Does Managerial 'Outsourcing' Reduce Expense Preference Behavior? A Comparison of Adopters and Non-Adopters of Contract-Management in US Hospitals

This paper explores potential realization of gains by hospitals that are managed on a day-to-day basis by external organizations under formal contracts. It draws from the incentives literature, which postulates that managers of firms where ownership is separated from control will employ an input mix that deviates from cost minimization. While this status applies to hospitals generally, we hypothesize that specialized managerial expertise, coupled with the threat of non-renewal, will improve efficiency in hospitals that opt for contract. Secondary data obtained from the AHA Annual Surveys (1991-1998) are applied to examine the distribution of expense preference' parameters for all contract management adopters both pre- and post-adoption. These are contrasted with two control groups of hospitals drawn from the same years using propensity score methods. Results reveal allocative inefficiency among both adoption and control groups but a significantly lower change in the expense preference parameter pre- and post-adoption associated with a staffing. This suggests that changes in incentive contracts are one important strategy hospitals are using to cope with competitive pressures.

Administered Prices and Suboptimal Prevention: Evidence from the Medicare Dialysis Program

Pricing methodologies in Medicare vary from one component of the system to another, often leading to conflicting incentives. The dialysis program represents a particularly interesting case, whereby outpatient payments are much more rigid than payments for related hospital care. Failure to recognize the preventive nature of outpatient services may result in inefficient allocation of medical care and higher overall costs. To motivate the analysis, a simple extension of basic prevention and insurance theory to fit a welfare-maximizing regulator is offered. I show that while optimal inpatient payments are standard Ramsey prices, optimal outpatient payments must incorporate net loss due to unnecessary hospitalizations, as well as supply elasticities. A myopic regulator will tend to ignore this, leading to underprovision of preventive services. With constant prices, empirical analysis examines the effect of dialysis intensity on various measures of hospital use, for a local sample of patients, using count data models. Results indicate that greater dialysis intensity (measured by a state-of -the-art clinical index) indeed reduces hospital use. Moreover, this is found even at moderate or high levels of intensity, where dialysis is viewed ex ante as being adequate. A simple cost-benefit calculation suggests that for every dollar of additional spending on outpatient intensity, nearly $2 in hospital expenditures can be saved. The research confirms that the current pricing structure within aspects of the Medicare program is inefficient.

Does Prescription Drug Adherence Reduce Hospitalizations and Costs?

We estimate the impact of diabetic drug adherence on hospitalizations, ER visits, and hospital costs, using insurance claims from MarketScan® employer data. However, it is often difficult to measure the impact of drug adherence on hospitalizations since both adherence and hospitalizations may be correlated with unobservable patient severity. We control for such unobservables using propensity score methods and instrumental variables for adherence such as drug coinsurance levels and direct-to- consumer-advertising. We find a significant bias due to unobservable severity in that patients with more severe health are more apt to comply with medications. Thus, the relationship between adherence and hospitalization will be underestimated if one does not control for unobservable severity. Overall, we find that increasing diabetic drug adherence from 50% to 100% reduced the hospitalization rate by 23.3% (p=0.02) from 15% to 11.5%. ER visits are reduces by 46.2% (p=.04) from 17.3% to 9.3%. While such an increase in adherence increases diabetic drug spending by $776 a year per diabetic, the annual cost savings for averted hospitalizations are$886 per diabetic, a cost offset of $110 (p=0.02), or$1.14 per $1 spent on drugs.

Transaction Prices and Managed Care Discounting for Selected Medical Technologies: A Bargaining Approach

It is generally assumed that managed care has been successful at capturing discounts from medical providers, but the implications have been a matter of debate. Critics argue that managed care organizations attain savings by reducing intensity of services, while others have argued that savings are 'real' and are a consequence of discounts per unit of care. To address this, we obtain separate transaction prices for hospital episodes (treatment) and for the narrowly defined surgical procedure, using the example of heart bypass surgery. Both sets of prices were drawn from a database of insurance claims of self-insured firms that offer a menu of insurance options. We use a Nash-Bargaining framework to obtain price discounts by type of insurance. Adjusting for product and patient heterogeneity, the per-procedure prices yield the anticipated pattern of discounts: Relative to traditional fee for service, point-of-service HMOs exhibited the largest discounts followed by Preferred-Provider-Organizations (18 and 12 percent, respectively). While reductions in intensity of services are not directly observable from the data, combining the results from the per-procedure and per-episode analysis yields a range of intensity reduction of 20-6 percent, with a corresponding per-unit price discount of 4-18 percent for the entire episode. We conclude that a large share cost savings by managed care organizations are due to per-unit price reductions.

The Effects of Private Insurance on Measures of Health: Evidence from the Health and Retirement Study

In this paper we investigate whether the presence of private insurance leads to improved health status. Using the Health and Retirement study we focus on adults in late middle age who are nearing entry into Medicare. Estimation addresses endogeneity of the insurance participation decision in health outcome regressions. Two models are tested, an instrumental variables models, and a model with endogenous treatment effects due to Heckman (1978). Insurance participation and health behaviors enter with a lag to allow their effects to dissipate over time. Separate regressions were run for groupings of chronic conditions. We find that the overall impact of insurance on health tends to be significantly downwards biased if no adjustment for endogeneity is made. With corrections there is a four-fold increase in the insurance effect; yielding a 7 percent increase in the overall health measure for the uninsured. Results are consistent across IV and treatment effects models, and for all major groupings of medical conditions. Thus, the effect of private insurance on health may be larger than previously estimated. As for policy, expanding coverage to the uninsured should result in substantial health improvement. By conjecture, this is likely to reduce the need for health care when individuals retire and enter Medicare, potentially leading to savings.

Juries and Justice: Are Malpractice and Other Personal Injuries Created Equal?

A study analyzed the civil jury system and the difference in personal injury awards between automobile and deep-pocket defendants, especially in medical malpractice cases. Six conclusions were reached, including the finding that juries sometimes respond emotionally and award some objectively similar cases higher damages than others

End-stage Renal Disease and Economic Incentives: The International Study of Health Care Organization and Financing

End-stage renal disease (ESRD), or kidney failure, is a debilitating, costly, and increasingly common medical condition. Little is known about how different financing approaches affect ESRD outcomes and delivery of care. This paper presents results from a comparative review of 12 countries with alternative models of incentives and benefits, collected under the International Study of Health Care Organization and Financing, a substudy within the Dialysis Outcomes and Practice Patterns Study. Variation in spending per ESRD patient is relatively small and is correlated with overall per capita health care spending. Between-country variations in spending are reduced using an input price parity index constructed for this study. Remaining differences in costs and outcomes do not seem strongly linked to differences in incentives embedded in national programs.

A Heavy Burden: The Individual Costs of Being Overweight and Obese in the United States

More than 60% of the United States population is overweight or obese, and if the current trajectory continues, 50% of the population will be obese by 2030. There is no question that being obese or overweight, is more costly than being of normal weight. Using existing literature, we have detailed the costs incurred due to overweight and obesity that affect working-age adults at the individual level. Among the items discussed in this review, overweight or obese individuals bear the full burden for some costs, such as the value of lost life, lost wages, gasoline costs, and, when applicable, life insurance. Employers and employees share the burden for many other costs, including direct medical costs, short-term disability, disability pension insurance, absenteeism, and productivity losses. Employers directly pick up the costs for many of these expenditures. However, employees indirectly share part of this burden through lower wages. In addition, through publicly funded programs such as Medicare and Medicaid, the government pays a significant portion of direct medical costs for their beneficiaries