion of the effect of rainfall on the health and growth of Indonesian babies.* It was subsequently discussed as an NBER working paper** by Jason Shafrin, and the thing that made it most interesting is that Maccini and Yang found an effect on female children, but not one on male children.

But that’s a developing economy. Would the same type of thing happen in a developed nation?

Apparently, via Mark Thoma’s links, the answer is yes.

People who suffer from cardiovascular diseases at advanced ages may have reason to suspect that the cause of their illness lies far away … around the date of their birth. A team of European researchers reports that if economic conditions at the time of birth were bad, then this leads to a higher risk of cardiovascular mortality much later in life.

The researchers used Danish twins born around the turn of the (19th into 20th) century as their baseline. And the nature-nurture difference appears to be at the margin:

The twin data come with an added bonus. They make it possible to check whether a twin pair’s health outcomes are more similar later in life if they were born under adverse conditions than if they were born under good conditions. It turns out that, indeed, they are more similar later in life if the starting position was bad. Conversely, if an individual is born under better conditions, then individual-specific factors dominate more. In short, individual-specific qualities come more to fruition if the starting position in life is better.

The full paper is available here (PDF).

*The reasoning for such a study seems fairly straightforward: babies are most affected in their earlier years, rainy seasons—especially in subsistence-farming areas—should tend to produce a better crop yield and therefore marginally more calories available to babies. So the alternative hypothesis should be that rainy seasons produce healthier children, as reflected in schooling accomplishments and height, among other things.
**[Free version here; PDF]

Economics Makes for Strange Sick-Bed Fellows

Obama ready to cave in to insurance industry


‘Her Way’; Obama Health Plan Could Go In Clinton’s Direction
Teddy Davis, John Santucci and Gregory Wallace ABC News 06.29.2008

Obama’s surrogate [Dr. Kavita Patel] made her comments Wednesday while representing him at a National Journal health-policy forum moderated by Ron Brownstein, the political director of Atlantic Media.

Patel’s individual mandate remarks were made in response to an insurance industry leader suggesting at the same forum that insurers will oppose Obama’s plan as currently structured. Insurers are worried that the Illinois Democrat has not tied an individual mandate to “guaranteed issue,” the industry’s term for requiring patients to be covered without regard to pre-existing conditions.

“We’ve had the conversation about . . . guaranteed issue,” said Karen Ignagni, the president and CEO of America’s Health Insurance Plans. “But we are prepared to have that conversation in the insurance industry if the politicians are ready to stand up and say we are going to get everyone in.”

Ignagni’s words are watched closely because the organization she heads emerged from the Health Insurance Association of America, sponsors of the “Harry and Louise” ads which played a critical role in killing Clinton’s effort to reform health-care in the 1990s.”

I didn’t see that coming, but I should have. Obama’s plan has the part consumers like but has the problem that it would bankrupt the health insurance industry. Hmmm what if his plan was to terrify them into accepting universal health insurance with the public sector allowed to compete ? Current proposal sounds lovely. It would make it advantageous to the young and healthy to wait till they get sick to get insurance. The problem is that it could cause the industry to enter a death spiral.

But it sounds lovely. Do you want to bet your industry on your ability to stop the 46 year old African American major party nominee whose middle name is Hussein and who beat the police and the newly elected Democratic governor in a *unanimous* Illinois senate vote ? Better to deal I’d say. Maybe, just maybe, Ignagni really agrees with me that opposing Obama on a superficially appealing plan whose only fault is that it will destroy her industry is not a bright move.

And look at the headline from Green Change. We have Obama caving to the health insurance industry by accepting 100% universal health insurance (sort of like the time that he adopted Republican talking points by proposing his donut social security funding huge progressive tax increase, class war, soak the rich and spread it out thin plan).

I don’t know if he is is just brilliant or is also blessed.

No data for Munich but…

The Healthcare Economist notes that you are more likely to die in a New York hospital than one in London or Paris. But London is less safe for “avoidable” mortality. (I believe the English translation of that is “Dying when you shouldn’t have had to do so.)

Unfortunately, there is no solution to the problems of London and New York relative to Paris. I believe Dani Rodrik, in another context, explained why this may be so, even if his commenters appear to miss the point.

(Title reference [YouTube link])

Senator Obama chooses Jason Furman econ advisor

By: Divorced one like Bush

From this story at Common Dreams comes the news that Senator Obama has chosen Jason Furman as an economic advisor. The story notes Mr. Furman’s fame for his defending of the Walmart model. The one that states Walmart is helping the less fortunate. I don’t buy it in the big picture scheme of viewing. In fact, we at AB have had this discussion and I even posted a link to a report from the EPI which noted not everything related to ones financial well being can be bought at Walmart. Frankly, there are some very big items that are not on Walmart’s shelves that take up a large portion of ones budget.

He has held a good position at the Brookings. Note that bit about director of economic policy for the Kerry/Edwards campaign. Not to keen on the Hamilton Project though:

The offices belong to the Hamilton Project, a small think tank created by Robert E. Rubin, Bill Clinton’s Treasury secretary and key economic adviser, and former Treasury deputy secretary Roger C. Altman, who would be a front-runner for the same job in a new Clinton administration.

Is this the concession the Clinton/Blue Dog group was looking for? The DLC still keeps control of the money issues? This article suggests some recent Hamilton Project influencing.Do we really need Chicago School lite? Are we that timid that we couldn’t try another school of thought? Now that would be “change”.

Then I read this in the Common Dreams article:

One economist who has disputed some of Mr. Furman’s findings on Wal-Mart said the disagreement shouldn’t disqualify him. “That’s small potatoes. Jason’s economic agenda goes way beyond that,” Jared Bernstein of the Economic Policy Institute said. “That’s not anything close to a deal breaker.”

Well ok? If the EPI can say there is more to this young man than Walmart, I need to go looking. I found this from Mr. Furman’s article on corporate taxes:

“We should consider tax reform in the classic 1986 mode: lower tax rates and broaden the tax base by limiting special exemptions. Both halves of this classic equation have the potential for helping the economy by eliminating the perverse incentives to invest in tax-favored activities rather than in more economically productive activities. “

Alrighty, there is more to his thinking. He relates our health care problems to the tax code also:

Not only do we spend more than any other country on health care, nearly 50 percent more per capita than the second-highest-spending nation, but citizens in 28 other countries have a higher life expectancy and 33 other nations have lower infant mortality rates.

If this were a government-run health care system, the voting public and policymakers would be up in arms. Yet, perhaps because health care is largely perceived as a private-sector concern, there is relative quiet: while voters tell pollsters that it is a top priority, there appears not to be comparable political pressure for serious reform or any fundamental change in the government’s involvement, either in the provision or funding of health care. This is in part because much of the federal government’s involvement with the health care system is through the hidden backdoor of the tax code. An importantprinciple for modern progressives is that when the government has to intervene in the marketplace, it should not prop up failure. Yet the federal government is, in fact, deeply involved in perpetuating the current “private” health care system and all its flaws, spending approximately $200 billion annually in subsidizing employer-provided insurance. It is the single biggest subsidy in our tax system, more than twice as costly as the mortgage interest deduction. The only government programs that cost more are Social Security, national defense, and Medicare.

Interesting perspective…yes? But, I’m not so sure he is correct with the solution, though I can now see why Senator Obama has put him at the table:

In fact, if we turned our irrational health tax subsidies right-side up–by curbing subsidies for higher-income workers and those with more generous health insurance plans–we could raise tens of billions of dollars annually, money that could go toward increasing access to health insurance. Taking it a step further, we could scrap the current deduction altogether and replace it with progressive tax credits that, together with other changes, would ensure that every American has affordable health insurance.

Not exactly a Mrs. Edward solution if I have read her correctly.

This person, Mr. Furman seems to fit well with Senator Obama’s other econ advisor, Mr. Austan Goolsbee. I think we can now start making some educated guess on what to expect for proposed solutions to the shift of income share to the top 1%. You know: It’s the economy stupid, Show me the money, declining real wages, consumer economy with little to spend, (add your’s here…). We’re going to try a new version of trickle down which has some form of tax code tightening, but no direct social policy influencing. Social influencing, like say, we use the tax code to make it more profitable for the company to pay the help as oppose to paying the very top management and shareholders.

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.

Health Care Spending

The other point from my earlier chart on health care spending worth noting is that in the PCE data health care accounts for around 20% of consumer spending. In contrast, medical care only has a weight of 6.2% in the CPI. Since health care prices generally rise some two to three percentage points faster then overall inflation this implies that the CPI significantly understates reported inflation. If the weight of medicine in the CPI were more like the weight in spending, the reported inflation rate would have been up to a full percentage point higher every year.

Interestingly, when I bring this point up to all the people who argue that the CPI overstates inflation they generally try to change the subject.

Healthcare Part XIX – Too Much Internet?

My wife (aka the world’s greatest nurse) has been an RN for three decades.

One of her annual rituals is to attend recertification class for CPR (because she doesn’t work ICU or surgery she does not need the advanced cardiac program). She has plenty of experience and often more clinical training than the Red Cross instructor.

This year due to a medical leave, some travel and the holidays her certification will be expired for about six weeks. Not that her skills expire, of course.

One of her co-workers suggested she get re-certified over the Internet for the interim period.

Ok she says, and sent dutiful husband to do the search.

Sure enough, since her certification is current now (or lapsed less than six months) and she has a license she could get herself re-certified on-line. She thinks it is bizarre.

In the search process I found some scary sites that claim that someone who has never had any first aid or CPR training can train on the Internet and get a certifications sufficient for most OSHA requirements. This is learning first aid and CPR by watching a video on a computer screen. Gasp.

I have done first aid and CPR training about 25 times in the past 45 years, with numerous refreshers in between while the youngsters are doing First Aid merit badge. I have pumped on the dummy ’til my hands were numb and I was out of breath (and I’m 1-for1 in real world CPR, the scariest 8 minutes of my life).

Can you learn a hands-on skills on the Internet? Is this a step too far for a novice? Would you want CPR from an Internet student?

My wife goes to the Red Cross and bangs on the dummy in January. She is for real.

The American Medical System – One Person’s Experience With Heart Surgery in the US… and Brazil

A week ago, my sister, while traveling in Natal, a city in Northeastern Brazil, experienced some heart trouble. Heart trouble is nothing new for her; she’s had a defibrillator in her for well over a decade now, and has undergone heart surgery a few times. Long story short, a taxi driver rushed her to the hospital, and on Tuesday she underwent heart surgery. Luckily for her, there’s a new heart hospital in Natal, so they knew what they’re doing. It also allows her to compare care under specialists in the US (she’s been through this in LA, Houston, and North Carolina) to her care under specialists in a city most people have never heard of in Northeastern Brazil.

A few interesting facts:

1. Needless to say, despite the plummeting value of the dollar relative to the Brazilian real, the cost of this surgery and everything related to the hospital stay is much, much cheaper in Brazil. (Thank goodness – her insurance company will reimburse her for most of the expenses, but since it was done abroad, she has to pay for it first and submit a bill later.)
2. My sister says that from her perspective, this surgery went more easily than the many surgeries she had in the US. In plain English, the pain, upon awakening, was much, much less, and she was up and about much more quickly. Whoever was in charge of sedation and anesthesia did one heck of a job. (I should also note – this surgery was something of an emergency – I believe each time she’s had surgery in the US, they had time to plan and the surgery was scheduled months in advance.)
3. The pre- and post- op care has been first rate. My sister uses words like “fabulous” and “incredible” to describe how she’s been treated. She’s talking about buying a place in Natal and moving there, and I suspect she’s only half joking. Maybe less than half.

Health care is more expensive and often of lower quality in the US than in developing countries like Brazil, even when you’re dealing with exotic problems which is what American care supposedly excels at dealing with. Someone tell me again about the greatness of the American medical system.