By Claudio Lucarelli, Molly Frean, Aliza S. Gordon, Lynn M. Hua, and Mark Pauly
National Bureau of Economic Research, November 2020
The growth of health care spending has been a longstanding policy concern. Over the years, several innovations have been proposed to lower levels of health care spending; however, their impact has been limited and not sustained over time. Costly new technology, while often an improvement to existing care, has been identified as a principal driver of health care spending growth. Recent literature has shown that high deductible health plans (HDHP) can have an immediate impact on levels of health care spending, but their medium- and long-run effects on spending growth remain unknown. In this paper, we use multiple-employer-group claims data from a large national insurer to (i) study whether HDHPs reduce the growth in spending over four years compared to lower deductible alternatives; and (ii) explore the mechanisms behind any reductions in growth by looking at whether HDHPs reduce the use of low- vs. high-value treatments. We find that HDHPs have a limited effect on spending growth, with a statistically significant reduction observed only for prescription drugs. HDHPs are not associated with significantly lower growth in spending on highly cost-effective medicines in a sample of drugs but do reduce spending growth for less cost-effective drugs.
From the Introduction
The overall pattern in our data therefore is one of no effect on aggregate spending growth for all insured care, and modest but potentially efficiency-improving effects on spending growth for drugs. High deductibles do not curb runaway medical spending, but may lead to more selective choices among drugs that better balance health benefits and cost. It appears that HDHPs do not have as much potential for long-term cost containment as their advocates contend, nor do they pose as much risk to the use of effective and cost-effective care as their detractors fear.
The Economics of Moral Hazard: Comment
By Mark V. Pauly
The American Economic Review, June 1968
When uncertainty is present in economic activity, insurance is commonly found. Indeed, Kenneth Arrow has identified a kind of market failure with the absence of markets to provide insurance against some uncertain events. Arrow stated that “the welfare case for insurance of all sorts is overwhelming. It follows that the government should undertake insurance where the market, for whatever reason, has failed to emerge.” This paper will show however, that even if all individuals are risk-averters, insurance against some types of uncertain events may be nonoptimal. Hence, the fact that certain kinds of insurance have failed to emerge in the private market may be no indication of nonoptimality, and compulsory government insurance against some uncertain events may lead to inefficiency. It will also be shown that the problem of “moral hazard” in insurance has, in fact, little to do with morality but can be analyzed with orthodox economic tools.
The particular type of insurance for which the argument will be presented is that of insurance against medical care expenses, for it was in discussion of medical care expenses that Arrow framed the propositions cited above.
By Don McCanne, M.D.
In 1968, Mark Pauly shook up the health policy world by noting, paraphrased, that the “moral hazard” of insurance created an inefficiency in which individuals would obtain health care that they would have otherwise declined if they had to pay for it. This moral hazard then has supposedly contributed to the very high health care spending in the United States.
Cost sharing in the form of deductibles, copayments and coinsurance were supposed to counter moral hazard by exposing patients to the costs of health care. Of course, costs continued to rise, so high deductibles were introduced to increase patient sensitivity to the costs, as one feature of the move to consumer-directed health care designed to make patients better shoppers of health care.
Now we have many studies that confirm that high deductibles have caused patients to forgo not just marginal care but also beneficial health care services. So it is interesting to see what Mark Pauly and his colleagues have found in studying the long-term effects of high deductibles.
The most important finding of this study: “The overall pattern in our data therefore is one of no effect on aggregate spending growth for all insured care.” They did show that there was some decrease in spending on less cost-effective drugs but not on highly cost-effective medicines, but that effect was so minimal that it produced no statistically significant change in spending growth in health care.
One of the reasons that this debate over moral hazard has been so important is found in the excerpt from The American Economic Review of June 1968. Kenneth Arrow states, “the government should undertake insurance where the market, for whatever reason, has failed to emerge.” Mark Pauly states, “compulsory government insurance against some uncertain events may lead to inefficiency.” So far, the Pauly camp has prevailed. Our insurance market failures have not led to universal government insurance, but, rather, we have turned to the market for private insurance “efficiencies” such as high deductible health plans. Yet Pauly now shows us that high deductibles have had no effect on aggregate spending growth.
There is one massive natural experiment that demonstrates that there is an effective method of slowing aggregate spending growth. The curves in the growth of health care spending in the United States and Canada were the same until Canada implemented their single payer provincial health programs. Since that time, the growth of U.S. health care costs has continued on the same high trajectory whereas Canada bent the cost curve down towards more sustainable levels. U.S. private insurers with their high deductibles and other market innovations have failed not only in controlling costs but also in achieving other crucial goals such as universality and equitable access and coverage for all.
So let’s say no to deductibles and the private insurance industry that has foisted them off on us. Let’s say yes to single payer improved Medicare for All.
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