Moral Hazard: Prices Chapter 7

Moral Hazard in Healthcare Price $60 $20 Demand X1 X2 Physician Visits

Moral Hazard in Healthcare Price Market Price $60 Z $20 Demand X1 X2 Physician Visits

How Big a Problem is Moral Hazard? Difficult question: Simply comparing those with and without insurance is confounded by adverse selection RAND Health Insurance Experiment (RAND-HIE) Random assignment of people to plans with differing amounts of cost sharing reduces the adverse selection concerns Old but still key study Elegant design Consistent model applied across many health services Results continue to be confirmed by smaller-scale, more narrowly focused studies

RAND Health Insurance Experiment 1974–1977 5,809 Enrollees Under age 62 <$25,000 in income ($104,900 in 2006) Six Sites Dayton, OH Seattle, WA Fitchburg, MA Franklin County, MA Charleston, SC Georgetown County, SC Source: Manning et al. (1987)

RAND - HIE Covered virtually all services 0, 25, 50, 95 percent coinsurance Stoploss of $1,000 ($4,160 in 2006) “Individual deductible” HMO plan (Seattle) Source: Manning et al. (1987)

Source: adapted from data in Manning et al. (1987)

Demand and 95 Percent Confidence Intervals by Coinsurance Rate * * * * Source: Data from Table 7-1. * is the mean expenditure by coinsurance level, and the rectangle surrounding it represents the 95 percent confidence level.

Figure 7-3 Price Sensitivity Differs by Income Level Annual Income Classes Reduction in the probability of any health services use free care vs. 25% coinsurance rate—by income class Percent Source: data from Manning et al. (1987)

RAND-HIE Summary of Findings PHYSICIAN SERVICES Full coverage visits up 67 percent CHIROPRACTIC SERVICES Full coverage expenditures up 128 percent PRESCRIPTION DRUGS Full coverage expenditures up 76 percent Source: Morrisey (1993)

RAND-HIE Summary of Findings EMERGENCY DEPARTMENT VISITS Full coverage visits up 54 percent 90 percent increase in nonurgent 30 percent increase in urgent DENTAL SERVICES Full coverage visits up 34 percent Large transitory first-year effect Preventive services about twice as price sensitive as basic care Source: Morrisey (1993)

RAND-HIE Summary of Findings MENTAL HEALTH Full coverage outpatient up 300 percent Increased use with experience Explains differential coverage for mental health: 81 percent covered employees with inpatient mental health benefits subject to separate limits 96 percent of covered employees with outpatient mental health benefits subject to separate limits That is, limits on days or expenditures, different copays Jensen et al. (1998) Source: Morrisey (1993)

RAND-HIE Summary of Findings HOSPITAL SERVICES Full coverage admissions up 29 percent SUBSTITUTION HOSPITAL—PHYSICIAN No evidence of substitution See Weinberger, Oddone, and Henderson (1996) CHILDREN VERSUS ADULTS Child ambulatory care about as price sensitive as adult care Child hospital admissions almost totally insensitive to price Source: Morrisey (1993)

Effect of Copayment on Use of Emergency Department in an HMO Kaiser Permanente on northern California 1992–1993 Introduce a $25 to $35 copay for emergency department use Affected group: 30,276 people employed by 20 large employers Control group 1: 60,408 people stratified by age, sex, and area of residence Control group 2: 37,539 people stratified by age, sex, area of residence, and employment in the electronics/computer industries Source: Selby, Fireman, and Swain (1996)

Table 7-3 Adjusted Kaiser-Permanente Emergency Department (ED) Use Overall ED Visits per 1,000 Persons 1992 1993 Copayment Group 162 135 Control Group 1 206 202 Control Group 2 173 169 Percent change in Copayment Group Relative to % change in Group 1 -14.6% (-19.4 to -9.5) Relative to % change in Group 2 (-19.9 to -8.9) Source: data from Selby, Fireman, and Swain (1996)

Changes in the Type of Emergency Department Visits Change Relative to Control Group* Differences in Changes Statistically Significant Group 1 Group 2 Always an emergency -9.6% + 7.3% No No Often an emergency -14.8 -12.7 Yes Yes Sometimes not an emergency -20.7 -20.1 Yes Yes Often not an emergency -20.8 -29.2 *That is, the difference in the copayment group between 1992 and 1993 compared with the difference in the relevant control group between 1992 and 1993 Source: data from Selby, Fireman, and Swain (1996)

Prescription Drug Use RAND-HIE Full coverage versus 95 percent plan resulted in expenditures that were 76 percent higher.

Recent Studies of Prescription Drug Use Modern pharmacy benefits programs have one-, two-, three-, and sometimes four-tier copayments Generics Preferred brands Nonpreferred brands Biotech drugs Mail order

“Employer Drug Benefit Plans and Spending on Prescription Drugs” 15 large private-sector firms 1997–1999 claims data ~420,000 primary enrollees C = f (copay by tier, coinsurance, MGS, plan characteristics, age, sex, active/retiree, urban/rural, median income in ZIP of residence, 26 chronic conditions, time dummies) Doubling copay reduced use by ~ one-third Source: Joyce et al. (2002) Note: MGS = mandatory generic substitution

Table 7-4 Predicted Average Annual Prescription Drug Spending per Member One-Tier Copay Two-Tier Copay Three-Tier Copay $5 $10 $5 Generic $10 Brand $10 Generic $20 Brand $10 Preferred $15 Nonpreferred $20 Preferred $30 Nonpreferred All drugs $725 $563 $678 $455 $666 $436 Generic 91 69 71 41 81 53 Preferred 571 448 534 367 518 343 Nonpreferred 63 46 73 47 67 40 All values in 1997 dollars. All horizontal comparisons within tiers are statistically significant at the 95% confidence level. Out-of-pocket % 16.9 22.3 17.6 25.6 20.1 32.3 Source: data from Joyce et al. (2002)

Pharmacy Benefits and the Use of Drugs by the Chronically Ill Study of 1997–2000 pharmacy benefits data from 30 employers and 52 health plans 528,969 privately insured beneficiaries aged 18 to 64 Two-part model of drug use Eight drug classes Source: Goldman et al. (2004)

Reduction in Days Supplied when Copayments Double Percent Source: computed from Goldman et al. (2004), Figure 1

Findings for Chronic Conditions Doubling copayments in a typical two-tier plan associated with significant reductions in use across all eight drug classes Largest reductions were for drugs with close over-the-counter substitutes that primarily treat symptoms rather than the underlying disease Antihistamines and NSAIDs by about 45 percent Antihypertensives and antidepressants by 26 percent Individuals receiving treatment for a specific condition were less likely to reduce their use of disease-specific medications Concerns about diabetics where short- and long-term health consequences may arise Source: Goldman et al. (2004)

Long-Term Care Very few studies and none of the rigor of the RAND-HIE Evidence of substantial price sensitivity for private nursing home care Reschovsky (1998)—private elasticity of -0.98 Married folks have more than twice the elasticity of singles Adult foster care good substitute for nursing homes Nyman et al. (1997)—Nursing home lost .85 residents for every additional foster care resident Foster day care—elasticity -5.2

Deductibles RAND-HIE randomly assigned people to a free plan and the 95 percent plan with a $1,000 stoploss ($4,160 in 2006 dollars) The 95 percent plan was essentially a high-deductible plan This “high-deductible plan” reduced total spending by ~31 percent relative to the free plan.

Netherlands Study 32 percent of the population voluntarily bought private coverage Benefit plans differed essentially only by the size of the deductible 1996 analysis using prior utilization (when the deductibles were not available) to control for health status (and potentially adverse selection)

Source: adapted from data in Van Vliet (2004)

Discussion Questions Why do you think the moral hazard response for dental care was different than that for medical services more generally?

Discussion Questions Prescription drug plans often have three tiers of increasing copayment. Given the results noted in the chapter, do you think the third tier saves enough to justify its presence?

Discussion Questions Ambulatory mental health services appear to be among the most price sensitive. Some have argued that this area of healthcare has changed dramatically since the RAND-HIE was conducted in the 1970s. If mental health services are less price sensitive now than formerly, what evidence in the current market would you look for to support or refute this argument?

Discussion Questions Suppose the RAND-HIE could be redone again in 2008 for $50 to $75 million. What topics would you include that were not in the original 1974 study? What topics would you give less attention? If you were a member of Congress, would you vote to fund a new study? Why or why not?