The Welfare Effects of Public Drug Insurance

Rewarding inventors with inefficient monopoly power has long been regarded as the price of encouraging innovation. Public prescription drug insurance escapes that trade-off and achieves an elusive goal: lowering static deadweight loss, while simultaneously encouraging dynamic investments in innovation. As a result of this feature, the public provision of drug insurance can be welfare-improving, even for risk-neutral and purely self-interested consumers. In spite of its relatively low benefit levels, the Medicare Part D benefit generate $3.5 billion of annual static deadweight loss reduction, and at least$2.8 billion of annual value from extra innovation. These two components alone cover 87% of the social cost of publicly financing the benefit. The analysis of static and dynamic efficiency also has implications for policies complementary to a drug benefit: in the context of public monopsony power, some degree of price-negotiation by the government is always strictly welfare-improving, but this should often be coupled with extensions in patent length.

Health Insurance as a Two-Part Pricing Contract

Monopolies appear throughout health care markets, as a result of patents, limits to the extent of the market, or the presence of unique inputs and skills. In the health care industry, however, the deadweight costs of monopoly may be small or even absent. Health insurance, frequently implemented as an ex ante premium coupled with an ex post co-payment per unit consumed, effectively operates as a two-part pricing contract. This allows monopolists to extract consumer surplus without inefficiently constraining quantity. This view of health insurance contracts has several implications: (1) Low ex post copayments to insured consumers substantially reduce deadweight losses from medical care monopolies -- we calculate, for instance, that the presence of health insurance lowers monopoly loss in the US pharmaceutical market by 82 percent; (2) Price regulation or break-up of health care monopolies may be inferior to laissez-faire or simple redistribution of monopoly profits; and (3) Promoting efficiency in the health insurance market can reduce static losses in the goods market while improving the dynamic efficiency of innovation.

Market Evidence of Misperceived Prices and Mistaken Mortality Risks

We construct and implement a test of rational consumer behavior in a highstakes financial market. In particular, we test whether consumers make systematic mistakes in perceiving their mortality risks. We implement this test using data from secondary life insurance markets where consumers with a lifethreatening illness sell their life insurance policies to firms in return for an up-front payment. We compare predictions from two models: one with consumers who correctly perceive their mortality risk, and one with consumers who are misguided about their life expectancy, and find that our data are most consistent with the predictions made by the second model.

Technology, Monopoly, and the Decline of the Viatical Settlements Industry

The viatical settlement industry provides an opportunity for terminally-ill consumers, typically HIV patients, to exploit a previously untapped source of equity in existing life insurance contracts to finance consumption and medical expenses. The 1996 introduction and dissemination of effecive anti-HIV medication reduced AIDS mortality, but also reduced viatical settlement prices, even holding fixed changes in life expectancy. Using Freedom of Information Act requests to state insurance regulatory agencies, we have assembled a unique dataset of over twelve thousand viatical transactions from firms licensed in states that regulate viatical settlement markets. We distinguish two explanations for falling prices---an increase in market power, and a change in market expectations about the likelihood of further improvements in HIV care. We find that both explanations have contributed to diminishing settlement prices over the last decade, but increased market power has been the more important driver in the most recent years. Our estimates imply that the increase in market power of firms reduced the value of life insurance holdings of HIV persons by about $1.0 billion.

Criminal Prosecution and HIV-related Risky Behavior

We evaluate the consequences of prosecuting HIV+ people who expose others to the risk of infection. We show that the effect of aggressive prosecutions on the spread of HIV is a priori ambiguous. Aggressive prosecutions tax risky behavior and thus deter unsafe sex and limit the number of sexual partners. However, such penalties might also create unique incentives for having sex with more promiscuous partners such as prostitutes and consequently increase the spread of HIV. We test these predictions using unique nationally representative data on the sexual activity and prosecutions of HIV+ persons. We find that more aggressive prosecutions are associated with a reduction in the number of sexual partners and increased likelihood of safe sex. However, they are also associated with increased likelihood of having sex with prostitutes and not disclosing HIV+ status. Overall, our estimates imply that doubling the prosecution rate could decrease the number of new HIV infections by 12% over a ten-year period.

The Link Between Public and Private Insurance and HIV-Related Mortality

As policymakers consider expanding insurance coverage for HIV+ individuals, it is useful to ask if insurance has any affect on health outcomes; and, if so, whether public insurance is as efficacious as private insurance in preventing premature deaths among HIV+ patients. Using data from a nationally representative cohort of HIV-infected persons receiving regular medical care, we estimate the impact of different types of insurance on mortality in this population. We find that ignoring observed and unobserved health status leads one to conclude (misleadingly) that insurance may not be protective for HIV patients. After accounting for observed and unobserved heterogeneity, insurance does protect against premature death, but private insurance is more effective than public coverage. The better outcomes associated with private insurance are attributable to the more restrictive prescription drug policies of Medicaid.

HIV Breakthroughs and Risk Sexual Behavior

Recent breakthroughs in the treatment of HIV have coincided with an increase in infection rates and an eventual slowing of reductions in HIV mortality. These trends may be causally related, if treatment improves the health and functional status of HIV+ individuals and allows them to engage in more sexual risk-taking. We examine this hypothesis empirically using access to health insurance as an instrument for treatment status. We find that treatment results in more sexual risk-taking by HIV+ adults, and possibly more of other risky behaviors like drug abuse. This relationship implies that breakthroughs in treating an incurable disease like HIV can increase precautionary behavior by the uninfected and thus reduce welfare. We also show that, in the presence of this effect, treatment and prevention are social complements for incurable diseases, even though they are substitutes for curable ones. Finally, there is less under-provision of treatment for an incurable disease than a curable one, because of the negative externalities associated with treating an incurable disease.

Mortality Risks, Health Endowments, and Parental Investments in Infancy: Evidence from Rural India

This paper examines whether increased background mortality risks induce households to make differential health investments in their high- versus low-endowment children. We argue that increases in background mortality risks may disproportionately affect the survival of the low-endowment sibling, consequently increasing the mortality gap between the high- and low-endowment siblings. This increase in mortality gap may induce households to investment more in their high endowment children. We test this hypothesis using nationally representative data from rural India. We use birth size as a measure of initial health endowment, immunization & breastfeeding as measures of childhood investments and infant mortality rate in the child’s village as a measure of mortality risks. We find that in villages with high mortality risks, small-at-birth children in a family are 6 - 17 percent less likely to be breastfed or immunized compared to their large-at-birth siblings. In contrast, we find no significant within family differences in investments in villages with low mortality risks.

The Reallocation of Compensation in Response to Health Insurance Premium Increases

This paper examines how compensation packages change when health insurance premiums rise. We use data on employee choices within a single large firm with a flexible benefits plan; an increasingly common arrangement among medium and large firms. In these companies, employees explicitly choose how to allocate compensation between cash and various benefits such as retirement, medical insurance, life insurance, and dental benefits. We find that a $1 increase in the price of health insurance leads to 52-cent increase in expenditures on health insurance. Approximately 2/3 of this increase is financed through reduced wages and 1/3 through other benefits

Does How Much and How You Pay Matter? Evidence from the Inpatient Rehabilitation Facility Prospective Payment System

We use the implementation of a new prospective payment system (PPS) for inpatient rehabilitation facilities (IRFs) to investigate the effect of changes in marginal and average reimbursement on costs. The results show that the IRF PPS led to a significant decline in costs and length of stay. Changes in marginal reimbursement associated with the move from a cost based system to a PPS led to a 7 to 11% reduction in costs. The elasticity of costs with respect average reimbursement ranged from 0.26 to 0.34. Finally, the IRF PPS had little or no impact on costs in other sites of care, mortality, or the rate of return to community residence.