# Brent Gibbons’s journal round-up for 12th December 2016

Every Monday our authors provide a round-up of some of the most recently published peer reviewed articles from the field. We don’t cover everything, or even what’s most important – just a few papers that have interested the author. Visit our Resources page for links to more journals or follow the HealthEconBot. If you’d like to write one of our weekly journal round-ups, get in touch.

As the U.S. moves into a new era with the recent election results, Republicans will have a chance to modify or repeal the Affordable Care Act. The Affordable Care Act (ACA), also called Obamacare, is a comprehensive health reform that was enacted on the 23rd of March, 2010, that helped millions of uninsured individuals and families gain coverage through new private insurance coverage and through expanded Medicaid coverage for those with very low income. The ACA has been nothing short of controversial and has often been at the forefront of partisan divides. The ACA was an attempt to fill the insurance coverage gaps of the patchwork American health insurance system that was built on employer-sponsored insurance (ESI) and a mix of publicly funded programs for various vulnerable subpopulations. The new administration and republican legislators are promising to repeal the law, at least in part, and have suggested plans that will re-emphasize the private insurance model based on ESI. For this reason, the following articles selected for this week’s round-up highlight different aspects of ESI.

The Mental Health Parity and Addiction Equity Act evaluation study: Impact on specialty-behavioral health utilization and expenditures among “carve-out” enrollees. Journal of Health Economics [PubMed] Published December 2016

Behavioral health services have historically been covered at lower levels and with more restrictions by ESI than physical health services. Advocates for behavioral health system reform have pushed for equal coverage of behavioral health services for decades. In 2008, the Mental Health Parity and Addiction Equity Act (MHPAEA) was passed with a fairly comprehensive set of rules for how behavioral health coverage would need to be comparable to medical/surgical coverage, including for ESI. This first article in our round-up examines the impact of this law on utilization and expenditures of behavioral health services in ESI plans. The authors use an individual-level interrupted time series design using panel data with monthly measures of outcomes. Administrative claims and enrollment data are used from a large private insurance company that provides health insurance for a number of large employers in the years 2008 – 2013. A segmented regression analysis is used in order to measure the impact of the law at two different time points, first in 2010 for what is considered a transition year, and then in the 2011 – 2013 period, both compared to the pre-MHPAEA time period, 2008 – 2009. Indicator variables are used for the different periods as well as spline variables to measure the change in level and slope of the time trends, controlling for other explanatory variables. Results suggest that MHPAEA had little effect on utilization and total expenditures, but that out-of-pocket expenditures were shifted from the patient to the health plan. For patients who had positive expenditures, there was a post-MHPAEA level increase in health plan expenditures of $58.03 and a post-MHPAEA level decrease in out-of-pocket expenditure of$21.58, both per-member-per-month. To address worries of confounding time trends, the authors performed several sensitivity analyses, including a difference-in-difference (DID) analysis that used states that already had strict parity legislation as a comparison population. The authors also examined those with a bipolar or schizophrenia disorder to test the hypothesis that impacts may be stronger for individuals with more severe conditions. Sensitivity analyses tended to result in larger p-values. These results, which were examined at the mean, are consistent with reports that the primary change in behavioral health coverage in ESI was the elimination of treatment limits. In addition to using a sensitivity analysis with individuals with bipolar and schizophrenia, it would have been interesting to see impacts for individuals defined as “high-utilizers”. It would also have been nice to see a longer pre-MHPAEA time period since insurers could have adjusted plans prior to the 2010 effective date.

Health plan type variations in spells of health-care treatment. American Journal of Health Economics [RePEcPublished 12th October 2016

Health care costs in the U.S. were roughly 17.8 percent of the GDP in 2015 and attempts to rein in health insurance costs have largely proved elusive. Different private insurance health plans have tried to rein in costs through different plan types that have a mix of supply-side mechanisms and demand-side mechanisms. Two recent plan types that have emerged are exclusive provider organizations (EPOs) and consumer-driven/high-deductible health plans (CDHPs). EPOs use a more narrowly restricted network of providers that agree to lower payments and presumably also deliver quality care while CDHPs give patients broader networks but shift cost-sharing to patients. EPOs therefore are more focused on supply-side mechanisms of cost reduction, while CDHPs emphasize demand-side incentives to reduce costs. Ellis and Zhu use a large ESI claims-based dataset to examine the impact of these two health plan types and to try to answer whether supply-side or demand-side mechanisms of cost reduction are more effective. The authors present an extremely extensive analysis that is really worth reading. They use a technique for modeling periods of care, called treatment “spells” that is a mix of monthly treatment periods and episode-based models of care. Utilization and expenditures are examined in the context of these treatment “spells” for the different health plan types. A 2SLS regression model is used that controls for endogenous plan choice in the first-stage. The predicted probabilities from plan choice are used as an instrument in the second stage along with a number of controls, including risk-adjustment techniques and individual fixed effects. The one drawback in using the predicted probabilities as the sole instrument is it is not possible to perform an exclusion test. The results, however, suggest that neither of the new plan types performs better than a standardly used health plan. EPOs have the lowest overall spending, but are not significantly different than the standard plan type, and CDHPs have 16 percent higher spending than the standard plan type. The CDHPs in particular have not been studied carefully and these results suggest that previous research on CDHPs found cost-savings due to younger and healthier patients and not because of plan type effects. There are also worries with high deductible plans that patients may elect to forgo necessary healthcare services.

The financial burdens of high-deductible plans. Health Affairs [PubMed] Published December 2016

Having discussed the consumer-directed/high deductible health plans, this third journal article looks at the Medical Expenditure Panel Survey (MEPS) data to examine the burden high deductible health plans place on individuals and families with low incomes. High deductible health plans like the CDHPs are increasingly offered. High deductible plans are sometimes paired with the option to use a flexible spending account (FSA). An FSA gives the patient the option to set aside money from her salary or paycheck that can only be used for healthcare costs, with the benefit that the money set aside will not be subject to various income taxes. The benefit of the high deductible plan is supposed to be lower premiums and the possibility of saving money through the FSA, if that option is available. Yet descriptive analyses using MEPS data from 2011 – 2013 from ESI plans show that high deductible plans impose a particularly high burden on individuals with family incomes below 250 percent of the poverty line. Specifically, the authors found that 29.1 percent of individuals with high deductible plans had financial costs exceeding 20 percent of family income, compared to 20.6 percent of individuals with low deductible plans. For individuals with family income greater than 400 percent of the poverty line, financial burden was not different for high deductible plans compared to other plan types. Yet worryingly, individuals with low incomes were just as likely to have high deductible plans as individuals with high incomes.

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# “Doing the math” on the distribution of healthcare expenditures: a Pareto-like distribution is inevitable

Yesterday I explored one of the major challenges to affordable, universal health insurance, namely the high cost of providing care to the sickest patients. The extreme distribution of healthcare costs means that “Targeting the highest spenders represents the greatest opportunity to have a significant impact on overall spending”, an opportunity for insurance carriers  to reduce costs by risk selection, as well as for public policy. Here is a deeper look into the math behind the distribution of healthcare expenditures, using 2012 US data as a model.

One can fit a Pareto (power law, 80/20) distribution with scale coefficient $\alpha$ – that is, $prob(expenditure)\sim 1/expenditure^{\alpha+1}$ – to the data in several ways. For a Pareto distribution with scale coefficient $\alpha$, the per-capita expenditure at a given percentile from the top scales as $1/\%ile^{1/\alpha}$. The first two of these approaches yield a scale coefficient $1/\%ile^{0.893}$, with expenditures scaling as :

1. Use the 80/20 rule modified to fit the data: the top 25% ranked by healthcare expenditures account for 86.7% of costs; thus $\alpha=1.115$.
2. Use the ratio of mean to median expenditure, 5.05:1; thus $\alpha=1.119$.
However, a graphical analysis finds that the data does not follow such a Pareto distribution, shown as a black dashed line in the following figure (representing a Pareto distribution with $\alpha=1.117$ and median expenditure $854, the actual median expenditure). 3. Use data for the most expensive patients (10% through 30% percentiles from the top), for these patients, per-capita expenditure scales as $1/\%ile^{1.24}, (R^{2}=0.994)$, shown as a dashed red line in the figure above; thus $\alpha=0.806$. 4. Use the fraction of total expenses paid by the most expensive patients. A comparison of the fraction of expenses paid by the most expensive 1%, 5% and 10% finds that this scales as $x^{0.4228}, (R^{2}=0.987)$, shown as a dashed black line in the figure below. This scaling exponent is $1-1/\alpha$; thus $\alpha=1.733$. (Scaling added to figure modified from Cohen, 2014) Thus, there really is no typical patient. For discussion and implications, see Feyman, who called the empirical distribution of healthcare costs “worse than Pareto”. The Pareto-like (hyper-Pareto?) empirical distribution of expenditures presents a severe challenge to risk pooling through insurance without limiting the highest expenditures through risk selection (illegal!). Pareto distributions differ sharply from normal distributions, with important consequences for payment models. For a Pareto-like distribution with $\alpha\leq2$ at large expenditures, the variance is not defined, and sample variance approaches infinity with increasing sample size. Therefore, unlike the case of distributions with finite variance, variability in the mean of a sample of size N does not decrease with N. This violates a standard requirement for insurance; that risk pooling over a large sample reduces variability in the mean expenditure, and thus, standard insurance models cannot effectively price health insurance when the highest per capita expenditures follow Pareto distributions. Moreover, a Pareto-like distribution may be a natural consequence of advances in healthcare: our growing ability to manage multiple simultaneous chronic conditions, with consequent exponential growth in costs, while extending life expectancy, so that the probability of dying is not only not reduced, but may actually increase. In a mathematically limiting case, with no bound on healthcare costs, these dynamics yield a Pareto distribution. In fact, if one extrapolates the power law for a broad range of the sickest patients (the 10th through 30th percentiles of expenditures from the top), obtaining a Pareto distribution with $\alpha\leq1$, even the mean is not defined and the sample mean approaches infinity with increasing sample size. The actual distribution of healthcare cost for the very sickest patients clearly falls below the empirical Pareto distribution with $\alpha=0.806$, such a distribution predicts a cost at the 1st percentile of$178,194, well above the average for the top 1% of \$97,956. Deviations from this distribution for the very sickest patients may reflect current limits on healthcare and thus healthcare expenses. These limits may be relaxed with advances in healthcare, causing further growth in costs.

A Pareto-like distribution of healthcare costs is here to stay, and must be reflected in how we share the burden of healthcare and provide care to our sickest patients.

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# Access to medicines and medical technologies for the global poor

The UN Secretary General’s High Level Panel on Access to Medicines recently published its long awaited report Promoting innovation and access to health technologies. The report explores and proposes some solutions to the well recognised problem of under-investment in research and development for new treatments for diseases that afflict the global poor. In the pharmaceutical market, innovation is directed to the areas that generate the highest returns. These market incentives explain why no new anti-tuberculosis drug has been developed since the 1960s. As a result, some of the WHO’s sustainable development goals (SDGs), such as to eradicate TB and malaria by 2030, look fanciful. To increase investment in research and development new incentive structures would need to be put in place.

Interventions already take place in the market to encourage R&D. Patents granting temporary monopolies are already widely used to allow companies to recoup the high costs of drug development. However, reported R&D costs, as we have previously discussed, are likely to be inflated to justify longer patent lengths. The UN report identifies other methods of ‘evergreening’ such as filing multiple patents for small variations of various drugs or patents for multiple indications of the same drug. The World Trade Organisation enforces strict US-style patent rights around the world, but it permits significant flexibility for granting patents. The report recommends punitive action against companies that pressure countries to use these flexibilities in their favour.

Relying on market incentives also leads to other adverse outcomes. The academic medical literature has become distorted. Industry funded research is more likely to find favourable outcomes. In some cases significant harms are not reported as the Vioxx scandal demonstrated. We have also previously reported on how policy uncertainty reduces pharmaceutical R&D. Thus, state involvement in the industry seems to be warranted.

Joseph Stiglitz proposed an international multi-billion dollar fund to reward drug innovations that did the most to improve public health. Other solutions proposed in the UN report are to prohibit patents on innovations resulting from publicly funded research, forcing private companies in the medical sector to disclose the true costs of R&D, and the public financing of biomedical R&D through transaction taxes and other mechanisms.

Some may worry that such restrictions and market distortions may significantly reduce private spending on medical R&D. But it should be noted that only around 14% of the industry’s budget goes towards R&D; a greater share is spent on marketing. However, as an editorial in the Lancet notes, these recommendations would require endorsement and adoption quickly as new legislation such as the trans-Pacific partnership (TPP) is gaining momentum, which will exacerbate the situation further.

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