Less Reg = More Med

Iwona Kicinger, the first PhD student whose thesis committee I have chaired, defends her dissertation tomorrow morning.  One part finds that US firms that self-insure, thereby avoiding many health insurance regulations, spend 18-25% more per employee on medicine:

Self-insured plans are characterized by higher [health insurance] employer’s contribution compared to traditional plans. … They do so … because they do not have to obey various laws and regulations, do not have to hold reserves, and have greater flexibility over the plan design … This result is highly statistically significant in all [five] models specified (pvalue<0.0001). Its magnitude is estimated to be 18-25% (depending on the model specification).

She controls for age, gender, race, poverty level, income, education, geographic region, firm size, industry, other benefits, unions, single vs. family coverage, and profit vs nonprofit. Her data is from 1987:

The original [USA] NMES sample covers 165 geographic areas as primary sampling units that represent 127 distinct geographic regions, in which around 15,000 households were interviewed on their health insurance during 1987.  After interviewing households, 11,422  employers (with the response rate of 85.5%), 353 unions (with the response rate of 76.7%), and 745 insurance companies (where 75.6% of them responded) were contacted in order to verify the information on the plan, including enrollment,  premiums, and payment sources.

(Iwona hopes to have her dissertation online for public perusal this weekend.)  For those who think med is great, this seems a strong argument for reducing med regulation; burdensome regulations seem to get in the way of folks buying the med they want.  Those like me who think we are over-treated should admit this may favor more regulation; burdensome regulation makes medicine seem less valuable, and so folks buy less of it.

FYI, the Self-Insurance Institute of America says the Senate reform plan would increase regulation of self-insurance.

Added 16Dec: Iwona’s disseration is now available here.

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  • bcg

    As an actuary, this is extremely interesting. I look forward to this being made available.

  • anon

    Perhaps firms which offer better healthcare benefits are more likely to self-insure in order to customize their plans to a degree which would otherwise be unachievable. This is good in general, but might also cause problems such as shrouding (workers are less able to assess the quality of their health plans), wage discrimination (workers who are committed to the firm and have few outside options may be offered lower-quality health care) and other issues.

    Self-insuring also favors large firms over small and medium businesses. This is not obviously desirable.

  • Jess Riedel

    I assume the regulation we’re talking about is not targeted against wasteful medicine, but is intended to protect the insured from their employer. Even if we agree that much of medicine is wasteful, would we want to decrease health care use through this kind of regulation because it made people want less medicine? That seems like an awfully blunt tool.

  • fascinating.

  • Greg Conen

    While I could certainly see more regulation leading to lower costs, that’s hardly the only possible cause. Even the largest self-insured firm insures fewer people than most insurance companies; perhaps there are economies of scale.

  • MZ

    I wonder how similar or different the situation is today, 22 years later.

  • Curt Adams

    Did she control for eliminating the expense of the Red Queen race between insurers and providers? That’s supposed to be about 20% of expenses.

    • There is still an agency conflict between the firm and providers – there just isn’t an additional level of agency problems between those two.

  • do not have to hold reserves— this might increase the risk of catastrophic failure.

  • noahpoah

    The phrase “highly statistically significant” is silly and, at least to me, deeply annoying. Under what I would consider statistically sound reasoning, a test is either statistically significant or not. Of course, I recognize that language changes, that words and phrases can take on new meanings, but even if we accept this, the phrase is redundant, given that you’re going to show the p-value and that it means “p is really, really small.”

    You could maybe argue that redundancy is not so bad, since readers can be careless. The phrase inherits all the silliness of the cult of p-values, though, making it, perhaps, even worse than just reporting p-values (and treating them as sacrosanct).

  • Yan Li

    Very provocative!

  • I too believe we tend towards over-treatment, but recognize the harmful effects of paternalistic measures in our society. If someone pays for their own over- treatment then so be it.
    However, more regulations seem to make it more difficult for people to get even basic checkups and other routine health practices.

  • Kevin Dick

    So you’re saying that when we move to a more efficient institution, we get more consumption. But in your opinion, people are consuming too much of this good, so you want to use the the threat of force to prevent them from getting something they want. How exactly does this fit in with any economic principles of efficiency?

    Much better to leave this to entrepreneurs. If this research is right, here’s what you should do. Start a self-insurance management company. Eliminated the procedures you think are wasteful. Replace them with cheaper procedures that deliver whatever benefit is causing people to consume. If it’s psychological benefit, you could have sham procedures that look really impressive. Everybody wins. Especially you, your outsourcing company would be really profitable.

    Oh, wait. This would be _prevented_ by regulation. Perhaps the solution then is _less_ regulation.

    • Grant

      I think Kevin has a point. A lot of signaling problems are really marketing problems: how can we signal more cheaply? How do you market a cheaper health insurance which cuts down on meds with no marginal benefit? How do you give dying patients some comfort without wasting resources trying to extend their life by a small amount?

      Either the government or entrepreneurs are going to have to do it. Its not clear to me that the government is going to be better at this than the private sector. At least in America, it seems very unlikely the government will be able to do this. I also seems unlikely the private sector will, though at least they’re saving the patient’s own money.

      Its a hard sell either way. The root of the problem may be people’s irrational respect for the medical industry rather than any socialist vs. capitalist argument.

  • There still seem to be a lot of missing pieces to your implications, at least as the excerpts are presented:

    * Did employees at self-insured firms have better health outcomes?
    * How did overall (not just employer) spending on healthcare compare with firms that were not self-insured?
    * What was the impact on salaries and other benefits offered by self-insured firms, and what were the entry-level, median(, etc.) salaries at self-insured firms comparative to non-self-insured firms? (This could be answered by the way the specified controls were applied, but it makes me interested in how a control for income would work in relation to company-wide insurance policy and spending decisions)
    * What was the comparative quality and flexibility of the available policies at self-insured firms v. non-self-insured firms?
    * Did self-insured firms experience any differences in employee selection based on any of the specified controls (e.g., different age ranges in self-insured v. non-self-insured firms)?

    Good basis for discussion but still need more information.

  • Umm, alternate explanation:

    Firms that self-insure are less willing or able to deny, restrict, and inconvenience their employees who wish to use medications than a third party insurance company. Not only is this plausible it would be extremely surprising if it wasn’t true.

    After all unlike the third party insurer the firm risks worse employee moral when imposing discouraging measures on medication purchase. Moreover, they lack the knowledge, capital overhead, and corporate culture to effectively discourage medication usage without seeming to be disgustingly evil. I mean let me put the point another way.

    An medical insurance company is a firm specialized in finding ways of minimizing claims while appearing to offer broad coverage. . It’s business 101 that they should be better at doing so than a company specialized in something else.

  • “do not have to hold reserves” … This is not true. If they file GAAP statements, they have to comply with FAS 5.

    There are significant simultaneity problems with observing self-insured status v. medical spend. Higher spending encourages opportunities to obtain more control; larger claims experience is more stable and therefore easier to self-insure; larger companies tend to face collectively bargained plans that can be quite rich.

  • I just added to this post.

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