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A major factor weighing down the long-term finances of state and local governments is the obligation to fund retiree benefits. While state and local government pension obligations have been analyzed in great detail, much less attention has been paid to the costs of the other major retiree benefit provided by these governments: retiree health insurance. The first portion of the paper uses the information contained in the annual actuarial reports for public retiree health plans to reverse engineer the cash flows underlying the liabilities given in the report. Obtaining the cash flows allows us to construct liability estimates which are consistent across governments in terms of the discount rate, actuarial method and assumptions concerning medical cost inflation and mortality. We find that the total unfunded accrued liability of state and local governments for the provision of retiree health care exceeds $1 trillion, or about ⅓ of total state and local government revenue. Relative to pension obligations discounted at the same rate, we find that unfunded retiree health care liabilities are ½ the size of unfunded pension obligations. We also find that using assumptions concerning the growth in health care costs that are arguably more realistic than those employed by most states actually reduces the size of the liability in most cases. Pushing in the opposite direction, we find that using plausibly more realistic mortality assumptions increases the size of liability. The second portion of the paper places retiree health care obligations into context by examining the budget pressures associated with retiree health on a continuing, largely pay-as-you go basis. We find that much of the projected increase in retiree health obligations as a share of revenue is the result of health care cost growth. On average, states could put their retiree health obligations into long-run fiscal balance by contributing an additional ¾ percent of total revenue toward the benefit each year. There is, however, wide variation across the states, with the majority of states requiring little in the way of additional financing, but some states requiring a significantly larger increase. [ABSTRACT FROM AUTHOR]

The conventional method for developing health care plan payment systems uses observed data to study alternative algorithms and set incentives for the health care system. In this paper, we take a different approach and transform the input data rather than the algorithm, so that the data used reflect the desired spending levels rather than the observed spending levels. We present a general economic model that incorporates the previously overlooked two-way relationship between health plan payment and insurer actions. We then demonstrate our systematic approach for data transformations in two Medicare applications: underprovision of care for individuals with chronic illnesses and health care disparities by geographic income levels. Empirically comparing our method to two other common approaches shows that the "side effects" of these approaches vary by context, and that data transformation is an effective tool for addressing misallocations in individual health insurance markets. [ABSTRACT FROM AUTHOR]

Abstract: New regulation of health insurance markets creates multiple levels of health plans, with designations like “Gold” and “Silver.” The underlying rationale for the heavy-metal approach to insurance regulation is that heterogeneity in demand for health care is not only due to health status (sick demand more than the healthy) but also to other, “taste” related factors (rich demand more than the poor). This paper models managed competition with demand heterogeneity to consider plan payment and enrollee premium policies in relation to efficiency (net consumer benefit) and fairness (the European concept of “solidarity”). Specifically, this paper studies how to implement a “Silver” and “Gold” health plan efficiently and fairly in a managed competition context. We show that there are sharp tradeoffs between efficiency and fairness. When health plans cannot or may not (because of regulation) base premiums on any factors affecting demand, enrollees do not choose the efficient plan. When taste (e.g., income) can be used as a basis of payment, a simple tax can achieve both efficiency and fairness. When only health status (and not taste) can be used as a basis of payment, health status-based taxes and subsidies are required and efficiency can only be achieved with a modified version of fairness we refer to as “weak solidarity.” An overriding conclusion is that the regulation of premiums for both the basic and the higher level plans is necessary for efficiency. [Copyright &y& Elsevier]

Managed health care plans and providers in the US and elsewhere sell their services to multiple payers. For example, the three largest groups of purchasers from health plans in the US are employers, Medicaid plans, and Medicare, with the first two accounting for over 90% of the total enrollees. In the case of hospitals, Medicare is the largest buyer, but it alone only accounts for 40% of the total payments. While payers have different objectives and use different contracting practices, the plans and providers set some elements of the quality in common for all payers. In this paper, we study the interactions between a public payer, modeled on Medicare, which sets a price and takes any willing provider, a private payer, which limits providers and pays a price on the basis of quality, and a provider/plan, in the presence of shared elements of quality. The provider compromises in response to divergent incentives from payers. The private sector dilutes Medicare payment initiatives, and may, under some circumstances, repair Medicare payment policy mistakes. If Medicare behaves strategically in the presence of private payers, it can free-ride on the private payer and set its prices too low. Our paper has many testable implications, including a new hypothesis for why Medicare has failed to gain acceptance of health plans in the US. [Copyright &y& Elsevier]

This paper examines medical savings accounts combined with high-deductible catastrophic health plans (MSA/CHPs), exploring the possible consequences of making tax preferred MSA/CHPs available to the entire employment-related health insurance market. The paper uses microsimulation methods to examine the equilibrium effects of MSA/CHPs on health care and non-health care expenditures, tax revenues, insurance premiums, and exposure to risk. If MSA/CHPs are offered alongside comprehensive plans, biased MSA/CHP enrollment can lead to premium spirals that drive out comprehensive coverage. Our estimates also raise concerns about equity, insofar as those who stand to lose the most tend to be poorer and in families with infant children. [ABSTRACT FROM AUTHOR]

To equalize differences in health plan premiums due to differences in risk pools, the German legislature introduced a simple Risk Adjustment Scheme (RAS) based on age, gender and disability status in 1994. In addition, effective 1996, consumers gained the freedom to choose among hundreds of existing health plans, across employers and state-borders. This paper (a) estimates RAS pass-through rates on premiums, financial reserves, and expenditures and assesses the overall RAS impact on market price dispersion. Moreover, it (b) characterizes health plan switchers and investigates their annual and cumulative switching rates over time. Our main findings are based on representative enrollee panel data linked to administrative RAS and health plan data. We show that sickness funds with bad risk pools and high pre-RAS premiums lowered their total premiums by 42 cents per additional euro allocated by the RAS. Consequently, post-RAS, health plan prices converged but not fully. Because switchers are more likely to be white collar, young and healthy, the new consumer choice resulted in more risk segregation and the amount of money redistributed by the RAS increased over time. [ABSTRACT FROM AUTHOR]

The constant rate discounted utility model is commonly used to represent intertemporal preferences in health care program evaluations. This paper examines the appropriateness of this model, and argues that the model fails both normatively and descriptively as a representation of individual intertemporal preferences for health outcomes. Variable rate discounted utility models are more flexible, but still require restrictive assumptions and may lead to dynamically inconsistent behaviour. The paper concludes by considering two ways of incorporating individual intertemporal preferences in health care program evaluations that allow for complementarity of health outcomes in different time periods. [ABSTRACT FROM AUTHOR]

Abstract: In recent years, consumer choice has become an important element of public policy. One reason is that consumers differ in their tastes and needs, which they can express most easily through their own choices. Elements that strengthen consumer choice feature prominently in the design of public insurance markets, for instance in the United States in the recent introduction of prescription drug coverage for older individuals via Medicare Part D. For policy makers who design such a market, an important practical question in the design phase of such a new program is how to deduce enrollment and plan selection preferences prior to its introduction. In this paper, we investigate whether hypothetical choice experiments can serve as a tool in this process. We combine data from hypothetical and real plan choices, elicited around the time of the introduction of Medicare Part D. We first analyze how well the hypothetical choice data predict willingness to pay and market shares at the aggregate level. We then analyze predictions at the individual level, in particular how insurance demand varies with observable characteristics. We also explore whether the extent of adverse selection can be predicted using hypothetical choice data alone. [Copyright &y& Elsevier]

Abstract: In two important health policy contexts – private plans in Medicare and the new state-run “Exchanges” created as part of the Affordable Care Act (ACA) – plan payments come from two sources: risk-adjusted payments from a Regulator and premiums charged to individual enrollees. This paper derives principles for integrating risk-adjusted payments and premium policy in individual health insurance markets based on fitting total plan payments to health plan costs per person as closely as possible. A least squares regression including both health status and variables used in premiums reveals the weights a Regulator should put on risk adjusters when markets determine premiums. We apply the methods to an Exchange-eligible population drawn from the Medical Expenditure Panel Survey (MEPS). [Copyright &y& Elsevier]

Abstract: This paper seeks to create new insights when judging the impact different risk adjustment schemes may have on the incentive to select risks. It distinguishes risk types with high and low profit potential and estimates long-run profits associated with risk selection in four scenarios (no risk adjustment, demographic only, including prior hospitalization, and including prior hospitalization and Pharmaceutical Cost Groups). The database covers 180,000 Swiss individuals over 8 years, 3 of which are used for model building and 5, to estimate insurers’ profits due to risk selection in the four scenarios. While these profits prove to be very high without risk adjustment and still substantial with demographic risk adjustment, they become surprisingly low when the crude morbidity indicator ‘prior hospitalization’ is included in the formula. These results clearly indicate the need for health status-related risk adjustment in insurance markets with community rating, taking into account insurers’ planning horizon. [Copyright &y& Elsevier]

Abstract: Global ratings, such as those based on consumer satisfaction, are a commonly used form of report on the performance of health plans and providers. A simple averaging of the global rating by plan members leads to a problem: it gives a plan greater incentives to improve services used by low-cost members than services used by high-cost members. This paper presents a formal model of consumer formation of global ratings and the incentives these rating convey to plans. We use this model to characterize weights on consumer respondents to correct the incentive problem. We implement our proposed solution using data from the Consumer Assessments of Health Care Providers and Systems (CAHPS) and the Medicare Current Beneficiary Survey (MCBS). Our correction is low-cost, easily implemented on an on-going basis, and insensitive to assumptions about why health plans care about quality ratings. [Copyright &y& Elsevier]

Abstract: Although it is well known theoretically that physicians respond to financial incentives, the empirical evidence is quite mixed. Using the 2004 Canadian National Physician Survey, we analyze the number of patient visits per week provided by family physicians in alternative forms of remuneration schemes. Overwhelmingly, fee-for-service (FFS) physicians conduct more patient visits relative to four other types of remuneration schemes examined in this paper. We find that family physicians self-select into different remuneration regimes based on their personal preferences and unobserved characteristics; OLS estimates plus the estimates from an IV GMM procedure are used to tease out the magnitude of the selection and incentive effects. We find a positive selection effect and a large negative incentive effect; the magnitude of the incentive effect increases with the degree of deviation from a FFS scheme. Knowledge of the extent to which remuneration schemes affect physician output is an important consideration for health policy. [Copyright &y& Elsevier]

The paper focuses on two estimation methods that have been widely used to address endogeneity in empirical research in health economics and health services research—two-stage predictor substitution (2SPS) and two-stage residual inclusion (2SRI). 2SPS is the rote extension (to nonlinear models) of the popular linear two-stage least squares estimator. The 2SRI estimator is similar except that in the second-stage regression, the endogenous variables are not replaced by first-stage predictors. Instead, first-stage residuals are included as additional regressors. In a generic parametric framework, we show that 2SRI is consistent and 2SPS is not. Results from a simulation study and an illustrative example also recommend against 2SPS and favor 2SRI. Our findings are important given that there are many prominent examples of the application of inconsistent 2SPS in the recent literature. This study can be used as a guide by future researchers in health economics who are confronted with endogeneity in their empirical work. [Copyright &y& Elsevier]

In designing a quality report, a health plan needs to account for the report’s effect on the doctor, hospital or other provider. This paper proposes a simple model of how quality reporting affects a health care provider, using the example of a doctor subject to reporting with a “cut point” that designates the doctor as above or below some standard. Choice of cut point affects the doctor’s welfare through the doctor’s preferences about income and by affecting market demand for the doctor’s services. These factors lead doctors to be “report-averse” or “report-loving,” a determination that affects a health plan’s cost to enlist a doctor in a contract with reporting and that guides choice of a cut point to maximize the doctors’ effort to improve her quality. [Copyright &y& Elsevier]

Abstract: Quality reports about health plans and providers are becoming more prevalent in health care markets. This paper casts the decision about what information to report to consumers about health plans as a policy decision. In a market with adverse selection, complete information about quality leads to inefficient outcomes. In a Rothschild–Stiglitz model, we show that averaging quality information into a summary report can enforce pooling in health insurance, and by choice of the right weights in the averaged report, a payer or regulator can induce first-best quality choices. The optimal quality report is as powerful as optimal risk adjustment in correcting adverse selection inefficiencies. [Copyright &y& Elsevier]

Although most private health insurance in US is employment-based, little is known about how employers choose health plans for their employees. In this paper, I examine the relationship between employee preferences for health insurance and the health plans offered by employers. I find evidence that employee characteristics affect the generosity of the health plans offered by employers and the likelihood that employers offer a choice of plans. Although the results suggest that employers do respond to employee preferences in choosing health benefits, the effects of worker characteristics on plan offerings are quantitatively small. [ABSTRACT FROM AUTHOR]

In this paper, we combine revealed preference and survey data on attribute importance to estimate parameters that represent average perceived differences in the quality and convenience of competing health benefit plans. We find that consumers do not perceive differences in provider quality across options. though they do perceive differences related to waiting time and access to specialists. In order to validate our approach, we estimate parameters representing perceived premiums and compare the estimates to actual premium differences. The results suggest that consumers correctly perceive the high-premium option to cost more than the low-premium option. These results increase our confidence in the use of stated importance data to identify and interpret parameters measuring the effect of otherwise unobservable attributes of choice alternatives. [ABSTRACT FROM AUTHOR]

This paper examines the objectives for performing sensitivity analysis in medical cost-effectiveness analysis and the implications of expected utility maximization for methods to perform such analyses. The analysis suggests specific approaches for optimal decision making under uncertainty and specifying such decisions for subgroups based on the ratio of expected costs to expected benefits, and for valuing research using value of information calculations. Though ideal value of information calculations may be difficult, certain approaches with less stringent data requirements may bound the value of information. These approaches suggest methods by which the vast cost-effectiveness literature may help inform priorities for medical research. [ABSTRACT FROM AUTHOR]

The paper presents a stylised model of contracting for a specific health service. The benefit of this service differs across patients. A purchaser, National Health Service (NHS, insurer) offers a contract to providers (hospitals, GP's), under the constraint of limited information about the provider's costs and the contract specifies the payment as a function of the number of cases treated. A number of features of the optimal contract are derived. Some of these are surprising: for example, the price per case generally increases with the efficiency of the provider. [ABSTRACT FROM AUTHOR]

This paper outlines a feasible employee premium contribution policy, which would reduce the inefficiency associated with adverse selection when a limited coverage insurance policy is offered alongside a more generous policy. The "efficient premium contribution" is defined and is shown to lead to an efficient allocation across plans of persons who differ by risk, but it may also redistribute against higher risks. A simulation of the additional option of a catastrophic health plan (CHP) accompanied by a medical savings account (MSA) is presented. The efficiency gains from adding the MSA/catastrophic health insurance plan (CHP) option are positive but small, and the adverse consequences for high risks under an efficient employee premium are also small. [ABSTRACT FROM AUTHOR]

This paper develops implications of Arrow's hypothesis that nonprofit organizations are prevalent in health care because of quality uncertainty. The model analyzes the ability of nonprofits to mitigate market failures created by asymmetric information in an environment characterized by potential competition from both explicitly for-profit firms and for-profits in disguise (profit-motivated firms who obtain nonprofit status in order to exploit the perceived trustworthiness of the nonprofit sector). Under certain conditions, it is shown that nonprofit status can serve as a credible signal of quality and that nonprofits can decrease the underprovision of quality both by providing high quality services and indirectly via a spillover effect on quality in the for-profit sector. Applicability to long-term care and implications for empirical research and policy towards nonprofits in health care are discussed. [ABSTRACT FROM AUTHOR]

Previous discussions of methods for the efficient allocation of health care resources subject to a budget constraint have relied on unnecessarily restrictive assumptions. This paper makes use of established optimization techniques to demonstrate that a general mathematical programming framework can accommodate much more complex information regarding returns to scale, partial and complete indivisibility and program interdependence. Methods are also presented for incorporating ethical constraints into the resource allocation process, including explicit identification of the cost of equity. [ABSTRACT FROM AUTHOR]

Understanding the determinants of the hazard of starting smoking is of great importance in developing policy to reduce the number of smokers. This paper develops a split population duration model of the decision to start smoking. Using data from the 1978 and 1979 Smoking Supplements to the National Health Interview Survey, we find some evidence that lifetime educational attainment, gender, and race are important determinants of both whether and when the smoking habit is initiated. The study finds no evidence that higher cigarette prices would have a significant impact on teenage decisions to pick up the smoking habit. [ABSTRACT FROM AUTHOR]