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NBER Working Paper 22353: Insurance and the High Prices of Pharmaceuticals

By David Besanko, David Dranove, Craig Garthwaite
National Bureau of Economic Research, June 2016

Abstract

We present a model in which prospective patients are liquidity constrained, and thus health insurance allows patients access to treatments and services that they otherwise would have been unable to afford. Consistent with large expansions of insurance in the U.S. (e.g., the Affordable Care Act), we assume that policies expand the set of services that must be covered by insurance. We show that the profit-maximizing price for an innovative treatment is greater in the presence of health insurance than it would be for an uninsured population. We also show that consumer surplus is less than it would be if the innovation was not covered. These results show that even in the absence of moral hazard, there are channels through which insurance can negatively affect consumer welfare. Our model also provides an economic rationale for the claim that pharmaceutical firms set prices that exceed the value their products create. We empirically examine our model’s predictions by studying the pricing of oncology drugs following the 2003 passage of Medicare Part D. Prior to 2003, drugs covered under Medicare Part B had higher prices than those that would eventually be covered under Part D. In general, the trends in pricing across these categories were similar. However, after 2003 there was a far greater increase in prices for products covered under Part D, and as result, products covered by both programs were sold at similar prices. In addition, these prices were quite high compared to the value created by the products – suggesting that the forced bundle of Part D might have allowed firms to capture more value than their products created.

From the Introduction

While our model is too stylized to offer precise numerical predictions, a canonical example that broadly fits real world data confirms some of the model’s surprising implications. First, we show that the profit- maximizing price for products is far greater in the presence of health insurance than it would be for an uninsured population, and consumer surplus is lower. The decrease in consumer surplus is quite large and exceeds the consumption smoothing benefits of health insurance for these products. We further show that this negative effect on consumer welfare grows as the number of innovative products increases. In fact, as the number of innovative products covered by insurance increases, the high prices they charge for their products eventually cause some consumers to not purchase insurance, resulting in a decrease in total surplus. We note that these results do not rely on moral hazard in that it exists even when customers never buy a product at a price that exceeds its value. Therefore, these results show that even in a situation where insurers could eliminate moral hazard (either through well designed cost sharing or effective managed care organizations) there are still other channels through which insurance can reduce welfare.

We note that the ability of firms to capture more value than they create solely results from regulations requiring an insurance bundle and that without these regulations, even in the presence of moral hazard, a monopolist selling an innovative product would be constrained by the effect that its price would have on insurance premiums.

From the Conclusions

While health insurance bears many similarities to more traditional financial insurance products, it also conveys the important benefit of breaking the liquidity constraint that many consumers face when attempting to purchase costly but valuable medical goods and services, including high priced pharmaceutical treatments. Previous work has asserted that this increase in access represents a benefit for consumers. However, our results, which endogenize the prices charged by the monopoly manufacturers of high value products, demonstrate that consumers may actually enjoy less consumer surplus, even in the absence of moral hazard. This occurs because insurance allows firms to more fully price out the expected benefits that their drugs generate for consumers, charging prices that may be far higher than what they would select if patients had to pay the entire price of their drugs out of pocket. This not only reduces consumer surplus, it may also reduce total surplus if some consumers are liquidity constrained from purchasing insurance. Thus, regulations requiring insurers to provide coverage for all new high-value products, such as the minimum insurance definition of the ACA, can decrease consumer surplus and, potentially, decrease total surplus.

While there may be worries that attempts at price controls in pharmaceuticals will be welfare reducing through reduced innovation, our results suggest that some existing regulations may provide incentives for innovation that are themselves not welfare maximizing because they are based on prices that exceed value.

http://www.nber.org/papers/w22353

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Comment:

By Don McCanne, M.D.

Although this paper is quite technical, the conclusions are straightforward. Health insurance makes expensive products and services affordable for patients and thus they will use them – a desirable policy outcome since patients will then receive the care they should have. But beyond that, by bundling services and products into the same insurance package, it allows monopoly manufacturers of high value products, such as expensive pharmaceuticals, to charge prices that exceed the value their products – an undesirable policy outcome.

The authors indicate that the mandate to include certain benefits in insurance products, such as the essential health benefits required by the Affordable Care Act, allows the firms to capture more value than their products created (i.e., charge prices greater than the value of the product).

Those preferring market solutions might suggest that specific mandated insurance benefits be eliminated thus creating a greater sensitivity to high prices. But since far too many patients do not have enough liquid assets to pay these high prices (they are “liquidity constrained”), they would have to do without beneficial health care services and products that are truly unaffordable in the absence of insurance. This is yet one more example of why the tradeoffs in depending on a market of insurance plans can lead to excessive prices and financial barriers to care.

A single payer system does not depend on markets to set prices and make determinations on coverage. Rather they include all essential services and products and use government-administered negotiated pricing to be sure that prices do not exceed value. Patients get the care they need without an excess drain on our collective funds.

Progressive redistribution without guilt

By Josh Bivens
Economic Policy Institute, June 9, 2016

What this report finds:

Boosting income growth for the bottom 90 percent requires a policy agenda that explicitly aims to halt or reverse the rise in inequality in the United States in recent decades. The economic evidence shows no generalizable relationship between rising inequality and faster growth. This is important good news. It means that an agenda based on progressive redistribution can unambiguously raise living standards for the bottom 90 percent and even likely be better for overall growth than the agenda promoted by those who are opposed to strong efforts to check rising inequality and instead want to focus solely on spurring overall growth.

Why this matters:

The lack of a general relationship between inequality and growth means that specifics matter in policy debates. And the specifics of the modern “growth only” agenda will fail. Policies such as cutting top tax rates, deregulating industries, and signing more trade agreements will both fail to appreciably boost growth rates and continue to send a disproportionate share of income gains to the top 10 and 1 percents. The “growth only” agenda has already been tried, and the results have been slower overall growth and sluggish income gains for the vast majority in recent decades.

How we can fix the problem:

Income redistribution over the last few decades has been a zero-sum process, with gains at the top essentially coming straight out of the pockets of the bottom 90 percent of Americans. This zero-sum dynamic means that intelligent policies—including but going way beyond smarter and fairer taxing and spending—can convert these lost potential gains for the bottom and middle into actual income increases without harming overall economic growth. We should:

*  Use the levers of macroeconomic policy (monetary, fiscal, and exchange-rate policy) to target genuine full employment.

*  Make investments that markets are not making—in early childhood education, infrastructure, school construction, energy efficiency, and public health care.

*  Strengthen antitrust regulations and look for other opportunities to introduce competition to private markets, such as public options for health insurance and retirement savings.

*  Reregulate many activities of the financial sector to squeeze out the activities that don’t enhance productivity or create efficiency but simply enrich well-placed actors within finance. A financial transactions tax is the clearest example of a policy that can stop this income skimming.

*  Enact climate-change mitigation measures—realizing that policies beyond simply increasing the market price of greenhouse gas emissions can play large and useful roles.

*  Strengthen regulations and institutions that help shift bargaining leverage from capital-owners and corporate managers to low- and middle-income workers. Key examples include higher minimum wages and labor law reform that allows willing workers to join unions and bargain collectively.

http://www.epi.org/publication/progressive-redistribution-without-guilt-using-policy-to-shift-economic-power-and-make-u-s-incomes-grow-fairer-and-faster/

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Comment:

By Don McCanne, M.D.

Health care costs for the typical working family of four now average over $25,000 (2016 Milliman Medical Index). The only way low- and middle-income individuals and families can afford health care is through progressive redistribution. How are we doing?

With Medicaid we are doing quite well. The majority of lower-income individuals in states that participate in the ACA Medicaid expansion have their health care paid for through taxes, especially progressive income taxes. Wealthier individuals pay a higher percentage of income in taxes than do lower income individuals, and the lowest income individuals pay no income taxes at all. That certainly represents progressive redistribution as far as low-income individuals are concerned, though not for those with average incomes.

Medicare is funded primarily by general revenues which tend to be progressive, and by payroll taxes which tend to be proportional to income and thus not as progressive as income taxes since the rates do not increase with income. The exception is that individuals with incomes over $200,000 do pay an additional 0.9% Medicare tax on wages, making it more progressive than it had been before ACA. However, most of the income of the wealthy is not from salaries but rather from tax-advantaged sources, thus the impact is not as great on them as it otherwise would be.

Private plans purchased through the ACA exchanges by lower-income individuals are eligible for subsidies and credits indexed to income and thus are progressively funded for this sector. But middle- and upper-middle-income individuals do not receive these subsidies and thus bear a disproportionate share of our collective (pooled) health care spending (disproportionate as a percentage of income). The latter also is true for those purchasing individual plans outside of the exchanges. For them, funding is regressive since the percent of income paid for heath care decreases as income increases.

By far the largest source of health insurance is through employer-sponsored plans. Almost all economists agree that these are paid for by the employee through forgone wage increases (certainly a contributing cause to flat wages of the last couple of decades). This funding is quite regressive since, as income increases, the percentage of wages devoted to health insurance premiums decreases. Further, premiums are subsidized by tax expenditures (the deductibility of premiums for employer-sponsored plans) which increase as the individual’s income increases. High-income individuals receive very generous government subsidies for their health insurance plans whereas lower-income individuals may receive little or none at all. Thus health financing for the majority of us is quite regressive.

The article by Josh Bivens is quite long but well worth reading if you want to understand policies that will shift us to progressive redistribution without having to feel guilt. The economic improvement for the great majority of us, creating a more robust economy, is well worth the trade off of expecting the wealthy to accept more progressive redistribution, which would certainly never negatively impact their very comfortable or even indulgent lifestyles.

Health care? Based on the examples above, we can certainly adopt policies that would significantly improve progressive redistribution so that health care is affordable for everyone. That is exactly what a well-designed single payer system does. No guilt, just ghastly politics.

Report of Reference Committee A
2016 AMA Annual Meeting, June 11-15, 1016

Excerpt from the Reference Committee report:

Overall your Reference Committee notes a distinction between supporting a single payer system and supporting a study on the issue. Your Reference Committee found testimony by the sponsor to be reasonable and persuasive. Your Reference Committee notes numerous reports by the Council on Medical Service evaluating health care financing payment models and believes it may be timely to reassess a variety of health care financing models, including single payer.

Resolution 111 – SINGLE PAYER HEALTH CARE STUDY

Recommendation A:

Madam Speaker, your Reference Committee recommends that Resolution 111 be amended by addition and deletion as follows:

RESOLVED, That our American Medical Association research and analyze the benefits and difficulties of a single-payer health care system in the United States variety of health care financing models, with consideration of the impact on economic and health outcomes and on health disparities and including information from domestic and international experiences. (Directive to Take Action)

Recommendation B:

Madam Speaker, your Reference Committee recommends that Resolution 111 be adopted as amended.

Recommendation C:

Madam Speaker, your Reference Committee recommends that the title of Resolution 111 be changed to read as follows:

UPDATED STUDY ON HEALTH CARE PAYMENT MODELS

HOUSE OF DELEGATES ACTION: Resolution 111 adopted as amended.

http://www.ama-assn.org/sub/meeting/index.html

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Comment:

By Don McCanne, M.D.

AMA members understand that the financing of health care in the United States is highly flawed, even after implementation of the Affordable Care Act. Although the AMA’s official position has been to oppose single payer reform, it has become clear that it is time to take another look at various models of financing health care, including single payer.

The Illinois delegation to the AMA House of Delegates offered a resolution calling for a single payer health care study. The Reference Committee amended the resolution to call for an updated study on health care payment models, with the comment that single payer would be included.

The House of Delegates adopted the resolution as amended.

As a Life Member of the AMA, I am proud that our organization has elected to begin a process based on facts rather than ideology.

Voluntary health insurance in Europe: role and regulation

By Anna Sagan and Sarah Thomson
World Health Organization
European Observatory on Health Systems and Policies
Observatory Studies Series No. 43

This book offers a succinct overview of the size, operation and regulation of markets for voluntary health insurance (VHI) in countries across Europe. We define VHI as health insurance that is taken up and paid for at the discretion of individuals or employers on behalf of employees, including group policies sponsored by employers that come with the job and are thus not strictly voluntary. VHI can be offered by public and quasi-public bodies and by for- profit (commercial) and non-profit-making private organizations.

National policy developments

The period from 2000 to 2015 has been marked by policy developments in four main areas: the extension of publicly financed coverage to groups of people previously excluded, which has effectively abolished several markets for VHI playing a substitutive role; an intensification of measures to make VHI more accessible and affordable, especially but not only where VHI plays a substitutive or complementary role; an increase in domestic legal challenges to some of these measures; and a reduction in the provision of tax incentives to take up VHI.

In spite of well-established evidence about the inefficiency and inequity of many forms of tax incentive for VHI, over half of the countries in this study (19 out of 34) offer some form of tax incentive for people to buy VHI. However, there has been a notable trend to reduce or abolish tax incentives for VHI, often because they have been found to be expensive for governments and a poor use of public funds. In France, Greece and Portugal, reductions in tax incentives were in part a response to fiscal concerns in the context of the economic crisis. Countries have also reduced or abolished tax incentives for equity reasons or used tax incentives in a targeted way to promote equity and access to health care.

National policy concerns

National policy concerns about VHI often include one or more of the following: inequitable (two-tier) access to health services; the magnitude of public subsidies for VHI; the challenge of ensuring affordable access to VHI for some groups of people; the high administrative costs associated with VHI; and the transaction costs linked to the complexity VHI brings to health systems, particularly in larger markets for VHI.

Concerns about unequal access to health care – so-called two-tier access, in which people with VHI enjoy easier, faster or preferential access to treatment – have been debated in Austria, Denmark, Finland, France, Germany, Italy, Latvia, Poland, Portugal, Spain and the United Kingdom. These concerns are driven by a number of factors. For example, where providers receive payment from public sources and VHI (doctors work in both sectors or there are private beds in public hospitals – the case in most countries), and VHI-paid fees are higher than publicly paid fees, doctors and hospitals will have incentives to prioritize VHI-financed patients. This may result in longer waiting times for those who rely on publicly financed coverage, as well as their having to be treated by less experienced junior medical staff. In addition, the time doctors devote to working in a private capacity is lost to the public sector and doctors working in both sectors may experience role conflicts.

Differential access for people with VHI goes against the principle of access on the basis of need rather than ability to pay. In the United Kingdom, these concerns have been countered by arguing that users of VHI are paying for VHI coverage over and above their tax-financed contributions to the NHS and, furthermore, that their use of VHI-funded care relieves pressure on the NHS, to the benefit of people who rely on the NHS for treatment. Even if this claim is valid, the benefits of VHI may not outweigh the cost in terms of doctors’ time and public subsidies. Similar claims have been made in Ireland in the past, where some have argued that public subsidies for VHI are justified because those who opt for VHI effectively forgo a statutory entitlement while continuing to contribute to the funding of the public health service through taxation. They have also argued that VHI reduces demand for publicly financed health care. However, the evidence does not support this claim; a significant proportion of VHI-financed care takes place in public hospitals at less than full economic cost – 60% of adult inpatients with VHI, according to recent figures.

Explicit and implicit public subsidies for VHI have generated fiscal, efficiency and equity concerns in some countries. Implicit subsidies may come from public funding of medical education; failure to charge VHI the full economic cost of using beds in public hospitals; the potential for VHI to shift costs onto the publicly financed part of the health system in other ways if the system lacks transparency and accountability – for example, where there is double coverage; and the backup function of the publicly financed system.

VHI take-up is systematically concentrated among people with higher socioeconomic status, partly because VHI is less accessible to the most vulnerable population groups: older or disabled people, people with chronic conditions, unemployed people and poorer households. This raises questions about policies that lower the breadth, scope or depth of publicly financed coverage in the expectation that VHI will fill the gap. Even in countries with well-established VHI markets that cover a large share of the population, such as France, there is evidence of inequities in the depth of VHI coverage, with resulting inequities in the use of health services. Earlier, we showed how some countries have increasingly adopted measures to address access and affordability issues, particularly in the larger VHI markets. Such measures have not always been sufficiently effective, however, as the French example reveals.

The relatively high administrative costs associated with VHI have been a source of concern in several countries. This is especially the case in countries that have promoted VHI by allowing private insurers to offer publicly financed benefits. In such instances, private insurers have not been seen as providing good value for money.

VHI can bring significant complexity to a health system, adding to transaction costs for governments and households. Monitoring and regulation of VHI markets, efforts to ensure VHI is accessible and affordable for those who need it, developing policies to establish clear boundaries between public and private financing and service delivery, responding to domestic and EU legal challenges – all are likely to be time consuming and expensive.

http://www.euro.who.int/__data/assets/pdf_file/0005/310838/Voluntary-health-insurance-Europe-role-regulation.pdf?ua=1

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Comment:

By Don McCanne, M.D.

Many European nations, in addition to having some form of universal or near-universal health insurance, also have optional voluntary health insurance plans (VHI). These have raised concerns about access, inequity, two-tiered care, queues, inefficient use of public funds, and the excess costs and inefficiencies due to greater administrative complexity. “Private insurers have not been seen as providing good value,” according to this report.

If their public programs fully covered costs for all reasonable health care services that would be expected in a comprehensive health care system, then there should be no need for additional voluntary health insurance. Certain services that should not be funded by a public program, such as luxury hospital suites or vanity cosmetic surgeries, should be paid for privately and not through a common insurance risk pool. Using private payment to jump the queue should be prohibited as well to ensure that the wealthy would continue to support an egalitarian public program.

We already have considerable experience with the waste, inefficiencies, and administrative excesses of plans that are somewhat comparable to their voluntary health plans, except our waste and inefficiencies are even worse. Medigap plans and private Medicare Advantage plans are prime examples. But what we do lack is a universal public financing infrastructure, and that makes our system much more dysfunctional, inequitable, and outrageously priced than the European systems.

Thus a well-designed single payer system that covers everyone for all essential services – an improved Medicare for all – would obviate the need for voluntary health insurance. We’d be much better off without it.

Unsafe Drugs Were Prescribed More Than One Hundred Million Times in the United States Before Being Recalled

By Sonali Saluja, Steffie Woolhandler, David U. Himmelstein, David Bor, Danny McCormick
The International Journal of Health Services, June 14, 2016

Abstract

For some drugs, safety concerns are only discovered after they have been on the market, sometimes for several years. The U.S. Food and Drug Administration (FDA) has adopted several policies that could increase the likelihood of approving a potentially unsafe medication. We attempted to quantify the number of exposures in the United States to drugs that were newly approved but later withdrawn from the market. We obtained a list of all drugs approved and subsequently withdrawn from the U.S. market due to safety concerns between 1993 and 2010. Using a representative sample of outpatient physician office visits in the National Ambulatory Medical Care Survey, we estimated the number of visits in the United States at which these unsafe drugs were prescribed. Seventeen drugs were approved and later withdrawn during this 18-year period and were prescribed at 112 million physician office visits in the United States. Nine of these drugs were prescribed more than 1 million times before their market withdrawal. New drugs that are later withdrawn due to being unsafe are frequently prescribed in the United States. To minimize the negative health consequences of prescribing potentially unsafe medications, we should reconsider some of the FDA policies that encourage the rapid approval and dissemination of new drugs.

From the Introduction

Each year more than 2 million serious adverse drug reactions occur in the United States, causing an estimated 100,000 deaths. Many safety problems emerge only after drugs have received Food and Drug Administration (FDA) approval. Indeed, in the first 16 years after approval, 27 market withdrawals and serious new safety warnings—so-called black box warnings (BBWs)—are issued for every 100 newly introduced drugs. For withdrawn drugs, the median time from FDA approval to removal from the market is five years.

The FDA initiated a series of programs in the 1980s and 1990s that allowed the expedited review of certain drugs. Perhaps as a consequence of these programs, the FDA approves new drugs significantly faster than the regulatory bodies of Europe, Canada, and Japan. Unlike the United States, most European Union countries require that new drugs undergo a secondary review process comparing their efficacy to the existing standard of care before health insurance plans will pay for them. Furthermore, the European Union, Canada, and Japan prohibit direct-to-consumer advertising, which is known to increase prescribing of the advertised drug.

Pharmaceutical firms often heavily market newly approved medications in the United States, and doctors frequently prescribe them. After the FDA relaxed regulations on direct-to-consumer advertising in 1997, including allowing less reporting of product risks, pharmaceutical spending on advertising increased more than three-fold. Patients commonly ask for advertised drugs in the United States and clinicians often feel pressured to prescribe them. Hence, many Americans may be exposed to drugs that pose a risk to their health before their dangers are adequately appreciated.

From the Discussion

This descriptive study is the first systematic attempt to quantify the extent to which the U.S. population is exposed to unsafe drugs in the outpatient setting.

Special FDA programs that allow for the expedited review of some drugs are now commonly used by industry to gain quick access to the U.S. market. Expedited reviews were initiated in the 1980s to allow for rapid approval of HIV drugs. These programs were intended for drugs used in exceptional circumstances: for life-threatening, untreatable, or rare diseases. However, the pharmaceutical industry now frequently uses these programs in non-exceptional circumstances; currently, the majority of new drugs qualify for expedited review. This year the U.S. Congress will consider additional legislation, the 21st Century Cures Act, that would further accelerate approval of some drugs and could expose millions more Americans to medications that have been only briefly studied for safety.

Several policy steps might reduce patients’ exposure to unsafe drugs, including: returning to a more stringent FDA approval process, increasing post-marketing surveillance, and eliminating direct-to-consumer advertising.

http://joh.sagepub.com/content/early/2016/06/10/0020731416654662.abstract

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Comment:

By Don McCanne, M.D.

Since it is impossible to read all of the research studies on new drugs, we can be thankful that we have the Food and Drug Administration (FDA) to collate and evaluate all of that information so that we know that new drug products released on the market have been demonstrated to be both effective and safe. Or can we? This new study adds to our concerns.

With the politics in our nation being under the control of the pro-market neoliberals and conservatives, the pharmaceutical industry and insurance companies have been given a most favored status under the belief that markets will serve the public better if not constrained by supposedly excessive government oversight.

In the case of pharmaceuticals, the public can experience the benefits earlier of the new blockbuster miracle drugs if the government (FDA) will just get out of the way, or so they say. More recent laws and regulations have allowed pharmaceutical firms to pay fees to enter an accelerated process for new drug approval (like buying their way to the front of the queue). This accelerated process has been expanded to include most new drugs, ignoring the fact that there may be a conflict of interest when firms can buy off government regulators to expedite approval of their products.

To be sure that the information evaluated truly represents the value of the new drugs, pharmaceutical firms have agreed to register all studies in advance and not just the studies with favorable results. But research studies with adverse results are still being filed away without public oversight, explaining some of the reason that drugs on the market do not have the same benefits and safety margin as the pre-marketing studies submitted to the FDA show. Also the firms have promised close post-marketing surveillance, but that seems to disappear once the drug is approved. Also the firms are not required to compare new drugs with existing drugs even though many turn out to be inferior. Yet with our lax rules on direct-to-consumer advertising, a demand can be created for these new drugs in spite of their typically outrageous prices. Now Congress is advancing the CURES Act to further benefit the biomedical firms, potentially at a cost to the public’s health that may offset the benefits.

This problem is serious. The study by Saluia et al. shows that over 100 million prescriptions were issued for drugs that had to be withdrawn from the market because they proved to be unsafe. About 100,000 people die each year from drug reactions, and this is particularly tragic when it is from a drug that never should have been on the market in the first place.

The stewards of a well designed single payer system would demand much better performance from the pharmaceutical industry – drugs and other biomedical products that are effective, that are an improvement over existing treatments, that are reasonably safe, and that are priced appropriately based on legitimate costs and a fair profit margin. Regardless, the government has to step up if we want better quality and value in our nation’s drug supply.

Impact of Increased Cost Sharing on Utilization of Low Value Services

By Jonathan Gruber; Catherine Maclean; Kevin G. Volpp; Bill Wright; Eric Wilkinson
American Society of Health Economics Sixth Biennial Conference, June 13, 2016

Given rising healthcare costs in the United States and the relatively poor health of Americans, research on cost-effective benefit designs that do not impede patient outcomes is critical.  Value-based insurance design (VBID) programs hold great promise as they align patient out-of-pocket spending with service value, and can thereby direct health dollars away from wasteful services, and improve patient outcomes through better alignment of treatment and patient need.
 
The existent VBID literature focuses primarily on reducing patient cost sharing for high value care and has tended to be limited to medications.  There is scant information on the effectiveness of raising patient cost sharing for low value care (e.g., unnecessary imaging services).  Moreover, insight from behavioral economics suggests that the latter benefit design may be more effective in changing behavior as it penalizes those patients using services of low value.  Better evidence on VBID programs is needed, given that such programs are embedded in the Patient Protection and Affordable Care Act and numerous employers across the U.S. are implementing such programs.
 
In this study we evaluated two innovative VBID programs implemented by public employers in the state of Oregon between 2010 and 2012.  The VBID programs we evaluated increased cost-sharing for low value healthcare services.  Specifically, patient co-payments were increased by $100 to $500, representing a much more substantial rise in out-of-pocket spending than has typically been evaluated in the past.  Targeted services included a number of services believed to offer limited benefits to patients (for example, inpatient sleep studies, upper GI endoscopies that are not viewed as medically necessary, and over-used imaging services and surgeries), and emergency room episodes.
 
To examine the effect of these VBID programs we estimate differences-in-differences (DD) models coupled with administrative claims data spanning 2009-2013 on approximately 300,000 public sector employees and their dependents.  Specially, we exploit programmatic changes that occurred across time, organization, and service, leveraging a quasi-experimental design to estimate the impact of the VBID programs.  To further strengthen our design, we utilize comparable data from three public employers in Oregon that did not implement a VBID program over the same time period as a comparison group.  Our outcomes include healthcare utilization (both on the extensive and intensive margins), healthcare costs, and patient well-being.  We also examine heterogeneity in treatment effects by patient characteristics.

Our findings suggest that increasing cost-sharing for low value healthcare services reduces utilization of some, but not all, targeted services.  However, we find that increased cost-sharing may lead to modest increases in overall healthcare spending.  Finally, we identify heterogeneity by patient characteristics.  These findings suggest that although VBID programs may steer patients away from targeted low value services, these programs may not lead to substantial reductions in healthcare spending overall, at least in the short run.  Future studies should examine longer term impacts of VBID programs and different types of VBID program designs on utilization and costs.

https://ashecon.confex.com/ashecon/2016/webprogrampreliminary/Paper4949.html

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Comment:

By Don McCanne, M.D.

It seems intuitive that value-based insurance design (VBID), such as requiring much higher patient cost sharing for low-value care (e.g., much greater out-of-pocket payments for “unnecessary” CT or MRI scans), should help reduce our total health care spending without inducing a major negative impact on health outcomes. But the authors of this study find that “increased cost-sharing may lead to modest increases in overall healthcare spending,” even though it may reduce utilization of some, but not all, targeted services.

Thus it appears that VBID may not be a very effective tool for reducing overall health care spending. Besides, philosophically it does not seem right that patients must face a financial penalty for obtaining the care that their health care professionals have recommended.

If penalties were to be assigned for using low-value care, wouldn’t it be more appropriate to apply them to the health care provider who would profit by selling more health care services with very limited value? But then how would you determine the threshold of what care is of value and what isn’t? Regardless, this report seems to provide an argument for dispensing with penalties in health care.

Maybe since we haven’t had much luck with carrots and sticks, we should give up on relying on intuition in implementing health care reform and instead adopt a proven model that is highly effective in improving affordability and access to health care for all – a single payer national health program: Improved Medicare for All.

Hearing: The Need to Control Automatic Spending and Unauthorized Programs

U.S. House of Representatives, Committee on the Budget
June 9, 2016

Witnesses:

The Honorable David M. Walker, Former Comptroller General of the United States

It is clear that our federal fiscal challenge is so great that, unlike after World War II, we will not be able to “grow our way out of the problem.” Our global economic market share, demographic patterns and government commitments are very different today than at the end of World War II. We clearly need to take steps to enhance economic growth, increase individual opportunity and improve our competitive posture. However, the math does not come close to working by relying on growth alone. It is also clear that we will not be able to reduce our federal public debt/GDP to a reasonable and sustainable level without addressing “mandatory” spending programs and engaging in comprehensive tax reform. In that regard, I would respectfully suggest that we need to address both direct and indirect mandatory spending, including tax preferences.

Stuart M. Butler, Ph.D., Senior Fellow in Economic Studies, The Brookings Institution

My testimony today focuses mainly on automatic spending, but let me begin with some remarks on the unauthorized programs.

Unauthorized Programs

Unauthorized programs and agencies are no small issue. As the CBO recently reported, the omnibus appropriations bill for FY 2016 appropriated over $300 billion to agencies and programs lacking authorization.

Authorizations are a very important part of the budget process. They create or redesign a federal agency or program, mapping out its activities and establishing federal obligations and expenditures. A major purpose of reauthorization is to conduct reviews and hearings and to refine the program or agencies’ activities based on that evaluation. With the climate in Congress undoubtedly making it more difficult for authorizing committees to move such legislation to the floor, the failure to review and reauthorize important agencies and programs underscores the growing failure of the budget process and the decline in the orderly functioning of Congress. It is embarrassing, to say the least, that many major agencies, such as the FBI and the State Department, have not been authorized for many years and must depend on the appropriations process for anything resembling a budget review.

On the face of it, the answer to this problem is quite simple – do not waive the rules.

Automatic Spending

The growth of automatic or mandatory spending within the federal budget is a similar but much larger problem. Like the growth of unauthorized programs, the rapidly growing proportion of federal spending for mandatory and other automatic spending escapes timely review. These programs also lack a real budget in the generally understood sense of a clear plan with specified spending and funding levels. This is a breakdown of responsible budgeting.

In conclusion Mr. Chairman, I believe the only way to achieve reasonable constraints on automatic spending is to do so within the context of an agreed long-term plan which becomes a default that is difficult – but not impossible – to alter over time. That procedure forces the discussion to take place in the context of the big picture that includes broad national objectives for the economy, broad fiscal goals, and decisions about the relative balance of protections needed for the elderly, the young, and working- age generations. That broad context, with the regular review and default feature of the proposal, provides sufficient political encouragement and protection over time for members to continue supporting the procedure.

Lily Batchelder, Professor of Law and Public Policy, NYU School of Law

My testimony makes three main points.

• Regardless of whether the goal in controlling automatic spending is reducing deficits or paying for important new investments, Congress should focus on cutting tax expenditures. Tax expenditures are simply a type of mandatory spending. With rare exceptions, tax expenditures continue automatically and anyone eligible can claim them, regardless of the budgetary impact. Tax expenditures are tremendously costly and are growing over time. Moreover, most are highly regressive and many are poorly structured. In contrast, almost all traditional mandatory spending programs are progressive and many are well designed.

• Deficit reduction will require compromise and tough policy choices. Budget process reform is not the answer, but rather bipartisan dialogue and compromise. In order to be bipartisan, deficit reduction will require both revenue increases and spending cuts, but it should be weighted towards revenues. Congress has made deep cuts in discretionary spending in recent years. In addition, the aging of the population, the retirement of the Baby Boom generation, and natural health care cost growth all mean we will need to spend more on traditional mandatory spending programs in the coming decades just to maintain our current commitments.

• Caps or limits, enforced by automatic across-the-board cuts, are a bad way to reduce traditional mandatory spending, and this is true of tax expenditures as well. Caps on traditional mandatory spending are pro-cyclical, automatically reducing spending at precisely the wrong time – during economic downturns. Caps on the annual cost of tax expenditures are unworkable. Such caps take a meat axe to complicated policy problems where a scalpel is needed. However, reforming multiple tax expenditures at the same time in a sensible way, such as limiting their value to 28 cents on the dollar, could be a promising approach.

Federal Government Spending, 2015

$1,442 billion   Tax expenditures
$889 billion   Medicare and Medicaid
$882 billion   Social Security
$583 billion   Non-defense discretionary
$582 billion   Defense discretionary

Share of Cost of Largest Tax Expenditures, 2013

8%  Lowest Quintile
10%  Second Quintile
13%  Third Quintile
18%  Fourth Quintile
51%  Top Quintile (17% for Top 1%)

Value of Tax Expenditures per Household, 2011

$635  Lowest Quintile
$2,333  Second Quintile
$2,897  Third Quintile
$4,559  Fourth Quintile
$24,045  Top Quintile
$154,856  Top 1%

Conclusion

As this Committee continues its important work on addressing our long-term budgetary challenges, I urge you to focus your attention on one type of automatic spending that is both enormously costly and too often overlooked: tax expenditures. The aging of the population, rising income disparities, and the natural growth of health care costs mean demands on federal resources are not going away. Cutting tax expenditures represents the fairest and most efficient way to address our nation’s fiscal needs. And within that category, I urge you to focus on cutting those tax expenditures that are the most regressive, the most distortionary, or the least beneficial for society as a whole.

Hearing:
http://budget.house.gov/hearingschedule2016/the-need-to-control-automatic-spending-and-unauthorized-programs.htm

Testimony of David Walker:
http://budget.house.gov/uploadedfiles/walkertestimony.pdf

Testimony of Stuart Butler:
http://budget.house.gov/uploadedfiles/butler_testimony.pdf

Testimony of Lily Batchelder
http://budget.house.gov/uploadedfiles/batchelder_testimony.pdf

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Comment:

By Don McCanne, M.D.

Although this hearing was allegedly about programs for which spending is mandatory (such as Social Security and Medicare) and the failure of Congress to formally reauthorize public agencies and programs (such as the FBI and The State Department), it is really about the supposed need to cut spending in essential government programs. This process should be of concern to single payer supporters since, if we had a Medicare for All program, it would be on the chopping block as well.

Two of the witnesses represent the Republican majority. Former Comptroller David Walker has continued to harp on the fact that the growth in Medicare and in the interest payments on our national debt will bankrupt the nation, implying that spending must be reduced, including mandatory spending. Stuart Butler was formerly with The Heritage Foundation and was author of the opposition’s plan to the Clinton health care reform proposal – the plan that later became the basis for the Affordable Care Act. He too implies that budget deficits require that mandatory spending must also be subject to the budget process. Neither Walker nor Butler suggest new revenues (taxes) as a means of balancing the budget.

In sharp contrast, Lily Batchelder shows us that a change in tax policy can close the budget gap without the necessity of cutting mandatory spending for essential programs (and discretionary spending has already been cut to the bone). She would emphasize increasing revenues and doing that indirectly by reducing tax expenditures. Tax expenditures are the reduction in taxes paid as a result of deductions taken from taxable income. Those taxes avoided are disproportionately a benefit for the very wealthy and are paid by the rest of us, and they are massive – over $1.4 trillion in 2015!

Our politicians are wrong when they tell us that we have to cut Social Security, reduce Medicare payments by privatizing the program, and that we could never afford to pay for Medicare for All (even though we already spend on health care what the program would cost).

All we have to do is fix the tax code – the most important step being to reduce the tax expenditures disproportionately benefiting the very wealthy. Lily Batchelder explained that to Congress, but do you think they would ever listen?

Is Health Insurance Good for Your Financial Health?

By Nicole Dussault, Maxim Pinkovskiy, and Basit Zafar
Federal Reserve Bank of New York, June 6, 2016

What is the purpose of health care? What is the purpose of health insurance? When people fall ill, they seek health care in order to get better. But insurance has a slightly different function: Its main role is not to protect our health per se, but to protect our finances.

Protection against financial hardship was one of the drivers behind passage of the 2010 Patient Protection and Affordable Care Act, commonly known as the Affordable Care Act (ACA). As President Obama said in a 2015 weekly address, “… that’s the whole point of health insurance. Peace of mind.”

In this blog post, we discuss the results of a research project that examines the effect of the Affordable Care Act’s Medicaid expansion on personal financial indicators. We find suggestive evidence that after the implementation of the ACA in the first quarter of 2014, counties with a high uninsurance burden pre-reform in states that subsequently expanded Medicaid had a decrease in average debt sent to collections agencies compared with such counties in states that did not expand Medicaid.

From the Conclusion

While the full effects of the Affordable Care Act on financial health are yet to be seen, and while the effects of the ACA — positive or negative — are not restricted to financial health, we offer suggestive early evidence that the Medicaid expansion is fulfilling the goal of health insurance: providing “peace of mind” by protecting against financial hardship.

http://libertystreeteconomics.newyorkfed.org/2016/06/is-health-insurance-good-for-your-financial-health.html

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Comment:

By Don McCanne, M.D.

One of the most important purposes of the Affordable Care Act (ACA) was to make health care affordable. After all, “Affordable” is in its name. This study reported by the Federal Reserve Bank of New York confirms that, indeed, health care has become more affordable for new enrollees in Medicaid, as confirmed by the decline in debt sent to collection agencies in states that did expand Medicaid. But that’s not the full story.

One of the problems faced by the architects of ACA was that health care costs have become so expensive that insurance premiums would not be affordable without modifying the private health plans that were to be sold on the exchanges. Thus they established the benchmark silver plan at an actuarial value of 70 percent (the patient pays an average of 30 percent of the costs if not qualified for subsidies). The easiest way to do this was to require high deductibles. Other studies have shown that these deductibles have made health care less affordable and have resulted in a perpetuation of medical debt that frequently ends up being assigned to collection agencies.

Why then would Medicaid patients have a lower incidence of accounts assigned to collection agencies than do those with private plans? It is simply because most Medicaid patients do not have deductibles or other forms of cost sharing. They do not incur much in the way of medical debt. As President Obama said, “That’s the whole point of health insurance – Peace of mind.”

We can do the same for everyone else. We can prevent financial hardship from medical debt by providing first dollar coverage for everyone. With a well designed single payer system we can control costs through much more patient-friendly means. For those who say that we can’t afford that, other nations have first dollar coverage while spending considerably less than we do with our highly dysfunctional financing system. Single payer. It’s that simple.