Forum for Health Economics & Policy

The Option Value of Innovation

Julia Thornton Snider et al. — Wed, 18 Apr 2012 10:56:19 PDT

Standard techniques of cost effectiveness analysis measure a technology’s benefits in terms of expected life years (or quality-adjusted life years) gained at today’s life expectancies. However, this approach ignores the gains which derive from the possibility that a health technology allows an individual to survive long enough to benefit from other technological innovations which raise life expectancy (and quality of life) in the future. Borrowing a term from the finance literature, we refer to this source of value as the “option value” of innovation. We explain where this value comes from and how to calculate it in a variety of standard cost effectiveness analysis contexts. We provide a proof-of-concept using the example of the drug tamoxifen, which delayed the onset of breast cancer for some patients until more effective adjuvant treatment was available. We find that incorporating option value can increase the conventionally estimated value of tamoxifen with better adjuvant treatment by nearly a quarter (from $200,000 to $248,000 for those who initiated tamoxifen in 1999). We expect similar results for other drugs in therapeutic areas of rapid technological advancement.

Nutrient Demand in Food Away from Home

Timothy J. Richards et al. — Mon, 02 Apr 2012 07:54:22 PDT

Food away from home (FAFH) and, specifically fast food, has been targeted by academics and public policy officials alike as a major contributor to the obesity epidemic. Criticized as high in energy, fat and sugars, the implication is that consumers demand the combination of nutrients in FAFH in excess. If market-based policies intended to correct the perceived market failure in nutrient demand are to be successful, information on nutrient elasticities is required. Moreover, co-dependent relationships between nutrient intake and bioeconomic outcomes – obesity, physical activity and health status – are found to be important in the public health literature, but are not typically included in econometric studies of FAFH demand. Nutrients, however, do not have market prices. This study derives a set of implicit nutrient prices and estimates the elasticities of demand for nutrients in FAFH that takes into account the endogeneity of bioeconomic outcomes. Our estimation results show that fat is the only macro-nutrient that is elastic in demand, and all cross-price elasticities are small, so nutrient-based price policies may indeed be effective in modifying FAFH choices. Simulation results confirm this hypothesis, and also support the use of policies that subsidize positive health outcomes.

A Prescription for Drug Formulary Evaluation: An Application of Price Indexes

Jacob Glazer et al. — Fri, 30 Mar 2012 08:05:56 PDT

Existing economic approaches to the design and evaluation of health insurance do not readily apply to coverage decisions in the multi-tiered drug formularies characterizing drug coverage in private health insurance and Medicare. This paper proposes a method for evaluating a change in the value of a formulary to covered members based on the economic theory of price indexes. A formulary is cast as a set of demand-side prices, and our measure approximates the compensation (positive or negative) that would need to be paid to consumers to accept the new set of prices. The measure also incorporates any effect of the formulary change on plan drug acquisition costs and “offset effects” on non-drug services covered by the plan. Data needed to calculate formulary value are known or can be forecast by a health plan. We illustrate the method with data from a move from a two- to a three-tier formulary.

Optimal Alcohol Taxes for Australia

James J. Fogarty — Sun, 05 Feb 2012 17:13:42 PST

The 2010 Australian government tax review suggested Australia move to a uniform excise tax rate for all alcoholic beverages. Here, a model is presented and calibrated that shows the optimal per litre of pure alcohol (LAL) tax rates for beer, wine, spirits, and ready-to-drink spirits are substantially different to both current alcohol tax rates and the uniform tax rate recommended by the tax review. Specifically, given an individual consumer utility model, the best estimate values of the welfare maximising LAL tax rates are: $37 for beer, $11 for wine, $50 for spirits, and $77 for ready-to-drink spirits. The variation in the optimal tax rate across beverage types flows from differences in the externality costs associated with the consumption of each beverage type, and differences in the proportion of moderate consumption and abusive consumption associated with each beverage type. In addition, it is shown that the optimal tax rates are influenced by the range of costs that are considered to be externality costs, and the relative price responsiveness of abusers and moderate consumers.

Behavioral Responses of Patients in AIDS Treatment Programs: Sexual Behavior in Kenya

Harsha Thirumurthy et al. — Tue, 31 Jan 2012 12:47:15 PST

We estimate changes in sexual behavior for HIV-positive individuals enrolled in an AIDS treatment program using longitudinal household survey data collected in western Kenya. We find that sexual activity is lowest at the time that treatment is initiated and increases significantly in the subsequent six months, consistent with the health improvements that result from ART treatment. More importantly, we find large and significant increases of 10 to 30 percentage points in the reported use of condoms during last sexual intercourse. The increases in condom use appear to be driven primarily by a program effect, applying to all HIV clinic patients regardless of treatment status.

The Impact of Household Investments on Early Child Neurodevelopment and on Racial and Socioeconomic Developmental Gaps: Evidence from South America

George L. Wehby et al. — Fri, 30 Dec 2011 15:23:51 PST

This paper assesses the effects of household investments through child educating activities on child neurodevelopment between the ages of 3 and 24 months, and evaluates whether investments explain racial and socioeconomic developmental gaps in South America. Quantile regression is used to evaluate the heterogeneity in investment effects by unobserved developmental endowments. The study finds large positive investment effects on early child neurodevelopment, with generally larger effects among children with low developmental endowments (children at the left margin of the development distribution). Investments explain part of the observed racial gaps and the whole socioeconomic developmental gap. Investments may compensate for low endowments and policy interventions to increase investments may reduce early development gaps and result in high social and economic returns.

A Primer on the Economics of Prescription Pharmaceutical Pricing in Health Insurance Markets

Ernst R. Berndt et al. — Mon, 07 Nov 2011 11:30:17 PST

The pricing of medical products and services in the U.S. is notoriously complex. In health care, supply prices (those received by the manufacturer) are distinct from demand prices (those paid by the patient) due to health insurance. The insurer, in designing the benefit, decides what prices patients pay out-of-pocket for drugs and other products. In this primer we characterize cost and supply conditions in markets for generic and branded drugs, and apply basic tools of microeconomics to describe how an insurer, acting on behalf of its enrollees, would set demand prices for drugs. Importantly, we show how the market structure on the supply side, characterized alternatively by monopoly (unique brands), Bertrand differentiated product markets (therapeutic competition) and competition (generics), influences the insurer’s choices about demand prices. This perspective sheds light on the choice of coinsurance versus copayments, the structure of tiered formularies, and developments in the retail market.

The Effects of Consumer-Directed Health Plans on Episodes of Health Care

Amelia M. Haviland et al. — Thu, 29 Sep 2011 09:54:29 PDT

Past research has shown that high deductible and consumer-directed health plans (HD/CDHPs) can significantly reduce health care costs. In this paper we investigate how these cost savings are realized. We use panel data from many large employers and difference in difference models to examine how HD/CDHPs affect the number of health care episodes and the cost per episode. Our results show that about two-thirds of the cost savings from HD/CDHP enrollment are from reductions in number of episodes and the remaining one-third of the savings are from reductions in costs per episode. The presence of a Health Reimbursement Arrangement (HRA) or Health Savings Account (HSA) does not temper the effects of high deductibles on number of episodes. However, enrollees in plans with generous employer contributions to HSAs have more episodes of care than enrollees in plans where employers make smaller account contributions. The reductions in costs per episode and in visits to specialists, inpatient care, and use of non-generic pharmaceuticals suggest that higher deductibles are effective at making patients more cost conscious even after care is initiated.

Regional Variation in Medication Adherence

Teresa B. Gibson et al. — Fri, 29 Jul 2011 11:18:16 PDT

An extensive literature has demonstrated geographic variation in medical services and this variation has been largely attributed to the health care system and not to regional differences in patient behavior. We use empirical Bayes shrinkage models, conditional on patient, firm, and market covariates, to investigate geographic variation in adherence to prescription medications across hospital referral regions (HRRs). Models are estimated for commercially insured patients in 11 combinations of chronic diseases and drug classes. We use factor analysis to create a market-level composite measure of adherence that we relate to adjusted market-level spending on non-drug services. We find that there is a very small amount of variation in adherence to prescription drugs across HRRs supporting the widely held assumption that geographic variation is attributable to the health system. Markets with high adherence have systematically lower medical spending, and this inverse correlation is more likely due to unobserved market traits.

Pound Wise and Penny Foolish? Weight Loss and The Dynamics of Health Care Spending

Thomas G. Koch — Thu, 21 Jul 2011 16:24:48 PDT

Current estimates of obesity costs ignore the impact of future weight loss and gain, and may either over or underestimate economic consequences of weight loss. In light of this, I construct static and dynamic measures of medical costs associated with body mass index (BMI), to be balanced against the cost of one-time interventions. This study finds that ignoring the implications of weight loss and gain over time overstates the medical-cost savings of such interventions by an order of magnitude. When the relationship between spending and age is allowed to vary, weight-loss attempts appear to be cost-effective starting and ending with middle age. Some interventions recently proven to decrease weight may also be cost-effective.

Toxic Choices: The Theory and Impact of Smoking Bans

Ian J. Irvine et al. — Fri, 08 Jul 2011 09:42:12 PDT

This paper first proposes a theoretical model of smoker behaviour that serves as a vehicle to evaluate workplace smoking bans. It is a nicotine inventory management model where smoking during one phase of the day impacts utility in other phases. Smoking intensity choice forms part of the optimization. Calibrated model simulations suggest that, with the exception of heavy smokers, workplace bans have small impacts due to substitution possibilities. Quantile regression estimates support the theory. However, restrictions on smoking in the home are an order of greater importance, even when instrumented. The policy conclusion is that workplace ban effectiveness depends heavily upon private choices.

Determinants of Tobacco Control Funding: Evidence from U.S. States

Craig A. Gallet — Thu, 07 Jul 2011 16:17:29 PDT

The literature on tobacco control funding has focused on its impact on the demand for tobacco products. This paper turns the issue around by utilizing state-level panel data to address the determinants of per capita tobacco control funding. Tobacco control funding is found to be increasing with per capita income, cigarette consumption, and cigarette taxes, but decreasing with population density and neighbor-state tobacco control funding. Political affiliation, cancer and heart attack mortalities, as well as the extent of smoke-free air laws, have little impact on tobacco control funding. Results are robust to addressing the endogeneity of cigarette consumption and cigarette taxes.

How Do Employers React to a Pay-or-Play Mandate? Early Evidence from San Francisco

Carrie H. Colla et al. — Wed, 20 Apr 2011 12:34:54 PDT

In 2008 San Francisco implemented major health reform, becoming the first city to adopt a pay-or-play employer health spending mandate. It also created Healthy San Francisco, a new “public option” low-cost health access plan for the uninsured. This study evaluates employer-level health benefit offering responses to the pay-or-play mandate in the first year of implementation using the 2008 Bay Area Employer Health Benefits Survey and a difference-in-difference estimator. Although 92% of firms subject to the mandate already offered insurance prior to enactment, we find that 76% of firms had to expand benefits to comply with the minimum hourly spending requirement for each worker. Nevertheless, most surveyed San Francisco employers (61%) were supportive of the law. There is substantial employer demand for the public option, with 18% of firms using Healthy San Francisco for at least some employees, yet there is little evidence of firms dropping or restricting existing insurance offerings in the first year after implementation. A non-trivial portion of firms chose to meet the mandate by paying into health reimbursement accounts (14%). These results confirm that employer mandate details can have crucial effects on employer behavior. While there are important geographic and political characteristics of San Francisco that are important to bear in mind, San Francisco’s early experience suggests that implementation of a strong pay-or-play mandate is indeed feasible.

Which Questions in the Health and Retirement Study are Used by Researchers? Evidence from Academic Journals, 2006-2009

Tina Jackson et al. — Mon, 18 Apr 2011 09:13:26 PDT

Since 2002, the average number of questions asked per respondent in the Health and Retirement Study (HRS) has risen by 39 percent, from 413 to 581. Yet there is little or no understanding of which questions, or how many in total, should be included—and more importantly, maintained—in longitudinal surveys. In this paper, we propose a simple approach to assessing the value of survey questions: journal citation counts. A sample of journal articles and book chapters published in 2006-09 (N = 206) is used to document which questions, and categories of questions, were used most and least frequently. A disproportionate number of published articles used a relatively small number of questions regarding health, wealth, income, and employment. By contrast, several categories of questions were rarely used, and many specific questions were never used. This evidence-based approach to measuring the value of survey questions can have applications for other surveys beyond the HRS.

Social Connectedness in Health, Morbidity and Mortality, and Health Care – The Contributions, Limits and Further Potential of Health and Retirement Study

Bernice Pescosolido — Mon, 18 Apr 2011 09:13:20 PDT

This part of the mid-term review of the Health and Retirement Study (HRS) provides an overall assessment of the utility of HRS data for research targeting the nature and influence of social connectedness. As one of the major dimensions of the social aspects of psychosocial influences, social connectedness is among the most complicated in terms of definition, conceptualization, and measurement. However, the century-long body of theory and findings couple with a recent resurgence of research on the critical impact of these ties for health, illness, and health care to call for an examination of the richness in and limitations of current HRS data.

This assessment is comprised of three broad steps: 1) an overview of the nature of social connectedness, and of the dimensions and methodological approaches that can and have been used in studying health, health care, and aging; 2) the range, strengths and limitations of the HRS data on each approach; and 3) suggestions for potential directions to increase the utility of data collected and further research contributions from the HRS. While no tabular listing of items relevant to social connectedness is presented, the sets of items that tap this notion are referenced throughout.

Overall, the HRS represents one of, if not the most impressive data sets regarding the ability to examine the influence of social connectedness on health, illness and health care. Given different theoretical and methodological traditions of social connectedness (e.g., the local or ego-centered perspective; social support perspective; social capital perspective; Pescosolido 2006a), the HRS either currently offers a way to tap into various views of social connectedness or holds the potential to do so. Specifically, the HRS includes four kinds of social connectedness data: socio-demographic proxies that represent a tie (e.g., marital status) with detailed data on the nature of the bond; social support batteries which offer respondent perceptions of the overall positive and negative aspects of sets of relationships; eco-centric tie data, which provide a list of names or roles that can provide support (i.e. latent ties); and networks of event response in which respondents list individuals who were called upon (e.g., activated ties) under certain conditions. Given the individually-based and national scope of the HRS, the collection of full or complete network data is not feasible at present.

Four strategies could improve the collection and use of social connectedness data in the HRS. First, data collection sections that are explicit or implicit ego-centric name generators or activated ties lists could be expanded and refined to provide more complete data. Under the “looping” structure of the HRS, both the ego-centric and event response batteries can serve as a foundation for expanded network batteries. Second, given the increasing role of social media in contemporary American lives, the HRS section on the use of technology should be reviewed and expanded to tap into virtual ties. Third, locator data designed to improve follow-up of the HRS samples can form the basis of a network roster and for analyses of the dynamics of ties and its influence on health and health care. Fourth, while it is not possible to “go back” and recapture data about social connectedness, a sub study which targets the named “social convoy” over a person’s life (defined only as time in the HRS) would provide invaluable data that could not be collected from any other existing study. That is, while subject to a variety of criticism (e.g., telescoping effects), the ability to collect data on extent of turnover and the reasons for shifts in social connectedness would allow an analysis of the impact of social network dynamics in later life, potentially reveal key turning points in social network support, and offer targeted points of interventions for fostering the social connectedness that has, to date, been shown (in the HRS and other studies) to be so essential to health and well-being.

Family Data and Research in the Health and Retirement Study

Suzanne Bianchi — Mon, 18 Apr 2011 09:13:16 PDT

I discuss the data in the Health and Retirement Study (HRS) that can be used to study family change and intergenerational family relationships and offer suggestions about what might be done to enhance the uses of the HRS family data going forward. A number of family demographic behaviors are altering the family context of more recent cohorts of the HRS. These family changes need to be well-captured in the data collection and and should also inform future design decisions. Changes include the higher rates of childlessness, delayed marriage and childbearing after age 30 among the Baby Boom cohorts just now being enrolled in the HRS. Cohorts coming into the study also have higher rates of (lifetime) labor force participation on the part of women and much higher rates of nonmarital childbearing, marital disruption, and informal cohabitation than the original HRS cohorts. There is also great heterogeneity in family patterns by race and class among Baby Boom cohorts. Many of these changes increase the value of collecting family data in the HRS but also complicate the collection of useful data on transfers between parents and children or among siblings. I offer four suggestions for enhancing data collection in the HRS in light of these family changes. These include the following: 1) Reevaluate decisions about the family members on whom to gather information, particularly the decisions about when to collect data on siblings. 2) Consider collecting more information directly from each spouse (and perhaps expanding the definition of “spouse” to include cohabiting partners as cohabitation is on the rise among cohorts now entering the HRS). 3) Begin to experiment with interviewing adult children of HRS respondents and consider broadening the content to include more on parent-child relationship quality and/or on everyday activities and exchanges. 4) Make the family data in the HRS easier to access and use.

Personality Measurement and Assessment in Large Panel Surveys

Brent Roberts et al. — Mon, 18 Apr 2011 09:13:08 PDT

Personality tests are being added to large panel studies with increasing regularity, such as the Health and Retirement Study (HRS). To facilitate the inclusion and interpretation of these tests, we provide some general background on personality psychology, personality assessment, and the validity of personality tests. In this review, we provide background on definitions of personality, the strengths and weaknesses of the self-report approaches to personality testing typically used in large panel studies, and the validity of personality tests for three outcomes: genetics, income, and health. We conclude with recommendations on how to improve personality assessment in future panel studies.

Time Use and Well-being, and Large Survey Studies

Dylan M. Smith — Mon, 18 Apr 2011 09:13:00 PDT

This paper reviews several methods for measuring how people spend their time, and how they feel during these different activities, and argues that some of these methods could be well suited for large scale longitudinal surveys. Because time use methods allow for the quantitative assessment of the dynamics of human experience, they provide opportunities to explore numerous research questions that cannot be readily answered with more traditional summary measures of well-being. In the last decade or two, techniques have become available that can capture the dynamics of time use and well-being in ways that also reduce methodological problems such as biased recall. The paper describes several such methods, with a discussion of how they are implemented, and a comparison of their relative strengths and weaknesses. In the final section, the paper describes how the addition of time use measures can enhance national surveys such as the Health and Retirement Study by a) opening new avenues of research, and b) clarifying previous findings from more traditional measures of well being.

A Rationale for Including a Brief Assessment of Hedonic Well-being in Large-scale Surveys

Arthur A. Stone — Mon, 18 Apr 2011 09:12:51 PDT

Subjective well-being is comprised of both evaluative (life satisfaction) and hedonic (affect) components, and there has been a call to include both aspects of well-being in large-scale surveys. This paper presents a rationale for the feasibility of including a brief measure hedonic well-being based on the measurement of yesterday’s affect and experience. It discusses issues of the distinctiveness of hedonic well-being from life satisfaction, the sensitivity of a single day’s affect, the sample sizes required for detecting group differences, and the experiential content that could also be collected to extend the value of affective reports. I conclude that a brief assessment is feasible and, in conjunction with measures of evaluative well-being, could add to our understanding of well-being in populations.

Genome-Phenome Linkages in Human Population Surveys, with Special Emphasis on the Health and Retirement Survey

Burton Singer — Mon, 18 Apr 2011 09:12:42 PDT

We review a diversity of genome-wide association studies (GWAS) with particular emphasis on precision in specifying phenotypes. This implies that examination of any specific phenotype involves considering the likely genetic contributions to it from the entire genome. We consider a variety of phenotypes specifiable with data from the Health and Retirement Survey (HRS). However, evidence from other large population studies is also incorporated as part of the process of developing and refining pathway representations from the genome thru a hierarchy of intermediate endpoints to behavioral, cognitive, and economic phenotypes. Any causal modeling focused on genome-phenotype connections must, of necessity, include consideration of intermediate endpoints (endophenotypes) as mediators of such associations. We also discuss metabolic and gene expression consequences of gene-environment interactions as a next research step beyond GWAS, not only for HRS but also for an integrated set of human population surveys that can provide much more statistical power than any one of them used alone. A variety of concrete examples based on physiological, psychological, sociological, and economic outcomes are carried along throughout our discussion.