By Tal Gross, Timothy Layton & Daniel Prinz
National Bureau of Economic Research, October 2020

Abstract

Some consumers lack the cash needed to pay for medical care. As a result, they either delay care until they can pay for it or they forgo the care altogether. To test for such a possibility, we study the distribution of monthly Social Security checks among Medicare Part D enrollees. When Social Security checks are distributed, prescription fills increase by 6-12 percent. In that sense, drug consumption of low-income Medicare recipients is “liquidity sensitive.” We then study recipients who transition onto a program that eliminates copayments. When those recipients do not face copayments, their drug consumption becomes less liquidity sensitive. That finding implies that, beyond risk protection, generous insurance also provides recipients with the ability to consume healthcare when they need it rather than when they have cash. Further, we find that recipients whose drug consumption is most liquidity sensitive exhibit price elasticities of demand that are twice the size of the average elasticity, suggesting that more-generous insurance causes recipients both to re-time prescription filling and also to start filling prescriptions that they otherwise would not fill. We present a stylized model that uses this finding to call into question the conventional interpretation of demand-response to price as solely inefficient moral hazard.

From the Introduction

There exists broad agreement among economists that health insurance ought to involve some form of cost sharing: copayments, coinsurance rates, or deductibles. Theory suggests that cost sharing can limit moral hazard (Zeckhauser, 1970), and empirical evidence confirms that cost sharing reduces spending (Manning et al., 1987; Aron-Dine et al., 2013; Shigeoka, 2014; Brot-Goldberg et al., 2017). Indeed, motivated by that evidence, high-deductible health insurance plans have become increasingly common in the United States.

Those cost-sharing mechanisms may introduce a particular challenge for low-income consumers. A large literature suggests that many low-income households wait to consume until their income arrives. Olafsson and Pagel (2018), for instance, find that low-income consumers purchase 70 percent more goods on days when they receive their paychecks. That finding is consistent with many other studies: consumption responds to both predictable and unanticipated changes in income. One might call such a pattern “liquidity sensitivity:” consumers often delay many of their purchases until their income arrives.

From the Conclusion

The results above suggest that Medicare Part D recipients delay the purchase of prescription drugs until their Social Security checks arrive. We estimate a 10–12-percent increase in prescription fills among low-income recipients facing subsidized copayments on the day that their checks arrive. Even among the general Part-D population that receives no subsidies, prescription fills increase by roughly 6 percent on Social Security paydays.

Those increases in prescription fills upon payday diminish when recipients’ copayments are reduced. In addition, we use the transition to lower copayments to estimate a price-elasticity of demand. Recipients who tend to fill their prescriptions on their Social Security paydays exhibit a much higher elasticity of demand.

The results thus suggest that discussions over cost-sharing mechanisms need to go beyond the traditional trade-off between moral hazard and risk protection. Some low-income consumers exhibit healthcare consumption that is “liquidity sensitive,” and so cost sharing leads to additional complications for them.

More generally, this paper emphasizes an additional benefit of full insurance. Full insurance not only reduces the uncertainty faced by consumers. It also allows low-income recipients’ consumption to be less sensitive to their liquidity. Liquidity sensitivity may be even more of an issue for other populations beyond Medicare recipients. For instance, consider adults who lack stable employment and thus face volatile incomes. That population does not have to wait a few weeks for a Social Security check—they may wait months for work. For them, full insurance allows the smoothing of healthcare consumption between employed and unemployed states. But for any population, the timeliness of healthcare consumption can have medical consequences. And so making healthcare consumption less liquidity sensitive ought to be a worthwhile policy goal.

https://www.nber.org…

Comment:

By Don McCanne, M.D.

This emphasis on consumerism in health care – making patients sensitive to the costs of health care by requiring out-of-pocket payment of deductibles, copayments, or coinsurance – is based on the concept that it is a “moral hazard” to use insurance to pay health care costs in full when that “hazard” can be avoided by requiring patients to pay a portion of the costs out-of-pocket so then they will accept only the care that they really need and are willing to pay for.

This study shows that low-income patients will delay or avoid care – in this case prescription drugs – when they do not have the funds needed for cost-sharing, though they will often obtain that care once they receive their Social Security checks. This suggests that we should redefine “moral hazard.” Rather than defining it as health care that might be declined if patients had to pay for it, we should define moral hazard as a barrier – a hazard – that policy wonks erect that is designed to save costs by preventing patients from receiving care that they should have since it was recommended by their physicians. That’s not a moral compromise; that’s a moral failure.

So now the policy community is dishing out policies based on “liquidity sensitivity.” Liquidity sensitivity comes into play when out-of-pocket health care costs exceed an individual’s discretionary income – an event much more likely to occur with lower-income individuals – though larger deductibles can also exceed the discretionary income of middle-income individuals.

Most individuals who support health care reform support reform that is equitable – fair for everyone. It would be far more equitable to eliminate cost-sharing and thus avoid liquidity sensitivity for those without higher incomes, while, at the same time, fund the entire health care system with equitable, progressive taxes. Now that’s fair.

Consumer-directed health care, moral hazard, liquidity sensitivity – let’s dump those in the trash bin of health policy concepts representing moral failure. Regular readers already know that we can fix this with a well designed, single payer, improved Medicare for All. Let’s do it!

Stay informed! Visit www.pnhp.org/qotd to sign up for daily email updates.

GAO, November 2020

What GAO Found

Enrollment in private health insurance plans in the individual (coverage sold directly to individuals), small group (coverage offered by small employers), and large group (coverage offered by large employers) markets has historically been highly concentrated among a small number of issuers. GAO found that this pattern continued in 2017 and 2018. For example:

• For each market in 2018, at least 43 states (including the District of Columbia) were highly concentrated.
• Overall individual and small group markets have become more concentrated in recent years. The national median market share of the top three issuers increased by approximately 8 and 5 percentage points, respectively, from 2015 through 2018. With these increases, the median concentration was at least 94 percent in both markets in 2018.

GAO found similar patterns of high concentration across the 39 states in 2018 that used federal infrastructure to operate individual market exchanges— marketplaces where consumers can compare and select among insurance plans sold by participating issuers—established in 2014 by the Patient Protection and Affordable Care Act (PPACA) and known as federally facilitated exchanges. From 2015 through 2018, states that were already highly concentrated became even more concentrated, often because the number of issuers decreased or the existing issuers accrued the entirety of the market share within a state. In 2017 and 2018 all 39 states were highly concentrated.

https://www.gao.gov…

Full report (59 pages):
https://www.gao.gov…

GAO: Private health coverage remains concentrated among largest insurers

American Hospital Association, November 13, 2020

Enrollment in private health insurance plans remained concentrated among a small number of issuers in 2017 and 2018, according to a report released today by the Government Accountability Office. The three largest issuers continued to hold 80% or more of the large group, small group and individual market in at least 43 states, with 10 states seeing an increase in concentration in the individual and small group markets since 2011, GAO found. The Affordable Care Act requires GAO to report on changes in the concentration of enrollment among issuers in overall individual, small group and large group markets, and individual and small group exchanges.

“The GAO’s findings underscore concerns expressed by hospitals and health systems: highly concentrated insurance markets reduce patient choice, endanger patient care and increase their costs,” said Molly Smith, AHA’s vice president for coverage and state issues. “This allows health plans to adopt policies that benefit them financially and not patients. Such lack of competition encourages plans to pull a bait-and-switch on patients: delaying and denying medically necessary care that patients paid for through their premiums and changing coverage rules mid-year.”

https://www.aha.org…

Fact Check: Does Joe Biden Want To Eliminate Private Health Insurance?

By Jocelyn Grzeszczak
Newsweek, October 23, 2020

“We have 180 million people out there that have great private health care, far more than we’re talking about with Obamacare,” Trump said. “Joe Biden is going to terminate all of those policies.”

Biden immediately shot down Trump’s claim, asserting that the reason he secured the Democratic Party’s nomination was because “I support private insurance.”

“Not one single person with private insurance would lose their insurance under my plan, nor did they under Obamacare,” Biden said. “They did not lose their insurance, unless they chose they wanted to go to something else.”

https://www.newsweek.com…

Comment:

By Don McCanne, M.D.

In rejecting Medicare for All, President-elect Joe Biden says, “I support private insurance.” This GAO report is just one more factor that should make us question his wisdom on this topic.

The private insurance market is heavily concentrated and that concentration has increased with the implementation of the Affordable Care Act. As a representative of the American Hospital Association states, “highly concentrated insurance markets reduce patient choice, endanger patient care and increase their costs.” Further, “This allows health plans to adopt policies that benefit them financially and not patients. Such lack of competition encourages plans to pull a bait-and-switch on patients: delaying and denying medically necessary care that patients paid for through their premiums.”

Of course, single payer improved Medicare for All would ultimately concentrate health care financing into one single payer, but the difference would be that it would be our own payer, owned by the people, while returning to us the free choice that we want, the choice of health care professionals and hospitals that the private insurers take away from us.

The American Hospital Association understands the evil of concentrated health insurance markets, but they don’t seem to have much to say about the increasing market concentration of the hospital industry which we see has increased hospital prices.

Under single payer Medicare for All hospitals would be placed on global budgets, just like we do for fire departments. For those in the hospital industry who express concerns over global budgeting, maybe we should offer to nationalize the hospitals, creating our own national health service.

Regardless, we do have to get rid of the private insurance industry because they are out of control, and that harms too many of us.

Stay informed! Visit www.pnhp.org/qotd to sign up for daily email updates.

By Christina Zhao
Newsweek, November 10, 2020

Senator Bernie Sanders of Vermont, a possible Labor secretary candidate in President-elect Joe Biden’s administration, on Tuesday said public support for the Green New Deal and Medicare for All was won at the polls.

Sanders—who ran off the promise of universal health care and policies to combat climate change in the 2020 Democratic race—has insisted that widespread public support for the policies championed by progressives were apparent through the results of the presidential race.

“112 co-sponsors of Medicare for All were on the ballot. All of them won. 98 co-sponsors of the Green New Deal were on the ballot. Only 1 lost,” the senator tweeted. “Supporting Medicare for All and the Green New Deal is not just good public policy. It is also good politics.”

https://www.newsweek.com…

Comment:

By Don McCanne, M.D.

Those who contend that Medicare for All caused a poor showing in the election are going to have to explain this one. All 112 co-sponsors of the Medicare for All Act of 2019 who were on the ballot won re-election!

Although many polls show support for Medicare for All, the one taken on election day is the one that really counts.

Stay informed! Visit www.pnhp.org/qotd to sign up for daily email updates.

By Michael K. Gusmano, Miriam Laugesen, Victor G. Rodwin, and Lawrence D. Brown
Health Affairs, November 2020

Abstract

Although the US has the highest health care prices in the world, the specific mechanisms commonly used by other countries to set and update prices are often overlooked, with a tendency to favor strategies such as reducing the use of fee-for-service reimbursement. Comparing policies in three high-income countries (France, Germany, and Japan), we describe how payers and physicians engage in structured fee negotiations and standardize prices in systems where fee-for-service is the main model of outpatient physician reimbursement. The parties involved, the frequency of fee schedule updates, and the scope of the negotiations vary, but all three countries attempt to balance the interests of payers with those of physician associations. Instead of looking for policy importation, this analysis demonstrates the benefits of structuring negotiations and standardizing fee-for-service payments independent of any specific reform proposal, such as single-payer reform and public insurance buy-ins.

From the Introduction

The rising costs of US health care make affordability—for consumers, employers, and governments—an elusive goal. Studies show that these expenditures are higher in the US than other countries not because the volume of service is higher but because prices are higher. One reason for the higher prices in the US is that private insurers typically do not have sufficient market leverage to control them, and there are dramatic price variations in the private market. Medicare has done better at controlling prices than private insurers have, but Medicare is limited by Congress in the degree to which it can negotiate prices.

In most countries with universal health insurance, physicians are paid on a fee-for-service basis, yet prices there are lower than in the US. As Miriam Laugesen and Sherry Glied explain, “Higher fees, rather than higher practice costs, volumes, or tuition expenses, are the main driver of higher US spending.”

Representatives of systems with universal health insurance explain that their health systems reflect an enduring commitment to solidarity. Their position reflects the insistence that health care is a human right and a continuing affirmation of redistribution and reciprocity as a central element of social justice.

In this article we explore how three countries—France, Germany, and Japan—appear to achieve economic sustainability in a fee-for-service system. We then identify the institutional processes that influence the prices of physician services in universal health insurance systems. These countries have all attempted to contain rising health care costs by negotiating prices with physician associations and adapting fee-for-service to the evolution of health care provision.

In the US, in contrast, insurance regulation is less developed and has suffered from a lack of national uniformity. Because there is no universal health insurance, public programs including Medicare and Medicaid address the gaps in coverage.

Summary of the approaches

The three countries we examined all negotiate fees in the context of expenditure constraints, but they have contrasting institutional processes to address health care prices and volumes. France has negotiated prices aggressively but has few controls over the volume of care. Germany controls service volume indirectly by imposing budget caps on sickness funds and physician associations and putting them in charge of enforcing volume controls.

Japan’s approach is more centralized, with a complex set of conditions that govern how and where health care services can be provided. These conditions are specified in the same document that lists the negotiated fees for each service. The aim is to constrain volume by limiting the volume of services billable for each item and by limiting the number and types of hospitals, clinics, and physicians that are allowed to provide particular services.

Although France and Germany hold physician fees at lower levels than in the US, both countries pay specialists more than primary care physicians. These fee schedules reflect a bias for more technical or procedural services over services such as office visits in primary care. In contrast, Japan, uniquely, pays private office–based generalist physicians, represented by the Japan Medical Association, more than academic hospital–based specialists.

From the Discussion

The health systems we studied focus on controlling prices in the context of fee-for-service medical practice and national expenditure constraints that do not result in withholding health care from the population. The use of fee-for-service physician payment does create problems, but marking fee-for-service as the major cause of high health care spending in the US is problematic, especially as countries with lower prices and expenditures use fee-for-service systems. France, Germany, and Japan limit the incomes of physicians by standardizing and adjusting the fees they are paid while using a variety of approaches to limit the volume of services provided.

The diversity of payment arrangements in the US acts as a constraint on unified approaches while also creating growing pressure to change and standardize fees. Although some Democratic leaders in Congress emphasize the buying power and leverage of a single-payer health care system to contain prices, extending Medicare to all legal residents would introduce challenges in negotiating prices with hospitals, pharmaceutical manufacturers, and physicians within the context of US institutions. Perhaps the most important implication of our study is that regardless of whether either fundamental changes such as Medicare for All or incremental expansion of the Affordable Care Act are proposed, both would oblige policy makers to think hard about how to set prices and oversee service volume.

Although France, Germany, and Japan vary in their approaches to regulating prices and service volume, all three rely on centralized fee negotiations. This general approach is evident in some Democratic health reform proposals, some of which have proposed empowering the secretary of health and human services to create a national fee schedule for payers and providers within a public option or Medicare for All design.

The experiences of these countries suggest that changes in physician reimbursement policy need not presuppose widespread changes to coverage and vice versa. Both become more interdependent when governments are committed to providing universal and affordable health insurance coverage. Health care pricing is an important pillar supporting and upholding universal coverage. Even without universal coverage, the US can and should regulate how much discretion providers of health care services have in setting their own prices. Standardization of prices can reduce treatment and administrative costs alike.

Americans should work within their institutional framework to allow for greater standardization of prices based on negotiation. Such an approach would be a shift away from the current system, in which payment negotiations lack transparency. The absence of arrangements similar to those in the three countries we have studied leaves payers fragmented and gives providers too much control over their own prices.

The purpose of international comparisons for policy learning is not to transplant or import foreign systems into domestic institutions. The US lacks a solidaristic vision—the population is distributed across separately regulated private insurance plans, and programs designed for different groups remove a shared identification, balkanizing the system of health care. Our approach to understanding physician payment policy across nations acknowledges the absence of solidarity in the United States. Price negotiations must reflect the history and distinct characteristics of each country.

Cross-national comparisons, however, offer perspective on the challenges that Americans confront and the ways in which experience abroad might be adapted to the specificities of other national institutions. The ways and means by which France, Germany, and Japan are “getting the price right” should not be ignored by US policy makers concerned with universal health insurance or with the incremental extension of affordable health insurance coverage.

https://www.healthaffairs.org…

Comment:

By Don McCanne, M.D.

Health care spending is highest in the United States, and a major reason for this is our very high prices. The private insurance industry in the United States has not been particularly effective in controlling prices, and our government has largely limited its control of prices to public programs such as Medicare and Medicaid, though, even there, the government has refused to control Medicare drug prices. The authors use the examples of the universal programs in France, Germany and Japan to show how governments can get the price right.

The authors contend that we do not have to enact a Medicare for All system to control prices. But when you look at our fragmented health care financing system and the free rein that the private sector is allowed – especially the private insurers – it does not take too much imagination to see that trying to implement fee controls across the entire system would be much like herding cats. The fact that the crisis has been with us for many decades without any real progress being made in price controls, outside of Medicare and Medicaid, demonstrates that these cats are not very herdable.

Essentially all other nations have been effective in controlling spending through control of prices, and we could be too, but it sure would be a lot easier if we had a well designed, single payer, improved Medicare for All. That way we would be standardizing prices in a system based on solidarity.

Why solidarity? The current political turmoil should provide us with enough evidence that we sure could use an infusion of a whole lot more solidarity. Just our lack of solidarity in managing the COVID-19 pandemic is causing suffering, economic hardship, and loss of lives, simply because we have prioritized political squabbles over solidarity. Let’s give solidarity a try – for our health.

Stay informed! Visit www.pnhp.org/qotd to sign up for daily email updates.