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Abstract:
We evaluate the effect of tort reform on employer-sponsored health insurance premiums by exploiting state-level variation in the timing of reforms. Using a dataset of healthplans representing over 10 million Americans annually between 1998 and 2006, we find that caps on non-economic damages, collateral source reform, and joint and several liability reform reduce premiums by 1 to 2 percent each. These reductions are concentrated in PPOs rather than HMOs, suggesting that can HMOs can reduce “defensive” healthcare costs even absent tort reform. The results are the first direct evidence that tort reform reduces healthcare costs in aggregate; prior research has focused on particular medical conditions.

health care reform, tort reform, insruance

Abstract:
One of the benefits commonly claimed for expanded public health insurance is improved efficiency of medical care delivery, but this claim has little rigorous empirical support. We provide such support by assessing the impact of the Medicaid expansions over the 1983-1996 period on the incidence of avoidable hospitalizations. We find that expanded public insurance eligibility leads to a significant decline in avoidable hospitalization: over this period Medicaid eligibility expansions were associated with a 22% decline in avoidable hospitalization. But we also find that there is a countervailing and larger impact in terms of increased access to hospital care for newly eligible children, so that there is an overall 10% rise in child hospitalizations due to the expansions. The expansions have mixed implications for treatment intensity, but appear to be associated with a significant shift in the types of hospitals at which children are treated, with fewer children treated in public hospitals and more in for-profit facilities.

Abstract:
This paper investigates whether hospitals respond in profit-maximizing ways to changes in diagnosis-specific prices determined by Medicare's Prospective Payment System and other public and private insurers. Previous studies have been unable to isolate this response because changes in reimbursement amounts (prices) are typically endogenous: they are adjusted to reflect changes in hospital costs. I exploit an exogenous 1988 policy change that generated large price changes for 43 percent of all Medicare admissions. I find that hospitals responded to these price changes by upcoding' patients to diagnosis codes associated with large reimbursement increases, garnering $330-$425 million in extra reimbursement annually. This response was particularly strong among for-profit hospitals. With the important exception of elective diagnoses, I find little evidence that hospitals increased the intensity of care in diagnoses subject to price increases, where intensity is measured by total costs, length of stay, number of surgical procedures, and number of intensive-care-unit days. Neither did hospitals increase the volume of patients admitted to more remunerative diagnoses, notwithstanding the strong a priori expectation that such a response should prevail in fixed-price settings. Taken together, these findings suggest that, for the most part, hospitals do not alter their treatment or admissions policies based on diagnosis-specific prices; however they employ sophisticated coding strategies in order to maximize total reimbursement. The results also suggest that models of quality competition among hospitals may be inappropriate at the level of specific diagnoses ( products').

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
Advances in structural demand estimation have substantially improved economists' ability to forecast the impact of mergers. However, these models rely on extensive assumptions about consumer choice and firm objectives, and ultimately observational methods are needed to test their validity. Observational studies, in turn, suffer from selection problems arising from the fact that merging entities differ from non-merging entities in unobserved ways. To obtain an accurate estimate of the effect of consummated mergers, I propose a combination of rival analysis and instrumental variables. By focusing on the effect of a merger on the behavior of rival firms, and instrumenting for these mergers, unbiased estimates of the effect of a merger on market outcomes can be obtained. Using this methodology, I evaluate the impact of independent hospital mergers between 1989 and 1996 on rivals' prices. I find sharp increases in rivals' prices following a merger, with the greatest effect on the closest rivals. The results for this industry are more consistent with predictions from structural models than with prior observational estimates.

Abstract:
Although the vast majority of Americans have private health insurance, researchers focus almost exclusively on public provision. Data on the private insurance sector is extremely difficult to obtain because health insurance contracts are complex, renegotiated annually, and not subject to reporting requirements. This study makes use of a privately-gathered national database of insurance contracts agreed upon by a sample of large, multisite employers between 1998 and 2005. To gauge the competitiveness of the group health insurance industry, I investigate whether health insurers charge higher premiums, ceteris paribus, to more profitable firms. I find they do, and this result is not driven by cross-sectional differences across firms or plans: firms with positive profit shocks subsequently face higher premium growth, even for the same healthplans. Moreover, this relationship is strongest in geographic markets served by a small number of insurance carriers. Further analysis suggests profits act to increase employers' switching costs, and insurers exploit this inelasticity where they have sufficient bargaining power. Given the rapid industry consolidation during the study period, these findings suggest healthcare insurers possess and exercise market power in an increasing number of geographic markets.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
The use of government-mandated report cards to diminish uncertainty about the quality of products and services is widespread. However, report cards will have little effect if they simply confirm consumers' prior beliefs. Moreover, documented "responses" to report cards may reflect learning about quality that would have occurred in their absence ("market-based learning"). Using panel data on Medicare HMO market shares between 1994 and 2002, we examine the relationship between enrollment and quality before and after report cards were mailed to 40 million Medicare beneficiaries in 1999 and 2000. We find evidence that consumers learn from both public report cards and market-based sources, with the latter having a larger impact during our study period. Consumers are especially sensitive to both sources of information when the variance in HMO quality is greater. The effect of report cards is driven by beneficiaries' responses to consumer satisfaction scores; other reported quality measures such as the mammography rate did not affect enrollment decisions.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
This paper examines the strategic behavior of hospitals in one of their primary output markets: inpatient surgical procedures. High levels of learning-by-doing in surgical fields may act as a barrier to entry. I investigate whether incumbent hospitals facing prospective entry in a procedure market manipulate their procedure volumes to produce such a barrier. I derive straightforward empirical tests from a model of patient demand, procedure quality, and differentiated product competition. Using hospital data on electrophysiological studies, an invasive cardiac procedure, I find evidence of entry-deterring investment in procedure volume. These findings suggest that competitive motivations may play a role in treatment decisions.

Abstract:
This paper investigates whether managers who fail to exploit regulatory loopholes are vulnerable to replacement. We use the U.S. hospital industry in 1985-1996 as a case study. A 1988 change in Medicare rules widened a pre-existing loophole in the Medicare payment system, presenting hospitals with an opportunity to increase operating margins by five or more percentage points simply by "upcoding" patients to more lucrative codes. We find that "room to upcode" is a statistically and economically significant predictor of whether a hospital replaces its management with a new team of for-profit managers. We also find that hospitals replacing their management subsequently upcode more than a sample of similar hospitals that did not, as identified by propensity scores.

Abstract:
We evaluate the effect of tort reform on employer-sponsored health insurance premiums by exploiting state-level variation in the timing of reforms. Using a dataset of healthplans representing over 10 million Americans annually between 1998 and 2006, we find that caps on non-economic damages, collateral source reform, and joint and several liability reform reduce premiums by 1 to 2 percent each. These reductions are concentrated in PPOs rather than HMOs, suggesting that can HMOs can reduce defensive healthcare costs even absent tort reform. The results are the first direct evidence that tort reform reduces healthcare costs in aggregate; prior research has focused on particular medical conditions.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
We examine whether and to what extent consolidation in the U.S. health insurance industry is leading to higher employer-sponsored insurance premiums. We make use of a proprietary, panel dataset of employer-sponsored healthplans enrolling over 10 million Americans annually between 1998 and 2006 to explore the relationship between premium growth and changes in market concentration. We exploit the differential impact of a large national merger of two insurance firms across local markets to estimate the causal effect of concentration on market-level premiums. We estimate real premiums increased by 2 percentage points (in a typical market) due to the rise in concentration during our study period. We also find evidence that consolidation facilitates the exercise of monopsonistic power vis a vis physicians, whose absolute employment and relative earnings decline in its wake.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.