Thursday, July 19, 2018

Nobel Symposium on Money and Banking Day 1

I attended the Nobel Symposium on Money and Banking in May, hosted by the Swedish House of Finance and Stockholm School of Economics.   It was a very interesting event. Follow the link for all the presentations and videos. (Click on "program." )

This review is  idiosyncratic, focusing on presentations that blog readers might find interesting. My apologies to authors I leave out or treat briefly -- all the presentations were action-packed and even my verbose blogging style can't cover everything.

"Nobel" in the title has a great convening power! The list of famous economists attending is impressive. And each presenter put great effort into explaining what they were doing, in part on wise invitation from the organizers to keep it accessible.  As a result I  understood far more than I do from usual 20 minute conference presentations and 15 minute discussions.

The first day was really "banking day," giving a whirlwind tour of the financial economics of banking.

Trading liquidity

Darrell Duffie gave (as always) a super presentation on the effects regulation is having on arbitrage in markets. (Slides, video)


Tuesday, July 17, 2018

Health care competition?

Continuing the health care series, there does come a time in which innovative disruptors can break open a protected market and bring some competition. Think Uber and taxis. In a very nice essay, John Goodman describes one such effort, MedBid, an online marketplace where hospitals (gasp) bid for your business:
[entrepreneur Ralph] Weber says MediBid got about 3,500 requests last year from patients; and providers made 12,000 bids on those requests. ...
The average knee replacement on MediBid costs around $15,000. The normal charge by U.S. hospitals is around $60,000 and the average insurance payment is about $36,500.  A similar range exists for hip replacements, with an average Medibid price of about $19,000.
Recall prices of $180,000 per hip in my last post. The most interesting feature of Goodman's essay is the nature of price discrimination hospitals practice. It turns out they will negotiate lower prices for cash customers... Sometimes:
...Canadians can come to the U.S. and pay about half as much as we Americans pay. By taking advantage of Medibid, you and I can do the same thing. So can employer health plans. 
So which hospitals are giving Canadians and MediBid patients 50% off? It could easily be a hospital right next door to you. Strange as it may seem, hospitals are willing to give traveling patients deals that they won’t give those of us who live nearby. 
The reasons? Hospitals believe that if you live in their neighborhood, they’re going to get your business, regardless. Also, after your operation, your insurance company might argue over whether the operation should have been done in the first place. They might argue that there was no pre-authorization. They may argue over price. They may argue over many other things. And when the hospital finally gets its money, it might be a year or two after the fact. 
The “medical tourism market,” as it’s sometimes called, has three requirements: (1) you have to be willing to travel and (2) you have to pay up front, and (3) there can be no insurance company interference after the fact. 
This last part is really interesting. You have to travel to get the discount.

We'll see how long the price discrimination lasts in the face of a market that organizes people around it. More and more people have high copayment policies, ACA policies that have such narrow networks they can't get the treatment they want, health savings accounts and so forth. Employers can steer you to Medbid as well.

Sunday, July 15, 2018

Cross subsidies again -- hip replacement edition

From the Wall Street Journal, a familiar story of medical pricing mischief:
Michael Frank...had his left hip replaced in 2015. The Manhattan hospital charged roughly $140,000. The insurance company paid a discounted rate of about $76,000, and his share—a 10% copay, plus a couple of uncovered expenses—was a bit more than $8,000. 
The author, Steve Cohen
I’d recently had two hips replaced, six months apart, at the same hospital that had treated him....the hospital had charged $175,000 for my right hip and $180,000 for the left. The insurance company had paid discounted rates of $75,000 and $77,000. 
The usual picture is a huge sticker price, an "insurance discount" and Medicare and Medicaid paying even less than that. I googled around a bit looking for the latter numbers, which I didn't find but I did find here a nice study of cost variation
The average typical cost for a total knee replacement procedure was $31,124 in 64 markets that were studied. However, it could cost as little as $11,317 in Montgomery, Alabama, and as high as $69,654 in New York, New York. Within a market, extreme cost variation also exists. In Dallas, Texas, a knee replacement could cost between $16,772 and $61,585 (267 percent cost variation) depending on the hospital. 
Similar trends also were seen for the average typical cost for a total hip replacement procedure, which averaged $30,124. However, it could cost as little as $11,327 in Birmingham, Alabama, and as much as $73,987 in Boston,5 Massachusetts, which had the greatest variance within a given market, with costs as low as $17,910 (313 percent cost variation). 
These are, I think, insurance costs not the above sticker prices. Also from the LA times,
New Medicare data show that Inglewood's Centinela Hospital Medical Center billed the federal program $237,063, on average, for joint replacement surgery in 2013. That was the highest charge nationwide. And it's six times what Kaiser Permanente billed Medicare eight miles away at its West L.A. hospital. Kaiser billed $39,059, on average, and Medicare paid $12,457. The federal program also paid a fraction of Centinela's bill -- an average of $17,609 for these procedures.
That does give some sense that Medicare is paying even less than private insurers.

Economics

What's going on here? Observations:

1) This market is grotesquely uncompetitive. In any competitive market, suppliers bombard you with price information to get you to shop, and prices are driven to something like cost. Airlines don't need a government run nonprofit to disclose how much they charge. There is not just massive price-based competition for flights, there is massive competition for price-shopping services -- google flights vs. orbitz vs. kayay vs. priceline vs. expedia and so on.

2) The insane list price, the insurance discount of about half, and medicare paying about half that is telling. You would expect a cash discount. There are people with $30k to spend, insurance that doesn't cover hip surgery, and hospitals should be jumping to serve them, cash and carry, no paperwork. There are plenty of people with that kind of money to spend on cosmetic surgery.

The clearest sign of pathology in US health care is that the cash market is dead. Even if you have the money, you must have an insurer to negotiate the "insurance discount."

I suspect that in fact if you go to the hospital and say you're paying cash and negotiate, you can get a much better deal. So long as you don't let anyone else know what you're paying. But even that is no defense. You don't have to go visit airline offices and negotiate one on one for a ticket to New York. Competitive businesses chase after their cash customers. And people with $30k to spend on hip replacements don't want to spend weeks negotiating.

Why don't they advertise? Hospitals cannot publicly say what the cash price is. If they did, insurance would demand that price too and the cross subsidies would vanish.

The quoted price is a fiction. It allows hospitals to declare lots of charity care when they treat uninsured people with no money at all. But more importantly, it gives them a great starting point for a one-on-one ex-post negotiation for the unwary.

As in "cross subsidies," we have an immense scheme of cross-subsidies going on, in which private insurance at $70k overpays compared to Medicare, and the hospital is left free to fleece the unwary with outrageous $140k bills. Cross subsidies cannot withstand competition.

3) The huge price variation gives some sense how wasteful the system is. In addition to the obvious variation across hospitals in a given town, variation across cities is telling.

Google flights shows $591 for a first class ticket from New York to Birmingham Alabama, and the most expensive hotel I can find there is $177 per night. Why not fly to Alabama? Well, of course, insured patients are insured. And insurance is, per law, state based, so Alabama is out of network!

Regulations 

The government needs to do something about this, right? Steve mentions one apparently failed effort,
In 2009, New York’s then-attorney general, Andrew Cuomo, announced the creation of a nonprofit organization called FAIR Health. Its mandate is to provide consumers accurate pricing information for all kinds of medical services. 
I found the FAIR Health website and queried its database. It reported that the out-of-network price for a hip replacement in Manhattan was $72,656, close to what Mr. Frank’s and my insurance companies had paid. The problem: We were both in-network, and FAIR Health estimated that cost as only $29,162. 
I never did figure out the reason for the difference in pricing—but somebody ought to.
The second natural response, which we hear over and over, is that the government needs to pass rules mandating price disclosure. But what happens when the government forces price disclosure and companies (evidently) don't want to tell customers what the price is? Well, there are rules mandating price disclosure for hotel rooms, which must be posted on the door of the hotel room.



Yet on the hotel's website,

Well, that regulation is working great isn't it.

It's easy to jump to the conclusion that people need more skin in the game, greater copays, greater incentive to shop. But the real problem is lack of supply competition. Incentive to shop is no good if you can't find out what things actually cost.

The problem is that hospitals don't want to tell you the price to attract your business. They don't want to because they don't have to, because they are protected from competition.

Hotels do want to tell you the real price. Until hospitals do too, they will find their way around disclosure regulations too. It's easy to post phony prices and wink that nobody actually pays that price.  Hospitals already do that when forced to disclose by stating huge prices and then offering insurers bundle discounts separated from the individual bill. 

Thursday, July 12, 2018

Loss Aversion

A frequent email correspondent asked "I’d love to hear your take on “loss aversion.” I just finished listening to Kahneman’s book." My response seems worth sharing with blog readers.

Expected Utility



Let’s review expected utility first. The utility you get from consumption or wealth is a concave function of consumption or wealth. An extra dollar makes you more happy than it makes Bill Gates. So, compare either getting C for sure, or a 50/50 bet of getting C+Delta or C-Delta, i.e. having C or betting 50/50 on a coin flip. The expected utility of C for sure is just U(C). The expected utility of the bet is

EU = prob(loss) * U(consumption if loss) + prob(gain) * U(consumption if gain)

EU = 1/2 * U(C - Delta) + 1/2 * U(C + Delta).

As the graph shows, this is less than the expected utility of C for sure. So, people should decline fair value bets. They are “risk averse”.

Comments. Behavioral fans (New York times has done this often in its economics coverage) criticize “classical economics” by saying it ignores the fact that people fear losses more than they value gains. That’s absolutely false. Look at the utility function. People fear losses more than they value gains. That’s the whole point of expected utility. (You’ll see the confusion in a second).

A common mistake: EU( C) is not the same as U [ E(C )]. You do not find the utility of expected consumption, you find the expected utility of consumption. In my graph, C is equal to the expected value of C-Delta and C+Delta, and the whole point is that the utility of C is bigger than the expected utility of (C-Delta) or (C+Delta). You can take E inside a linear function, but you cannot take E inside a nonlinear function.

Loss aversion

OK, on to loss aversion. In the usual sort of experiments Kahneman found that people seem reluctant to lose money. They have a “reference point” and work  hard to avoid bets that might put them below that reference point. He models that as expected utility with a kink in it, as in the second drawing.

I was careful to draw the reference point as different than C. People do not necessarily place the reference point at the expected value of the bet. In fact, usually they don’t. If betting on stocks, the expected value of the bet is to gain 7% per year. The “don’t lose money” point would be do not go below 0, not do not go below the mean. Here people are especially afraid only of the very left part of the distribution.

Now, really, how are these models different? Expected utility can be any function, and nobody said it doesn’t have a kink in it. The key distinguishing feature of loss aversion – and its Achilles heel – is that the reference point shifts around. If you make some money, and play again, then your kink shifts up to the new amount of money you made. Expected utility is supposed to stay the same function of consumption or wealth. People might change behavior – most likely the utility curve is flatter at high levels of consumption, so rich people are less risk averse. But the curve itself does not shift. The key assumption that distinguishes loss aversion from expected utility is that the kink point shifts around as you gain and lose money.

That’s also the Achilles heel.  The first problem is how do you handle sequential bets. If I go to the casino, and know I will play twice, how do I think about my strategy? With expected utility this is easy, because the expected utility works backwards. Suppose you win the first bet, then figure out what you do in the second bet. For each of win or loss in the first bet, then, you have an expected utility from taking the second bet. The expected utility of the first bet is then the expected vaule of the expected utilities you would have if you won or lost.