Is moral hazard bigger under Medicaid or private insurance?

UPDATE: I posted an updated version of this article at my Medianism blog.
Some health professionals perceive greater moral hazard among Medicaid recipients than among the rest of us.  All the research I have been able to find about the matter indicates that Medicaid does increase health expenditures, but by less than private insurance does.  One study in the Journal of Health Economics found no moral hazard in nursing home care when Medicaid is more generous than when it is stingy. Another study in Inquiry, found that health care spending is significantly lower under Medicaid than under private insurance due to lower provider payment rates and found little difference in services used. A paper in the American Journal of Public Health found that children on Medicaid have more physician visits than uninsured children, but less than privately insured children. 
Evidence in a recent HSC Research Brief suggests that there is greater moral hazard among Medicaid recipients in their use of Emergency Room (ER) vists.  The only category of care in the figure below that is likely to indicate moral hazard is non-urgent care because this does not require care within 2 hours and so is not worthy of being called an emergency.  But even non-urgent care is not always wasteful.  I have been forced to go to an ER when my child needed antibiotics on a Friday night (my kids always seem to get sick and have accidents on weekends and evenings) and there was no alternative until Monday morning, 60 long hours later.  Medicaid recipients are more concentrated in places with less access to convenient doctor office hours and that could explain some of these results. The US healthcare system does rely excessively on ER care, but that is not due to the moral hazard of insurance.  It is because our system has a shortage of primary-care physicians (insufficient office hours) and too many uninsured people who lack access to care except in an ER. 
The big moral hazard headline in the data below is that Medicaid recipients use 45% more non-urgent care than people with private insurance! Forty-five percent! 

Forty-five percent sounds like a huge percentage increase in moral hazard, but compared to the total amount of ER care, it is insignificant.  Medicaid recipients only get 3 percentage points more non-urgent care than people with private insurance so if all the extra non-urgent care were eliminated, there would only be 3% fewer ER visits for Medicare patients.  And non-urgent care is the cheapest care so the dollars lost are probably much less than one percent of total ER expenditure.  A few expensive urgent-care patients cost almost all of the money.  In healthcare, 20% of patients typically account for 80% of the spending and non-urgent care is the very cheapest kind of care. 

But the number of non-urgent patients sometimes looks overwhelming if you look around in any busy ER.  That is because the non-urgent care is triaged, so those patients have to wait.  A busy ER will typically have many non-urgent patients impatiently waiting for care until the ER doctors have the free time to deal with them.  That will make them much more visible than the urgent care that gets dealt with immediately.  Even though non-urgent patients are less than 10% of the people coming into an ER, they might make up more than 50% of the patients who are present in the ER because they have to wait longer, sometimes many hours (in my own experience).  

Many economists think that moral hazard on the part of patients produces most of the expensive waste in the US healthcare system, but I have never seen statistical evidence that moral hazard are a significant problem compared with high administrative costs or over-treatment by providers.  This data seems to confirm that the moral hazard of Medicaid is not particularly important in the big picture.  The use of ER care for Medicaid recipients and people with private insurance is broadly similar. Neither group uses much frivolous, non-urgent care compared with the total volume of care according to this data and in dollars spent, it is trivial.  And remember, much of the non-urgent care is not frivolous.  Much is useful care that happens to be outside of office hours.  It isn't completely clear if any of this is really moral hazard at all, but even if all non-urgent care were moral hazard, it would not be anywhere near the biggest source of waste in our ER system.

Economists like Mark Pauly who focus on 'moral' hazard are usually using a warped ethical system which defines morality according to ability to pay.  According to this version of the theory, insurance should never cause anyone to spend more on healthcare than they would spend without insurance.  Any expenditures that a patient would not pay out of pocket is moral hazard.  Under this definition of moral hazard, poor people are always more guilty of moral hazard than wealthier people because poor people have lower ability to pay than wealthy people.  But the whole point of health insurance is to increase your ability to pay if you get a mortal illness and need more money to survive.  People who are wealthy enough to pay for any possible health problem out-of-pocket have little need for insurance.  Insurance is the most useful when the ability to pay for healthcare could make a life-or-death difference.  This warped morality underlying 'moral' hazard explains why economists like Mark Pauly see greater moral hazard in insurance for poor people like Medicaid than in insurance for the rest of us.  Under the 'moral' hazard view, elites like Bill Gates should be able to get whatever they can afford, (whether insurance pays or not) but healthcare should be rationed for the middle classes and healthcare for the poorest people is pure moral hazard that should be eliminated.  According to the 'moral' hazard view, a billionaire alcoholic whose habit burns through liver transplants at a black-market boutique hospital is exercising his consumer sovereignty and efficiently maximizing consumer surplus whereas a homeless guy who gets a lifesaving $10 antibiotic at an ER is squandering society's resources because his life is worth less than $10 if he isn't willing to pay that much to save it.  

If there is more actual wasteful treatment among Medicaid recipients, (as opposed to 'moral' hazard), I have yet to see it measured in any statistical work.  There is wasteful treatment for people with every kind of insurance and I don't know why providers would want to do more for Medicaid recipients than for the rest of us. 

Set The Nurses Free

Licensure raises costs which can only be justified if it also raises quality.  However, the evidence makes it clear that licensure restrictions on nurse practitioners is too strong.  If we set the nurses free, we can get lower costs.  Yglesias:

In 18 states (disproportionately but not exclusively rural ones) and the District of Columbia, a nurse practitioner can examine, diagnose, and treat patients in a primary care context. Nurse practitioners also get paid less than doctors. Medicare reimburses them at 85 percent of the doctors' rate, for example, but they also charge less to insurance companies and out-of-pocket patients. And since the "blue states" in this sense are a pretty diverse lot, we can get pretty good quasi-experimental data as to whether cheaper nurse practitioners are actually any worse than primary care doctors in this regard. The answer is a resounding no:

There is a growing body of research demonstrating that patients perceive that receiving primary care and having a usual source of care is more important than who it was that provided these services. Studies comparing the quality of care provided by physicians and nurse practitioners have found that clinical outcomes are similar. For example, a systematic review of 26 studies published since 2000 found that health status, treatment practices, and prescribing behavior were consistent between nurse practitioners and physicians.

What's more, patients seeing nurse practitioners were also found to have higher levels of satisfaction with their care. Studies found that nurse practitioners do better than physicians on measures related to patient follow up; time spent in consultations; and provision of screening, assessment, and counseling services. The patient-centered nature of nurse practitioner training, which often includes care coordination and sensitivity to the impact on health of social and cultural factors, such as environment and family situation, makes nurse practitioners particularly well prepared for and interested in providing primary care.

It isn't surprising that nurse practitioners get higher quality ratings from patients than physicians do.  Patients typically judge quality according to bedside manner and medical schools don't select students based on their warm-and-fuzziness!  They want the academic elites of society.  In contrast, nursing programs have a long tradition of seeking to provide comfort.  The very word 'nurse' means to take care of. 

Why Is Disability Expenditure Increasing?

NPR's Planet Money did a story about how disability rolls have been increasing and linking it to declining welfare rolls and rising unemployment.  There is some truth to this, but the bigger story is that demographics have had a bigger impact on the following graph.  NPR did not even adjust the graph for population growth nor our aging population which accounts for much of the increase. 

 
If you look at the red line on the graph in Figure 1 below, it doesn't look like the recession of 2008 caused disability rolls to spike upwards. Brad Plumer:

Three big demographic factors are at work [increasing disability rolls]. First, as the U.S. population ages, people are more likely to become physically disabled, especially if they’re working in manual labor. Second, Congress has hiked the retirement age for Social Security over the years — in fact, about 5 percent of current disability recipients would simply be on ordinary Social Security had Congress not changed the rules.
Third, many more women have been qualifying for disability insurance since the 1980s because there are many more women in the workforce, period.
If one controls for those three demographic factors, the rise looks somewhat more gradual, with the percentage of workers on disability going from 3.5 percent in 1995 to 4.6 percent in 2012:

And these three factors won’t continue forever: Ruffing writes that the disability program is currently at “its peak demographic stress,” with the rolls expected to shrink in the coming years as many current beneficiaries age into Social Security and Medicare.
That said, demographics aren’t the whole story. The program is still growing even after controlling for age and gender dynamics. In her recent testimony to Congress, Ruffing runs through some of the other possible factors. For instance, the changing economy has made it harder for older workers with less education to find jobs. (States with lower education levels tend to have far more workers on disability.) And the surging cost of health insurance over the years has pushed more people with ailments to seek out federal disability insurance in order to get care.
Interestingly, however, Ruffing is skeptical that the current recession created a surge of beneficiaries. “[E]conomists generally find that while a sour economy significantly boosts applications to the program, it has a much smaller effect on awards,” she notes. ”The implication is that economic downturns tend to attract more marginal, partially disabled applicants, but their applications are more likely to be denied.”
Now, that still leaves a pressing ...issue here. The disability insurance program is underfunded and is expected to exhaust its trust fund by 2016. At that point, benefits will get cut sharply unless Congress makes alterations. ...Ruffing, ...offers some recommendations for fixing disability insurance here.

 Brad Plumer has another graph:

Pricing Everything and Value of ???

An undergraduate student, Jaime Rosenthal, spent her summer working for some University of Iowa professors and published her summer research in JAMA.  She called 102 hospitals, usually multiple times, to request pricing information about hip surgery for her uninsured grandmother (ficticious).  Only about half could come up with any price at all and the prices varied hugely. 

“Among both top-ranked and non-top-ranked hospitals, total price estimates ranged from $10,000 to well over $100,000; for reference, available data suggest that Medicare and other large payers frequently pay between $10,000 and $25,000 for primary joint replacement surgery.”

Sara Kliff notes that medical prices are usually nontransparent and vary widely:

Rosenthal’s findings are not exactly an anomaly in medical research: A study published in the Archives of Internal Medicine in the spring found even greater variation in prices for an appendectomy. Depending on where it was performed, the very simple procedure could cost anywhere from as little as $1,529 to as much as $182,955.

Moneybox notes that the health care industry is similar to other industries with price discrimination like hotels (which a hospital resembles) and airlines:

[The health care industry lacks price transparency and has wide variance in prices.] I often hear this discussed by health care wonks as driven by unique attributes of the health care industry... But nontransparent pricing is a fairly common feature of economic life outside the realm of standardized commodities traded in highly competitive markets. Look at the range of different prices residents of any given city are paying for identical cable television packages at any given time. Or look at airline pricing, where all kinds of crazy stuff happens. Connecting flights are sometimes cheaper than direct ones despite higher costs, how many days you stay is often a factor, one-way and round-trip price differentials are wacky, nobody understands the alchemy behind when you can redeem frequent flier miles, etc.

Or perhaps the most directly relevant comparison would be hotels, since hospitals and hotels feature the same basic dynamic that an empty room is pure waste. Hotel revenue management is a very complicated issue that you can study at Cornell or hire consultants for and is undertaken with the assistance of complicated computer models. A small, charming B&B may have a pricing scheme that's as simple as a two-by-two grid assessing whether it's a weekend or a weekday and whether it's peak or off-peak season. But a sophisticated hospitality firm is going to have a pricing formula that's extremely hard to summarize, and there's no reason to expect hospitals to be any different from hotels in this regard.

Will Obamacare Cause Mass Unemployment?

It turns out that there was a CBO study that concluded that about 800,000 Americans are only working because being on a group plan is the only way for them to afford health insurance. When Obamacare  makes it feasible for them to get insurance on the individual market, they are going to retire.  That is a huge change.  Rep. Michele Bachmann said that Obamacare "will kill" the jobs, but by this measure, Social Security and Medicare are the biggest job killing programs in US history for enabling mass retirements.

These retirements won’t increase unemployment because the definition of unemployed are people who are looking for work and these people do not want to work.  It should decrease unemployment because the unemployed will be able to fill these jobs.  It will swap some employed people who don’t want to work for unemployed people who do want to work. This is not falling into the lump-of-labor fallacy because people who want to retire have a lot more savings than unemployed people and so the spending of the newly retired will decrease less than the spending of the newly employed will increase and that will boost aggregate demand.

A Medicare-for-all plan really would kill jobs because it would dramatically reduce administrative costs.  It would eliminate private insurance company jobs and many jobs of people who work in billing departments.  This is what increased efficiency usually does.  Look what happened to farmer employment as they got more efficient.  If farmers could still only feed a little more than their family, then we would still all be farmers. 

Too bad the CBO didn't also estimate how many entrepreneurs are only working a corporate job for the health insurance and will start small businesses once they can afford an individual plan.

Economies of Scale vs. Monopoly Power

The Wall Street Journal (behind subscription paywall) says that hospitals are rapidly buying up small physician's practices because hospitals can negotiate a higher price from insurers for exactly the same services that the the doctors had been doing.  The title of the story is Same Doctor Visit, Double the Cost, and it tells about David Hubbard who, "underwent a routine echocardiogram at his cardiologist's office last year, [and] was surprised to learn that the heart scan cost his insurer $1,605. That was more than four times the $373 it paid when the 61-year-old optometrist from Reno, Nev., had the same procedure at the same office just six months earlier."  The reason was that his doctor's practice had been acquired by a hospital that was better at negotiating a higher price from insurers because of its economies of scale in bargaining clout! David was upset that he had to pay the extra thousand dollars himself because of his high-deductible health plan.  And it isn't just private insurance.  Big hospitals are also able to negotiate higher payment from Medicare too.  
This is kind of like an economy of scale.  Walmart has been able to lower its average costs as it has grown bigger simply because a larger buyer has more leverage to squeeze down supplier prices through monopsony power.  Monopsony power is not the textbooks example of an economy of scale because it is a market failure and economists usually think of economies of scale as being efficient, but monopsony power does meet the textbook definition.   In the above case, doctors offices are able to increase their seller power (monopoly power) by getting larger.  This has the same effect as an economy of scale: It increases the size of organizations because smaller organizations cannot compete. 

Value of a Life

A Life’s Value

As U.S. Agencies Put More Value on a Life, Businesses Fret

As the players here remake the nation’s vast regulatory system, they have been grappling with a subject that is more the province of poets and philosophers than bureaucrats: what is the value of a human life? The answer determines how much spending the government should require to prevent a single death.

To protests from business and praise from unions, environmentalists and consumer groups, one agency after another has ratcheted up the price of life, justifying tougher — and more costly — standards.
The Environmental Protection Agency set the value of a life at $9.1 million last year in proposing tighter restrictions on air pollution. The agency used numbers as low as $6.8 million during the George W. Bush administration. The Food and Drug Administration declared that life was worth $7.9 million last year, up from $5 million in 2008, in proposing warning labels on cigarette packages featuring images of cancer victims.
The Transportation Department has used values of around $6 million to justify recent decisions to impose regulations that the Bush administration had rejected as too expensive, like requiring stronger roofs on cars.

And the numbers may keep climbing. In December, the E.P.A. said it might set the value of preventing cancer deaths 50 percent higher than other deaths, because cancer kills slowly. A report last year financed by the Department of Homeland Security suggested that the value of preventing deaths from terrorism might be 100 percent higher than other deaths.

...“Agencies have been using numbers that I thought were just too low,” said W. Kip Viscusi, a professor of economics at Vanderbilt University whose research is cited by most of the federal agencies as the basis for their calculations.

...some industry representatives said assigning a value to life was inherently subjective, and that the recent changes were driven by the administration’s pursuit of its regulatory agenda rather than scientific considerations.

“It looks like they just cooked the books — they just doubled the numbers,” said Todd Spencer, executive vice president of the Owner-Operator Independent Drivers Association, a trade group for the trucking industry, which faces higher costs under some of the Transportation Department’s new rules.

...The current rise in the value of life is based on the work of Professor Viscusi, who wrote his first paper on cost-benefit analysis as a Harvard undergraduate in the early 1970s. ...

The idea he and others have since developed in a long string of studies is that differences in wages show the value that workers place on avoiding the risk of death. Say that companies must pay lumberjacks an additional $1,000 a year to perform work that generally kills one in 1,000 workers. It follows that most Americans would forgo $1,000 a year to avoid that risk — and that 1,000 Americans will collectively forgo $1 million to avoid the same risk entirely. That number is said to be the “statistical value of life.”
Professor Viscusi’s work pegs it at around $8.7 million in current dollars.  Before the current administration, only the E.P.A. had fully embraced this methodology. Other agencies relied instead on the results of surveys asking Americans how much they would spend to avoid a given risk. This technique tends to produce significantly lower results. An even older technique, which yields even lower numbers, is to sum the wages lost when a worker dies.

Here is a comedian's take on the reductions in the value of a life that the government uses for regulations: Colbert Report. Time magazine reported that several foreign governments had been using yet another value per year:

In theory, a year of human life is priceless. In reality, it's worth $50,000. That's the international standard most private and government-run health insurance plans worldwide use to determine whether to cover a new medical procedure. More simply, insurance companies calculate that to make a treatment worth its cost, it must guarantee one year of 'quality life' for $50,000 or less. New research, however, would argue that that figure is far too low. Stanford economists have demonstrated that the average value of a year of quality human life is actually closer to about $129,000.

These Stanford economists used cost effectiveness analysis for determining that $129,000 is the best value of a year of life, but their . They basically looked at how costly kidney dialysis is and simply declared that to the the benchmark value of a life.  But nobody put much thought into the cost effectivness of kidney dialysis.  It is just a longstanding US tradition to pay for that.  

The Value of a Human Life for government agencies -  Mother Jones:

Though calculating the "value of a statistical life" (VSL) may sound callous or morbid, it can lead to stronger safety and environmental regulations. For example, auto safety rules that would cost $100 million to implement but might protect $500 million worth of lives (say, 100 people at $5 million a pop) are seen as a good deal, cost-benefit-wise. VSLs can vary widely, depending on the agency crunching the numbers and the administration in office. As this chart shows, the feds currently think each of us is worth somewhere between $5 million and $9.1 million.