Topic: General

More Evidence on Coinsurance and ‘Skimping’

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.

More on the Ideological Neutrality of Behavioral Economics

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


On the off chance anyone may have thought there were any vestiges of limited government left in the ranks of today’s GOP:

Senate Majority Leader Bill Frist is trying use a bill authorizing U.S. military operations, including in Iraq and Afghanistan, to prohibit people from using credit cards to settle Internet gambling debts. Frist, R-Tenn., and his aides have been meeting with other lawmakers and officials in both the House and Senate to get the measure attached to a compromise Defense Department authorization bill, according to a Senate GOP leadership aide.

If this goes through, any senator who would dare suggest that the gambling ban be killed on the grounds that what people do with their own money on their own time in their own homes is none of Bill Frist’s business now risks accusations that he doesn’t support U.S. troops overseas.

What’s most aggravating about Congress’ full-throttle push to ban online game is that there’s really no call for it from the public, save for some of the fringe family-values conservatives. Some in Congress – Sen. John Kyl, and Reps. Goodlatte and Leach, for example – have been pushing this ban for years. But Frist’s sudden interest looks like little more than election year red meat.

Public opinion polls show most voters are overwhelmingly opposed to an online gambling prohibition. And to my knowledge, supporters of the bill can’t point to a single study showing that large numbers of Americans are gambling away their futures on these poker sites. Thus far, they’ve justified the bill with no more than a few anecdotes.

Of course, there’s also the naked hypocrisy of exempting state lotteries and the politically powerful horse racing industry from the ban. There actually are studies showing state lotteries to be a primary outlet for gambling addicts.

Saddam’s Supergun

An article in Sunday’s New York Times takes you to a Graveyard of Goofy Weapons south of Baghdad.  Among them, the remnants of Saddam’s Project Babylon, which, if completed, would have been the world’s biggest spud gun:

the barrel alone would have been 512 feet long and weighed 1,665 tons. As the pieces lying around in the lot in Iskandariya illustrated, the barrel was wide enough to fire projectiles “the size of industrial garbage cans,” as Mr. Lowther put it.

Estimates on the cost of two planned superguns and a smaller prototype called Baby Babylon range from $25 million to several hundred million dollars. If the big guns had operated as designed, they could have shot a 300-pound projectile 600 miles, or lifted a much larger payload into orbit if it was outfitted with a small rocket engine.

Doubtless there’s some true believer out there in the right-wing blogosphere trumpeting this story, hailing it as confirmation that Saddam was the Arab Hugo Drax, coming ever closer to having the means to kill us all.  What if he had loaded up an industrial garbage can with some of those degraded mustard gas shells, floated the whole works off our southern coastline and aimed it right at Disneyworld? 

Well, it’s never too late to be retroactively terrorized, but most of us are probably with Lt. Col. James A. Howard, quoted in the article after visiting the site: “I think a gun this big would be kind of dumb.” 

It’s Constitution Day, Charlie Brown

Note to D.C. readers: Tomorrow is Cato’s annual Constitution Day symposium, headlined by Chief Judge Danny Boggs of the Sixth Circuit, a polymath and one of the bright lights of the federal appellate bench. View the schedule and last-minute registration information here. (Bonus points: Take a version of the quiz Boggs famously asks clerkship candidates to fill out here).

Tomorrow, Cato also releases our annual Cato Supreme Court Review, now ranked among the top 20 peer-reviewed specialty law journals in terms of “impact” according to the influential Washington & Lee law review ranking system. For a sample of the 2005-2006 edition’s contents, see former Thomas clerk Peter “Bo” Rutledge’s thoughtful article analyzing the next Supreme Court term here.

New at Cato Unbound: Clark Ervin Replies to John Mueller on Terrorism

In today’s installment of Cato Unbound, Clark Kent Ervin, former Inspector General of the Department of Homeland Security and author of Open Target: Where America is Vulnerable to Attack, strongly disagrees with John Mueller’s provocative lead essay, “Some Reflections on What, if Anything, “Are We Safer” Might Mean,” in this month’s issue devoted to “9/11 Five Years After: Reassessing Homeland Security and the Terrorist Threat.”

Borrow and Spend, Spend and Elect

As chairman of the National Republican Congressional Committee, Rep. Tom Reynolds (R-NY) is charged with helping House Republicans get elected and re-elected. In this difficult year for Republicans he’s facing a tough race at home in the Buffalo area. According to the Wall Street Journal (paid reg. required), he’s using today’s standard Republican formula: promise to cut taxes and spend, spend, spend:

Mr. Reynolds, with about $3 million in campaign contributions, has run ads on local television for more than a month, earlier than in past campaigns. The first emphasized his support for low taxes and few business regulations, ending, “Tom Reynolds – Fighting to save New York jobs.” Another had two retired military officers hailing his role in saving the Niagara Falls Air Reserve Station from shutdown. The third featured a mother holding her toddler while recalling the congressman’s help in forcing Blue Cross/Blue Shield to cover surgeries for the child’s cleft palate. “Tom Reynolds has a big heart,” she says into the camera.