Alan M. Garber

English

Research Papers in Economics

This PDF is a selection from an out-of-print volume from the National
Bureau of Economic Research
Volume Title: Frontiers in Health Policy Research, Volume 3
Volume Author/Editor: Alan M. Garber, editor
Volume Publisher: MIT Press
Volume ISBN: 0-262-57141-2
Volume URL: http://www.nber.org/books/garb00-1
Publication Date: January 2000
Chapter Title: Introduction to "Frontiers in Health Policy Research,
Volume 3"
Chapter Author: Alan M. Garber
Chapter URL: http://www.nber.org/chapters/c9827
Chapter pages in book: (p. -5 - 0)Introduction
This volume contains papers presented at the third Frontiers in Health
Policy Research Conference held on June 17, 1999, in Bethesda, Mary-
land. This conference series brings academic economists investigating
topics in health policy together with journalists, researchers, legislative
staff, and other government officials whose work directly affects health
policy. The conferences are designed to promote discussion and com-
munication among these groups and to ensure that the results of ongo-
ing research conducted by leading health economists will be known to
a broader community who can incorporate the information into health
policy. The papers (articles) in this volume cover a diverse set of cur-
rent health policy issues, ranging from expenditures in employer-
sponsored health plans to rating the quality of health care providers, to
larger issues of variation in expenditures and the consequences of tech-
nological innovation in the treatment of low-birthweight infants.
Despite the large public sector role in health insurance in the United
States, in the working age population, private health insurance pre-
dominates heavily. Private insurance, in turn, is strongly linked to em-
ployment. Premiums, expenditures, and plan characteristics vary
greatly from one plan to another and often from one employer to an-
other. This observation leads to the question, What characteristics of
employment-based health insurance account for the variation in health
expenditures across firms?
Eichner, McClellan, and Wise provide preliminary answers to this
question by decomposing the variation in per employee (or per family)
expenditures. They use a unique set of data on insurance claims from
eight health plans. These claims represent all inpatient and outpatient
claims filed by employees and their dependents in self-insured plans.
They find that a substantial fraction of the expenditure variation is
attributable to demographic characteristics of the enrollees and to thexii Introduction
prevalence of various diagnoses. Treatment cost, however, is also im-
portant in explaining cost variation. Among these plans, average cost
differs by $838. The demographic mix of plan enrollees accounts for
wide differences in cost ($649). But perhaps the most noticeable feature
of the results is that, after adjusting for demographic mix, the differ-
ence in expenditures accounted for by the treatment costs given diag-
nosis ($807) is almost as wide as the unadjusted range in expenditures
($838). Differences in cost due to the different mixes of illness that are
treated, after adjusting for demographic mix, also account for large dif-
ferences in cost ($626).
The authors have also provided an approximate decomposition of
the "variation" in expenditures across firms. Although outpatient care
accounts for almost 50 percent of expenditures on average, it accounts
for only about 20 percent of the variation in expenditures across firms.
Inpatient care accounts for about 34 percent of expenditures on aver-
age, but almost 59 percent of the variation in expenditures.
These findings imply that variation in high-cost inpatient treatments
is a principal cause of the substantial cost variation across firms. (A "re-
sidual" group accounts for about 16 percent of expenditures and about
20 percent of variation in expenditures across firms). The most impor-
tant component of variation is the diagnosis rate, which accounts for
about 52 percent of variation across firms. Treatment cost differences,
given treatment, account for about 40 percent, with the remainder ac-
counted for by the "interaction" between the two. Additional investi-
gation of the causes of variation in plan expenditures may enable
employers to design insurance arrangements that are effective yet less
costly.
Cutler and Meara address an important issue in the evaluation of
overall health system performance. The United States is the wealthiest
nation in the world and the one that spends the most per capitaby a
wide marginon health care. Yet life expectancy at birth in the United
States is shorter than that of several other nations. The difference in life
expectancy is largely attributable to high perinatal mortality rates,
which in turn are associated with low birthweight. Much of the prog-
ress to be made in increasing life expectancy comes from the preven-
tion of low birthweight and from interventions to improve survival in
low-birthweight infants.
Treatment of low-birthweight infants, particularly those who are
tiny, occurs in intensive care units and is costly. On average, the cost of
treating a low-birthweight infant costs tens of thousands of dollars,Introduction xiii
and not uncommonly runs to hundreds of thousands of dollars. Cutler
and Meara ask whether the complex treatment is worth its high costs.
They study trends in survival of low-birthweight infants as measured
by United States and Massachusetts vital statistics data. In the period
from 1952 to 1990, there has been a dramatic decline in neonatal mor-
tality. Although they find that the cost of caring for very low
birthweight infants remains high, the dramatic improvements in out-
comes seem to make it highly cost-effective. Their cost-benefit calcula-
tions suggest that advances in the treatment of low-birthweight
infants, particularly those who have very low birthweight, is a good
investment.
The future of the Medicare program is a perennial topic of policy
concern, bringing together the dual concerns of rising per-capital
health expenditures and the projected growth of the number of elderly
Americans. Medicare provides near-universal health insurance for el-
derly Americans and is truly a national program. One would expect
that participants in a health insurance program that operates under the
same rules from Maine to Hawaii would be treated more or less the
same throughout the nation. Not so, according to the work of Skinner
and Wennberg. They argue that regional variation in per-beneficiary
Medicare expenditures is strikingly large and that such variation has
important policy implications. At the very least, policies need to take
into account local variation in wages, prices for goods and services,
and the health of the community. But these factors account for only
part of the variation in expenditures. After discussing possible causes
of variation, Skinner and Wennberg describe the budgetary implica-
tions of reducing regional differences in per-capita Medicare expendi-
tures. For example, a reduction in expenditures in high-expenditure
areas could result in a 10 percent reduction in overall Medicare expen-
ditures, enough to fund some versions of a Medicare drug benefit or to
extend the solvency of the Medicare Part A trust fund.
Managed care has been among the forefront of policy concerns in re-
cent years, and interest in managed care is intensifying. Complaints
about managed care figure predominantly in the popular press, while
legislation to protect enrollees in managed care plans seems to be an ir-
resistible temptation for politicians in Washington and in state legisla-
tures. Any serious discussion of managed care, of course, presupposes
a common understanding of what managed care is. Yet health care
plans described as "managed care" represent a wide range of forms of
organization of care and payment mechanisms, including everythingxiv Introduction
from traditional health maintenance organizations (HMOs), which op-
erate under pure capitation, to modifications of indemnity (fee-
for-service) insurance plans that include some features to control
utilization and/or choice of providers. Given such diversity general-
izations about managed care are hazardous, and it is important to en-
sure that any policies are directed appropriately.
To improve our understanding of the essential features of managed
care, Laurence Baker analyzes household survey data that includes in-
formation about HMO market share, the "stage of managed care devel-
opment" in the local market, and limitations on provider choice in each
plan. He contrasts more sophisticated and detailed measures of man-
aged care with simple measures, like HMO market share, and assesses
how the measurement of HMO activities affects estimates of managed
care effects. He finds that traditional measures of HMO market share
are positively correlated with the presence of strong restrictions on pa-
tient choices of providers. But traditional measures of HMO market
share do not reflect the weaker sets of restrictions on patient choices
found in some managed care plans like open-ended HMOs and PPOs.
These findings suggest that existing studies using HMO market share
should be interpreted as reflecting the effects of relatively strong plans.
They may not predict the effects of expansions of less restrictive plans.
The results also suggest that more refined and specific measures of
managed care are needed. Policy responses to perceived shortcomings
of managed care are likely to be more effective if they are targeted to-
ward specific managed care features, like provider restrictions, not the
broad concept of managed care.
From many perspectives, the quality of health care is one of the most
important unresolved issues for health policy. Before health plans can
select high-quality providers with whom to contract and before pa-
tients can choose high-quality hospitals and physicians to care for
them, it is necessary to be able to measure quality. Yet in practice, qual-
ity measurement in health care poses daunting challenges. Because
quality is multidimensional, accurate measures must seemingly be
complex. Also, meaningful measures of provider quality require re-
peated observations of health outcomes for each provider, which
means that it is impossible to measure quality even at the hospital level
for the care of health conditions that are uncommon. For these and
other reasons, most quality measurements have focused on simple as-
pects of quality and on procedures and other forms of medical care that
are provided to large numbers of patients. For example, the widelyused National Commission on Quality Assurance ratings focus on
measures like the rates at which preventive procedures, such as Pap
smears and cholesterol measurement, are performed because nearly all
adult patients are candidates for these forms of care. But this leaves out
care for specific medical conditions, including almost all serious condi-
tions that involve hospital care, even though such conditions are fre-
quently fatal or disabling and generate greater expenditures.
McClellan and Staiger propose new methods for measuring the qual-
ity of hospital care. Their methods overcome much of their complexity
of quality measurement and the problems of small sample sizes by us-
ing techniques that combine observations on multiple dimensions of
quality of care over several years. Using a statistical technique called
vector autoregression that is an improvement over more complex sta-
tistical methods, they generate predictions of health outcomes that are
surprisingly precise. They show how these methods can be used to un-
derstand the relationship between hospital volume and procedure out-
comes and to address other issues in the measurement of quality. If
successful, methodological advances in quality measurement like these
have the potential to transform the delivery of health care by laying the
groundwork for identifying the best hospitals and physicians.
These articles reveal the considerable areas of uncertainty in assess-
ing the potential effects of changes in health policy. As they strongly
imply, however, health policy research can point to areas in which poi-
icy intervention is likely to be most effective, and it can lead to a better
understanding of the limitations of current policies and the functioning
of health care markets.
Introduction xv

Frontiers in Health Policy Research, Volume 3

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