Obama Fail Blog

MIT economist Jonathan Gruber is one of the most widely cited "experts" who support ObamaCare. Last week, it was revealed that Gruber has a major conflict of interest - he is on the payroll of the Department of Health and Human Services.

It was also uncovered that Gruber had co-authored a paper that advocates raising prices on hospital stays and medicine to discourage elderly patients from seeking treatment.

The paper also compares the effects of higher prices on elderly and chronically ill patients. Gruber concludes that raising prices on chronically ill patients will not significantly reduce the strain on the healthcare system, because chronic patients will wind up in the hospital if they don't receive the treatment they need...

HOWEVER, Gruber seems to view elderly patients with chronic illnesses as the best of both worlds - this "sub-population" will stop seeking treatment at higher prices but they won't wind up in the hospital because the lack of initial treatment will kill them quicker than a non-elderly patient.

You can download the full paper (PDF) for free here.

Below you will find the final section of Gruber's paper, entitled "Patient Cost-Sharing, Hospitalization Offsets, and the Design of Optimal Health Insurance for the Elderly." If you can navigate through the techno-jargon, you will be rewarded with a firmer grasp on the logic behind Ezekiel Emanuel and ObamaCare. It ain't pretty:

The rapid rise in both the share of our population that is elderly, and the spending per elderly person, has placed pressure on both public and private insurers to find new ways to control medical costs in this population. A number of approaches have been suggested, but forefront among them is increased consumer cost-consciousness. While Medicare has relatively high copayments and deductibles, these “holes” are filled by supplementary insurance for most elderly. Thus, the elderly typically face very low copayments on most medical utilization.

Our results show that higher copayments for office visits and prescription drugs can have a real effect in terms of reducing medical spending by the elderly. The effects are large in absolute terms, suggesting that moving from a $0 to a $10 copayment led to a 20% reduction in physician visits, and that a roughly $6 copayment rise, on average, reduced prescription drug use by 20%. The implied elasticities are substantially larger than those reported in the RAND HIE for the non-elderly, often exceeding 1 in absolute value, but they may not be directly comparable due to the very different nature of the price changes in our example.

Most interestingly, we also document the first convincing evidence for an offset effect of higher copayments. While previous work has conjectured that such an offset might be present, the only convincing evidence, from the RAND HIE, rejected the notion of an offset, suggesting instead that physician and hospital care were complements. Overall, we find a rather modest offsetting rise in hospital care when physician and prescription drug copayments are raised. But we find large offsets for the sickest populations with chronic diseases, suggesting that, for chronically ill populations, there is little financial gain to higher copayments.
These findings have several important policy implications. The first is that the fiscal externality associated with supplemental insurance coverage may be more modest than originally presumed. This is because the increase in physician and drug spending arising from supplemental coverage is substantially offset (for the Medicare program) by the fall in hospital costs.

This finding also has implications for the design of Medicare’s new prescription drug benefit. One of the most controversial features of Medicare’s new prescription drug benefit is the so-called “doughnut hole”: the gap in prescription drug coverage for beneficiaries with total drug costs that exceed $2,250 per year, until their drug costs exceed $5,100 per year. Our results suggest that this “doughnut hole,” by increasing coinsurance rates to 100% for some of the most chronically ill Medicare beneficiaries, could increase Medicare’s costs. In particular, those beneficiaries who are affected by the “doughnut hole” are likely to be similar to the chronically ill sub-populations where we found that increased Medicare hospital spending exceeded any savings from reduced prescription drug and office visit utilization. Future research should carefully explore the full system-wide implications of this design feature of the Part D program.

More generally, these findings have important implications for the optimal design of health insurance. The results from RAND clearly implied that optimal health insurance would feature high patient coinsurance up to an income-related out-of-pocket limit. Our findings qualify that result, suggesting further that optimal insurance would be tied to underlying health status, with chronically ill patients facing lower cost-sharing. The cost-sharing increases in our data were sufficiently modest that income-related out-of-pocket limits alone would not accomplish this goal, so specific targeting of copayments may be required.