Bitter Medicine

Kevin Lewis

April 12, 2021

Are the Costs of Employer-Sponsored Health Insurance Passed on to Workers at the Individual Level?
Conor Lennon
Economics & Human Biology, forthcoming


Because employer-sponsored health insurance (ESI) is experience rated, employers have an incentive to try to offset its cost by paying lower wages to employees who have greater medical expenditures. The existing evidence on this topic, however, illustrates only that ESI is associated with lower wages for groups of workers who are costlier to cover. In contrast, I use the variation provided by the Affordable Care Act's employer mandate to examine if differences in medical expenditures are passed on to workers at the individual level. My estimates rely on Medical Expenditure Panel Survey data in a dose response difference-in-difference framework that examines how wages change for workers with varying medical expenditures when they must soon be offered ESI. I find that each $1 difference in medical expenditures is associated with a $0.35 to $0.51 wage offset after the employer mandate's announcement wherever ESI must soon be offered to workers. Placebo analyses, focusing on workers whose employers are not affected by the mandate, provide support for a causal interpretation. I also show that my findings are not sensitive to sample selection or data reliability issues and that they cannot be explained by the effects of the Great Recession, demographic characteristics that correlate with medical expenditures, or location- or industry-specific idiosyncratic shocks.

Health Care Policy Uncertainty, Real Health Expenditures and Health Care Inflation in the USA
Chak Hung Jack Cheng & Nopphol Witvorapong
Empirical Economics, April 2021, Pages 2083-2103


Based on a structural VAR model estimated with Bayesian methods over the period of 1985Q1-2017Q1, we investigate the effects of health care policy uncertainty (HCPU) on the US health sector. We find that HCPU exerts a negative and significant impact on the growth rate of real health expenditures and health care inflation. It has an especially persistent effect on health care inflation and explains a generous portion of the post-2007 decline in the growth rate of health care services prices in the USA. HCPU also dampens the growth rate of GDP and general inflation, eliciting cautiousness from economic agents and acting as a negative aggregate demand shock.

Analysis Suggests Government And Nonprofit Hospitals’ Charity Care Is Not Aligned With Their Favorable Tax Treatment
Ge Bai et al.
Health Affairs, April 2021, Pages 629-636


The different tax treatment of government, nonprofit, and for-profit hospitals implies different charity care obligations, with the greatest obligation for government hospitals and the least for for-profit hospitals. Prior research has not examined charity care provision among all three ownership types at the national level. Using 2018 Medicare Hospital Cost Reports, we compared charity care provision across 1,024 government, 2,709 nonprofit, and 930 for-profit hospitals. In aggregate, nonprofit hospitals spent $2.3 of every $100 in total expenses incurred on charity care, which was less than government ($4.1) or for-profit ($3.8) hospitals. No hospital ownership type outperformed the other two types with respect to charity care provision in a majority of hospital service areas containing all three types. Using different kinds of analyses, we also found wide variation in charity care provision within ownership types and a lack of a consistent pattern across ownership types. These results suggest that many government and nonprofit hospitals’ charity care provision was not aligned with their charity care obligations arising from their favorable tax treatment. Policy makers may consider initiatives to enhance hospitals’ charity care provision, particularly hospitals with government and nonprofit ownership.

Can Automatic Retention Improve Health Insurance Market Outcomes?
Adrianna McIntyre, Mark Shepard & Myles Wagner
NBER Working Paper, April 2021


There is growing interest in market design using default rules and other choice architecture principles to steer consumers toward desirable outcomes. Using data from Massachusetts’ health insurance exchange, we study an "automatic retention" policy intended to prevent coverage interruptions among low-income enrollees. Rather than disenroll people who lapse in paying premiums, the policy automatically switches them to an available free plan until they actively cancel or lose eligibility. We find that automatic retention has a sizable impact, switching 14% of consumers annually and differentially retaining healthy, low-cost individuals. The results illustrate the power of defaults to shape insurance coverage outcomes.

Does Market Power Encourage or Discourage Investment? Evidence from the Hospital Market
Elena Patel & Nathan Seegert
Journal of Law and Economics, November 2020, Pages 667-698


Does market power encourage or discourage investment? This is an open question due to theoretical ambiguity and empirical difficulties. The answer is particularly important in the hospital market, where market power has increased dramatically since the 1990s. To answer this, we exploit an investment tax shock and data on the universe of US hospitals. We find a negative relationship between competition and investment. In particular, hospitals in concentrated markets increased investment by 5.1 percent ($2.5 million) more than firms in competitive markets in response to tax incentives. Further, firms’ investment responses monotonically increased with market concentration.

Time Is the Wisest Counselor of All: The Value of Provider-Patient Engagement Length in Home Healthcare
Hummy Song, Elena Andreyeva & Guy David
Management Science, forthcoming


Home healthcare is a rapidly growing area of the health sector in the United States. We study its role in the shift toward value-based care, as it is viewed as an avenue for achieving reductions in the cost and utilization of expensive downstream healthcare services. Using a novel data set on home healthcare visits, we examine whether and how the amount of time that a provider spends during a home health visit with a recently discharged patient impacts the patient’s likelihood of being readmitted to the hospital. Because unobserved patient health status may influence both the length of a home health visit and the likelihood of hospital readmission, we use the within-provider average visit length of all other episodes’ visits conducted by each provider in the 30-day period before and after the focal visit as an instrument for visit length. Using this instrumental variable approach and controlling for operational, demographic, and patient condition-related characteristics, we find the following: on average, an extra minute during a focal home health visit is associated with a 1.39% decrease in the likelihood of readmission to the hospital following that visit. Our finding suggests that a 10% increase in visit length would decrease the likelihood of readmission following a home health visit by 6%. We document heterogeneity in this effect across different patient types and visit types. We conduct a cost-benefit analysis that suggests that the cost of investing in additional home health capacity is outweighed by the cost savings arising from fewer hospitalizations.

Medicaid Coverage ‘Cliff’ Increases Expenses And Decreases Care For Near-Poor Medicare Beneficiaries
Eric Roberts et al.
Health Affairs, April 2021, Pages 552-561


Cost sharing in traditional Medicare can consume a substantial portion of the income of beneficiaries who do not have supplemental insurance from Medicaid, an employer, or a Medigap plan. Near-poor Medicare beneficiaries (with incomes more than 100 percent but less than 200 percent of the federal poverty level) are ineligible for Medicaid but frequently lack alternative supplemental coverage, resulting in a supplemental coverage “cliff” of 25.8 percentage points just above the eligibility threshold for Medicaid (100 percent of poverty). We estimated that beneficiaries affected by this supplemental coverage cliff incurred an additional $2,288 in out-of-pocket spending over the course of two years, used 55 percent fewer outpatient evaluation and management services per year, and filled fewer prescriptions. Lower prescription drug use was partly driven by low take-up of Part D subsidies, which Medicare beneficiaries automatically receive if they have Medicaid. Expanding eligibility for Medicaid supplemental coverage and increasing take-up of Part D subsidies would lessen cost-related barriers to health care among near-poor Medicare beneficiaries.

Hospital Pricing Following Integration with Physician Practices
Haizhen Lin, Ian McCarthy & Michael Richards
Journal of Health Economics, forthcoming


The past decade has witnessed a new wave of hospital-physician integration, with the fraction of hospitals owning any office-based physician practice increasing from 28% in 2009 to 53% in 2015 nationwide. We offer one of the first hospital-level longitudinal analyses in examining how hospital-physician integration affects hospital prices in the modern healthcare environment. We find a robust 3-5% increase in hospital prices following integration. There is little indication that hospital quality is commensurately higher or that patient mix has changed following integration. Our supplementary analyses point to stronger bargaining leverage and foreclosure of rival hospitals as potential mechanisms for the estimated price effects.

The Value of Employer-Sponsored Health Insurance
Casey Mulligan
NBER Working Paper, March 2021


Based on published estimates of its price elasticity of demand and of tax wedges, as well as the method of revealed preference, I estimate that the annual social value of ESI is about $1.5 trillion beyond what policyholders, their employers, and taxpayers pay for it. The private component of that value, which in some respects is the other side of “job lock,” derives in part from group plans, with the group determined by many characteristics other than the demand for healthcare. With voluntary groups formed this way, adverse risk selection is reduced, the groups can be effective at obtaining substantial discounts and rebates for their members, and division of labor employed in shopping for health providers. ESI is also a mechanism for employers to act on their incentives for a healthy and productive workforce. External effects include tax externalities (in both directions), encouraging work, and easing government expenditure obligations by helping to prevent people from going without health insurance.

Impacts of Performance Pay for Hospitals: The Readmissions Reduction Program
Atul Gupta
American Economic Review, April 2021, Pages 1241-1283


US policy increasingly ties payments for providers to performance on quality measures, though little empirical evidence guides the design of such incentives. I deploy administrative data to study a large federal program that penalizes hospitals with high readmissions rates. Using policy-driven variation in the penalty incentive across hospitals for identification, I find that hospital responses to the penalty account for two-thirds of the observed decrease in readmissions over this period, as well as a decrease in heart attack mortality. Quality improvement accounts for about one-half of the decrease in readmissions; the remainder is explained by selective admission of returning patients.

Do pharmaceutical prices rise anticipating branded competition?
Alice Ellyson & Anirban Basu
Health Economics, forthcoming


Growth in pharmaceutical prices is a major policy issue in the United States. Competition is encouraged to counteract such growth, yet less is known about the effect of brand competition on prices. We discover a unique feature of this market by studying the pricing strategies of incumbent drug manufacturers under tiered‐insurance anticipating branded competition. Using the insulin market as a natural experiment, we exploit exogenous variation in several potential entrants' completion of clinical trials to identify the effect of drug pipeline pressure on the prices of incumbent drugs. We find that pipeline pressure exerts cumulative and significant upward pressure on prices of incumbent drugs. In the insulin market such pressure explained 10.5% of the growth of prices. We were able to replicate these findings among incumbents with other emerging biosimilars. Insurance designs that fail to promote price competition through negotiations and value‐based principles may contribute to such price increases.

Are community health centers’ chief executive officers’ compensation related to clinical performance?
Ganisher Davlyatov et al.
Health Care Management Review, April/June 2021, Pages 162-171

Methods/Approach: Agency, social comparison, and managerial power theories guided this research, which examines the relationship of clinical performance and CEO compensation. Secondary data on Uniform Data System’s CHC clinical performance combined with CEO compensation from Internal Revenue Service Form 990 were analyzed using generalized estimating equations with state and year fixed effects on a national sample of section 330 grant-funded CHCs (N = 984) for the period 2011-2016.

Results: We found no evidence that clinical performance was associated with CHCs’ CEO compensation. Except for race, all other CEO characteristics were positively associated with CEO compensation and in line with previous research. We found that non-White CEOs were compensated more than White CEOs. In addition, further subanalyses revealed that an increase in the highest paid employees’ compensation was associated with an increase in CEO compensation.

The impact of urgent care centers on nonemergent emergency department visits
Lindsay Allen, Janet Cummings & Jason Hockenberry
Health Services Research, forthcoming

Study Design: We used a difference‐in‐differences design to examine ZIP code‐level changes in the acuity mix of emergency department visits when local urgent care centers were open versus closed. ZIP codes with no urgent care centers served as a control group. We tested for differential impacts of urgent care centers according to ED wait time and patient insurance status.

Principal Findings: We found that having an open urgent care center in a ZIP code reduced the total number of ED visits by residents in that ZIP code by 17.2% (P < 0.05), due largely to decreases in visits for less emergent conditions. This effect was concentrated among visits to EDs with the longest wait times. We found that urgent care centers reduced the total number of uninsured and Medicaid visits to the ED by 21% (P < 0.05) and 29.1% (P < 0.05), respectively.

Urgent Care Centers Deter Some Emergency Department Visits But, On Net, Increase Spending
Bill Wang, Ateev Mehrotra & Ari Friedman
Health Affairs, April 2021, Pages 587-595


There is substantial interest in using urgent care centers to decrease lower-acuity emergency department (ED) visits. Using 2008-19 insurance claims and enrollment data from a national managed care plan, we examined the association within ZIP codes between changes in rates of urgent care center visits and rates of lower-acuity ED visits. We found that although the entry of urgent care deterred lower-acuity ED visits, the impact was small. We estimate that thirty-seven additional urgent care center visits were associated with a reduction of a single lower-acuity ED visit. In addition, each $1,646 lower-acuity ED visit prevented was offset by a $6,327 increase in urgent care center costs. Therefore, despite a tenfold higher price per visit for EDs compared with urgent care centers, use of the centers increased net overall spending on lower-acuity care at EDs and urgent care centers.

A Welfare Analysis of Competitive Insurance Markets with Vertical Differentiation and Adverse Selection
Bentley MacLeod
NBER Working Paper, March 2021


A feature of many insurance markets is that they combine vertical differentiation (all consumers prefer high to low-coverage policies) and adverse selection (high cost customers prefer high-coverage plans). Building on Novshek and Sonnenschein (1978) and Azevedo and Gottlieb (2017), this paper characterizes the competitive equilibria in a vertically differentiated market characterized by adverse selection. This provides a simple, dynamic model of the market, along with their welfare consequences over time in response to policy changes. The model makes predictions consistent with recent evidence on the ACA exchange in the US (Frean et al. (2017)). Moreover, it provides a complete characterization of the health insurance “death spiral”. The death spiral leads to an inefficient outcome, but does not lead to a complete breakdown of the market. Rather, it predicts a large number of plans, with coverage that falls with an individual’s willingness to pay. It is shown that introducing a minimum coverage standard combined with an insurance mandate cannot restore efficiency. The optimal system depends on both the valuation of public funds and the social value of insurance. Depending on these parameters, a number of different types of systems may be optimal, including a single payer system with mandatory participation for all, such as the Canadian system, a mixed private-public system, as one sees in many countries, or a pure, free market system.

Upcoding of Hospital Admissions: No Longer a Substantial Issue for Medicare
Keith Joiner, Jianjing Lin & Juan Pantano
University of Arizona Working Paper, February 2021


A relatively small but influential economics literature is devoted to financial abuse in Medicare. Much of that literature focuses on upcoding/no upcoding for hospital admissions, where reimbursements requested are greater/the same as justified by the cost of care provided. Analysis of Medicare claims data from 1985-1996 suggested that upcoding was a substantial issue. We used a different approach to examine this issue from 2011-2019, analyzing audit data from the Comprehensive Error Rate Testing program (CERT). Upcoding represented less than 0.5% of all Medicare reimbursements, a small fraction of improper bills for hospitalization, and was not significantly correlated with diagnosis related group (DRG) weights. Audit data does not discriminate between intentional (fraudulent) and unintentional upcoding. We therefore used Office of the Inspector General reports, showing that of all cases successfully prosecuted for health care fraud from 2013-2019, only 0.39% were for upcoding of hospital admissions, or 7.2% of all prosecutions for hospitals. Other forms of improper billing/fraud constituted more than 90% of all cases, both for hospital admissions and for Medicare Part B, paid on a fee-for-service basis. More stringent regulatory initiatives, starting in 1996, reforms of the DRG system, and widespread adoption of electronic medical records, mean that upcoding of hospital admissions is now minimal.


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