The Incidental Economist

One doesn’t have to look hard to find ways, big and small, in which our health system is far from the best. I’ve had a few battles with insurers and providers to get them to do their jobs. Aaron Carroll has too. His story is so typical and frustrating. It’s hard to summarize in a brief quote so I’ll just give you the conclusion and encourage you to read the rest (warning: it will piss you off, and it should).

I did nothing wrong.  I follow the rules.  I pay my bills.  I go to my appointments.  I remember to refill on time.  I do everything right.  And I’m absolutely screwed.

Best health care system in the world my ass.

And remember, Carroll is a physician and a researcher who studies our health system. If it fails him, even in a small way, imagine what it’s doing to those less able to “work it.”

This post appeared in Kaiser Health News on 27 May 2010 and was cited in the 10 June 2010 edition of Health Wonk Review.

One of the latest criticisms of the new health overhaul law is that it will encourage employers to stop offering health insurance. In fact, it will.

We should welcome this, provided the decline in employer coverage is gradual and good alternatives exist. There are several advantages to the way in which the new law promotes severing the connection between employment and health insurance. One of them is that it will make more visible the biggest looming health care problem: costs.

The erosion of employer-sponsored health insurance is not new. Employers have been dropping coverage for years. According to the 2009 Kaiser/HRET Employer Health Benefits Survey, over the last decade employer offers of health insurance have declined by 10 percent. That’s been a problem because affordable coverage has not been readily available for many consumers outside of employer groups. For far too many, the only viable alternative to employer-sponsored insurance has been no insurance.

That will change in 2014 when coverage becomes available on exchanges, along with federal subsidies — depending on income – to buy it. That same year, Medicaid will expand to cover all individuals with incomes below 133 percent of the federal poverty level. As these non-employer options become available, the incentive and need for employer-sponsored insurance will decline.

A few years later, in 2018, another incentive for employer-sponsored health insurance – its preferential tax treatment – will begin to erode. A 40 percent excise tax (the “Cadillac tax”) will be levied on a gradually increasing portion of employer-based premiums. Right now, in contrast to insurance bought by individuals, premiums on employer-provided coverage are not taxed. That tax subsidy causes employer plans to be about 40 percent cheaper than they otherwise would be and encourages 26 percent more health spending than would otherwise occur. The excise tax will gradually recapture the foregone tax revenue, reduce the health care costs encouraged by the tax subsidy and drive down the incentive for employees to seek employer-sponsored coverage and for employers to offer it.

So, the deck is stacked against employer-sponsored coverage. The only things in the new health care law that encourages it are small-business subsidies for offering coverage and large-employer penalties for failing to do so. The former are scheduled to sunset after 2016 and the latter are small relative to a typical insurance premium. In the long run, they’re no match for the forces against employer-sponsored coverage.

But we need not fear the loss of employer-sponsored insurance if good, reasonably-priced options exist in the individual market. It’s essential that exchanges with fair subsidies to purchase coverage function properly.

Breaking the connection between insurance and employment solves other labor market problems too. It would reduce “job lock” (keeping a job for the insurance only) and enhance employment mobility. It would increase the insurance options available to most workers, an effect estimated in a recent National Bureau of Economic Research working paper to be valued at over $2,000 for a family of four. And, it would permit the reallocation of dollars spent by employers on health care premiums to wages, giving workers greater control over how the money is spent.

Meanwhile, as our health care system undergoes this change, health care costs will continue to rise faster than GDP, a clearly unsustainable rate. This isn’t a result of the new health care law (health care costs would soar nearly as rapidly without it), and it isn’t likely to be fully resolved by it (despite some provisions that can help).

One thing the new health care law will do is make us more aware of those costs. The same features that will contribute toward reduction in employer-sponsored coverage will also more fully reveal the cost of care.

A growing portion of largely obscure employer-based insurance tax subsidies will be replaced with explicit income-based subsidies. Higher-income individuals who switch from employer-sponsored to individually-purchased coverage will directly pay the full cost of premiums. For such individuals the hidden contribution their employers had made toward premiums as well as their own implicit payments via payroll deduction will be fully revealed. No longer will health insurance premiums be out of sight, out of mind. Cost increases will be easy to observe and harder to accept.

As the full impact of those cost increases becomes apparent, there may be a temptation to interpret them as a consequence of the erosion of employer-sponsored coverage. That would be a mistake. Some will likely confuse the distributional consequences of the new law with the absolute changes in underlying costs. That would also be incorrect. There may be calls for rollbacks of the high-premium excise tax, reductions in low-income subsidies, or higher employer penalties. Providers and the insurance industry may encourage such measures as means of putting off painful changes to their business models. That would be a shame.

The mechanisms that will contribute toward reduction of employer offers will make costs more visible and play a role in the redistribution of their burden, but they will not be responsible for cost increases. Weakening those mechanisms may temporarily push cost increases back below the radar, but it will do nothing to reduce them.

The ultimate consequence of the decline of employer-sponsored insurance depends on how we respond. Good, bad or ugly? It’s up to us.

(Hat tip: Greg Mankiw who credits Joshua Green and links to Brian Barrett.)

Earlier this month I couldn’t find answers to my question expressed as Hurricanes + Oil Spill = ? As predicted, folks are thinking about this, and journalists are beginning to cover it. From CNN:

Evans said the storm could either move the oil along the water’s surface or it could mix the oil with the water and cause it to sink. If the oil moved horizontally, the shoreline would be polluted, she said. If it moved vertically, the marine life under the surface would suffer.

The oil could slow the storm’s growth, Feltgen said. Evaporated ocean water fuels hurricanes, and the oil forming a film across the Gulf could buffer the water from the air, preventing the ocean water from feeding the hurricane, he said.

But other scientists say the storms could be stronger than usual because the black oil would heat the water faster and accelerate formation of hurricanes, which rely on warm waters for their development, Evans said.

So, there are some hypotheses, but it sorta seems like we don’t know much.

Andrew Revkin of the NY Times Dot Earth blog provides some links to terrific ways to visualize the Deepwater oil spill gusher and its effects. Below, for example, is the oil slick superimposed over my home town.

You can make your own map trivially at Beowulfe.com. See also the Oil Spill Crisis Map.

In a guest post on Ezra Klein’s blog, Mike Konczal brought my attention to Will Ambrosini’s blog The Ambrosini Critique. It appears to be serious and good. Count me as a new subscriber. I like the recent focus on the relationship between immigration and wages, which reviews some of the classic studies on the topic. Plus, I automatically have high regard for anyone who writes something like the following:

[W]e want to be sure that there is not something that makes a particular area or job a more attractive place to work causing both foreigners and natives to migrate to that area or job. If such a third factor existed, it would hide the effect of immigrants on natives. Suppose, for example, there was a technological advance making a particular job more lucrative (e.g. an acceleration in computational power makes the wages of computer programmers go up) or suppose there was a surge in demand for a job (e.g. nurses are in more demand as the population ages). Because immigrants and natives would be attracted to these jobs, the increase in immigration would be positively correlated with the increase in wages and the increase in native employment in these jobs. These omitted variables, to use economic jargon, might mask the potentially negative effect of immigration on wages.

Yep. Immigration is endogenous to wages. There are other factors that affect both. Hence, exploitation of natural randomness is necessary. Cue recent posts on observational studies with such designs, including instrumental variables approaches. They’re the bread and butter of this area of research.

My latest Kaiser Health News column bids farewell to employer-sponsored health insurance. It will erode. And that’s a good thing. It begins,

One of the latest criticisms of the new health overhaul law is that it will encourage employers to stop offering health insurance. In fact, it will.

We should welcome this, provided the decline in employer coverage is gradual and good alternatives exist. There are several advantages to the way in which the new law promotes severing the connection between employment and health insurance. One of them is that it will make more visible the biggest looming health care problem: costs.

More here.

See also, today’s Health Wonk Review for a roundup of recent posts from around the blogosphere on health policy.

I feel guilty relishing the engineering ingenuity of the Deepwater top kill attempt. I’m reminded of the fascination I had with the physics details of the 9/11 NY World Trade Center collapse, as they came out weeks and months after the horrible events of that day. In each case, my interest is in part (but only in part) distinct from the tragic nature of the events. The tragedies brought the amazing engineering and physics to my attention. I am a recovering physics/engineering geek and am permitted a relapse now and then. I … just … can’t … resist … my … curiosity.

But there is something therapeutic about learning the details. I’m upset. I’m powerless. I need to focus on something related that feels comprehensible, something connected to a solution of the problem or to questions about it.

With that as motivation, I herewith provide a beautiful excerpt from a wonderful post on The Oil Drum about top kill specifics:

The pumps will deliver the mud into the lines at a pressure of 6,800 psi, but as Kinuachdrach has correctly noted, it will then acquire the pressure from the full 5,000 ft column of mud as it flows down to the BOP, and enters the flow channel carrying the oil. Now we know that the BOP [blow-out preventer] rams are at least partially closed. If they are planning on using golf balls for the “junk shot”, it is feasible to surmise that the maximum width of the flow channel is no more than a third of a golf ball diameter. Not arguing the merits of American vs British ball sizes, let us assume that this is roughly half-an-inch (though it may have a greater length).

However, as flow volumes go up it requires more and more pressure for the fluid to get through a small gap. And at a given delivery pressure, only a certain flow volume will thus be able to escape that way. As long as this pressure exceeds that in the well, the net result will then be that the mud begins to push the oil and gas back down the well, and the well fills up with mud. The weight of that mud should then be enough to exert a pressure on the bottom of the well that is enough to exceed the fluid pressure in the rock and therefore stabilize the well and stop the flow of fluid out. Cement can then be pumped into the well to seal the top end. (Or with the flow stopped, another BOP can be put on the well to seal it). The main worry is that the hole in the top of the BOP is small enough to contain the additional flow volumes, and not allow the entire flow to escape upwards rather than being forced down the well. The higher flows might, in addition, if they do exit the riser, further erode the openings. This could increase the oil flow, as it lowers the resistance.

There’s so much more, with diagrams and videos.

When something shows up in my dreams I know it is time to deal with it. Last night it was the Deepwater oil spill and humanity’s environment stewardship in general. In one crazy dream segment the weather was predicted to be 100 degrees Fahrenheit with blizzard conditions. Hmm …

In my consciousness (where I know the proper conditions for snow), I’ve been really bothered by the Deepwater oil spill but haven’t worked too hard at learning a lot about it. To the extent that my text and aural news and information sources I follow have covered it, I’ve paid attention, riveted and disgusted. But I don’t subscribe to any science or environmental blogs, until today. I just added the NY Times’ Dot Earth to my Reader. Andrew Revkin, in particular, is doing some great reporting on the Deepwater spill there.

My question for you is, what are other good sources to follow the Deepwater spill disaster, global climate change, and other scientific and environmental news? I’m not interested in environmental hysteria. I want the real goods: solid, well-written, science-based information.

Suggestions?

Comparative Effectiveness Research: Challenges for Medical Journals, by Harold C. Sox, Mark Helfand, Jeremy Grimshaw, Kay Dickersin, the PLoS Medicine Editors, David Tovey,J. André Knottnerus, and Peter Tugwell.

[R]ealiz[ing] the full potential of [comparative effectiveness] research … will require assessing a heterogeneous body of evidence consisting of prospective randomized trials—including pragmatic trials—and observational research using data obtained in the course of regular practice. (Bold mine.)

Regional Variations in Diagnostic Practices, by Yunjie Song, Jonathan Skinner, Julie Bynum, Jason Sutherland, John E. Wennberg, and Elliott S. Fisher. Jason Shafrin has a review. The following is an excerpt from the paper’s abstract.

Current methods of risk adjustment rely on diagnoses recorded in clinical and administrative records. Differences among providers in diagnostic practices could lead to bias. … We used Medicare claims data from 1999 through 2006 to measure trends in diagnostic practices for Medicare beneficiaries. Regions were grouped into five quintiles according to the intensity of hospital and physician services that beneficiaries in the region received.  … Beneficiaries within each quintile who moved during the study period to regions with a higher or lower intensity of practice had similar numbers of diagnoses and similar HCC risk scores (as derived from HCC coding algorithms) before their move. The number of diagnoses and the HCC measures increased as the cohort aged, but they increased to a greater extent among beneficiaries who moved to regions with a higher intensity of practice than among those who moved to regions with the same or lower intensity of practice. … Substantial differences in diagnostic practices that are unlikely to be related to patient characteristics are observed across U.S. regions. The use of clinical or claims-based diagnoses in risk adjustment may introduce important biases in comparative-effectiveness studies, public reporting, and payment reforms.

Implementing Accountable Care Organizations, by Stephen M. Shortell, Lawrence P. Casalino, and Elliot S. Fisher.

In the face of concerns over rising health care costs, the new health care reform law offers one answer: the Accountable Care Organization (ACO).  The health care reform law encourages fee-for-service Medicare providers to create ACOs and also sets up a pediatric demonstration project.  This brief provides guidance to the federal government, states, and health care providers engaged in the work of developing ACOs.

[Book] The Promise: President Obama, Year One, by Jonathan Alter. Perhaps this book will reveal something new about health reform. Below is an excerpt of a summary from the publisher.

The Promise is a fast-paced and incisive narrative of a young risk-taking president carving his own path amid sky-high expectations and surging joblessness. Alter reveals that it was Obama alone—“feeling lucky”—who insisted on pushing major health care reform over the objections of his vice president and top advisors, including his chief of staff, Rahm Emanuel, who admitted that “I begged him not to do this.”

Alter takes the reader inside the room as Obama prevents a fistfight involving a congressman, coldly reprimands the military brass for insubordination, crashes the key meeting at the Copenhagen Climate Change conference, and bounces back after a disastrous Massachusetts election to redeem a promise that had eluded presidents since FDR.

Taking Up or Turning Down: New Estimates of Household Demand for Employer-Sponsored Health Insurance, by Jean Marie Abraham and Roger Feldman

This study provides new estimates of demand for employer-sponsored health insurance, using the 1997–2001 linked Household Component-Insurance Component of the Medical Expenditure Panel Survey (MEPS). Our focus is on households’ decisions to take up coverage through a worker’s employer. We found a significant inverse relationship between the out-of-pocket premium and the probability of taking up coverage, with the price effect considerably larger when we used instrumental variables methods to account for endogenous out-of-pocket premiums. Additionally, workers in families with more children eligible for Medicaid were less likely to take up coverage.

Workers on the Margin: Who Drops Health Coverage when Prices Rise? by Edward N. Okeke, Richard A. Hirth, and Kyle Grazier

We revisit the question of price elasticity of employer-sponsored insurance (ESI) take-up by directly examining changes in the take-up of ESI at a large firm in response to exogenous changes in employee premium contributions. We find that, on average, a 10% increase in the employee’s out-of-pocket premium increases the probability of dropping coverage by approximately 1%. More importantly, we find heterogeneous impacts: married workers are much more price-sensitive than single employees, and lower-paid workers are disproportionately more likely to drop coverage than higher-paid workers. Elasticity estimates for employees below the 25th percentile of salary distribution in our sample are nearly twice the average.