PAUL FRONSTIN, Employee Benefit Research Institute (EBRI)
Email: FRONSTIN@EBRI.ORG
MURRAY N. ROSS, Kaiser Permanente Institute for Health Policy
Email: murray.ross@kp.org

Managed competition and a health insurance exchange appear to be the primary proposed vehicles for expanding Americans’ access to health insurance coverage. For managed competition to work, most analysts agree that a number of components will need to be included: individual mandates, risk adjustment, streamlined comparability of benefit design, subsidies for the low-income population, some form of community rating, and guaranteed issue. Most also agree that, absent mechanisms to restrain the growth of the underlying costs of care, the combination of universal coverage and subsidized premiums will produce even faster cost growth than the current system.

This paper examines issues related to managed competition and the use of a health insurance exchange for the purpose of addressing cost, quality, and access to health care services. It discusses issues that must be addressed when designing an exchange in order to reform the health insurance market, examines state efforts at health reform that use a health insurance exchange, and discusses implications for employment-based health benefits. This paper is neutral on whether an exchange should or should not be formed, and focuses instead on the logistics and implications of what would be involved in implementing an insurance exchange and the potential ramifications of such an action.

KAREN EGGLESTON, University of California, Los Angeles - International Institute
Email: karen.eggleston@tufts.edu
ANUPA BIR, Harvard Medical School
Email: BIR@HCP.MED.HARVARD.EDU

Capitation gives insurers incentive to manipulate their offerings to attract the healthy and deter the sick. We calculate the incentives for such service-specific quality distortions using managed care medical and pharmacy spending data for fiscal years 2001 and 2002 from the Massachusetts State Employee Insurance Program. Services most vulnerable to stinting are cardiac care, diabetes care, and mental health and substance abuse services. Empirically, the financial temptation to distort service quality increases nonlinearly with supply-side cost sharing. Our empirical results highlight how selection incentives work at cross-purposes with efforts to reward excellent chronic disease management. Initiatives coupling pay-for-performance with risk adjustment and mixed payment hold promise for aligning incentives with quality improvement.

GARY V. ENGELHARDT, Syracuse University - Center for Policy Research, Dartmouth College - Department of Economics, National Bureau of Economic Research (NBER)
Email: gvengelh@maxwell.syr.edu
NADIA GREENHALGH-STANLEY, Syracuse University - Department of Economics
Email: nngreenh@maxwell.syr.edu

We provide empirical evidence on the extent to which long-term care insurance affects the housing and living arrangements of the elderly by examining plausibly exogenous changes in the supply of long-term care insurance through the Medicare program that occurred in the late 1990s. Prior to 1997, Medicare reimbursed home health care agencies on a retrospective-cost basis. Then, starting in October, 1997, as a result of the Balanced Budget Act of 1997 (BBA97), Medicare switched to a system of prospective payments for home health care, which induced state-by-calendar-year variation in the supply of this type of public long-term care insurance. We exploit this variation to econometrically identify the impact on the housing and living arrangements of the elderly, using CPS data from 1995-2000 (before and after the law change). Our estimates indicate that living arrangements are quite responsive to home health care benefits. The estimated elasticity of shared living to benefits is -0.7 over all elderly and -1 for widowed elderly. However, these benefits have little impact on household headship among the elderly. This suggests that the bulk of the shared-living response occurred through co-residents living in elderly households. There is some weak evidence that increases in benefits raised elderly homeownership.

ELENI KARAGIANNAKI, London School of Economics
Email: e.karagiannaki@lse.ac.uk

The analysis in this paper focuses on the impact of health on the savings and consumption decisions of the elderly. In principle, there are at least five alternative channels through which health may affect consumption and savings. Ill health may affect both consumption capacities and needs while the risk of deteriorating health might increase subjective mortality expectations inducing higher consumption. Conversely ill health may induce lower consumption and an increase in precautionary savings given that agents may anticipate increased consumption needs following a negative health shock. Our main objective in this paper is to describe how consumption decisions of the elderly adjust to health changes and to disentangle of the different channels through which consumption responds to health changes. To identify the effect of health on consumption and saving decisions we use data from the British Household Panel Survey and the English Longitudinal Survey of Ageing (ELSA) and we estimate a series of regression models which relate health changes to observed consumption changes. Our findings suggest that there are significant adjustments in the composition of consumption following an illness onset. These adjustments reflect mainly the combined effect of increased costs associated with illness onset as well as the effect of constraints on opportunity to spend associated with illness onset.

DARON ACEMOGLU, Massachusetts Institute of Technology (MIT) - Department of Economics, Centre for Economic Policy Research (CEPR), National Bureau of Economic Research (NBER)
Email: daron@mit.edu
AMY FINKELSTEIN, Massachusetts Institute of Technology (MIT) - Department of Economics, National Bureau of Economic Research (NBER)
Email: afink@mit.edu
MATT NOTOWIDIGDO, Massachusetts Institute of Technology (MIT) - Department of Economics
Email: noto@mit.edu

Health expenditures as a share of GDP have more than tripled over the last half century. A common conjecture is that this is primarily a consequence of rising real per capita income, which more than doubled over the same period. We investigate this hypothesis empirically by instrumenting for local area income with time-series variation in global oil prices between 1970 and 1990 interacted with cross-sectional variation in the oil reserves across different areas of the Southern United States. This strategy enables us to capture both the partial equilibrium and the local general equilibrium effects of an increase in income on health expenditures. Our central estimate is an income elasticity of 0.7, with an elasticity of 1.1 as the upper end of the 95 percent confidence interval. Point estimates from alternative specifications fall on both sides of our central estimate, but are almost always less than 1. We also present evidence suggesting that there are unlikely to be substantial national or global general equilibrium effects of rising income on health spending, for example through induced innovation. Our overall reading of the evidence is that rising income is unlikely to be a major driver of the rising health share of GDP.

TIAN ZHOU-RICHTER, Humboldt University of Berlin - School of Business and Economics
Email: zhourich@wiwi.hu-berlin.de
MARK J. BROWNE, University of Wisconsin - Madison - School of Business
Email: MJBROWNE@FACSTAFF.WISC.EDU
HELMUT GRÜNDL, Humboldt University of Berlin - School of Business and Economics, Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE)
Email: gruendl@wiwi.hu-berlin.de

The potential need for long-term care (LTC) is one of the greatest financial risks faced not only by the elderly, but also by their adult children, who often provide care or financial assistance. We investigate adult children’s role in the demand for LTC insurance. Similar to flood insurance, we find that demand for LTC insurance is low due to low risk perception. The more aware adult children are of the risk, the more often LTC insurance is purchased, either by the adult children themselves on behalf of their parents or by the parents under the influence of their adult children.

PAUL FRONSTIN, Employee Benefit Research Institute (EBRI)
Email: FRONSTIN@EBRI.ORG
DALLAS L. SALISBURY, Employee Benefit Research Institute (EBRI)
Email: SALISBURY@EBRI.ORG
JACK VANDERHEI, Employee Benefit Research Institute (EBRI), Temple University - Risk Management & Insurance & Actuarial Science
Email: vanderhei@ebri.org

This paper updates earlier EBRI research on estimated savings needed to cover health insurance to supplement Medicare and out-of-pocket expenses for health care services in retirement. It finds that men retiring at age 65 in 2009 will need anywhere from $68,000 to $173,000 in savings to cover health insurance premiums and out-of-pocket expenses in retirement if they want a 50-50 chance of being able to have enough money, and $134,000 to $378,000 if they prefer a 90 percent chance. With their greater longevity, women will need more: a woman retiring at age 65 in 2009 will need anywhere from $98,000 to $242,000 in savings to cover health insurance premiums and out-of-pocket expenses in retirement for a 50-50 chance of having enough money, and $164,000 to $450,000 for a 90 percent chance. For those seeking a median (50 percent) chance of having enough money for health care in retirement, these estimates are about 9 percent higher than a year ago for men and married couples, and 16 percent higher for single women.

Many individuals will need more money than the amounts cited in this report because this analysis does not factor in the savings needed to cover long-term care expenses, nor does it take into account the fact that many individuals retire prior to becoming eligible for Medicare. However, some workers will need to save less than what is reported if they choose to work during retirement and receive health benefits as active workers.

The PDF for the above title, published in the June 2009 issue of EBRI Notes, also contains the fulltext of another June 2009 EBRI Notes article abstracted on SSRN: “Many 401(k) Sponsors Suspending Matching Contributions Are Funding Defined Benefit Pension Plans.”

ANTHONY T. LO SASSO, University of Illinois at Chicago - School of Public Health
Email: losasso@uic.edu
LORENS A. HELMCHEN, UIC School of Public Health, Institute of Government and Public Affairs
Email: helmchen@uic.edu
ROBERT KAESTNER, University of Illinois at Chicago - Institute of Government and Public Affairs, National Bureau of Economic Research (NBER)
Email: kaestner@uic.edu

We use unique data from an insurer that exclusively offers high-deductible, consumer-directed health plans to identify the effect of plan features, notably the spending account, on health care spending. Our results show that the marginal dollar in the spending account is entirely spent on outpatient and pharmacy services. In contrast, inpatient and out-of-pocket spending were not responsive to the amount in the spending account. Our results represent the first plausibly causal estimates of the components of consumer-driven health plans on health spending. The magnitudes of the effects suggest important moral hazard consequences to higher spending account levels.