Health Insurance, Medical Care, and Health Outcomes: A Model of Elderly Health Dynamics

1
Health Insurance, Medical Care, and Health
OutcomesA Model of Elderly Health Dynamics

• Zhou Yang, Emory University
• Donna B. Gilleskie, Univ of North Carolina
• Edward C. Norton, Univ of Michigan
• Journal of Human Resources 44(1) 48-108, 2009
• November 16, 2010
• UNC School of Nursing

2
As individuals, what do we know?

• The U.S. spends a lot on medical care.
• Most elderly are covered by Medicare (parts A and
  B).
• Elderly may choose Medicares managed care plan
  (part C).
• Many of the elderly have supplemental health
  insurance.
• Medicare, generally, did not cover prescription
  drugs.
• The Medicare Prescription Drug Improvement and
  Modernization Act has made drug coverage an
  option for the elderly (part D).

3
As economists, what do we know?

• Third-party coverage of medical care expenses
  leads to increased demand for covered services.
• Prescription drug coverage leads to greater
  consumption of prescription drugs.
• Increased prescription drug use reduces mortality
  (and morbidity).
• Differences in the cost-sharing characteristics
  of coverage for different types of medical care
  can affect consumption behavior.
• Differences in the effectiveness of different
  types of medical care can affect consumption
  behavior.

4
Can we predict the long-run impact of Rx
coverage?

• Yes, but what we dont want to do is
• ignore the endogeneity of insurance selection
• consider the effect of drug coverage on drug
  expenditures only
• measure the effect of prescription drug use on
  mortality only
• fail to model changes in health over time
• evaluate outcomes in a static setting
• ignore unobserved individual heterogeneity likely
  to influence behavior in several dimensions

5
The Big Picture
Health Shock
6
Typical Patterns of Health Decline among the
Elderly
Health
Sudden death extreme health shock but
no functional decline
Age
Terminal Illness good functional health
then health shock and certain decline in
function
Entry-re-entry chronic condition(s)
associated with multiple health shocks and
expected decline in function
Frailty no health shock(s) or
serious chronic condition, but slow decline
in function
JAMA 289(18), 2003
7
A Preview of our Main Findings

• A change from Medicare with no drug coverage
• to a plan that covers prescription drugs reveals
  that
• Drug expenditures over 5 years increase between 7
  and 27.
• Survival rates increase 1-2. But the
  distribution of functional status among survivors
  shifts toward worse health.
• Marginal survivors spend significantly more than
  individuals who would have survived anyway.
• There is some contemporaneous reallocation of
  consumption (a cross-price effect), but changes
  in consumption are largely driven by changes in
  health and survival as people age.

8
Model of behavior of individuals age 65
beginning of age t
beginning of age t1
It , Jt
St
At, Bt, Dt
Et1, Ft1
insurance and drug coverage
health shock
medical care demand
health production
Ot (Et, Ft, At-1, Bt-1, Dt-1, Xt, ZIt, ZHt,
ZMt )
Ot1 (Et1, Ft1, At, Bt, Dt, Xt1, ZIt1,
ZHt1, ZMt1 )
And we model the set of structural equations
jointly, allowing unobserved components to be
correlated
9
Empirical Model
beginning of t
beginning of t1
It , Jt
St
At, Bt, Dt
Et1, Ft1
insurance and drug coverage
health shock
medical care demand
health production
Logit Rx coverage (63)
(conditional on private or Part C plan)

• Multinomial logit
• Medicare only (parts A and B) ( 8)
• Medicaid dual coverage (12)
• Private plan supplement (64)
• Medicare managed care plan (part C) (16)

10
Empirical Model
beginning of t
beginning of t1
It , Jt
Skt
At, Bt, Dt
Et1, Ft1
insurance and drug coverage
health shock(s)
medical care demand
health production

• Separate logits
• Heart/stroke event (ICD-9 390-439) in period
  t (24.5 )
• Respiratory event (ICD-9 480-496) in period
  t ( 4.8 )
• Cancer event (ICD-9 140-209) in
  period t ( 5.7 )

11
Empirical Model
beginning of t
beginning of t1
It , Jt
Skt
At, Bt, Dt
Et1, Ft1
insurance and drug coverage
health shock(s)
medical care demand
health production

• Separate logit for any use and OLS log
  expenditures conditional on any
• Hospital use and expenditures in period t (20
  and 13,057)
• Physician service use and expenditures in
  period t (84 and 2,013)
• Prescription drug use and expenditures in period
  t (90 and 980)

12
Empirical Model
beginning of t
beginning of t1
It , Jt
Skt
At, Bt, Dt
Ekt1, Ft1
insurance and drug coverage
health shock(s)
medical care demand
health ever had chronic condition k , functional
status

• Indicator for having ever had a chronic condition
  entering period t1
• Heart/stroke (47)
• Respiratory (15)
• Cancer (19)
• Diabetes (20)

• Multinomial logit for functional status entering
  period t1
• Not disabled (no ADL or IADLs) (58)
• Moderately disabled (IADL or lt3 ADLs) (28)
• Severely disabled (3 or more ADLs) (10)
• Dead ( 5)

Ekt1 Ekt Skt
13
Empirical Model
beginning of t
beginning of t1
It , Jt
Skt
At, Bt, Dt
Et1, Ft1
insurance and drug coverage
health shock(s)
medical care demand
health production
It I(Et, Ft, At-1, Bt-1, Dt-1, Xt, ZIt, ZHt,
ZMt, t , uit)
Jt J(Et, Ft, At-1, Bt-1, Dt-1, Xt, ZIt, ZHt,
ZMt, t , uJt)
Skt S(Et, Ft, Xt, ZHt, ukt), k 1, 2, 3
At A(ItJt, St, Et, Ft, At-1, Bt-1, Dt-1, Xt,
ZMt, t , uAt)
Bt B(ItJt, St, Et, Ft, At-1, Bt-1, Dt-1, Xt,
ZMt, t , uBt)
Dt D(ItJt, St, Et, Ft, At-1, Bt-1, Dt-1, Xt,
ZMt, t , uDt)
Ft1 F(Et, Ft , St, At, Bt, Dt, Xt, uft)
14
Unobserved Heterogeneity Specification

• Permanent risk aversion or attitude toward
  medical care use
• Time-varying unmodeled health shocks or
  natural rate of deterioration

uet ?e µ ?e ?t eet

• where uet is the unobserved component for
  equation e decomposed into
• permanent heterogeneity factor µ with factor
  loading ?e
• time-varying heterogeneity factor ?t with factor
  loading ?e
• iid component eet
• distributed N(0,s2e) for continuous
  equations and
• Extreme Value for dichotomous/polychotomou
  s outcomes

15
Features of our Empirical Model Suggested by
Theory

• Supplemental insurance coverage is chosen at the
  beginning of the period before observing health
  shocks, but with knowledge of ones functional
  status, chronic conditions, and, most
  importantly, unobserved individual
  characteristics entering the period.

16
Features of our Empirical Model Suggested by
Theory

• Adverse selection

• Permanent and time-varying unobserved individual
  characteristics affect annual demand for all
  three types of medical care.

17
Features of our Empirical Model Suggested by
Theory

• Adverse selection
• Jointly estimated demand

• Health transitions are a function of medical care
  input allocations and health shocks during the
  year. (Grossman)

18
Features of our Empirical Model Suggested by
Theory

• Adverse selection
• Jointly estimated demand
• Dynamic health production

• Previous medical care use may alter the utility
  of medical care consumption today hence, lagged
  use affects current expenditures directly as well
  as indirectly through health transitions.

19
Features of our Empirical Model Suggested by
Theory

• Adverse selection
• Jointly estimated demand
• Dynamic health production
• Dynamic demand for medical care

20
Medicare Current Beneficiary Survey (MCBS) Sample

• Survey and Event files
• from 1992-2001
• Overlapping samples
• followed from 2 to 5 years
• Exclude individuals
• ever in a nursing home
• Attrition due to death
• and sample design
• Sample
• 25,935 men and women
• 76,321 person-year obs

21
Actual and Simulated Annual Mortality Rate, by Age
22
Actual and Simulated Prescription Drug
Expenditures, by Age and Death
23
Actual and Simulated Physician Services
Expenditures, by Age and Death
24
Actual and Simulated Hospital Expenditures, by
Age and Death
25
Simulations

• Start everyone off with a particular type of
  health insurance
• Medicare only
• Dual coverage by Medicaid
• Private supplement without Rx coverage
• Private supplement with Rx coverage
• Medicare managed care (part C) without Rx
  coverage
• Medicare managed care (part C) with Rx coverage
• Simulate behavior for 5 years
• Examine expenditures and health outcomes over 5
  years
• Examine expenditures of 5-year survivors

26
Five-year Simulations with unobserved
heterogeneity
27
Five-year Simulations without unobserved
heterogeneity
28
Five-year Simulations with unobserved
heterogeneity
22.5 10.6 4.8 10.7
29
Sole Survivors vs. Marginal Survivors
Rx expenditures triple or quadruple

With increases here, too
Increases in expenditures are 3.5 to 5.5 times
larger
30
Take home messageso far

• Methodologically, we have built and estimated a
  comprehensive dynamic model of health behavior of
  the elderly as they age.
• Substantively, our model allows us to examine the
  effects of health insurance extensions (Rx
  coverage) not simply on prescription drug use but
  also on other types of care, as well as the
  impacts of this altered demand on health outcomes
  and subsequent behavior over time.
• Increases in Rx coverage increase short-run
  demand for drugs, as well as other types of care.
  Mortality rates decline, but functional status
  of survivors is worse. Hence, total expenditures
  increase over a 5-year period.

31
Why might nursing care matter?
Or better, where would it enter the model?

• Clearly it might affect health outcomes,
  conditional on endogenous inputs
• affects marginal product of health input
• but only the hospital care input
• Might it affect demand for care?
• consumers care about price (budget constraint)
• but preferences might also depend on quality

32
Identification in the set of dynamic equations

• Exogeneity of some explanatory variables
  conditional on the unobserved heterogeneity
• theoretically-relevant exogenous supply-side
  variables
• lagged values of exogenous (both ind and ss)
• lagged values of endogenous variables
• Exogenous variables, in the reduced-form initial
  condition equations, that are excluded from the
  dynamic structural equations
• Specification and covariance structure of the
  permanent and time-varying unobserved individual
  heterogeneity
• Functional form of the equations

33
(No Transcript)
34
What next?

• We lack good data at the individual level
• on outcomes
• on inputs
• at reasonable intervals
• for a large sample of representative people
• We lack a theory that considers the effects of
  both price and quality on demand for medical care
  and health production.

35
Five-year Simulations with unobserved
heterogeneity
36
Five-year Simulations without unobserved
heterogeneity
37
Unobserved Heterogeneity Distribution
38
Actual and Simulated Prescription Drug Use and
Expenditures, by Age
39
Actual and Simulated Hospital Use and
Expenditures, by Age
40
Actual and Simulated Physician Services Use and
Expenditures, by Age