1. Moral Hazard: Prices
Chapter 7

2. Moral Hazard in Healthcare
Price
$60
$20
Demand X1 X2
Physician Visits

3. Moral Hazard in Healthcare
Price
Market Price
$60 Z
$20
Demand X1 X2
Physician Visits

4. How Big a Problem is Moral Hazard?
Difficult question:
Simply comparing those with and without insurance is confounded by adverse selection
RAND Health Insurance Experiment (RAND-HIE)
Random assignment of people to plans with differing amounts of cost sharing reduces the adverse selection concerns
Old but still key study
Elegant design
Consistent model applied across many health services
Results continue to be confirmed by smaller-scale, more narrowly focused studies

5. RAND Health Insurance Experiment
1974–1977
5,809 Enrollees
Under age 62
<$25,000 in income ($104,900 in 2006)
Six Sites
Dayton, OH
Seattle, WA
Fitchburg, MA
Franklin County, MA
Charleston, SC
Georgetown County, SC
Source: Manning et al. (1987)

6. RAND - HIE Covered virtually all services
0, 25, 50, 95 percent coinsurance
Stoploss of $1,000 ($4,160 in 2006)
“Individual deductible”
HMO plan (Seattle)
Source: Manning et al. (1987)

7. Source: adapted from data in Manning et al. (1987)

8. Demand and 95 Percent Confidence Intervals by Coinsurance Rate* * * *
Source: Data from Table 7-1. * is the mean expenditure by coinsurance level, and the rectangle surrounding it represents the 95 percent confidence level.

9. Figure 7-3 Price Sensitivity Differs by Income Level
Annual Income Classes
Reduction in the probability of any health services use free care vs. 25% coinsurance rate—by income class
Percent
Source: data from Manning et al. (1987)

10. RAND-HIE Summary of Findings
PHYSICIAN SERVICES
Full coverage visits up 67 percent
CHIROPRACTIC SERVICES
Full coverage expenditures up 128 percent
PRESCRIPTION DRUGS
Full coverage expenditures up 76 percent
Source: Morrisey (1993)

11. RAND-HIE Summary of Findings
EMERGENCY DEPARTMENT VISITS
Full coverage visits up 54 percent
90 percent increase in nonurgent
30 percent increase in urgent
DENTAL SERVICES
Full coverage visits up 34 percent
Large transitory first-year effect
Preventive services about twice as price sensitive as basic care
Source: Morrisey (1993)

12. RAND-HIE Summary of Findings
MENTAL HEALTH
Full coverage outpatient up 300 percent
Increased use with experience
Explains differential coverage for mental health:
81 percent covered employees with inpatient mental health benefits subject to separate limits
96 percent of covered employees with outpatient mental health benefits subject to separate limits
That is, limits on days or expenditures, different copays
Jensen et al. (1998)
Source: Morrisey (1993)

13. RAND-HIE Summary of Findings
HOSPITAL SERVICES
Full coverage admissions up 29 percent
SUBSTITUTION HOSPITAL—PHYSICIAN
No evidence of substitution
See Weinberger, Oddone, and Henderson (1996)
CHILDREN VERSUS ADULTS
Child ambulatory care about as price sensitive as adult care
Child hospital admissions almost totally insensitive to price
Source: Morrisey (1993)

14. Effect of Copayment on Use of Emergency Department in an HMO
Kaiser Permanente on northern California 1992–1993
Introduce a $25 to $35 copay for emergency department use
Affected group: 30,276 people employed by 20 large employers
Control group 1: 60,408 people stratified by age, sex, and area of residence
Control group 2: 37,539 people stratified by age, sex, area of residence, and employment in the electronics/computer industries
Source: Selby, Fireman, and Swain (1996)

15. Table 7-3 Adjusted Kaiser-Permanente Emergency Department (ED) Use
Overall ED Visits per 1,000 Persons
1992
1993
Copayment Group
162
135
Control Group 1
206
202
Control Group 2
173
169
Percent change in Copayment Group
Relative to % change in Group 1
-14.6%
(-19.4 to -9.5)
Relative to % change in Group 2
(-19.9 to -8.9)
Source: data from Selby, Fireman, and Swain (1996)

16. Changes in the Type of Emergency Department Visits
Change Relative to Control Group*
Differences in Changes Statistically Significant
Group 1
Group 2
Always an emergency
-9.6% %
No No
Often an emergency
-14.8
-12.7
Yes Yes
Sometimes not an emergency
-20.7
-20.1
Yes Yes
Often not an emergency
-20.8
-29.2
*That is, the difference in the copayment group between 1992 and 1993 compared with the difference in the relevant control group between 1992 and 1993
Source: data from Selby, Fireman, and Swain (1996)

17. Prescription Drug Use RAND-HIE
Full coverage versus 95 percent plan resulted in expenditures that were 76 percent higher.

18. Recent Studies of Prescription Drug Use
Modern pharmacy benefits programs have one-, two-, three-, and sometimes four-tier copayments
Generics
Preferred brands
Nonpreferred brands
Biotech drugs
Mail order

19. “Employer Drug Benefit Plans and Spending on Prescription Drugs”
15 large private-sector firms
1997–1999 claims data
~420,000 primary enrollees
C = f (copay by tier, coinsurance, MGS, plan characteristics, age, sex, active/retiree, urban/rural, median income in ZIP of residence, 26 chronic conditions, time dummies)
Doubling copay reduced use by ~ one-third
Source: Joyce et al. (2002) Note: MGS = mandatory generic substitution

20. Table 7-4 Predicted Average Annual Prescription Drug Spending per Member
One-Tier Copay
Two-Tier Copay
Three-Tier Copay $5
$10
$5 Generic
$10 Brand
$10 Generic
$20 Brand
$10 Preferred
$15 Nonpreferred
$20 Preferred
$30 Nonpreferred
All drugs
$725
$563
$678
$455
$666
$436
Generic 91 69 71 41 81 53
Preferred
571
448
534
367
518
343
Nonpreferred 63 46 73 47 67 40
All values in 1997 dollars. All horizontal comparisons within tiers are statistically significant at the 95% confidence level.
Out-of-pocket %
Source: data from Joyce et al. (2002)

21. Pharmacy Benefits and the Use of Drugs by the Chronically Ill
Study of 1997–2000 pharmacy benefits data from 30 employers and 52 health plans
528,969 privately insured beneficiaries aged 18 to 64
Two-part model of drug use
Eight drug classes
Source: Goldman et al. (2004)

22. Reduction in Days Supplied when Copayments Double
Percent
Source: computed from Goldman et al. (2004), Figure 1

23. Findings for Chronic Conditions
Doubling copayments in a typical two-tier plan associated with significant reductions in use across all eight drug classes
Largest reductions were for drugs with close over-the-counter substitutes that primarily treat symptoms rather than the underlying disease
Antihistamines and NSAIDs by about 45 percent
Antihypertensives and antidepressants by 26 percent
Individuals receiving treatment for a specific condition were less likely to reduce their use of disease-specific medications
Concerns about diabetics where short- and long-term health consequences may arise
Source: Goldman et al. (2004)

24. Long-Term Care Very few studies and none of the rigor of the RAND-HIE
Evidence of substantial price sensitivity for private nursing home care
Reschovsky (1998)—private elasticity of -0.98
Married folks have more than twice the elasticity of singles
Adult foster care good substitute for nursing homes
Nyman et al. (1997)—Nursing home lost .85 residents for every additional foster care resident
Foster day care—elasticity -5.2

25. Deductibles
RAND-HIE randomly assigned people to a free plan and the 95 percent plan with a $1,000 stoploss ($4,160 in 2006 dollars)
The 95 percent plan was essentially a high-deductible plan
This “high-deductible plan” reduced total spending by ~31 percent relative to the free plan.

26. Netherlands Study
32 percent of the population voluntarily bought private coverage
Benefit plans differed essentially only by the size of the deductible
1996 analysis using prior utilization (when the deductibles were not available) to control for health status (and potentially adverse selection)

27. Source: adapted from data in Van Vliet (2004)

28. Discussion Questions
Why do you think the moral hazard response for dental care was different than that for medical services more generally?

29. Discussion Questions
Prescription drug plans often have three tiers of increasing copayment. Given the results noted in the chapter, do you think the third tier saves enough to justify its presence?

30. Discussion Questions
Ambulatory mental health services appear to be among the most price sensitive. Some have argued that this area of healthcare has changed dramatically since the RAND-HIE was conducted in the 1970s. If mental health services are less price sensitive now than formerly, what evidence in the current market would you look for to support or refute this argument?

31. Discussion Questions
Suppose the RAND-HIE could be redone again in 2008 for $50 to $75 million. What topics would you include that were not in the original 1974 study? What topics would you give less attention? If you were a member of Congress, would you vote to fund a new study? Why or why not?