Economics, Finance, and Organization Program

The Economics, Financing, and Organization Program at the RAND Corporation addresses issues related to the financing and delivery of health care services; health insurance, organization and regulation of health care markets and providers; health-related behaviors from an economic perspective; and distributional issues in health and health care.

The program's current research agenda focuses on 10 major topics:

• Health care costs
• Health insurance
• Health insurance and aging
• Prescription drugs
• U.S. health care reform
• Economic incentives to improve quality
• Health care for immigrants
• HIV and infectious disease
• Obesity
• Substance abuse

Health Care Costs

Since 2003, health care expenditures have claimed a two trillion dollar share of the United States economy. The Center for Medicare and Medicaid has projected health expenditure will reach $2.25 trillion by 2007. Program studies examine a broad range of cost-related issues, including why costs are rising, what value is provided for existing spending, and how the health care system can function more efficiently.

Highlights of recent studies

• New medical technology is likely to inflate future Medicare costs.
• Properly implemented and widely adopted, health information technology could generate annual savings of $77 billion just from gains in efficiency.
• Strategically lowering co-payments for certain drugs could keep patients healthier and save more than $1 billion a year in medical costs.
• Retail medical clinics provide less costly treatment than physician offices or urgent care centers for some illnesses, with no apparent adverse effect on quality of care

Current research topics include the effects of health care cost growth on the U.S. economy; the relationship between health plan consolidation and hospital prices, costs, charity care, and outcomes of care; relationships between medical malpractice liabilities and both medical costs and adoption and utilization of new medical technologies; examination of utilization and performance of retail medical clinics; and impact of parity for mental health and substance abuse on Medicare costs.

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Health Insurance

The U.S. health care system has yet to solve a fundamental challenge: delivering quality health care to all Americans at an affordable price. Many proposed solutions include cost sharing—shifting a greater share of health care expense and responsibility onto consumers. Recent public discussion of cost sharing has often cited a landmark RAND study—the RAND Health Insurance Experiment (HIE). Although completed more than two decades ago, it remains the only long-term, experimental study of cost sharing and how it affects service use, quality of care, and health. Current program work continues to explore these effects in the current context.

Highlights of recent studies

• Subsidies have only a small effect on consumer decisions to purchase health insurance in the private market.
• Consumer-directed health plans can reduce health care use and save money, but their effects on quality of care are uncertain.
• Providing health insurance to low-income children improves their quality of life.
• In rural areas, the distance between home and a health care provider is an obstacle to care for uninsured children.
• The foreign born represent a disproportionate share of non-elderly U.S. adults without health insurance.

Current research topics include potential links between medical malpractice and physician behavior, trends in the cost of health care coverage across industries and occupations, employer strategies for selecting health plans, the effects of hospital pricing practices on the uninsured population and on hospital finances, trends in employer-sponsored retirement health insurance offers and cost sharing requirements, and the effect of new health insurance benefit designs (consumer-directed health plans) and parity for mental health and substance abuse on health care use and quality.

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Health Insurance and Aging

Medicare is the largest medical insurance program in the United States and pays nearly one-fifth of total U.S. health care costs. But evidence has been limited about whether the program improves health outcomes. Several recent studies have explored the link between Medicare eligibility and health care utilization and health outcomes.

Highlights of recent studies

• Severely ill patients admitted to hospitals just after they become eligible for Medicare at 65 are 20 percent less likely to die within a week of admission than their slightly younger counterparts who are not Medicare eligible
• Medical care use increases sharply as people transition from private or no insurance to the Medicare program, but the gains differ by race and by type of service
• Racial disparities in routine doctor visits and access to care narrow once people become eligible for Medicare
• But for major elective procedures such as hip or knee replacement and bypass surgery, racial disparities in procedure use widen after Medicare eligibility.

Current research topics include the impact of Medicare on ED use, price variation in the Medigap insurance market, and the effects of Medicare Part D on a range of outcomes.

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Prescription Drugs

Spending on out-patient drugs is the third largest component of health care expenses after hospital care and physician services. In an attempt to control costs, many employers and insurers have adopted incentive-based formularies, in which enrollees have lower co-pays for using less expensive drugs. However, it is not clear how different drug benefit packages affect either drug use or patient outcomes. A substantial body of program research addresses these and related issues.

Highlights of recent studies

• Increasing co-payments for expensive specialty drugs won't reduce overall health care costs: a better approach is to make sure the medications are prescribed only to patients who can truly benefit from them.
• Setting co-payments based on disease risk can improve medication compliance and reduce overall health care costs.
• Cutting drug co-payments for people taking cholesterol-lowering medication can keep them healthier and save more than $1 billion a year in medical costs
• Doubling patients' co-payments for drugs can reduce their use of the most common classes of medications by 25 to 45 percent, raising concerns about adverse health consequences, especially among diabetes patients.
• Patients whose drug coverage has an annual cap are more likely to stop taking their medication; only a minority of these patients will resume drug therapy when coverage is restored.

Current research topics include the effects of market size and pricing policies on future innovation in the pharmaceutical industry, the consequences of alternative policies for the future health and welfare of consumers, trends in cost-sharing for specialty drugs and subsequent use of hospital or emergency-room use, effects of changes in pharmaceutical benefits on chronically ill patients, and the consequences of cost-sharing on use of drugs for rheumatoid arthritis.

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U.S. Health Care Reform

The U.S. health care system is massive, complex, fragmented, and in crisis. Awareness of the problem has generated countless reform proposals from the states, the private sector, and the federal government. But a constructive, objective dialogue about the merits of alternative solutions is hampered by lack of a comprehensive framework for assessing how alternative approaches will affect multiple dimensions of the health care system.

Providing such a framework is the purpose of RAND Health's Comprehensive Assessment of Reform Efforts (COMPARE) initiative. As part of COMPARE's multidisciplinary team, staff in the Economics, Financing, and Organization program collaborate with their colleagues to assess the effects of various reform mechanisms–for example, how changes in health insurance coverage can affect system costs, how the design of insurance benefit packages can affect health care outcomes, or how economic incentives can improve quality of care delivered.

Highlights of recent studies

• The most promising options for reducing health care spending in Massachusetts (bundled payments, hospital all-payer rate setting, rate regulation for academic medical centers, and elimination of payment for adverse hospital events) all involve changing methods of paying for health care services, not changing care itself.
• Two factors explain why some health care reform options are more promising at reducing costs than others: (1) the size of the population affected, and (2) a clear mechanism for changing either the price or quantity of services delivered.
• Individual mandates have the greatest potential impact on lowering the number of uninsured as compared to other Congressional propositions to reduce the number of uninsured.

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Economic Incentives to Improve Quality

Commercial health plans are introducing pay-for-performance incentives into physician contracts at an accelerating pace. These incentives tie a portion of a physician's reimbursement to measures of clinical quality or other processes such as use of diagnostic imaging or use of preferred medications. Congress mandated that Medicare include pay-for-performance incentives in its traditional fee-for-service payment system by 2008, and several Medicare demonstrations include such incentives. However, evaluations of incentive programs have generally shown little, if any, improvement in performance on quality measures.

Highlights of recent studies

• Physician groups participating in pay-for-performance programs in Massachusetts view the program favorably but believe the dollar amount of the incentives should be increased.
• Physician groups in Massachusetts that had pay-for-performance incentives were more likely to have quality improvement initiatives.
• Many California physicians participating in a financial incentive program support increased pay for delivering high-quality care but question the accuracy of measurement, bonus payment financing, and health plan involvement.

Current research topics include evaluating pay-for-performance initiatives such as the program implemented by the Integrated Healthcare Association and seven major managed care plans in California and a pay-for-performance pilot plan to improve the quality of breast cancer care in Taiwan; assessing the effectiveness of specific financial and non-financial incentives in the PPO Physician Quality and Incentive program in California; evaluating effects of the Medicare Premier Hospital Quality Incentive Demonstration; and assessing options for designing and implementing the mandated pay-for-performance purchasing program for Medicare hospitals.

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Health Care for Immigrants

The costs of health care for immigrants, especially to undocumented immigrants, remains a prominent part of both the public debate and legislative initiatives. To provide an empirical foundation for the ongoing discussion, program staff analyzed estimates of health status and health care for foreign-born and U.S. born immigrants in Los Angeles County during 2000 and 2001. Because Los Angeles has the largest immigrant community in the United States, it is possible to apply the LA experiences across the nation.

Highlights of recent studies

• Only a small fraction of American's health care spending is used to provide publicly supported care to the nation's undocumented immigrants—about $1.1 billion of the $88 billion in public funds spent nationally on health care for non-elderly adults.
• Non-elderly adult immigrants, whether legal or illegal, make fewer visits to doctors and hospitals than native-born non-elderly adults
• Native-born residents were more likely to use publicly funded health care services than foreign-born residents.
• Lower use of medical services by immigrants is driven in part by their lower rates of insurance but they are also generally healthier than the native born population.

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HIV and Infectious Disease

The introduction of aggressive antiretroviral medications such as Highly Active Antiretroviral Therapy (HAART) has revolutionized care for HIV. HAART, an anti–HIV treatment that usually combines three or more drugs, was introduced in early 1996. Its use was common by mid-1997, and both clinical trials and observational data have confirmed its benefits. However, HAART is expensive, ranging from about $10,000 to $13,000 a year. Thus, it is possible that health outcomes for HIV-positive individuals will be very responsive to the availability of insurance. To provide a better understanding of this issue, program staff have analyzed cost data drawn from the Cost and Services Utilization Study (HCSUS), the first nationally representative study of HIV-infected persons receiving regular medical care in the contiguous United States.

Highlights of recent studies

• Since the introduction of HAART, the total cost of care for HIV+ adults has declined, although the cost of medications has increased.
• Increasing the availability of insurance coverage can reduce total treatment costs and increase productivity.
• The benefits of improved access to HAART typically accrue at the federal level, but the costs are borne by states.
• Improved treatment has improved health and survival for HIV+ individuals, but treating HIV+ individuals more than doubles their number of sex partners, thereby substantially increasing the risk of infection for the HIV-negative.

Current research topics include an assessment of how reduced access to Medicaid will affect the insurance coverage of the HIV-positive population; analysis of the barriers and facilitators, quality assurance practices, and costs associated with use of rapid HIV tests in the U.S; assessment of how HIV disclosure laws affect risky sexual behavior; and the economics of vaccine production.

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Obesity

America appears to be in the midst of an obesity epidemic. A substantial body of program work has analyzed obesity trends and estimated their effects on future health care costs.

Highlights of recent studies

• Obesity in the U.S. population has been increasing steadily over the last two decades—and severe obesity is increasing the fastest.
• Obesity is linked to higher health care costs than are smoking or drinking.
• Obesity plays a major role in disability at all ages.
• Bariatric surgery has had no noticeable effect on the prevalence of severe obesity.
• The cost consequences of disability among the young could swamp recent Medicare and Medicaid savings stemming from increasingly good health among the elderly.

Current research topics include assessment of how economic determinants--retirement decisions, food prices, and the cost of exercise--affect weight gain among the elderly and investigation of the adverse effects of health insurance, which blunts incentives that individuals might have to control their health care spending by lowering their weight.

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Substance Abuse

The economic cost of substance use in the United States is estimated to exceed that of most other chronic illnesses and is highly correlated with many preventable causes of death for youth and young adults. Yet insurance for and delivery of substance abuse services is frequently ignored in health care reform debates and lag considerably behind those for physical health.

Highlights of recent studies

• Economic cost of methamphetamine use in the United States in 2005 is estimated to be $23.4 billion, although there is substantial uncertainty surrounding this estimate.
• Methamphetamine users experience lower productivity and higher unemployment than nonusers, despite the fact that this drug is frequently taken to maintain alertness.
• Marijuana abuse and/or dependence as a primary diagnosis is associated with longer hospital lengths of stay than alcohol, cocaine, or heroin abuse and dependence.

Current research topics include assessments of how brief interventions in employer assistance programs affect health service utilization and productivity; the impact of parity on the provision of mental health and substance abuse services among Medicare beneficiaries; and the use of microsimulation modeling to better estimate the cost and benefits of alternative policy approaches to reducing drug use and its harms.

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