The Effects of Public Health Insurance Expansions

The National Bureau of Economic Research
NBER Digest OnLine, October 2011

In the United States, public health insurance programs cover over 90 million individuals. Changes in the scope of these programs, such as the Medicaid expansions under the recently passed Patient Protection and Affordable Care Act, or in the generosity of these programs, may affect physician behavior.

In “The Doctor Might See You Now: the Supply Side Effects of Public Health Insurance Expansions” (NBER Working Paper No. 17070), Craig Garthwaite finds that after the 1990s implementation of the State Children’s Health Insurance Program (SCHIP) – a partnership between federal and state governments intended to increase insurance coverage for low-income Americans under the age of 19 – more physicians participated in the program, but their total number of hours spent with patients declined as a result of shorter office visits.

Garthwaite finds that there were fewer visits that lasted more than 10 minutes after this public program expansion. The evidence on shorter office visits is consistent with economic models of physician behavior in a system with both public and private payers.

The negative effects of reductions in physician labor supply, such those observed in this study, may be particularly important for Medicaid patients because they are covered by a program that is increasingly not accepted by physicians.

http://www.nber.org/digest/oct11/w17070.html

Most of us who support a single payer national health program do so primarily because it would provide high quality, comprehensive care for everyone. Although the Affordable Care Act will not cover everyone, much of the expansion in coverage that it does accomplish is through increased eligibility for the Medicaid and CHIP programs, chronically underfunded welfare programs. This study demonstrates that such an approach does result in a system with at least two tiers, the lower tier patients facing shorter visits and a decline in access to participating physicians.

There is already enough money in our health care system to provide a single level of comprehensive, high quality care for everyone. We should reject the concept of a separate, underfunded, lower tier program for low-income individuals and families, with a higher tier of great care for the rest of us (though the Affordable Care Act certainly doesn’t ensure that either).

The National Bureau of Economic Research
NBER Digest OnLine, September 2011

Since the 1980s, people eligible for Medicare have been able to choose between the regular fee-for-service plan, under which the federal government pays a set fee to health care providers for each service provided, and Medicare Advantage (MA), whereby the government pays private health plans a fee for each individual they enroll. Almost one quarter of Medicare beneficiaries are currently enrolled in Medicare Advantage plans.

Paying the same amount for every person enrolled in a health plan encourages plans to enroll low-cost people and to avoid high-cost ones. Because of this, the federal government historically overpaid for MA enrollees relative to their costs in traditional Medicare. So, in 2004 the Medicare program began to adjust its payments to private plans for enrollees health status. As a result, a plan would, for example, receive a higher “risk-adjusted” payment for a recipient with diabetes or heart disease than for an otherwise identical person without these conditions.

In “How Does Risk Selection Respond to Risk Adjustment? Evidence for the Medicare Advantage Program” (NBER Working Paper No. 16977), Jason Brown, Mark Duggan, Ilyana Kuziemko, and William Wollston study individual-level data for 55,000 people in the Medicare Current Beneficiary Survey (MCBS) from the period 1994 to 2006. Prior to risk adjustment, insurers simply had an incentive to enroll individuals with low costs. After risk adjustment, insurers instead had an incentive to enroll individuals with low costs conditional on their medical conditions. The main reason for this is that the risk adjustment formula pays the plans the average cost of the average person in a particular risk category. The authors demonstrate that, because individuals with less costly cases of diabetes and other health conditions enrolled in MA plans after the move to risk adjustment, overpayments to these plans actually increased.

The risk adjustment formula that is used also explains only 11 percent of an individual’s fee-for-service costs in the year after risk is assessed. The formula systematically over-predicts costs for those with below average costs, and systematically under-predicts costs for those with above average costs. The authors find that individuals who are more expensive than the average person to insure are less likely to enroll in Medicare Advantage plans. So on balance, the government ends up paying the average cost for people who, had they stayed in fee-for-service Medicare, would have cost the government much less.

Before risk-adjustment began in 2004, switching from fee-for-service Medicare to Medicare Advantage increased average individual Medicare spending by $1,800. The authors calculate that using risk adjustment formulas on the population that enrolled before 2004 would have reduced Medicare Advantage overpayments by more than $800 a person. But when the reimbursement formula changed, so did the pattern of enrollment in Medicare Advantage plans. After 2004, switching from fee-for-service to Medicare Advantage increased Medicare spending by approximately $3,000 per person. Thus the shift to risk adjustment actually increased Medicare spending.

Although Medicare Advantage plans did enroll people with higher “risk scores” after risk adjustment was instituted, those people still tended to be significantly below the average cost in their risk category. Furthermore, both before and after risk adjustment, MA enrollees in poor health expressed greater dissatisfaction with their medical care relative to their counterparts in traditional Medicare. This pattern suggests that MA plans invest more resources in their relatively healthy enrollees, perhaps to differentially retain them. Thus the authors conclude that the Medicare Advantage program both increased total Medicare spending and transferred Medicare resources from the relatively sick to the relatively healthy, and that risk-adjustment was not able to address either of these problems.

http://www.nber.org/digest/sep11/w16977.html

And…

How does Risk Selection Respond to Risk Adjustment? Evidence from the Medicare Advantage Program

By Jason Brown, Mark Duggan, Ilyana Kuziemko, William Woolston
NBER Working Paper No. 16977, April 2011

We close by returning to the potential distributional consequences of our results. Regardless of how the surplus described above is split, the MA program appears to expand the cost of Medicare while also transferring relative expenditures from the FFS population toward the financing of care for the MA population. As those switching into MA have, throughout the sample period, lower baseline costs and better self-reported health than do those remaining in FFS, the MA program transfers Medicare expenditure to those who likely have less need for it.

Moreover, as we show in Section 7, the gradient of satisfaction with one’s health care is a more positive function of self-reported health for MA enrollees than FFS enrollees, consistent with MA plans treating their healthier (and thus more profitable) enrollees better so as to differentially retain them. Indeed, exit rates out of MA plans are differentially higher among those in poor health. Therefore, the MA program appears not only to transfer aggregate Medicare expenditures from the relatively higher-cost FFS population to the relatively lower-cost MA population, but it seems to effect a similar transfer within the MA population.

These results suggest that governments may wish to take special care in “contracting out” social insurance. Imperfect pricing – whereby the government overpays a private firm relative to the cost and quality of in-house production – is, of course, a potential concern every time governments contract with a private party and has received great attention in the literature (see, for example, Hart et al. 1997). In the case of, say, paving a road, the consequences of imperfect pricing would seem limited to whatever amount the government overpaid. With social insurance programs, however, imperfect pricing can induce private firms to cream-skim, exacerbating the utility consequences of the underlying inequality the program was initially intended to mitigate. At least in the case of Medicare, we find little evidence that risk adjustment has solved this problem.

http://www.nber.org/papers/w16977

Comment:

By Don McCanne, MD

Never underestimate the ability of the private insurance industry to stick it to us. This shocking study on risk adjustment in the Medicare Advantage program should have been a front page story across the nation. It shows us how the private insurers have used risk adjustment – designed to correct their cheating through favorable selection – to further reap their own rewards by upending the adjustments so that they steal even more funds from us!

How could this be? Some history.

Congress was sold on the concept that private insurers could provide higher quality at lower costs than could the traditional, government-run Medicare program. The Medicare + Choice program was established to do this. Even though the plans were able to selectively enroll healthier, lower-cost patients (favorable selection), the concept still was a failure and plans began withdrawing from the markets. They could not fulfill their promise of lower costs for comparable care.

The conservatives would not give up. It was essential that a robust market for private Medicare plans be established as an initial step toward privatizing the entire Medicare program (a concept still very much alive in the Paul Ryan proposal which was approved in the House of Representatives). They wer
e successful in passing legislation that gave private Medicare plans (now Medicare Advantage) a new life by paying them about 13 percent more per beneficiary than it costs to provide care for them in the traditional fee-for-service program.

As is that weren’t enough, the plans continued to selectively enroll healthier, less expensive patients, further expanding their margins. To counter this, risk adjustment was applied to the payment rates. If the plans’ beneficiaries were healthier than average, they would be paid less. If they were subject to adverse selection – enrolling a greater portion of sicker patients – they would be paid more.

Enter this study. Although it is 55 pages of a very heavy read, seriously testing your math skills, the conclusions can be gleaned from the summary and excerpts above. The plans continued to favorably select their patients, not only by enrolling the healthy, but even more by selecting fairly healthy patients that had just a touch of illness that would allow the insurers to move them into intensified diagnostic groups that increased their payments much more than the level of illness would warrant.

The authors explain that firms have been able to decrease “extensive-margin” selection and increase “intensive-margin” selection. These terms might be obscure to us, but what isn’t obscure is that this chicanery on the part of the insurers allowed them to escape the risk adjustments that would have reduced their overpayments from $1,800 to $800 per beneficiary (still an overpayment), and replace it with a $3,000 per person overpayment!

The authors conclude that “governments may wish to take special care in ‘contracting out’ social insurance.” They are far too kind. We need to throw the damn crooks out, fix our traditional Medicare program, and then provide it for everyone.

The Consequences of Risk Adjustment in the Medicare Advantage Program

The National Bureau of Economic Research
NBER Digest OnLine, September 2011

Since the 1980s, people eligible for Medicare have been able to choose between the regular fee-for-service plan, under which the federal government pays a set fee to health care providers for each service provided, and Medicare Advantage (MA), whereby the government pays private health plans a fee for each individual they enroll. Almost one quarter of Medicare beneficiaries are currently enrolled in Medicare Advantage plans.

Paying the same amount for every person enrolled in a health plan encourages plans to enroll low-cost people and to avoid high-cost ones. Because of this, the federal government historically overpaid for MA enrollees relative to their costs in traditional Medicare. So, in 2004 the Medicare program began to adjust its payments to private plans for enrollees health status. As a result, a plan would, for example, receive a higher “risk-adjusted” payment for a recipient with diabetes or heart disease than for an otherwise identical person without these conditions.

In “How Does Risk Selection Respond to Risk Adjustment? Evidence for the Medicare Advantage Program” (NBER Working Paper No. 16977), Jason Brown, Mark Duggan, Ilyana Kuziemko, and William Wollston study individual-level data for 55,000 people in the Medicare Current Beneficiary Survey (MCBS) from the period 1994 to 2006. Prior to risk adjustment, insurers simply had an incentive to enroll individuals with low costs. After risk adjustment, insurers instead had an incentive to enroll individuals with low costs conditional on their medical conditions. The main reason for this is that the risk adjustment formula pays the plans the average cost of the average person in a particular risk category. The authors demonstrate that, because individuals with less costly cases of diabetes and other health conditions enrolled in MA plans after the move to risk adjustment, overpayments to these plans actually increased.

The risk adjustment formula that is used also explains only 11 percent of an individual’s fee-for-service costs in the year after risk is assessed. The formula systematically over-predicts costs for those with below average costs, and systematically under-predicts costs for those with above average costs. The authors find that individuals who are more expensive than the average person to insure are less likely to enroll in Medicare Advantage plans. So on balance, the government ends up paying the average cost for people who, had they stayed in fee-for-service Medicare, would have cost the government much less.

Before risk-adjustment began in 2004, switching from fee-for-service Medicare to Medicare Advantage increased average individual Medicare spending by $1,800. The authors calculate that using risk adjustment formulas on the population that enrolled before 2004 would have reduced Medicare Advantage overpayments by more than $800 a person. But when the reimbursement formula changed, so did the pattern of enrollment in Medicare Advantage plans. After 2004, switching from fee-for-service to Medicare Advantage increased Medicare spending by approximately $3,000 per person. Thus the shift to risk adjustment actually increased Medicare spending.

Although Medicare Advantage plans did enroll people with higher “risk scores” after risk adjustment was instituted, those people still tended to be significantly below the average cost in their risk category. Furthermore, both before and after risk adjustment, MA enrollees in poor health expressed greater dissatisfaction with their medical care relative to their counterparts in traditional Medicare. This pattern suggests that MA plans invest more resources in their relatively healthy enrollees, perhaps to differentially retain them. Thus the authors conclude that the Medicare Advantage program both increased total Medicare spending and transferred Medicare resources from the relatively sick to the relatively healthy, and that risk-adjustment was not able to address either of these problems.

http://www.nber.org/digest/sep11/w16977.html

And…

How does Risk Selection Respond to Risk Adjustment? Evidence from the Medicare Advantage Program

By Jason Brown, Mark Duggan, Ilyana Kuziemko, William Woolston
NBER Working Paper No. 16977, April 2011

We close by returning to the potential distributional consequences of our results. Regardless of how the surplus described above is split, the MA program appears to expand the cost of Medicare while also transferring relative expenditures from the FFS population toward the financing of care for the MA population. As those switching into MA have, throughout the sample period, lower baseline costs and better self-reported health than do those remaining in FFS, the MA program transfers Medicare expenditure to those who likely have less need for it.

Moreover, as we show in Section 7, the gradient of satisfaction with one’s health care is a more positive function of self-reported health for MA enrollees than FFS enrollees, consistent with MA plans treating their healthier (and thus more profitable) enrollees better so as to differentially retain them. Indeed, exit rates out of MA plans are differentially higher among those in poor health. Therefore, the MA program appears not only to transfer aggregate Medicare expenditures from the relatively higher-cost FFS population to the relatively lower-cost MA population, but it seems to effect a similar transfer within the MA population.

These results suggest that governments may wish to take special care in “contracting out” social insurance. Imperfect pricing – whereby the government overpays a private firm relative to the cost and quality of in-house production – is, of course, a potential concern every time governments contract with a private party and has received great attention in the literature (see, for example, Hart et al. 1997). In the case of, say, paving a road, the consequences of imperfect pricing would seem limited to whatever amount the government overpaid. With social insurance programs, however, imperfect pricing can induce private firms to cream-skim, exacerbating the utility consequences of the underlying inequality the program was initially intended to mitigate. At least in the case of Medicare, we find little evidence that risk adjustment has solved this problem.

http://www.nber.org/papers/w16977

Never underestimate the ability of the private insurance industry to stick it to us. This shocking study on risk adjustment in the Medicare Advantage program should have been a front page story across the nation. It shows us how the private insurers have used risk adjustment – designed to correct their cheating through favorable selection – to further reap their own rewards by upending the adjustments so that they steal even more funds from us!

How could this be? Some history.

Congress was sold on the concept that private insurers could provide higher quality at lower costs than could the traditional, government-run Medicare program. The Medicare + Choice program was established to do this. Even though the plans were able to selectively enroll healthier, lower-cost patients (favorable selection), the concept still was a failure and plans began withdrawing from the markets. They could not fulfill their promise of lower costs for comparable care.

The conservatives would not give up. It was essential that a robust market for private Medicare plans be established as an initial step toward privatizing the entire Medicare program (a concept still very much alive in the Paul Ryan proposal which was approved in the House of Representatives). They were successful in passing legislation that gave private Medicare plans (now Medicare Advantage) a new life by paying them about 13 percent more per beneficiary than it costs to provide care for them in the traditional fee-for-service program.

As is that weren’t enough, the plans continued to selectively enroll healthier, less expensive patients, further expanding their margins. To counter this, risk adjustment was applied to the payment rates. If the plans’ beneficiaries were healthier than average, they would be paid less. If they were subject to adverse selection – enrolling a greater portion of sicker patients – they would be paid more.

Enter this study. Although it is 55 pages of a very heavy read, seriously testing your math skills, the conclusions can be gleaned from the summary and excerpts above. The plans continued to favorably select their patients, not only by enrolling the healthy, but even more by selecting fairly healthy patients that had just a touch of illness that would allow the insurers to move them into intensified diagnostic groups that increased their payments much more than the level of illness would warrant.

The authors explain that firms have been able to decrease “extensive-margin” selection and increase “intensive-margin” selection. These terms might be obscure to us, but what isn’t obscure is that this chicanery on the part of the insurers allowed them to escape the risk adjustments that would have reduced their overpayments from $1,800 to $800 per beneficiary (still an overpayment), and replace it with a $3,000 per person overpayment!

The authors conclude that “governments may wish to take special care in ‘contracting out’ social insurance.” They are far too kind. We need to throw the damn crooks out, fix our traditional Medicare program, and then provide it for everyone.

By Adam Liptak
The New York Times, September 29, 2011

The 2010 health care overhaul law has provoked an unprecedented clash between the federal government and 26 states, dividing them on fundamental questions about the very structure of the federal system. But the two sides share a surprising amount of common ground, too, starting with their agreement in briefs, filed on Wednesday, that the Supreme Court should resolve the clash in its current term.

Their briefs also reflect agreement on matters of substance. The two sides, along with the judges in the majority in the appeals court decision most likely to be reviewed by the justices, all said the dispute is about means rather than ends. There are other ways, they said, for Congress to achieve near-universal health coverage, some of them more expansive than what was enacted.

“Both sides agree that Congress has the constitutional power to enact a national health care system that raised taxes to support a single government agency that pays all medical bills, just like Medicare,” said Walter Dellinger, who served as acting solicitor general in the administration of President Bill Clinton and supports the law.

Randy E. Barnett, a lawyer for some of the plaintiffs who on Wednesday sought Supreme Court review, made essentially the same point. “What I’ve said from Day 1,” he said, “is that if Medicare is constitutional then Medicare-for-everyone is constitutional.”

http://www.nytimes.com/2011/09/30/us/health-care-adversaries-have-common-ground.html

Comment:

By Don McCanne, MD

The Affordable Care Act represents the most expensive model of reform and yet falls short on universality and affordability, and now it is being challenged as a violation of the Constitution. Why are we defending it when the least expensive model that actually would accomplish our goals has been declared by all parties to be compliant with the Constitution?

Fast tracking the decision is great. Once the legal issues are dispensed with, we can look at the mess we have left, reject it, and move on to enacting an improved Medicare for all.

Additional comment from Merrill Goozner:

What’s interesting about rising insurance premiums is that they are way out of line with the rise in costs, which was only around 4% last year in nominal dollars, which in inflation-adjusted dollars would be just a 2% increase. Both Medicare total expenditures and insurance total expenditures rose (which, after adjusting for inflation was the same rate as economic growth; GDP rose 2.6% in 2010). It was one of the lowest increases in decades, as health care’s share of the economy did not increase for the first time in many years.

So why the hike in premiums. A Goldman Sachs analyst quoted in the WSJ story earlier this week attributed the outsized premium increases to insurance
companies padding their bottom lines.

I blogged on it here: http://gooznews.com/?p=3215

Some Common Ground for Legal Adversaries on Health Care

By Adam Liptak
The New York Times, September 29, 2011

The 2010 health care overhaul law has provoked an unprecedented clash between the federal government and 26 states, dividing them on fundamental questions about the very structure of the federal system. But the two sides share a surprising amount of common ground, too, starting with their agreement in briefs, filed on Wednesday, that the Supreme Court should resolve the clash in its current term.

Their briefs also reflect agreement on matters of substance. The two sides, along with the judges in the majority in the appeals court decision most likely to be reviewed by the justices, all said the dispute is about means rather than ends. There are other ways, they said, for Congress to achieve near-universal health coverage, some of them more expansive than what was enacted.

“Both sides agree that Congress has the constitutional power to enact a national health care system that raised taxes to support a single government agency that pays all medical bills, just like Medicare,” said Walter Dellinger, who served as acting solicitor general in the administration of President Bill Clinton and supports the law.

Randy E. Barnett, a lawyer for some of the plaintiffs who on Wednesday sought Supreme Court review, made essentially the same point. “What I’ve said from Day 1,” he said, “is that if Medicare is constitutional then Medicare-for-everyone is constitutional.”

http://www.nytimes.com/2011/09/30/us/health-care-adversaries-have-common-ground.html

The Affordable Care Act represents the most expensive model of reform and yet falls short on universality and affordability, and now it is being challenged as a violation of the Constitution. Why are we defending it when the least expensive model that actually would accomplish our goals has been declared by all parties to be compliant with the Constitution?

Fast tracking the decision is great. Once the legal issues are dispensed with, we can look at the mess we have left, reject it, and move on to enacting an improved Medicare for all.

Additional comment from Merrill Goozner:

What’s interesting about rising insurance premiums is that they are way out of line with the rise in costs, which was only around 4% last year in nominal dollars, which in inflation-adjusted dollars would be just a 2% increase. Both Medicare total expenditures and insurance total expenditures rose (which, after adjusting for inflation was the same rate as economic growth; GDP rose 2.6% in 2010). It was one of the lowest increases in decades, as health care’s share of the economy did not increase for the first time in many years.

So why the hike in premiums. A Goldman Sachs analyst quoted in the WSJ story earlier this week attributed the outsized premium increases to insurance
companies padding their bottom lines.

I blogged on it here: http://gooznews.com/?p=3215

The Denver Post
September 29, 2011

When critics insist the growth of this nation’s health care burden is unsustainable, this is what they mean: The average cost of an employer-provided family insurance plan soared by 9 percent in 2011. That’s far higher than the rate of inflation or the average growth of wages.

Nor is this year’s increase out of line with recent history.

In a word, it’s a looming disaster. And yet our political leaders mostly still refuse to come to terms with it.

Some Republicans immediately sought to blame the Affordable Care Act, which critics call Obamacare, for the latest news, although unsustainable health-care inflation predated the legislation and indeed was one of the main arguments offered in support of its passage.

But many Democrats appear equally determined to sidestep reality when discussing health care costs, insisting — in the face of all early evidence — that the Affordable Care Act will restrain costs over time, if we are patient enough.

We opposed that legislation because we were convinced — and have seen nothing since to change our opinion — that it will not, unfortunately, rein in costs to any major extent. The Congressional Budget Office certainly doesn’t think so, either.

Although both parties are still largely in denial on health care, there are exceptions. Democrats who favored a single-payer system understood that it would have a better chance of achieving cost control than most alternatives, given the experience in other countries. And other Dems have prioritized cost containment.

Some Republicans also understand the need for fundamental reform, with Rep. Paul Ryan, chairman of the House Budget Committee, leading the charge. We take issue with elements of Ryan’s approach — block grants to states for Medicaid and premium subsidies for Medicare coverage that patients would then purchase in the private market — but at least he appreciates the necessity of revamping incentives.

“At its core,” Ryan said in speech this week at the Hoover Institution, “the health care problem is one of inflation, driven by the over-utilization of services, dramatic underpayments, and massive inefficiency.”

And if nothing is done to address those issues, this nation’s future will be bleak indeed.

http://www.denverpost.com/opinion/ci_18998740

Comment: 

By Don McCanne, MD

The Kaiser Family Foundation report on the 9 percent increase in family health insurance premiums brought back to the front pages the issue of unsustainable health care cost increases. The Denver Post had previously opposed the Affordable Care Act (ACA) because they “were convinced — and have seen nothing since to change our opinion — that it will not, unfortunately, rein in costs to any major extent.” So what do they see as our options?

They dismiss the political battle between the Republicans who are blaming ACA for this year’s premium increases, and the Democrats who are defending ACA as a (certainly dubious) vehicle for cost restraint.

They do give credit to Republican Paul Ryan for recognizing the problem, but they “take issue with elements of Ryan’s approach.”

And Democrats? The Denver Post editors state, “Democrats who favored a single-payer system understood that it would have a better chance of achieving cost control than most alternatives, given the experience in other countries.”

The Denver Post falls short of endorsing single payer, but it’s the only truly effective option that they seem to offer.

The better people understand the single payer model, the greater the support that we’ll see. Keep spreading the word.