How much will one part of ObamaCare cost? Results from a random controlled experiment

I attended a talk today at MIT by Amy Finkelstein, an economics professor who led a $20 million research study of a group of poor people in Oregon who were randomly assigned either to receive Medicaid or not (paper). Oregon had enough money to do for some of its poor able-bodied adults what ObamaCare will do for all poor able-bodied Americans: give them Medicaid (unlimited river of money as long as it is handed over to the world’s most expensive health care industry; I pointed out in my health care reform article that Americans could have a free house, free cars, free children, and free college education for those children if they cut their health care spending to what Mexicans spend). Oregon did not have enough money for everyone and therefore decided that the fairest way to allocate coverage was to let people apply and then give out coverage by lottery. It was an almost perfect random experiment, except that the program was limited to those who bothered to fill out the paperwork to apply (possibly sicker than average).

The study included actual checkups for thousands of participants, hence the enormous cost.

The conclusion was that Medicaid increased hospital use by about 30 percent, outpatient medical care by about 35 percent, and total spending by 25 percent. Finkelstein noted that advocates for expanding health insurance often predict that use of hospital emergency rooms will decrease when everyone is insured. That turned out not to be true in Oregon. The insured and uninsured used emergency departments at hospitals at roughly the same rate.

An unexpected result was the recipients of the Medicaid card reported themselves to be about 30 percent happier than before, a result equivalent to having doubled their income. As they did not measure all that much healthier this may be partially explained by a feeling of security that they won’t have to deal with the nightmare of being an uninsured individual in an American health care industry that exists to serve insurance companies, not individuals.

Finkelstein closed by noting that this result should not be too surprising. The introduction of Medicare in the 1960s resulted in an enormous increase in hospital usage and then a huge boom in hospital construction.

So if Americans as a whole behave the same as the survey group in Oregon, health care spending on approximately 20 million Americans should go up by 25 percent (Medicaid already consumes about half a trillion dollars every year, about the same as the GDP of Argentina, Belgium, or Norway). We may get some value for that money, though, as these people will be walking around with big grins.

[Note that the study proves Malcolm Gladwell  more or less dead wrong. In 2005 he wrote a New Yorker article about how health care was different than anything else people buy. Providing insurance would not increase demand. The “moral hazard” that applied to every other kind of insurance did not exist for health insurance. Related: see my analysis of Gladwell’s Outliers.]

11 thoughts on “How much will one part of ObamaCare cost? Results from a random controlled experiment

  1. Unsurprising results; of course people with insurance are going to use it.

    You have also in the past explained how the insurance companies pay much less for any given treatment than someone walking in with cash would do. The bargaining power of the insurance company does that.

    How much are medicare paying compared to insurance companies? Is government doing enough to negotiate (or if necessary force) reasonable pricing?

    As a non-American, I can never understand that the people of the US are OK with paying twice as much by GDP as anyone else on healthcare but having life expectancy that is shorter by years than those in countries with “socialist” health care systems.

  2. Bas: I believe that Medicaid pays less than Medicare or private insurers. Remember that the U.S. has fewer doctors per capita than other developed countries so an MD here will always be a scarce and valuable person. I do not think that there is much room for Medicaid to pay less for the procedures that it covers except perhaps by sending people from high-cost areas to low-cost areas for treatment (people will drive to New Hampshire from Massachusetts to buy tires for their car and save the 6.25% sales tax but they won’t make the drive to save their insurance company (or Medicaid/Medicare) big $$ on a procedure).

  3. Its great that we’re doing studies like this, which is one positive result of Obamacare.

    I remain optimistic. Health care delivery is a moving target. As we get better at delivering health care to all, perhaps some of the price gouging will be eliminated.

    I recently switched to Kaiser Health care, the first large HMO, and I am pleasantly surprised at how good they are at delivering quality care without wasting money. Of course, they’ve been at it for 40 years, but it can be done.

  4. Phil,

    Two words that could in theory bring US health care costs down dramatically:

    Tort reform.

    I have three friends who are an MD, an MD and a PA, respectively and they are unanimous in their complaints regarding the incredibly high premiums they incur and that said expenses are blunt trauma that simply goes ignored by our legislators.
    Maybe that’s oversimplification, but I don’t think so.

  5. People don’t even know what the cost is until they get the “explanation of benefits”, and sometimes don’t find out the real cost in the case of prescription drug plans. My doctor prescribed Lovaza, and I used it until I found out it costs $300 a month, and it’s just fish oil, equivalent to what the vitamin store sells for $20 a month.

  6. Brian: “I remain optimistic… As we get better at delivering health care to all…” Why would you expect the next 50 years of American health care to be different than the last 50 years (expansion of insurance, growth in cost)? Americans haven’t become smarter, on average, in the intervening years, have we?

  7. Phil,

    I read Gladwell’s 2005 story and was amazed at the oversimplification that a presumably smart writer would take from the Harvard researcher’s study, in addition to the same oversimplification these researchers seemed to have made. Namely, how is it that a poor person’s teeth rots out if they don’t see a dentist?
    Did the researchers fail to ask the poor why they didn’t invest in a toothbrush and paste?? My own mother lives in a social security stipend of about $1,100 per month and doesn’t visit a dentist regularly, yet she does brush and floss and her teeth seem to be in pretty good condition. !!
    Also, I know of no dental insurance plan that covers toothbrush and toothpaste purchases, yet reading the Harvard researcher’s findings one is asked to believe that failing to visit a dentist regularly results in rotten teeth and bad gums.
    That’s more than a bit silly. I could understand a seven-year old school student reaching that conclusion, but a Harvard research team? Come on…

  8. Is it just doctor scarcity, though? When I go to a hospital, they seem an important but small part of the operation. Support staff, equipment, buildings, medications – even if a doctor is 2, or even 4, times as expensive in the US as elsewhere, I don’t see how that needs to raise the entire costs to twice as much.

  9. Americans get a lot more health care done to them than people in other countries.

    It’s an assumption, almost surely wrong, that the more things the doctor does to you the healthier you are. But that assumption saturates our entire health care economy. Anyone, patient or doctor, who tries to fight against it is swimming against the tide.

  10. @Bas,

    The news is full of lawsuits filed against hospitals, physicians and the like. The resulting costs of malpractice insurance is astronomical in comparison to virtually any other country.
    You surely are familiar with this issue?

  11. Tip: Blaming the lawyers is convenient, but in I wrote that it was estimated that litigation is responsible for 2-10 percent of the current cost. If we had no lawyers and no medical malpractice lawsuits we would still spend more on the health care industry than any other country (as a percentage of GDP). Furthermore, most of the cost of our system for resolving malpractice disputes is defensive medicine (ordering unnecessary tests) so it doesn’t show up as a direct cost (e.g., of malpractice insurance).

    Another way to look at is the cost of malpractice insurance is so high that the net salary for a radiologist is only $388,713 (see ). Hardly worth getting out of bed in the morning…

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