Sick of Spending

Kevin Lewis

June 07, 2021

Why Do Americans Spend So Much More on Health Care than Europeans?
Hui He, Kevin Huang & Lei Ning
International Economic Review, forthcoming


Empirical evidence shows that both leisure and medical care are important in maintaining health and taxation may affect the allocation of these two inputs. We highlight this point using an analytical setting whose implications conform to micro and macro data. We then quantify these implications using a life-cycle overlapping-generations model where taxation and relative health care price are key determinants of the composition of the two inputs in the endogenous accumulation of health capital. We find that differences in taxation alone explain 44.7% of US-EU differences in health expenditure-GDP ratio and more than 70% of their differences in time allocation.

Cancer Outcomes Among Medicare Beneficiaries And Their Younger Uninsured Counterparts
Gerard Silvestri et al.
Health Affairs, May 2021, Pages 754-762


Proposals for expanding Medicare insurance coverage to uninsured Americans approaching the Medicare eligibility age of sixty-five has been the subject of intense debate. We undertook this study to assess cancer survival differences between uninsured patients younger than age sixty-five and older Medicare beneficiaries by using data from the National Cancer Database from the period 2004–16. The main outcomes were survival at one, two, and five years for sixteen cancer types in 1,206,821 patients. We found that uninsured patients ages 60–64 were nearly twice as likely to present with late-stage disease and were significantly less likely to receive surgery, chemotherapy, or radiotherapy than Medicare beneficiaries ages 66–69, despite lower comorbidity among younger patients. Compared with older Medicare patients, younger uninsured patients had strikingly lower five-year survival across cancer types. For instance, five-year survival in younger uninsured patients with late-stage breast or prostate cancer was 5–17 percent lower than that among older Medicare patients. We conclude that survival after a diagnosis of cancer is considerably lower in younger uninsured patients than in older Medicare patients. Expanding comprehensive health insurance coverage to people approaching Medicare age eligibility may improve cancer outcomes in the US.

Reducing administrative costs in US health care: Assessing single payer and its alternatives
David Scheinker et al.
Health Services Research, forthcoming

Study Design: We developed a simulation model of physician billing and insurance‐related (BIR) costs to estimate how certain policy reforms would generate savings. Our model is based on structural elements of the payment process in the United States and considers each provider's number of health plan contracts, the number of features in each health plan, the clinical and nonclinical processes required to submit a bill for payment, and the compliance costs associated with medical billing.

Principal Findings: Our model estimates that national BIR costs are reduced between 33% and 53% in Medicare‐for‐All style single‐payer models and between 27% and 63% in various multi‐payer models. Under a wide range of assumptions and sensitivity analyses, standardizing contracts generates larger savings with less variance than savings from single‐payer strategies.

Worker Earnings, Service Quality, and Firm Profitability: Evidence from Nursing Homes and Minimum Wage Reforms
Krista Ruffini
Federal Reserve Working Paper, May 2021


This paper examines whether higher earnings for frontline workers affect the quality of services consumers receive. I leverage increases in the statutory minimum wage, combined with worker, consumer, and firm outcomes in the nursing home sector. I find that higher minimum wages increase income and retention among low-wage employees while improving consumer outcomes measured by fewer inspection violations; lower rates of adverse, preventable health conditions; and lower resident mortality. Firms maintain profitability by attracting consumers with a greater ability to pay and increasing prices for these individuals.

Threat of Racial and Economic Inequality Increases Preference for Algorithm Decision-Making
Yochanan Bigman et al.
Computers in Human Behavior, forthcoming


Artificial intelligence (AI) algorithms hold promise to reduce inequalities across race and socioeconomic status. One of the most important domains of racial and economic inequalities is medical outcomes; Black and low-income people are more likely to die from many diseases. Algorithms can help reduce these inequalities because they are less likely than human doctors to make biased decisions. Unfortunately, people are generally averse to algorithms making important moral decisions — including in medicine — undermining the adoption of AI in healthcare. Here we use the COVID-19 pandemic to examine whether the threat of racial and economic inequality increases the preference for algorithm decision-making. Four studies (N=2,819) conducted in the United States and Singapore show that emphasizing inequality in medical outcomes increases the preference for algorithm decision-making for triage decisions. These studies suggest that one way to increase the acceptance of AI in healthcare is to emphasize the threat of inequality and its negative outcomes associated with human decision-making.

Adverse Selection in Medicaid: Evidence from Discontinuous Program Rules
Betsy Cliff et al.
NBER Working Paper, May 2021


Recent expansions of Medicaid eligibility have come with increased experimentation with enrollee cost-sharing. In this paper, we exploit a discontinuous premium increase at the federal poverty level in Michigan’s Medicaid expansion program to test low-income individuals’ sensitivity to premiums using linked enrollment and claims data. At the cutoff, average premiums increase by $3.15 and the probability of disenrollment increases by 2.3 percentage points. Increased disenrollment occurs among those with fewer documented medical needs at baseline, but not among those with greater medical needs. These results suggest healthier low-income individuals may be sensitive to even modest health insurance premiums, and that premiums may induce adverse selection in Medicaid plans.

Hospital Employment Of Physicians In Massachusetts Is Associated With Inappropriate Diagnostic Imaging
Gary Young et al.
Health Affairs, May 2021, Pages 710-718


The transition among many US physicians from independent practice to hospital employment has raised concerns about whether employed physicians will be more inclined to refer patients for hospital-based services that are unnecessary or inappropriate. Using claims data for 2009–16, we conducted a difference-in-differences analysis to investigate whether this form of hospital-physician integration is associated with inappropriate referrals for magnetic resonance imaging (MRI), a widely used mode of diagnostic imaging, for three common medical conditions: lower back pain, knee pain, and shoulder pain. Study findings indicate that the odds of a patient receiving an inappropriate MRI referral increased by more than 20 percent after a physician transitioned to hospital employment. Most patients who received an MRI referral by an employed physician obtained the procedure at the hospital where the referring physician was employed. These results point to hospital-physician integration as a potential driver of low-value care.

Product Proliferation under Rational Inattention: Application to Health Insurance
Zach Brown & Jihye Jeon
AEA Papers and Proceedings, May 2021, Pages 554-559


In markets with complicated products such as insurance, why do firms offer many products even when consumers appear to receive little benefit? We show that when consumers face information acquisition costs, firms may have an incentive to introduce many undifferentiated products. This allows firms to gain market share and increase markups. We document initial evidence consistent with the model using data from Medicare prescription drug insurance. Insurers that offer more duplicate or similar plans have higher-cost plans. These results suggest a role for policymakers to restrict product proliferation in markets with complicated products.

The Impact of Competition on Investment: Evidence From California Hospitals
Nathan Wilson
Journal of Industrial Economics, March 2021, Pages 1-32


I examine the relationship between bargaining leverage and capital investment using data on California’s hospital markets. I find evidence that investment increases with bargaining leverage; a hospital whose bargaining position improves by one standard deviation will increase its investment rate by 16 percentage points. A positive causal relationship between bargaining leverage and investment fits the institutional details of the health care sector, where many firms have non-profit tax status, making it difficult to return monopoly rents to shareholders. Consistent with this explanation, I find that non-profit hospitals with bargaining leverage invest more than for-profit ones, all else equal. I do not find strong evidence that financing constraints matter disproportionately for hospitals operating in more competitive markets, supporting the hypothesis that the incremental investment may not be socially efficient.

Virtual Competition and Cost of Capital: Evidence from Telehealth
Kimberly Cornaggia, Xuelin Li & Zihan Ye
Pennsylvania State University Working Paper, April 2021


Using the staggered implementation of telehealth parity laws in the U.S. Healthcare industry, we find causal evidence that virtual competition affects U.S. hospitals' cost of capital through a credit risk channel. Financial statements indicate that rural hospitals lose patients to urban hospitals in the same state after states require equivalent reimbursement of remote and in-person services. These effects increase rural hospital bankruptcy risk indicated by leverage and Z-Score. This increased financial stress translates into lower credit ratings and a higher cost of capital for rural hospitals. Controlling for bond characteristics, we find that affected rural hospitals' new bond costs rise by 20 - 38 bps relative to urban hospital bonds issued in the same state and in the same year. Secondary market yields of outstanding rural bonds increase by a significant 8 - 17 bps. Overall, we conclude that virtual competition in healthcare provision exacerbates healthcare inequality between rural and urban areas.

Market Size and Research: Evidence from the Pharmaceutical Industry
Dennis Byrski, Fabian Gaessler & Matthew Higgins
NBER Working Paper, May 2021


Prior literature has established a link between changes in market size and pharmaceutical innovation; whether a link exists with scientific research remains an open question. If upstream research is not responsive to these changes, the kinds of scientific discoveries that flow into future drug development could be disconnected from downstream demand. We explore this question by exploiting the effects of quasi-experimental variation in market size introduced by Medicare Part D. We find no causal relationship between market size and biomedical research in the decade following the implementation of Medicare Part D. While many factors have been shown to motivate scientists to conduct research, this result suggests that changes in market size provide no such incentive. We do find, however, limited support for a response by corporate scientists conducting applied research. Implications for pharmaceutical innovation policy are discussed.

Which Markets (Don't) Drive Pharmaceutical Innovation? Evidence From U.S. Medicaid Expansions
Craig Garthwaite, Rebecca Sachs & Ariel Dora Stern
NBER Working Paper, May 2021


Pharmaceutical innovation policy involves managing a tradeoff between high prices for new products in the short-term and stronger incentives to develop products for the future. Prior research has documented a causal relationship between market size and pharmaceutical research and development (R&D) activities. The existing literature, however, provides no evidence of how this relationship varies across markets. We investigate whether recent expansions in state Medicaid programs caused an increase in R&D. We find no evidence of a response, potentially a result of Medicaid’s low reimbursement for pharmaceuticals, suggesting low(er) price markets may have different dynamics with respect to innovation policy.

Higher Medicare Spending On Imaging And Lab Services After Primary Care Physician Group Vertical Integration
Christopher Whaley et al.
Health Affairs, May 2021, Pages 702-709


In recent years direct ownership of physician practices by hospitals and health systems (that is, vertical integration) has become a prominent feature of the US health care system. One unexplored impact of vertical integration is the impact on referral patterns for common diagnostic tests and procedures and the associated spending. Using a 100 percent sample of 2013–16 Medicare fee-for-service claims data, we examined whether hospital and health system ownership of physician practices was associated with changes in site of care and Medicare reimbursement rates for ten common diagnostic imaging and laboratory services. After vertical integration, the monthly number of diagnostic imaging tests per 1,000 attributed beneficiaries performed in a hospital setting increased by 26.3 per 1,000, and the number performed in a nonhospital setting decreased by 24.8 per 1,000. Hospital-based laboratory tests increased by 44.5 per 1,000 attributed beneficiaries, and non-hospital-based laboratory tests decreased by 36.0 per 1,000. Average Medicare reimbursement rose by $6.38 for imaging tests and $0.57 for laboratory tests, which translates to $40.2 million and $32.9 million increases in Medicare spending, respectively, for the entire study period. This study highlights how the growing trend of vertical integration, combined with differences in Medicare payment between hospitals and nonhospital providers, leads to higher Medicare spending.

Medicaid Expansions and Participation in Supplemental Security Income by Noncitizens
Felix Muchomba & Neeraj Kaushal
American Journal of Public Health, June 2021, Pages 1106-1112

Methods: Using data from the Social Security Administration for 2009 through 2018 (n = 1020 state-year observations) and the Current Population Survey for 2009 through 2019 (n = 78 776 respondents), we employed a difference-in-differences approach comparing SSI participation rates in US states that adopted Medicaid expansion with participation rates in nonexpansion states before and after ACA implementation.

Results: Medicaid expansion reduced the SSI (disability) participation of nonelderly noncitizens by 12% and of nonelderly citizens by 2%. Estimates remained robust with administrative and survey data.

Docs with their eyes on the clock? The effect of time pressures on primary care productivity
Seth Freedman et al.
Journal of Health Economics, May 2021


This paper examines how time pressure, an important constraint faced by medical care providers, affects productivity in primary care. We generate empirical predictions by incorporating time pressure into a model of physician behavior by Tai-Seale and McGuire (2012). We use data from the electronic health records of a large integrated delivery system and leverage unexpected schedule changes as variation in time pressure. We find that greater time pressure reduces the number of diagnoses recorded during a visit and increases both scheduled and unscheduled follow-up care. We also find some evidence of increased low-value care, decreased preventive care, and decreased opioid prescribing.

Racial and ethnic disparities in benefits eligibility and spending among adults on the autism spectrum: A cohort study using the Medicare Medicaid Linked Enrollees Analytic Data Source
Teal Benevides et al.
PLoS ONE, May 2021

Methods: We conducted a cross-sectional cohort study of U.S. publicly-insured adults on the autism spectrum using 2012 Medicare-Medicaid Linked Enrollee Analytic Data Source (n = 172,071). We evaluated differences in race-ethnicity by eligibility (Medicare-only, Medicaid-only, Dual-Eligible) and spending.

Findings: The majority of white adults (49.87%) were full-dual eligible for both Medicare and Medicaid. In contrast, only 37.53% of Black, 34.65% Asian/Pacific Islander, and 35.94% of Hispanic beneficiaries were full-dual eligible for Medicare and Medicare, with most only eligible for state-funded Medicaid. Adjusted logistic models controlling for gender, intellectual disability status, costly chronic condition, rural status, county median income, and geographic region of residence revealed that Black beneficiaries were significantly less likely than white beneficiaries to be dual-eligible across all ages. Across these three beneficiary types, total spending exceeded $10 billion. Annual total expenditures median expenditures for full-dual and Medicaid-only eligible beneficiaries were higher among white beneficiaries as compared with Black beneficiaries.

Owning the Agent: Hospital Influence on Physician Behaviors
Haizhen Lin, Ian McCarthy & Michael Richards
NBER Working Paper, May 2021


The organizational structure of U.S. health care has changed dramatically in recent years, with nearly half of physicians now employed by hospitals. This trend toward increasing vertical alignment between physicians and hospitals may alter physician behavior relative to physicians remaining in independent or group practices. We examine the effects of such vertical alignment using an instrumental variable strategy and a clinical context facilitating well-defined episodes of care. We find relatively modest positive effects (point estimates of 7% or lower) on total Medicare payments per episode, characterized by an increase in billable activity among other integrated physicians alongside a large decrease in activity among non-integrated providers. Acquiring hospitals ultimately capture more revenue following a physician practice acquisition; yet, the smaller overall bundle of care generates no net savings to Medicare due to location-based payment rules favorable to hospitals.


from the


A weekly newsletter with free essays from past issues of National Affairs and The Public Interest that shed light on the week's pressing issues.


to your National Affairs subscriber account.

Already a subscriber? Activate your account.


Unlimited access to intelligent essays on the nation’s affairs.

Subscribe to National Affairs.