More Evidence on Coinsurance and ‘Skimping’

By
Michael F. Cannon

PHOENIX—In a recent paper on common criticisms of health savings accounts (HSAs), I discussed the concern that, since HSAs encourage greater price-sensitivity, they will encourage patients to forgo necessary medical care. I found that most of the evidence points to the opposite conclusion: Price-sensitive patients do not seem to “skimp” on necessary care.

The latest issue of Health Affairs includes an article that adds more weight to that conclusion. Dana Goldman and colleagues examined the effect of different levels of cost-sharing on privately insured patients with at least two of the following diagnoses: cancer, kidney disease, rheumatoid arthritis, and multiple sclerosis. The out-of-pocket costs for specialty drugs that treat these diseases can be quite high. For example, median out-of-pocket drug spending for cancer patients was $336 dollars (in 2004), but ran as high as $12,000 for some cancer patients.

What was striking about this study was that greater cost-sharing did not cause those patients to cut back on their drug expenditures. According to the authors:

[C]oinsurance did not significantly affect the level of spending at all once a patient initiated specialty drug use. What is most striking about these results is how inelastic demand is — that is, how insensitive patients are to price — in comparison to traditional pharmaceuticals, for which it is not uncommon to see responses of 30–50 percent when copayments double.

For emphasis, the authors include the following figure, which shows pharmaceutical spending among kidney patients as a function of the coinsurance rate:

Effective Coinsurance Rate For Kidney-Related Products And Spending, 2003–04

The coinsurance rate seems to have little effect, which suggests that when patients need medical care, they don’t cut back when exposed to more of the cost.

Despite these results, the authors argue against greater cost-sharing for specialty drugs, both because the drugs tend not to be used by patients who would not benefit, and to protect those patients from financial hardship. Yet that recommendation does not seem to follow from their findings. First, those drugs may not be subject to overuse at present. However, as the authors recognize, the market for specialty drugs is set to expand dramatically, which increases the potential for moral hazard when cost-sharing is low. Second, if those patients are suffering serious financial hardship, it isn’t apparent from this study: They are still able to obtain the drugs they need.

The authors seem to have a preference for pooling the cost of specialty drugs — which is fine. Personally, I’m agnostic: I think consumers should make that choice according to their own preferences. But this study’s empirical results do not illuminate whether it is better to have individual patients bear those costs, or to have those costs borne by the entire insurance pool — an option that could possibly make coverage unaffordable for other patients, whether now or in the future.

Topics: 
Cato Publications, General, Health Care

More on the Ideological Neutrality of Behavioral Economics

By
Will Wilkinson

Below, Mark links to a fascinating-looking paper pointing out that government regulators are human, too, and therefore subject to the same cognitive foibles as the rest of us.

It might seem pretty surprising to Cato-style classical liberals that this sort of application of behavioral research didn’t immediately leap out to researchers. But on reflection, it makes sense that the first bunch of policy implications to be suggested from a new area of research will tend to reflect the ideological preferences of the investigators. This need not imply any kind of willful axe-grinding bias. This kind of unwitting bias, in fact, illustrates a few of the main points of behavioral economics: We don’t have unbounded cognitive capacities, the mind uses lots of quick and dirty rules of thumb, and we can’t count on those speedy cognitive tricks to conform to canonical standards of rationality. Even brilliant economists and sage government regulators simplify the complexity of the real world by passing it through sometimes shoddy ideological filters — even while attempting to draw out the implications of that very phenomenon.

Here are a couple more examples of papers drawing on behavioral research that don’t have an obvious ideological tendency. In a paper under review at Public Choice, “Behavioral Economics and Perverse Effects of the Welfare State” [doc], Bryan Caplan and Scott Beaullier write:

Critics often argue that government poverty programs perversely make the poor worse off by discouraging labor force participation, encouraging out-of-wedlock births, and so on. However, basic microeconomic theory tells us that you cannot make an agent worse off by expanding his choice set. The current paper argues that familiar findings in behavioral economics can be used to resolve this paradox. Insofar as the standard rational actor model is wrong, additional choices can make agents worse off. More importantly, existing empirical evidence suggests that the poor deviate from the rational actor model to an unusually large degree. The paper then considers the policy implications of our alternative perspective.

The policy implications would make Charles Murray smile. And here is a working paper by Daniel Benjamin, Sebastian Brown, and Jesse Shapiro showing that

… higher cognitive ability — especially mathematical ability — is predictive of much lower levels of small-stakes risk aversion and short-run impatience. For example, we calculate that a one-standard-deviation increase in measured mathematical ability is associated with an increase of about 8 percentage points in the probability of behaving in a risk-neutral fashion over small stakes (as against a mean probability of about 10%) and an increase of about 10 percentage points in the probability of behaving patiently over shortrun trade-offs (with a mean of about 28%).

And what are we to make of that? The authors somewhat tepidly suggest that better education might improve poor cognitive ability a bit, though they recognize that differences in ability run deeper than differences in schooling. More intriguingly, their results go to the heart of the currently raging inequality debate. Because the more “cognitively able” are less likely to make errors relative normative standards of risk and expected utility, they’re likely to do better at choosing the elements of an investment portfolio:

Our results also suggest additional reasons why the overall returns to cognitive ability may be underestimated by focusing solely on the labor market returns … we might conjecture that a one-standard-deviation increase in cognitive ability is worth about 0.3% of lifetime wealth due to improved portfolio allocation alone. Since portfolio choice is only one of many important household decisions that are affected by cognitive ability, the total value of cognitive ability’s effect on decision-making could be quite substantial.

If changes in the economy have increased the payoff to the decisions affected by cognitive ability, that might explain some changes in wealth inequality.

Behavioral economics done right is just good science. The real peril is in the transition over the gap from psychology to policy. Big philosophical and ideological assumptions lurk in the gap. It’s very important to make those assumptions explicit, and defend them. Unfortunately, that’s too rarely done

Topics: 
General, Political Philosophy

Hopelessly Devoted to HIM?

By
Andrew J. Coulson

SMU Biblical studies professor Mark Chancey has just penned a study of Bible teaching in Texas Public Schools (.pdf). The report concludes that “the public school courses currently taught in Texas often fail to meet minimal academic standards for teacher qualifications; curriculum, and academic rigor; promote one faith perspective over all others; and push an ideological agenda that is hostile to religious freedom, science and public education.”

Chancey’s most damning charge: “Most Bible courses are taught as religious and devotional classes that promote one faith perspective over all others.” If true, that, of course. would be unconstitutional. (Nadine Strossen, call your office.)

Here’s a thought: Rather than forcing all Americans to pay for a one-size-fits-few government monopoly that inevitably creates legal and cultural conflict over the curriculum, why not institute a school system that would give both parents and other taxpayers real educational choice? This could easily be done by combining and enlarging the existing personal use and scholarship donation tax credit programs that exist in states like Pennsylvania and Arizona. A short exposition of the idea appears here, and a more comprehensive one is available here.

Cato’s Neal McCluskey will be publishing a study of the endless school wars caused by our state-run education monopolies later this year. Stay tuned.

Topics: 
Cato Publications, Education and Child Policy, Law and Civil Liberties

New at Cato Unbound: Veronique de Rugy on Anti-terrorism Spending

By
Will Wilkinson

In today’s installment of Cato Unbound, AEI resident scholar (and Cato adjunct scholar) Veronique de Rugy argues that the $271.5 billion devoted by the federal government to homeland security since 9/11 has not been well spent.

“Not only are we over-investing in homeland security,” de Rugy argues, “but most times we spend too much money in the wrong way and on the wrong things.”

The consequence is that we are no safer. “Bad security is often worse than no security at all,” de Rugy writes. “By trying, and failing, to make ourselves more secure, we make ourselves less secure.”

Topics: 
Cato Publications, Foreign Policy and National Security

How I Learned to Stop Worrying and Love Behavioral Economics

By
Mark Moller

Peter raises the threat that behavioral economics poses to free market policy. I’m less concerned about this movement, in large part because its teachings can be turned against central regulators. 

Here’s law professors Stephen Choi and Adam Pritchard, from the conclusion to their excellent 2003 article Behavioral Economics and the SEC (from the Stanford Law Review; working paper version available here):

Regulators are vulnerable to a wide range of behavioral contagion. Regulators may suffer from overconfidence and process information with only bounded rationality. Heuristics play a large role in how regulators make decisions. Even with expertise, regulators may misapply heuristics across the spectrum of different regulatory problems. Regulators may also suffer from confirmation bias, supporting prior regulatory decisions whatever the wisdom of the decisions.

And in groups the decisionmaking of regulators may decline rather than improve. On the one hand, groups and organizational structures may help alleviate some of the mistakes that derive from individually biased decisions. Studies of group decisionmaking provide evidence that the total can indeed be greater than the sum of individuals in enhancing the accuracy of decisions. But cognitive illusions may grip entire groups. Groupthink may also lead to an uncritical acceptance of regulatory decisions.

If both investors and regulators operate under the influence of behavioral biases, the value of regulation in correcting these biases comes into question. If regulators are not well equipped to determine whether regulation will counteract the biases facing investors, regulation may well do more harm than good. Worse still, SEC regulators may suffer greater behavioral biases than securities market participants. Investors that perform poorly will either learn (and perhaps put their money into an index fund or otherwise hire expertise) or exit the market. Private institutions face similar market pressures to serve the interests of their client-investors or perish. Although some types of biases may give institutions a competitive edge, the magnitude of such biases is limited by the cost that they impose on investors. The market may not function perfectly, but regulators under the present regime face no such pressures.

Topics: 
Government and Politics, Regulatory Studies

Doublespeak and the War on Terror

By
Tim Lynch

Last week, Cato published my paper “Doublespeak and the War on Terrorism.” Of course, this has not kept President Bush from using doublespeak. 

In his televised address this week, Mr. Bush said that all members of the U.S. military are “volunteers.” Not so. We do not have the large-scale conscription of civilians, but we do have “stop-loss” orders from the White House, which means soldiers that have fulfilled the terms of their enlistment contracts may not leave military. The men and women who wanted to return to civilian life after serving their term of service are not “volunteers.”  In military circles, the stop-loss order is known as the “backdoor draft.”

Fortunately, more people are calling attention to such misuse of language by government. Go here for a column by Eugene Robinson of the Washington Post. Go here for a column by Dick Meyer of CBS News.

We’ll never be able to stop the government from engaging in doublespeak because the government is constantly engaging in mischief. But if we’re vigilant about it, we can keep the government in check.

Topics: 
Cato Publications, Foreign Policy and National Security, Law and Civil Liberties

A New Solution to the Trade Deficit ‘Problem’

By
Sallie James

I’ll be honest with you folks — in Australia we have an expression, “Only in America!” It is used whenever outlandish, seemingly crazy, or especially unusual ideas or events occur over here. It is frequently used by news-readers. Please don’t be offended.

Anyway, I am proposing a new expression, “Only from Congress.” It could be used to describe, well, whenever an outlandish, seemingly crazy, or especially unusual idea is announced by members of Congress. And to kick things off, I would like to introduce the first item for your consideration.

Two Democratic senators, Byron Dorgan of North Dakota and Russ Feingold of Wisconsin, have proposed that any company wishing to import goods into America would need a government-issued certificate. The senators, according to this New York Times article (link requires subscription), view this as a “market-based system to cut the trade deficit to zero within 10 years.”

It would work thus: Any company that exports goods would be issued an import certificate that would allow it to import goods. The “exchange rate” would fall from $1.40 in the first year (i.e., $1 worth of exports would earn $1.40 worth of imports), to $1.30 in the second year, and so on until we achieve “balance.” If a company does not wish to import anything, it can sell the import certificate to someone who does. I guess that’s the “market-based” part.

Sherman Katz of the Carnegie Endowment for International Peace was quoted in the article as saying that “’it looks on the face of it to represent an enormous intrusion of government activity into business totaling trillions of dollars each year.”

“Enormous” doesn’t seem to quite capture it though, does it? How about “insane”?

Can you imagine the type of federal oversight this would require? And how would our trade partners react to the U.S. market being restricted in this way?

And what about oil? Ah, the wise senators have already thought of that. Oil would be given a 10-year phase-in, to allow the economy “time to find and develop alternative energy supplies.”

Imports of goods keep inflation in check and imports of capital keep interest rates down and help finance economic growth. Restricting imports would necessarily restrict capital flows into the economy because of the necessary balance between the current and capital accounts. To bring investment in line with savings, domestic interest rates would need to rise, reducing investment and economic growth. (More here.)

Question for the senators: What sort of certificate would you issue to cope with those sorts of macroeconomic effects?

I’m guessing we can expect lots of “Only from Congress” ideas in the coming campaign season. I’m excited.

Topics: 
Government and Politics, International Economics and Development, Trade and Immigration

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