2016, No. 2

Abstracts of Selected Recent NBER Working Papers

WP 22106
Leemore Dafny, Kate Ho, Robin Lee
The Price Effects of Cross-Hospital Mergers

So-called "horizontal mergers" of hospitals in the same geographic market have garnered significant attention from researchers and regulators alike. However, much of the recent hospital industry consolidation spans multiple markets serving distinct patient populations. We show that such combinations can reduce competition among the merging providers for inclusion in insurers' networks of providers, leading to higher prices. The result derives from the presence of "common customers" (i.e. purchasers of insurance plans) who value both providers, as well as (one or more) "common insurers" with which price and network status is negotiated. We test our theoretical predictions using two samples of cross-market hospital mergers, focusing exclusively on hospitals that are bystanders rather than the likely drivers of the transactions in order to address concerns about the endogeneity of merger activity. We find that hospitals gaining system members in-state (but not in the same geographic market) experience price increases of 6–10 percent relative to control hospitals, while hospitals gaining system members out-of-state exhibit no statistically significant changes in price. The former group are likelier to share common customers and insurers. This effect remains sizeable even when the merging parties are located further than 90 minutes apart. The results suggest that cross-market, within-state hospital mergers appear to increase hospital systems' leverage when bar-gaining with insurers.

WP 22171
David Howard, Guy David, Jason Hockenberry
Selective Hearing: Physician-Ownership and Physicians' Response to New Evidence

Physicians, acting in their role as experts, are often faced with situations where they must trade off personal and patient welfare. Physicians' incentives vary based on the organizational environment in which they practice. We use the publication of a major clinical trial, which found that a common knee operation does not improve outcomes for patients with osteoarthritis, as an "informational shock" to gauge the impact of physicians' agency relationships on treatment decisions. Using a 100% sample of procedures in Florida from 1998 to 2010, we find that publication of the trial reduced procedure volume, but the magnitude of the decline was smaller in physician-owned surgery centers. Incentives affected physicians' reactions to evidence.

WP 22194
Eric Helland, Seth Seabury
Are Settlements in Patent Litigation Collusive? Evidence from Paragraph IV Challenges

The use of "pay-for-delay" settlements in patent litigation—in which a branded manufacturer and generic entrant settle a Paragraph IV patent challenge and agree to forestall entry—has come under considerable scrutiny in recent years. Critics argue that these settlements are collusive and lower consumer welfare by maintaining monopoly prices after patents should have expired, while proponents argue they reinforce incentives for innovation. We estimate the impact of settlements to Paragraph IV challenges on generic entry and evaluate the implications for drug prices and quantity. To address the potential endogeneity of Paragraph IV challenges and settlements we estimate the model using instrumental variables. Our instruments include standard measures of patent strength and a measure of settlement legality based on a split between several Circuit Courts of Appeal. We find that Paragraph IV challenges increase generic entry, lower drug prices and increase quantity, while settlements effectively reverse the effect. These effects persist over time, inflating price and depressing quantity for up to 5 years after the challenge. We also find that eliminating settlements would result in a relatively small reduction in research and development (R&D) expenditures.

WP 22199
Janet Currie, Hannes Schwandt
Mortality Inequality: The Good News from a County-Level Approach

Analysts who have concluded that inequality in life expectancy is increasing have generally focused on life expectancy at age 40 to 50. However, we show that among infants, children, and young adults, mortality has been falling more quickly in poorer areas with the result that inequality in mor-tality has fallen substantially over time. This is an important result given the growing literature showing that good health in childhood predicts better health in adulthood and suggests that today's children are likely to face considerably less inequality in mortality as they age than current adults. We also show that there have been stunning declines in mortality rates for African-Americans between 1990 and 2010, especially for black men. The fact that inequality in mortality has been moving in opposite directions for the young and the old, as well as for some segments of the African-American and non-African-American populations argues against a single driver of trends in mortality inequality, such as rising income inequality. Rather, there are likely to be multiple specific causes affecting different segments of the population.

WP 22249
Norma Coe, Jing Guo, R. Tamara Konetzka, Courtney Harold Van Houtven
What is the Marginal Benefit of Payment-Induced Family Care?

Research on informal and formal long-term care has centered almost solely on costs; to date, there has been very little attention paid to the benefits. This study exploits the randomization in the Cash and Counseling Demonstration and Evaluation program and instrumental variable techniques to gain causal estimates of the effect of family involvement in home-based care on health care utilization and health outcomes. We find that family involvement significantly decreases Medicaid utilization. Importantly, we find family involvement significantly lowers the likelihood of urinary tract infections, respiratory infections, and bedsores, suggesting that the lower utilization is due to better health outcomes.

WP 22277
Liran Einav, Amy Finkelstein, Maria Polyakova
Private Provision of Social Insurance: Drug-specific Price Elasticities and Cost Sharing in Medicare Part D

Standard theory suggests that optimal consumer cost-sharing in health insurance increases with the price elasticity of demand, yet publicly-provided drug coverage typically involves uniform cost-sharing across drugs. We investigate how private drug plans set cost-sharing in the context of Medicare Part D. We document substantial heterogeneity in the price elasticities of demand across more than 150 drugs and across more than 100 therapeutic classes, as well as substantial heterogeneity in the cost-sharing for different drugs within privately-provided plans. We find that private plans set higher consumer cost-sharing for drugs or classes with more elastic demand. Our findings suggest that benefit design may be more efficient in privately rather than publicly provided insurance.

WP 22288
Carlos Dobkin, Amy Finkelstein, Raymond Kluender, Matthew Notowidigdo
The Economic Consequences of Hospital Admissions

We examine some economic impacts of hospital admissions using an event study approach in two data sets: survey data from the Health and Re-tirement Study, and hospital admissions data linked to consumer credit reports. We report estimates of the impact of hospital admissions on out-of-pocket medical spending, unpaid medical bills, bankruptcy, earnings, income (and its components), access to credit, and consumer borrowing. The results point to three primary conclusions: non-elderly adults with health insurance still face considerable exposure to uninsured earnings risk; a large share of the incremental risk exposure for uninsured non-elderly adults is borne by third parties who absorb their unpaid medical bills; the elderly face very little economic risk from adverse health shocks.

WP 22338
Kurt Lavetti, Kosali Simon
Strategic Formulary Design in Medicare Part D Plans

The design of Medicare Part D causes most Medicare beneficiaries to receive fragmented health insurance, whereby prescription drugs and other medical care are covered by separate insurance plans. Fragmentation of insurance plans is potentially inefficient since separate insurers maximize profits over only one component of healthcare spending, despite many complementarities and substitutabilities between types of healthcare. Fragmentation of some plans but not others can also lead to market distortions due to differential adverse selection, as integrated plans may use drug formulary designs to induce enrollment by patients who are profitable under Parts A & B, while stand-alone drug plans have no such incentive. We study whether the design of insurance plans in Medicare Part D reflects these two differences in incentives using data on the universe of Part D plan formularies, drug prices, and Medicare claims data. We find evidence consistent with both hypotheses. Relative to fragmented plans, integrated plans systematically design their drug formularies to encourage enrollment by beneficiaries with medical conditions that are profitable under Parts A & B. However, integrated plans also more generously cover drugs that have the potential to causally reduce medical costs. These large differences in incen-tives and plan design between integrated and fragmented plans are likely the precursors of substantial differential selection of enrollees, and the basic design of Medicare Part D abets this covert selection.

WP 22419
Kathleen Mullen, Stefan Staubli
Disability Benefit Generosity and Labor Force Withdrawal

A key component for estimating the optimal size and structure of disability insurance (DI) programs is the elasticity of DI claiming with respect to benefit generosity. Yet, in many countries, including the United States, all workers face identical benefit schedules, which are a function of one's labor market history, making it difficult to separate the effect of the benefit level from the effect of unobserved preferences for work on individuals' claiming decisions. To circumvent this problem, we exploit exogenous variation in DI benefits in Austria arising from several reforms to its DI and old age pension system in the 1990s and 2000s. We use comprehensive administrative social security records data on the universe of Austrian workers to compute benefit levels under six different regimes, allowing us to identify and precisely estimate the elasticity of DI claiming with respect to benefit generosity. We find that, over this time period, a one percent increase in potential DI benefits was associated with a 1.2 percent increase in DI claiming.

WP 22438
David Huffman, Raimond Maurer, Olivia Mitchell
Time Discounting and Economic Decision-making Among the Elderly

This paper evaluates the extent of heterogeneity in time discounting among elderly Americans, as well as its role in explaining older peoples' key behaviors. We first show how older Americans evaluate simple (hypothetical) intertemporal choices in which payments now are compared with payments in the future. This adds to the literature on time horizon experiments by focusing on a nationally representative sample of persons age 70+. Using the indicators derived from this experiment, we show how differences in discounting patterns are associated with characteristics of particular importance in elderly populations, such as serious health and mental conditions. We then relate our discounting measure to key outcome variables including wealth, the timing of retirement, investments in health, and decisions about end of life care.

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