reconsidering the moral hazard- risk aversion tradeoff joseph p. newhouse, © 2006 many thanks to...
TRANSCRIPT
Reconsidering the Moral Hazard-Risk Aversion Tradeoff
Joseph P. Newhouse, © 2006
Many thanks to David Cutler, Richard Frank, Jon Gruber, Tom McGuire, and Richard Zeckhauser for comments.
JHE and HE citation counts: Kodrzycki and Pingkang 2005, http://www.bos.frb.org/economic/wp/wp2005/wp0512.pdf.
Some Prefatory Remarks
I thought about several topics for this talk How and when does a subfield of economics
get established? When is it recognized by the AEA classification system? When is there a field journal? A professional society?
Clear that health economics is established; JHE and HE now 1 and 2 in citation counts among all economics and policy journals taken jointly!
The questions at the top were too hard
The Future
Another natural topic: the future of the field This is something of a fool’s errand, but
several factors suggest continued vitality: Technological change and cost pressures Use of administered pricing Off-frontier production, e.g. variations A second-best world; few unambiguous
predictions; need for empirical verification
Cost Sharing in Health Insurance
Instead of these topics I went back to what I worked on at the beginning of my career; the structure of cost sharing in health insurance For example, the size of a deductible Although I assume a health insurance context,
the issues are also relevant in a health service context
Outline of Talk
Received theory and empirics The context for reconsidering An elaboration of received theory Incorporating time-inconsistent preferences
Arrow, AER, 1963, 53(5): 941-978; 1968, 58(3):537-539; Pauly, AER, 1968, 58(3):531-537; Zeckhauser, JET, 2(1):10-26.
Received Theory
Cost sharing in health insurance is traditionally framed as finding the optimal tradeoff between moral hazard and risk From Arrow (1963, 1968), Pauly (1968),
Zeckhauser (1970) This is how our textbooks present it; e.g.,
Phelps, ch. 10, Feldstein, ch. 6, Zweifel and Breyer, ch. 6
Newhouse and the Insurance Experiment Group, Free for All?, chapter 4.
Optimal Cost Sharing? - 1
Using the framework of trading off moral hazard and risk, the RAND Health Insurance Experiment calculated the optimal cost sharing in 1983 dollars to be a $200 individual deductible, followed by 25% coinsurance, to a $1,500 stop loss
Optimal Cost Sharing? - 2
These values were slightly above those in early 1980s indemnity policies, but….
The RAND calculations didn’t consider the tax subsidy to employer paid premiums nor liquidity constraints, which would have lowered the optimal cost sharing On the other hand, the calculations assumed
actuarily fair insurance
What Happened?
Instead of cost sharing escalating with medical spending, we entered the era of managed care with lower cost sharing
Lower cost sharing was consistent with the idea that greater supply-side cost sharing had altered the moral hazard-risk tradeoff, which it probably did, but…
Two Problems Remained
Supply-side cost sharing was not well placed to affect the decision to initiate treatment for an episode, which the RAND data suggested was the principal margin that demand-side cost sharing affected, and…
Pauly and Ramsey, JHE, 1999, 18(4) 443-458; Rosenthal and Newhouse, Jnl Hlth Care Fin, 2002,28(4):1-10.
Did Supply-Side Cost Sharing Reduce Deadweight Loss?
With minimal demand-side cost sharing and reliance on supply-side cost sharing there was no mechanism to reveal willingness-to-pay, so that services a consumer would have been willing to pay for might have been denied
Did this play a role in the managed care backlash?
And Now…
Whether because of the backlash or because supply-side cost sharing was about one-off effects, or both, demand-side cost sharing is now coming back on the table
The 2003 legislation authorizing Health Savings Accounts prescribed a minimum $1,050 deductible (individual), maximum $5,250 stop-loss (2006 values)
HSAs and Optimal Cost Sharing
Despite product change, the HSA figures are not so far from the RAND calculations Health spending from 1983-2006 grew by ~5X Ignoring the product change and using 5X to
inflate, the HSA deductible is in line The stop loss is larger by 3.5X, but medical
care is a larger share of income, so a less than proportional increase would be optimal
Law Says Preventive Services Can Be Exempt
The Treasury defines preventive services as: periodic health examinations; routine prenatal and well-child care; tobacco cessation programs; immunizations; weight loss programs; various screening programs
Importantly for my story, the Treasury excludes services that treat existing conditions; they are subject to cost sharing
Should More Services be Exempt?
In particular, should cost sharing be reduced for chronic maintenance drugs and routine maintenance visits for chronic conditions? Considerable evidence that compliance
increases with less cost sharing In some cases this may lower total lifetime
cost; in others it may not, but it may improve health
Evidence on Capped Drug Benefits - 1
The following slides compare results from two matched groups at Kaiser Northern California
One group had a drug benefit capped at $1,000 of member spending (no benefits after that), and the other group had no cap All were Medicare eligibles over 65 years of
age
Evidence on Capped Drug Benefits - 2
The comparisons are for those who had diabetes, hyperlipidemia, or hypertension, and who filled a prescription for an anti-diabetic drug, a lipid-lowering drug, or an anti-hypertensive in the prior year
The tables show drug consumption, non-adherence, and physiologic outcomes Adherence is having ≥ 80% of days covered
Odds Ratio results control for age, sex, race, comorbidities, office, ED copays. Physiologic odds ratio controls for initial value.
Diabetics
Benefit Not Capped (%)
Benefit Capped (%)
Odds Ratio (95% C.I.)
Drug Quantity ($)
-- -- 0.79
(0.73-0.86)
Drug Non-Adherence
21.2 26.2 1.33
(1.18-1.48)
Glycated Hg > 8%
17.0 19.7 1.23
(1.03-1.46)Odds ratio = capped/non-capped; Source: Hsu, et al., NEJM, June 1, 2006
Odds Ratio results control for age, sex, race, comorbidities, office, ED copays. Physiologic odds ratio controls for initial value.
High Cholesterol
Benefit Not Capped (%)
Benefit Capped (%)
Odds Ratio (95% C.I.)
Drug Quantity ($)
-- -- 0.73
(0.70-0.77)
Drug Non-Adherence
26.5 31.4 1.27
(1.19-1.34)
LDL>130 mg/dl
19.6 21.3 1.13
(1.03-1.25)Odds ratio = capped/non-capped; Source: Hsu, et al., NEJM, June 1, 2006
Odds Ratio results control for age, sex, race, comorbidities, office, ED copays. Physiologic odds ratio controls for initial value.
Hypertensives
Benefit Not Capped (%)
Benefit Capped (%)
Odds Ratio (95% C.I.)
Drug Quantity ($)
-- -- 0.85
(0.82-0.89)
Drug Non-Adherence
14.6 18.1 1.30
(1.23-1.38)
SBP>140 mm Hg
38.5 39.5 1.05
(1.00-1.09)Odds ratio = capped/non-capped; Source: Hsu, et al., NEJM, June 1, 2006
Odds Ratio results control for age, sex, race, years of Kaiser membership, comorbidities, office, ED copays.
Use and Costs, Rate/100
Benefit Not Capped
Benefit Capped
Odds Ratio (95% C.I.)
ED Visits 45.2 49.2 1.09
(1.04-1.14)
Non-elective
Admissions
16.6 18.7 1.13
(1.05-1.21)
Total Cost -- -- 0.99
(0.94-1.04)
Conclusion from Kaiser Study
A drug benefit capped at $1,000 versus no cap led to less compliance with chronic disease regimens, poorer physiologic health, and cost increases in other medical services that about equaled the savings in drug costs If non-compliance were to continue and
physiologic health to deteriorate further, the future increase in other medical spending may exceed the decrease in drug spending
Soumerai, et al., NEJM, 1991, 325:1072-1077, 1994, 331:650-655.
Additional Evidence - 1
Soumerai, et al. studies on caps in two Medicaid populations: 3 drug/month limit saved 35% on drugs, but more than doubled nursing home admissions Among schizophrenics: Cap on mental health
drugs raised other spending by 17 times the savings on drugs
Are You Saying: So What?
Did you already know that initial benefits with caps were poor economics and policy?
Then ask yourself whether an actuarily equivalent deductible with full coverage over the deductible would have yielded better or worse compliance results?
How many think better results?
Huskamp et al, NEJM, 2003, 349:2224-2232; Goldman, et al., JAMA, 2004, 291:2344-2350.
Additional Evidence - 2
In any event, if you don’t like caps, there are analogous findings about drug copays
Huskamp, et al. and Goldman, et al. find that increased copays decreased the use of ACE inhibitors, anti-hypertensives, anti-diabetics, and statins, though they have no data on other medical costs
Tamblyn, et al., JAMA, 2001, 285(4):421-429.
Additional Evidence – 3
Tamblyn, et al. find imposing cost sharing for drugs among the poor and the elderly in Quebec reduced drug use by 15-22%, but led to an approximate doubling of serious adverse events, meaning death, hospitalization, or nursing home admission No cost data, but it seems likely that total costs
increased
Rosen, et al., Annals of Internal Med, 2005, 143(2):89-99.
Additional Evidence - 4
Rosen, et al. (2005) simulate that full coverage of ACE inhibitors for Medicare beneficiaries who are diabetic would increase QALYs and save money relative to the default cost sharing in Part D
An Extreme Example
With Directly Observed Therapy, tuberculosis patients are paid to be observed swallowing their medications Negative cost sharing!
3 Cases to Stretch the Usual Risk-Moral Hazard Tradeoff
An easy one to warm up A second one that is a straightforward
elaboration of received theory A third one that ventures further afield,
time-inconsistent preferences
An Easy Case
The marginal social cost of another pill is frequently negligible, so any induced consumption has negligible deadweight loss
Assuming no increase in costs elsewhere, no moral hazard-risk aversion tradeoff
I assume for the remainder of the talk that marginal social cost is non-negligible Of course, private costs of the pill are positive
Before Coming to Case 2: How Is Cost Sharing Determined?
For many cost sharing is determined by employer or government choice Even with choice among plans, employer may
have standardized cost sharing
As a result: In many cases cost sharing is exogenous And even with choice of plan, a person’s health
costs are shared with an insurance pool
Goldstein-Pauly, in Role of Health Insurance in the Health Services Sector, 1976; Miller, JHE,24(5):931-939.
The Employer’s Choice
How does an employer choose cost sharing? Goldstein-Pauly (1976): Employers minimize
labor cost, look at benefit to marginal worker; unions look at benefit to median worker
– Labor cost = health care cost + productivity effects Miller (2005): Employer who minimizes cost
and offers plan choice sells more generous plan as an upgrade; a lump sum subsidy to all plans is probably not optimal
Public Insurance
Straightforward extension of Goldstein-Pauly median employee model to median voter?
An Implication
Tenure in the employment group is relevant for a cost-minimizing employer; ceteris paribus, firms with longer job tenure will provide insurance with less cost sharing if those services reduce future costs I have not tested this
In Medicare life cycle costs relevant
A Note on Measuring the Risk-Moral Hazard Tradeoff
Much empirical analysis, the RAND HIE included, uses an annual time frame, but lifetime risk is relevant with chronic disease
Positive intertemporal correlation of health spending from chronic disease raises risk for a given level of positive cost sharing
Held and Pauly, JHE, 1990, 9(4): 447-461.
Second Case: An Elaboration of Received Theory
Because costs are shared within a common insurance pool, less cost sharing for those services and/or individuals that lowers overall spending for the pool is the usual case of a subsidy to recognize an externality Here too no moral hazard-risk aversion tradeoff Held-Pauly (1990) take up an analogous case,
but don’t frame the issue as optimal cost sharing for all services
A Third Case: Take Your Medicine!
We surely all heard that from our mothers So why as adults do some persons not take
drugs that will improve their future health but may not save them money?
One Answer
They are insured for other medical services and place a low value on the uninsured health costs such as pain, suffering
The second part doesn’t seem very plausible for the above cases of chronic disease
Models of time-inconsistent behavior seem relevant in this context
Strotz, 1956; Akerlof, 1991; Laibson, 1997; O'Donoghue and Rabin, 1999; Frederick, Loewenstein, and O'Donoghue, 2002.
Models of Time-Consistent and Time-Inconsistence Preferences
Assume a standard health economics utility function:
With time-consistent preferences (standard discounting), or:
0 < < 1 Time-inconsistent preferences, quasi-hyperbolic
discounting:
0 < β, < 1
Maximize lifetime utility s.t. lifetime budget constraint
it
tT
i
iU
0
tT
i
iti
t UU1
)),(,( xmHxUU ttt
Gruber-Koszegi, QJE, 2001, 116(4), 1261-1305; J Pub Econ, 2004,88(9-10): 1959-1987.
Already a Health Application
Gruber-Koszegi (2001, 2004) use a model with time-inconsistent preferences to justify much higher cigarette taxes to induce “compliance” with not smoking With this model cigarette taxes are less
regressive than usually assumed and may be progressive because “internalities” disproportionately accrue to the low income
Laibson, QJE, 1997, 112(2):443-477; O'Donoghue and Rabin, AER, 1999,89(1):103-124. .
Time-Inconsistent Preferences and Optimal Cost Sharing - 1
Solutions in these models depend on whether the individual is aware of the time- inconsistent preferences or not Solutions are easier if unaware (naïve case)
Also can depend on whether example is immediate reward or immediate cost Chronic disease application is immediate cost;
small difference between and β can generate large welfare losses if individual is naïve
Time-Inconsistent Preferences and Optimal Cost Sharing - 2
In other words, with time-inconsistent preferences, induced compliance can be welfare increasing, potentially by a large amount, independent of risk
Specific Subsidies
Very specific cost sharing structures such as free ACE inhibitors for elderly diabetics are not found in the market (selection), but disease management and case management use non-price methods toward similar ends Medicare could adopt such a structure and there
could be mandates in private insurance
Conclusions: Social Perspective
Current cost sharing structure may not be optimal from society’s perspective
Without considering risk, welfare may be improved by selectively lowering cost sharing for certain persons and/or certain services
Case 1: Negligible marginal social cost From social perspective, negligible cost sharing
Social Perspective, cont.
Case 2: Induced greater compliance that adds cost for the specific good or service but saves overall lifetime costs Additional subsidy; externality
Case 3:Induced greater compliance that increases value of health by more than cost Models of time-inconsistent behavior relevant? Marginal Benefit of health = MC compliance
Conclusions: Private Perspective
From a private perspective: Case 1 of negligible cost probably doesn’t exist Cases 2, 3: Optimal subsidy will generally be
less than from social perspective
Conclusions: Policy and Research
HSA legislation seems too restrictive More generally, current cost sharing
structure seems sub-optimal, even from a private perspective
Optimal cost sharing seems like a fruitful field for future research