New Perspectives on Health and Health Care Policy

By Lubotsky, Darren; Mazumder, Bhashkar et al. | Chicago Fed Letter, July 2010 | Go to article overview
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New Perspectives on Health and Health Care Policy


Lubotsky, Darren, Mazumder, Bhashkar, Seeskin, Zach, Chicago Fed Letter


Health care reform has been the primary focus of policymakers for much of the past year, culminating with the Patient Protection and Affordable Care Act that was signed into law by President Obama on March 23, 2010. The vigorous national debate on the act has highlighted the importance of innovative, high-quality research on health and health care policy.

The New Perspectives on Health and Health Care Policy Conference, held on March 22 and 23, 2010, at the Federal Reserve Bank of Chicago and cosponsored by the Chicago Fed and the Institute of Government and Public Affairs at the University of Illinois, featured presentations of the latest academic research in health policy. This Chicago Fed Letter discusses the conference and summarizes the presentations.

Impact of Medicare

The conference opened with a historical analysis of the effects of the introduction of Medicare in 1965. Kenneth Chay of Brown University presented new research showing that Medicare led to dramatic improvements in access to health care and reductions in mortality among the elderly in the years following its enactment. Chay utilized newly available data that enabled him to investigate agespecific insurance coverage rates both prior to and after Medicare's enactment. Using data from 1963 onward, Chay estimates that Medicare caused hospital and surgical insurance rates for those 65 and older to increase by more than 20%.

Chay also found strong evidence that Medicare increased hospital utilization and decreased mortality among the elderly. The sharpest mortality reductions were in acute causes of death, such as heart disease. He estimated that the cost of Medicare's introduction per each additional patient life-year was less than $200 (1982-84 dollars) . As we continue to debate expanding or contracting the Medicare program, Chay's work suggests we need to better understand why the program was so successful at its inception.

Competitiveness of health insurance markets

Three conference presentations focused on the competitiveness of the health insurance industry. The first one, by Leemore Dafny of Northwestern University, explored mergers of health insurance companies over the past decade and the impact of consolidation on the health insurance market.

The past decade has seen sharp increases in both health insurance premiums and the level of consolidation within the health insurance industry. Dafny noted that between 1998 and 2006, average health insurance market concentration across local markets, as measured by the widely used Herfindahl-Hirschman Index, increased by 31%. Meanwhile, growth in health insurance premiums has far exceeded both inflation and growth in workers' earnings.

Despite these trends, it is not clear whether there is a causal relationship between industry concentration and premiums. Increased industry concentration could be anti-competitive if greater market power allow« insurers to raise premiums. Conversely, mergers may be pro-competitive and lead to lower premiums if they generate efficiencies. This could arise from improved management, superior distribution systems, or increased investment in technology, for example.

Dafny's research focused on the AetnaPrudential merger of 1999. Aetna and Prudential had market shares that varied significantly across many local markets, allowing Dafny to identify the causal effect of consolidation by comparing markets that became significantly more concentrated as a result of the merger with those that experienced only small increases. Using data on premiums paid by ten million Americans between 1998 and 2006, she estimated that premiums rose about 3% overall as a result of the rise in industry concentration. Dafny emphasized that this increase, although significant, is a small fraction of the overall increase in premiums during this time.

Dafny's study also provided evidence that health insurers in more concentrated markets exercise monopsonistic power.

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