NBER Reporter: Summer 2002

Health Care

    The NBER's Program on Health Care met in Cambridge on May 3. Program Director Alan M. Garber of Stanford University organized the meeting. These papers were discussed:

    Dahlia K. Remler and Joshua Graff Zivin, Columbia University, and Sherry A. Glied, NBER and Columbia University, "Modeling Health Insurance Expansions: Effects of Alternate Approaches"

    Frank R. Lichtenberg, NBER and Columbia University, "The Effect of Changes in Drug Utilization on Labor Supply and Per Capita Output"

    Jay Bhattacharya, Stanford University; Darius Lakdawalla, NBER and Rand Corporation; and Michael Schoenbaum, Rand Corporation, "Whom Does Medicare Benefit?"

    Mark Duggan, NBER and University of Chicago, "Does Contracting Out Increase the Efficiency of Government Programs? Evidence from Medicaid HMOs" (For a description of this paper, see "Public Economics" earlier in this issue)

    Mark V. Pauly, NBER and University of Pennsylvania, and Bradley J. Herring, Yale University, "The Demand for Health Insurance in the Group Setting: Can You Always Get What You Want?"

    Nancy D. Beaulieu and David M. Cutler, NBER and Harvard University, and Katherine E. Ho, Harvard University, "Why Quality is So Poor"

    Remler, Zivin, and Glied categorize and describe the different methodological approaches used to predict the effects of proposals to increase health insurance coverage; they explain the conceptual theoretical relationships between the of the approaches can yield quantitatively identical predictions Finally, they illustrate the conditions under which these approaches diverge, and the quantitative extent of that divergence. All of the modeling approaches implicitly make assumptions about functional form that impose restrictions on unobservable heterogeneity. Those assumptions can dramatically affect the quantitative predictions made.

    Lichtenberg examines the effect of changes in both the average quantity and average vintage ("quality") of drugs consumed on labor supply, using longitudinal, condition-level data. First, he considers the effect of changes during 1996-8 in the average number of prescriptions consumed for a given condition on the probability of missed work days. His estimates indicate that conditions for which there were above-average increases in prescription use tended to have above-average reductions in the probability of missed work days. The estimated value to employers of the reduction in missed work days appears to exceed the employer's increase in drug cost. Using different data, Lichtenberg then examines the effect of changes during 1985-96 in the average vintage of prescriptions consumed for a condition on five different, condition-specific measures of activity limitation, including limits on ability to work. His estimates are consistent with the hypothesis that an increase in a condition's mean drug vintage reduces the probability that people with that condition will experience activity and work limitations, and reduces their average number of restricted-activity days. The estimates imply that activity limitations decline at the rate of about one percent per year of drug vintage, and that the rate of pharmaceutical-embodied technical progress with respect to activity limitations is about 18 percent. Estimates of the cost of the increase in drug vintage necessary to achieve reductions in activity limitations indicate that increases in drug vintage tend to be very "cost-effective."

    Bhattacharya, Lakdawalla, and Schoenbaum attempt to construct the rate of return on Medicare for various groups in the population. They focus in particular on how rates of return vary with permanent income and education. This allows them to determine whether Medicare is beneficial for the average person, the average disadvantaged person, or the average advantaged person. Implicitly, they view Medicare taxes as investments in future health benefits. Whether or not Medicare is beneficial depends on the internal rate of return on these investments. The authors find that the internal rate of return is significantly higher for the less educated. Indeed, the internal rate of return is less than the real rate of interest for the most educated groups, but well above it for the least educated. As a result, less educated individuals would willingly choose to invest in Medicare, while more educated individuals would not. This is true in spite of the fact that less educated people do not live as long.

    To what extent do health benefits obtained in the employment-based setting reflect individual preferences? Pauly and Herring examine this question by comparing characteristics of plans obtained in this setting to those obtained in the individual insurance market, using data from the 1996-7 Community Tracking Study's Household Survey. They also examine the effect of unions on group choice. Their structural models of the demand for insurance using individual-level demographic characteristics indicate that plans obtained in the group setting generally reflect underlying preferences for insurance, although they do observe significantly different effects of ethnicity and unionization.

    Examining quality measures for care of chronically ill patients by Health Maintenance Organizations (HMOs) suggests that there is substantial room for improvement, as well as substantial variation among HMO plans. Beaulieu, Cutler, and Ho hypothesize several factors, both health plan-related and market-related, that could be associated with higher or lower performance on these chronic care measures. They then test these hypotheses in a multivariate model. They find that HMOs in markets characterized by lower competition and a greater presence of large employers score higher on the chronic care quality measures. Also, several health plan characteristics are associated positively with better performance: not-for-profit tax status; tighter physician networks; privately-held ownership; and group-model organizational form. Socio-demographic characteristics of the market in which health plans operate and the method by which health plans compensate their physicians have no significant influence on the quality of care.

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