In the Medicare program, increases in cost sharing by a supplemental insurer can exert financial externalities. We study a policy change that raised patient cost sharing for the supplemental insurer for retired public employees in California. We find that physician visits and prescription drug usage have elasticities that are similar to those of the RAND Health Insurance Experiment (HIE). Unlike the HIE, however, we find substantial "offset" effects in terms of increased hospital utilization. The savings from increased cost sharing accrue mostly to the supplemental insurer, while the costs of increased hospitalization accrue mostly to Medicare.The elderly are the most intensive consumers of health care in the United States today. Individuals over age 65 consume 36 percent of health care in the US, despite representing only 13 percent of the population (Centers for Medicaid and Medicare Services 2005). The Medicare program that insures the nation's elderly (as well as the disabled) is the thirt largest expenditure item for the federal government, and is projected to exceed Social Security by 2024 (Centers for Medicaid and Medicare Services 2005a). This rapid growth in program expenditures was reinforced by the recent introduction of Medicare Part D, a new plan providing coverage for the outpatient prescription drugs used by Medicare beneficiaries.The federal government has undertaken a variety of strategies to control Medicare program growth on the supply side, from the introduction of prospective reimbursement for hospitals to reductions in provider reimbursement rates. Yet Medicare spending growth has continued unabated. Recently, therefore, there has been a growing interest in demand-side approaches to controlling system costs, through higher patient costs which would induce more price sensitivity in medical spending.Demand-side approaches, however, are complicated by the fact that Medicare beneficiaries are often covered by multiple insurers at once. Because Medicare already has quite substantial cost sharing, most enrollees have some form of supplemental coverage for their medical spending, provided by an employer, purchased on their own, or provided through state Medicaid programs. The incentives of the supplemental insurer and Medicare are not necessarily readily aligned. Indeed, there are long-standing concerns about the fiscal externality on Medicare from supplemental coverage: by insulating beneficiaries from costs, the policies increase utilization, thereby raising costs to Medicare (Adam Atherly 2001). In this paper, we NIH Public Access Author ManuscriptAm Econ Rev. Author manuscript; available in PMC 2011 March 1. NIH-PA Author ManuscriptNIH-PA Author Manuscript NIH-PA Author Manuscript focus on an additional, offsetting effect of supplemental coverage: if the additional utilization induced by supplemental insurance coverage prevents subsequent hospitalizations, then the net external cost of supplemental insurance is smaller than previously believed.A necessary condition for such an externa...

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Long-term care currently comprises almost 10% of national health expenditures and is projected to rise rapidly over coming decades. A key, and relatively poorly understood, element of long-term care is home health care. I use a substantial change in Medicare reimbursement policy, which took the form of tightly binding average per-patient reimbursement caps, to address several questions about the market for home care. I find that the reimbursement change was associated with a large drop in the provision of home care. This drop was concentrated among unhealthy beneficiaries, which is consistent with the incentives for patient selection inherent in the per-patient caps. I find that the decline in home health utilization was not offset by increases in institutional long-term care or other medical care and that there were no associated adverse health consequences. However, approximately one-quarter of the decline in Medicare spending was offset by increases in out-of-pocket expenditures for home health care, with the offset concentrated in higher income populations. Despite the value of home health care implied by the out-of-pocket expenditures, I find that the welfare implications of the reimbursement change were ambiguous. *

This paper assesses the impact of policies to increase insurance coverage for young adults. The introduction of SCHIP in 1997 enabled low-income teens up to age 19 to gain access to public health insurance. More recent policies enabled young adults between the ages of 19 and (typically) 24 to remain covered under their parents' health insurance. We use the discrete break in coverage at age 19 to evaluate the impact of SCHIP, and quasi-experimental variation to evaluate the impact of “extended parental coverage” laws. Our results suggest that both types of policies were effective at increasing health insurance coverage. (JEL G22, H75, I18, J13)

Patient cost-sharing for primary care and prescription drugs is designed to reduce the prevalence of moral hazard in medical utilization. Yet the success of this strategy depends on two factors: the elasticity of demand for those medical goods, and the risk of downstream hospitalizations by reducing access to beneficial health care. Surprisingly, we know little about either of these factors for the elderly, the most intensive consumers of health care in our country. We remedy both of these deficiencies by studying a policy change that raised patient cost-sharing for retired public employees in California. We find that physician office visits and prescription drug utilization are price sensitive, with implied arc-elasticities that are similar to those of the famous RAND Health Insurance Experiment (HIE). However, unlike the HIE, we find substantial "offset" effects in terms of increased hospital utilization in response to the combination of higher copayments for physicians and prescription drugs. These offset effects are concentrated in patients for whom medical care is presumably efficacious: those with a chronic disease. Finally, we find that the savings from increased cost-sharing accrue mostly to the supplemental insurer, while the costs of increased hospitalization accrue mostly to Medicare; thus, there is a fiscal externality associated with cost-sharing increases by supplemental insurers. Our findings suggest that health insurance should be tied to underlying health status, with chronically ill patients facing lower cost-sharing. We also conclude that the externalities to Medicare from supplemental insurance coverage may be more modest than previously suggested due to these offsets.