The Incidental Economist

I had stopped paying attention several weeks ago. Today a trickle of traffic drew my attention to the fact that the (rather poor) Wikipedia entry for this blog survived a debate over its notability. I’m amazed.

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Sometimes readers get confused by the title of a post (or newspaper article, book, etc.). How accurate and complete can a brief statement be? Not very. Sometimes one has to read the content of the piece and apply a little thinking to assess the title’s scope. We know this, right?

Case in point: I titled a prior post “Individual Mandate Penalties Are Adequate.” Adequate for what? And in what sense? Adequate to rid the world of disease and famine? Adequate to confuse or annoy people? Of course the body of the post is crystal clear of the scope of adequacy, the means by which the assessment was made, and the limitations of analysis applied. As Reihan Salam quoted my conclusion,

Since there is little evidence of substantial gaming in Massachusetts, based on an analysis of penalty size alone there would seem to be little cause for concern over gaming under ACA, particularly for higher income individuals. This analysis ignores other differences between Massachusetts and its health reform law and the national population and ACA, respectively. Results are sensitive to assumptions, but I deliberately selected those conservatively as indicated above.

Salam also correctly points out that Massachusetts permits insurers to apply a six month pre-existing condition exclusion period. That is, they must guarantee issue of a policy but do not have to cover a pre-existing condition in the first six months. As far as I know, no such exclusion period is permitted under ACA rules. So, this is a difference between the Massachusetts individual mandate and the ACA’s mandate. I pointed out this difference in a prior post to which I linked in the “Individual Mandate Penalties Are Adequate” post.

For all that, Salam concludes, “Frakt titles his post, ‘Individual Mandate Penalties Are Adequate.’ I’m struck by his confidence, and impressed by it.” I’m delighted to be viewed as impressively confident, but what’s so impressive really? Does Salam think I meant that the penalties are adequate to overcome all the other differences of relevance between the Massachusetts and ACA laws? That would be an impressive assertion. Impressively dumb. If I meant that would I have pointed out that other important differences may exist and linked to a post that described one (the exclusion period)? No. Nor would I have written the conclusion Salam quoted, emphasizing that my analysis was based on “penalty size alone.” And I wouldn’t have started the piece with “Some have asserted that the individual mandate penalties under the Affordable Care Act (ACA) are lower than those imposed in Massachusetts.”

Thus, it should be clear to that I was documenting that there is no basis for an argument that the ACA penalties are lower than Massachusetts’ penalties. That’s not how one goes about supporting a claim that there will be gaming under ACA. Yet that’s the argument Salam had made in an earlier post in which he wrote, “My reading is that the penalties are considerably more onerous in Massachusetts than under the new federal legislation.” Since that is false, one has to base the argument on something else. That is, ACA penalties are adequate as far as penalties go, but other provisions of ACA may not be sufficient to prevent gaming.

I’m not saying there is no cause for concern about gaming. On that Salam and I may agree. I’m saying that penalty size differences aren’t the place to look for support of such a concern. Clear?

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Bundling payments to health care providers for all services provided during an episode of care is one of the ideas for reducing health care costs and increasing quality. This mode of payment is also associated with the accountable care organization (ACO) concept. A reader pointed me to RAND’s thorough, evidence-based brief on bundled payments, which makes for good reading for anyone wishing to understand the related issues or find relevant literature.

The particular issue that concerns me is how providers will need to organize to manage bundled payments and what the implications–particularly for market power–are of those organizational arrangements. From the RAND brief:

For example, hospitals are not typically in the position of having to reimburse physicians for services. If hospitals received the bundled payment and had to distribute it, they would have to set up contracting, billing, and reimbursement systems, all of which could require an expansion of current technologic capabilities. Further, mechanisms would have to be in place to guarantee that physicians were not being double paid (via the bundle and separate billing) for their services and that physicians seeing a patient for a problem unrelated to the bundled diagnosis were still paid appropriately.

Note, RAND has an even shorter overview of bundled payments that might be a good place to start if this is all new to you.

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Didn’t take long for the insurance industry to cave:

After battling President Barack Obama’s health care overhaul the better part of a year, the insurance industry said Monday it won’t try to block his efforts to fix a potentially embarrassing glitch in the new law.

In a letter to Health and Human Services Secretary Kathleen Sebelius, the industry’s top lobbyist said insurers will accept new regulations to dispel uncertainty over a much-publicized guarantee that children with medical problems can get coverage starting this year…

“Health plans recognize the significant hardship that a family faces when they are unable to obtain coverage for a child with a pre-existing condition,” Karen Ignagni, president of America’s Health Insurance Plans, said in a letter to Sebelius. Ignagni said that the industry will “fully comply” with the regulations, expected within weeks.

There’s still nothing to stop them from charging more for those children, but I take this as a sign that they really don’t want this fight – at least not in public.  Maybe I’m being too pessimistic.

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Jason Shafrin is the only other health economist I’m aware of who routinely blogs. He deserves some credit for reviewing literature and posting references. His post today on the effect on premiums of health insurance benefits mandates is a good example. Here’s an excerpt.*

A recent paper by the Pacific Research Institute summarizes the findings of various studies of the impact of mandates on health insurance premiums.

• CBO (2000): 4 to 9 percent of premiums, all mandates aggregated
• Graham (2008): 5 to 23 percent of premiums, all mandates aggregated
• Bunce and Wieske (2009): 20 to 50 percent of premiums, all mandates aggregated
• New (2006): 15 percent of premiums, all mandates aggregated
• Congdon et al. (2006): 0.3 to 0.7 percent of premiums, per mandate above 20
• Wisconsin OCI (2002): 1 to 3 percent of premiums, five specific mandates aggregated
• GAO (2003): 3 to 5 percent of premiums, all mandates aggregated
• Krohm and Grossman (1990): 0.2 percent of claims, specific mandated benefits
• Maryland HCC (2006): 2 percent of premiums, all mandates aggregated
• Maryland HCC (2008): 0.01 to 1 percent of premiums per each of five specific mandates

… What one can conclude from the above studies is that mandates do increase cost.  The degree to which health insurance premiums increase, however, is not a settled matter.

Of course the notion that mandates increase costs and premiums cannot possibly be controversial except in the case of a small subset of services the increase use of which might offset other, more expensive, health care utilization. An advantage of mandates, or standardization, is that it can decrease complexity and search costs for the consumer, making the market function more efficiently.

Note that costs are increased in two ways: (1) More benefits covered translates to higher insurer payout; (2) More benefits covered attracts enrollment from higher risk individuals. In a market with no standardization low-risk individuals could find less expensive insurance that covers fewer services. But such a market might segment risks so finely that the risk pooling mechanism of insurance ceases to function. That’s made all the more likely in a market with guaranteed issue and no pre-existing condition exclusion periods. Switching products to match needs to coverage is just an extension of the gaming problem I’ve been writing about lately.

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In the health care cost shifting debate there are two hypotheses. One is that lower Medicare reimbursements motivate hospitals to seek higher payments from private payers. That’s the classic and pervasive notion of cost shifting. The other hypothesis is that hospitals with high degrees of power command high prices from private payers. This permits such well-paid hospitals to have weak cost controls, resulting in low or negative Medicare margins. That’s a somewhat counter-intuitive story that has been offered by MedPAC in reports to congress and explored in a new Health Affairs paper by three members of MedPAC’s staff, Jeffrey Stensland, Zachary Gaumer, and Mark Miller (summary on the Health Affairs blog).

Which hypothesis seems more likely to be correct? Do low Medicare prices cause high private payments, or do high private payments cause low Medicare margins (via relaxed cost controls)? There is no way to tell from descriptive analysis of observational data. The best evidence would come from a randomized trial. Go ahead and wait for it if you like, but it won’t happen. We can’t randomize hospitals to low and high payments any more than we can randomize them to low and high market clout.

The best we can do is look for natural experiments that can be exploited by well-designed observational studies. Sometimes there is exogenous (uncorrelated with private payment) variation in Medicare payment, such as that induced by the 1997 Balanced Budget Act. In a credible and well designed study, Vivian Wu exploited that phenomenon to deduce that, on average 21% of Medicare payment reductions are shifted to private payers. She also found that market concentration mattered, that in markets with the most dominant hospitals cost shifting rates were as low as 5%. (I reviewed Wu’s paper in a prior post.)

Wu’s results are consistent with other work, and I’m generally satisfied that cost shifting from public to private payers does occur, but at a level much lower than claimed by the hospital or insurance industries. However, that does not mean MedPAC’s hypothesis is incorrect. In fact Wu’s results actually strengthen it. In truth (or so I believe) payer-specific revenues, costs, and market power are, at least in part, simultaneously determined. There is no causal chain that runs only one way or another. Relatively dominant hospitals do cost shift (in the classic sense found by Wu, though at a relatively low rate) and they are also able to accommodate high cost structures and low/negative Medicare margins (as per the MedPAC interpretation). There’s really no disagreement between the two views.

Of course it would be very nice to see a convincing study that explores the issue explicitly from the MedPAC perspective. As the authors make clear themselves, the paper by Stensland, Gaumer, and Miller only illuminates the hypothesis and shows that it might plausibly be true. But it does not show evidence that is necessarily consistent with a causal connection between market power and costs. That ‘s not a critique, just a fact.

Theory-minded economists might dismiss the notion that an organization would allow revenue to drive costs. Don’t all organizations minimize costs to maximize profit, independent of revenue? Stensland, Gaumer, and Miller think that nonprofit hospitals would not.

When nonprofit hospitals have more resources, they tend to spend those resources because nonprofit hospitals do not have shareholders to distribute profits to. The nonprofit hospital’s expenditures could be on service-line expansions, such as a new cardiac surgery wing; on acquiring physician practices; on patient amenities, such as larger rooms; or on other capital expenditures that help the hospital maintain and expand its market share of private-payer patients.

On the other hand, in theory for-profit hospitals should minimize costs irrespective of revenue and should maximize revenue over each payer independently. For such hospitals, neither cost shifting theory should hold. If costs don’t vary with revenue then they can’t explain Medicare margins. And a revenue maximizing firm cannot compensate for low Medicare payment with high private payment because, as for profit entities, they’re already maximizing private payment independent of other revenue sources, including Medicare.

Well, that’s theory. The world is often messier. In her empirical study Wu did not find a statistically significant relationship between cost shifting and hospital profit status writing that, “cost shifting is not determined solely by institutional characteristics.”

Market power, costs, private, and public payment are almost surely all related and nothing definitive can be learned without exogenous variation in at least one of these factors. Though work that exploits just that exists, the cost shifting debate will no doubt continue, due in part to the allure of descriptive work based on the weak assumption that costs are exogenous (i.e. outside the control of administrators). But one thing ought to be settled. When two things are simultaneously determined it cannot be said which causes which. Do low Medicare margins cause higher private payments or vice versa? The answer is yes (but to a small degree). And the key mediating factor is market power.

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I’ve covered the extent to which ACA and Massachusetts individual mandate penalties differ in size. But there are so many other ways in which ACA and the Massachusetts law may or may not be similar that could have an impact on gaming and selection. Some of these are coming up in the comments.

• Does ACA have an open enrollment period? Does Massachusetts? (Restricting enrollment to certain periods increases the downside risk of waiting until one is sick to obtain insurance.)
• Does Massachusetts have stronger enforcement for failing to pay penalties than ACA seems to have?
• Does an exclusion period for pre-existing conditions exist in Massachusetts? (I think the answer is yes to this one.) I assume one does not exist under ACA, right?

If a credible expert on the Massachusetts individual mandate and penalties wishes to submit a guest post on those topics and how ACA differs for each, the door is open. Or, if  readers can point to a summary that serves the same function, let me know. (Yes, I could Google about and figure all this out myself. But maybe someone out there with the expertise would like a little credit for saving me the trouble.)

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Well, the ink on the law may not be dry yet, but it appears that insurance companies may already be looking for loopholes in the Affordable Care Act:

Insurers agree that if they provide insurance for a child, they must cover pre-existing conditions. But, they say, the law does not require them to write insurance for the child and it does not guarantee the “availability of coverage” for all until 2014.

So basically, they are saying that the law tells insurance companies that they cannot decide not to cover certain conditions if they already cover the children through policies.  But – and this is important – they are saying that nothing in the law says they are obligated to cover any children they don’t already cover.

That’s what is known as a “guaranteed issue”, and one does exist in the bill.  It just doesn’t go into effect until 2014, when the exchanges go online.  Without a guaranteed issue, the pre-existing condition clause does little for families with children who are looking for insurance on the individual market.

How did this happen?  The NYT says:

As originally conceived, most of the new federal requirements would have taken effect at the same time, in three or four years. The requirements for people to carry insurance, for employers to offer it and for insurers to accept all applicants were tied together.

But as criticism of their proposal grew, Democrats wanted to show that the legislation would produce immediate, tangible benefits. So they accelerated the ban on “pre-existing condition exclusions” for children.

So some of the “t”‘s weren’t crossed.  It appears the ban on exclusions was accelerated without the guaranteed issue.

Is this a crappy mistake? Yes.  Should supporters of reform been more careful?  Yes.  But all laws are going to have loopholes.  It’s up to Congress to keep closing them, and they should for this one.  None of this surprises me.

What does surprise me is the tone-deafness of the insurance companies.  Really, is there any way they could make themselves look worse here?  They’ve waited barely a week before providing some validation for those who demonize them as looking for any way to game the system to put profits ahead of patients.  Not only that, but they decided to fire their first salvo at sick children.  Seriously, is there any way they could make themselves look worse?

It’s like they are trying to lend support to those who hate them the most.

UPDATE: Eagle-eyed Austin Frakt points me to this:

To clarify their intent, the Department of Health and Human Services will close the loophole by issuing regulations “making it clear that the term ‘pre-existing exclusion’ applies to both a child’s access to a plan and to his or her benefits once he or she is in the plan.” The regulations will depart from the exact language of the law and could be vulnerable to a legal challenges, but most health care experts I’ve spoken to are fairly confident that the new rules would pass the so-called Chevron test — named for a Supreme Court decision which found that federal agencies hold broad authority in interpreting statues as long as that interpretation is found to be reasonable.

Insurers will likely accept the new rules and simply increase premiums as a result. They’ve spent the last year cleaning up their image and certainly don’t want to be caught in a nasty public relations battle in which they’re on the side of denying health care coverage to sick children. After all, they’re for new insurance regulations as long as they’re paid for by the beneficiary.

Igor Volsky is asserting that HHS will change the meaning of “pre-existing condition” so that it will close the loophole.  He also believes that the insurance companies will play ball because they don’t want to look as bad as I said they would above.  Even if they do, he’s right that they will jack up the rates to compensate for it – another thing they can do until 2014 with impunity.

But I’m not that sure.  There’s no reason they can’t challenge the regulations in court and drag this out a few years, say until 2014 when it all becomes moot.  I think they may be just that tone-deaf.

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This post has been cited in the 1 April 2010 edition of Health Wonk Review. See also my follow-up post on this topic.

Some have asserted that the individual mandate penalties under the Affordable Care Act (ACA) are lower than those imposed in Massachusetts. If that were the case then it would be one reason why one couldn’t generalize the experience in Massachusetts where guaranteed issue exists and near-universal coverage has been achieved with low penalties. If ACA penalties are lower than Massachusetts’ penalties then there is reason for concern that individuals might game the system–buying coverage only when sick, paying the low penalty when coverage isn’t needed–more than they appear to in Massachusetts.

So, are ACA penalties lower than those in Massachusetts? This is an empirical question, and I can answer it. The details are below, but to cut to the chase, the ACA penalty will be $674 for an average U.S. resident while the Massachusetts penalty would be $537 on average. That doesn’t mean the ACA penalty is higher for everyone. About 40% of the population would have a higher penalty under Massachusetts rules than under ACA rules. However, nearly half of those who would have a higher Massachusetts than ACA penalty are exempt from ACA penalties due to low income. Many such individuals are eligible for premium and cost sharing subsidies under ACA. Thus, the incentive for gaming is lower for this subset.

So, I don’t think it is fair to say the ACA penalties are lower than Massachusetts’ penalties. On average they’re higher, and they’re higher for 60% of of the population. If gaming is low in Massachusetts we cannot expect it to be higher under ACA based on a penalty-size argument. Hence, ACA penalties are not too low. However, the U.S. population may differ from the Massachusetts population, and other details of ACA differ from health reform in Massachusetts. For these reasons, gaming may still be an issue despite the evidence on penalty size.  Keep reading if you want the details.

Let’s first look at the Massachusetts penalty schedule for 2010:

FPL = Federal Poverty Level. This table is copied from the Massachusetts Department of Revenue website. I believe the 18-26 age specification in the 250.1-300% band is in error, that the dollar figures in that band apply to all ages. The penalty figures shown are per adult (i.e., married couples pay double, kids are exempt).

When fully phased in (2016), the penalty under ACA will be $695 per person per year up to a maximum of three times that amount ($2,085) per family or 2.5% of household income, whichever is greater. For the penalty calculation, children under 18 count as half a person (i.e. lead to a penalty of $374.50–h/t reader Jacob Shmukler). Individuals with out-of-pocket (OOP) premium-to-income ratio above 8% are exempt from the penalty. Here, OOP premium is net of employer contribution or exchange subsidies (source for premiums: 2009 Kaiser/HRET Employer Health Benefits Survey; premiums for employer-sponsored plans not reduced by the tax subsidy, which is conservative).

With a nationally representative source of income data we can calculate what proportion of individuals would face lower penalties under ACA than in Massachusetts. To answer these questions I turned to the Medical Expenditure Panel Survey (MEPS) because I have it handy and am very familiar with it. One could also use the Current Population Survey or any number of other nationally representative surveys with income data. Because it is the latest available, I used the 2007 version of MEPS. I didn’t trend incomes forward to 2010, which is conservative to the extent incomes went up (but given the economy they likely have not).

I computed the penalty paid by each family in the MEPS sample under each set of rules, ACA and Massachusetts. I then assigned to each individual in each family an equal share of each penalty and averaged the penalties over the population, weighted appropriately to compute national means. I also computed the number of individuals for whom the ACA penalty would be greater than the Massachusetts penalty. Results:

• Mean ACA penalty: $674
• Mean Massachusetts penalty: $537
• Percent of population for whom ACA penalty > Massachusetts penalty: 60%

These results are qualitatively robust after stratifying according to exchange subsidy eligibility. Since there is little evidence of substantial gaming in Massachusetts, based on an analysis of penalty size alone there would seem to be little cause for concern over gaming under ACA, particularly for higher income individuals. This analysis ignores other differences between Massachusetts and its health reform law and the national population and ACA, respectively. Results are sensitive to assumptions, but I deliberately selected those conservatively as indicated above.

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It’s the story that has dominated the past year’s news, especially on this program: Healthcare reform.

When the landmark legislation passed the House and Senate this week, and was signed on Tuesday by the President, it ended one long process and began another.

Joining Barbara Lewis in the studio to discuss what’s in the new law, and what it will mean for medicine and the healthcare industry, is our regular policy analyst, Dr. Aaron Carroll.

Go listen to it!

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