Thursday, July 2, 2015

Interview with Al Roth: Market Design When Prices Aren't Sufficient

Douglas Clement offers another characteristically excellent interview in The Region magazine published by the Federal Reserve Bank of Minneapolis, this one with Al Roth (June 2015 issue, pp. 14-25). Roth, of course, was a co-winner of the 2012 Nobel prize in economics (with Lloyd S. Shapley) for his work on market design. The interview ranges over Roth's work in many areas, including programs run by cities in which parents chose schools for their children, matching medical residents and hospitals, and matching kidney donors and recipients. The whole interview is very readable, but here are a few comments that jumped out at me.

On what makes a matching market different from a market where price is sufficient for buyers and sellers to agree to a transaction:

God makes wheat, but the Chicago Board of Trade makes #2 hard red winter wheat. It has a lot less variance than wheat. You know what you’re going to get and, therefore, you don’t have to care who you’re buying it from. You don’t have to inspect it. But before wheat was commodified, you had to have someone look at the wheat to see what you were buying. Similarly, before coffee was commodified in Ethiopia, you needed a man in Addis Ababa tasting the coffee; now you don’t.
In those markets, you can make an offer to the entire market. I want #2 hard red winter wheat from whomever; it doesn’t matter who I get it from.
But, of course, labor markets aren’t like that, and many other markets aren’t like that—because you care not just about the price, but also about who you’re dealing with. What that means is, if everyone has a different price—if dealing with you is so nice that I’m willing to pay a higher price rather than deal with someone else—there’s no longer a small-dimensional vector of prices that organizes the market, like a price for each kind of wheat.
Instead, it’s personalized prices, maybe doubly personalized prices. How much will Google pay me to work for them? How much would I need to take their offer, rather than a different salary from Facebook?
The space of prices is larger, so even if you tried to organize the market entirely through prices, you would need to see many, many more prices than you do in the market for coal, where you only need a price per ton for each grade of coal.
There isn’t a sharp line between matching markets and commodity markets. I think there is sort of a continuum. There are markets where price does all the work: the New York Stock Exchange, for instance. Its job is to define at any moment the price at which supply equals demand for each of a bunch of financial commodities. The labor market is very personal, but price also matters a lot, so it’s somewhere in the middle of the continuum. For school choice and kidney exchange, we don’t let prices work at all. And lots of markets fall somewhere between kidney exchange and the market for wheat.
What used to happen in matching medical residents to hospitals before a formal process was set up--and how matching market can unravel: 
In 1900, when you graduated from medical school, you looked for a job. We’re talking about graduating in June and looking for a job that starts around July. By 1930, those jobs were being filled by Christmastime (before graduation) rather than June. Medical journals from the 1930s say, “We’re now hiring our new interns without knowing their class rank and other important information we might get by waiting until they graduate. We can live with that, but let’s not go any earlier.”
But, of course, it’s hard to stop people from competing simply by asking them not to do so. By 1940, hospitals were hiring people two years before graduation. That was very inefficient. Everyone understood it was very inefficient. Hospitals couldn’t tell who the good students were two years before graduation, and the students couldn’t really know what jobs they wanted. They didn’t yet have much experience with different medical specialties. ... 
Around 1945, the medical schools intervened and managed to control the dates at which contracts were signed for post-graduation employment. The medical schools are a third party: They’re not the doctors, they’re not the hospitals, so they weren’t suffering from the competitive self-control problem that kept forcing hiring earlier. By not releasing transcripts, not releasing letters of reference, they managed to get control of the date and move it back into the senior year of medical school. That prevented unraveling, but then they had terrible exploding offer problems—job offers that were retracted if not accepted quickly. ...
Fortunately, that problem has now been solved in the medical residency market, but it’s happening right now with law clerks. So this isn’t an ancient problem; it’s still very present in other markets. ... Federal judges have tried over and over again, maybe a dozen times in the last 30 years, to deal with unraveling in the market for law clerks. They develop rules that they then cheat on. Right now, they’re in a period of no rules. They just abandoned their most recent set of rules because everyone was cheating. So they’re back to making very early exploding offers. If you’re a law student who is going to get an offer of a clerkship, it will come sometime well before you graduate, and it will be earlier this year than it was last year. ...

[I]t’ll probably be in your second year. Some judge will make you an offer, and you will most often accept it on the spot because that’s part of the deal for getting the interview. So you won’t get to consider a lot of offers. ... This unraveling process, this process of making offers earlier and earlier, turns out to be common to many markets.
On what made the University of Pittsburgh, as well as other departments, a supportive place for a researcher: 
The mathematician Alfréd Rényi is said to have said that a mathematician is a machine for turning coffee into theorems. Maybe economists turn decaf into models.
There were lots of people to talk to at Pittsburgh. It was a fruitful time. And it was a very good department. I think a lot of what makes a department a good place to work is that when you’re onto something you’re excited about and you walk out the door of your office and tell one of your colleagues about it, he’s excited to hear about it, too. He says “That’s great. Let’s go have a cup of coffee, and you can tell me about it.” So there’s the positive reinforcement you get just from having people think, “Isn’t that great you’re excited about something. You’re thinking about something interesting.” It makes places fun to work.
Here at Stanford, I try to organize regular coffees—I did this at Harvard and I do it here—regular coffees with students interested in different things. We have a Tuesday morning coffee for experimental economics and a Thursday morning coffee for market design. I think that a lot of intellectual interaction arises out of social interaction. You have to be talking to people before you’re talking about work.

Wednesday, July 1, 2015

Puerto Rico: Echoes from Greece

The situation of Puerto Rico as a territory of the United States is of course fundamentally different than the situation of Greece as one of the sovereign countries that are part of the European Union. But the announcement earlier this week by by Puerto Rico's governor, Alejandro García Padilla, that it will not be able to repay its $72 billion or so in debt, has some echoes of the situation in Greece. Anne O. Krueger, Ranjit Teja, and Andrew Wolfe provide a dose of useful perspective in "Puerto Rico: The Way Forward," written for the Government Development Bank for Puerto Rico and released June 29.

The basic starting point is that the ratio of government/debt GDP has been climbing in Puerto Rico for the last 15 years, while the economy has been contracting for 10. The market is now recognizing that this combination is not sustainable. The first figure shows the debt/GDP ratio. General government debt is the large gray portion at the bottom of each bar. The colored slices on top are debt accumulated by government-owned enterprises, with the biggest being PREPA, the Puerto Rico Electric Power Authority which is basically in the business of importing oil and using it to generate electricity.  Krueger et al. argue for various reasons that this debt/GDP ratio probably understates the actual level; for example, it doesn't include the liabilities of various government pension funds. Indeed, the New York Times reported that on a per capita basis, Puerto Rico has more municipal bond debt than any US state.

The second figure shows the inflation-adjusted GDP of Puerto Rico, peaking in 2005 and falling since then.
When markets perceive that debt more risky and less likely to be paid off, then anyone who buys that debt will demand a higher rate of return. Here's the rising rate of return for the PREPA debt and for general government debt. 
Like Greece, Puerto Rico does not have the option to address its economic woes by depreciating its currency. Greece is locked into the euro (at least for awhile longer), and Puerto Rico is locked into the US dollar.

Like Greece, labor markets in Puerto Rico are a mess, exhibiting very low levels of employment. Krueger, Teja, and Wolfe write:

The single most telling statistic in Puerto Rico is that only 40% of the adult population – versus 63% on the US mainland – is employed or looking for work; the rest are economically idle or working in the grey economy. In an economy with an abundance of unskilled labor, the reasons boil down to two. o Employers are disinclined to hire workers because (a) the US federal minimum wage is very high relative to the local average (full--‐time employment at the minimum wage is equivalent to 77% of per capita income, versus 28% on the mainland) and a more binding constraint on employment (28% of hourly workers in Puerto Rico earn $8.50 or less versus only 3% on the mainland); and (b) local regulations pertaining to overtime, paid vacation, and dismissal are costly and more onerous than on the US mainland. Workers are disinclined to take up jobs because the welfare system provides generous benefits that often exceed what minimum wage employment yields; one estimate shows that a household of three eligible for food stamps, AFDC, Medicaid and utilities subsidies could receive $1,743 per month--as compared to a minimum wage earner’s take‐home earnings of $1,159.
There are lots of reasons for Puerto Rico's slow growth and high debt. Certain federal tax provisions for manufacturing in Puerto Rico expired in 2005. The housing price bubble was large in Puerto Rico, and the corresponding fall in the local construction industry--and the injury it did to local banks--was large as well. The sharp rise in oil prices after 2005 hurt Puerto Rico, because it depends almost entirely on imported oil for electricity. (Of course, a more innovative electricity provider would be finding ways for Puerto Rico to branch into alternative energy sources like wind, solar, perhaps even ocean thermal gradients.)

The government of Puerto Rico has been unwilling to lay off worker. The Krueger et al team report: "Puerto Rico currently has 40% fewer students but 10% more teachers than a decade ago. Teacher-student ratios are high, higher than in the mainland ..." A Wall Street Journal op-ed notes that government workers in Puerto Rico have not faced layoffs (unlike in Greece) and are typically paid about twice the average salary.

The resolution to situations like this involves some sort of deal. Any such deal tarts with a recognition by those who currently own the debt have already experienced large losses--although they not yet have recognized the fact in an accounting sense. Imagine someone you bought bonds issued by Puerto Rico that promised to pay 4-5% five years ago (as in the figure above). But now, no one will buy that bond from you at face value, because the 4-5% return isn't enough to compensate for the current risks of default. Instead, you would have to sell the bond at less than face value. It's essentially similar to buying stock, and then watching the price of the stock go down: even if you haven't yet sold the stock, it's actual value is now less--and whether you choose to admit it or not, you have in fact already lost money.

In a debt-reduction deal, those who hold the debt agree to accept some of the losses that in fact have already occurred, but hope to move to a situation where those losses will be limited. At a minimum, the lenders agree to be repaid more slowly. In exchange, the borrower offers a set of economic reforms, so that the reduced borrowing or stretched-out loans are more likely to be repaid. Of course, cutting such a deal is never easy. In the case of Puerto Rico, some of the needed reforms--like those affecting the minimum wage and the level of welfare payments--are determined by the US federal government. But the alternative of outright default won't be pretty, either.

Without economic growth, Puerto Rico's debt problems will only worsen. As Krueger et al. write:
The key to turning around Puerto Rico’s situation is a revival of growth. The island has many problems but they all result in the same outcome – a lack of growth. Structural rigidities have compromised competitiveness and yielded stagnation. Weak fiscal discipline has resulted in uncertainty that is further depressing economic activity and employment. Low growth feeds back to strains on revenue and spending. It is a vicious circle.
The good news, if you are the sort of person who can overlook the risk of screaming economic disaster in the short run and instead raise your eyes to the long-term and the big picture, is that Puerto Rico does have some notable advantages. 
Puerto Rico has many advantages to build on but also important disadvantages, some within its power to tackle and some requiring federal help. Among the advantages are its natural gifts as a tropical island, the size of its college--‐educated and bilingual population, its sizable manufacturing base, its situation as an integral part of the United States, with all the attendant benefits in terms of currency stability, legal system, property rights, and federal backing of welfare, education, defense, and banking. That is a lot. At the same time, there are numerous policy failures that raise input costs and stifle growth. While some of these are within the Commonwealth’s power to fix (such as local labor regulations), others lie in the remit of the federal government and the US Congress (the minimum wage and welfare rules, the Jones Act, and Chapter 9 bankruptcy eligibility). If these could be overcome, there is no reason why Puerto Rico could not grow in new directions – likely ones like tourism, possible ones like serving as a financial/services hub between North and South America, and entirely unpredictable ones because that is how reforms have played out elsewhere. Reducing input costs for labor, energy and transport is key to regaining competitiveness, so that production can be geared to more buoyant external markets.
In the meantime, however, the population of Puerto Rico is shrinking, as people move to other parts of the United States.

Tuesday, June 30, 2015

Focusing on High-Cost Patients

There's a widespread belief that a large share of US health care spending goes to highly interventionist end-of-life care that does little or nothing to prolong the length of life, while quite possibly reducing the quality of remaining life. What share of health care costs is spent on those in the last year of life? More broadly, what are the possibilities for holding down the rise in health care costs over time by focusing on the patients that experience the highest level of costs.

Melissa D. Aldridge and Amy S. Kelley offer some facts and background for thinking about this question in their essay "Epidemiology of Serious Illness and High Utilization of Health Care." It appears as Appendix E in a 2015 National Academy of Sciences report called Dying in America: Improving Quality and Honoring Individual Preferences Near the End of Life.

Aldridge and Kelley write: "As of 2011, the top 5 percent of health care spenders (18.2 million people) accounted for an estimated 60 percent of all health care costs ($976 billion) ...  In this high-cost subgroup, total annual costs ranged from approximately $17,500 to more than $2,000,000 per
person."  Just to be clear, this spending person includes spending by private or public health insurance on a given patient: it's not a measure of out-of-pocket health care costs. Aldridge and Kelley suggest dividing those with high health expenditures into three groups: "individuals who
experience a discrete high-cost event in one year but who return to normal health and lower costs; individuals who persistently generate high annual health care costs due to chronic conditions, functional limitations, or other conditions; and individuals who have high health care costs because it is their last year of life."

Here are a couple of diagrams to help envision this three-way division. First, here's the breakdown of the top 5% into these three groups. About half are those who experienced a high-cost event, but do not continue to be in the top group for health care expenses in the next year. Only 11% of this top-expenditures group was in the last year of life.

But here's another perspective on the same subject. It turns out that about 80% of those in the last year of life are indeed in the high-expenditures group. Thus, it is true that those in the last year of life often have high health care costs, but because  in a given year many others also have high health care costs, the end-of-life group is a relative small share of the overall high-cost group.

How might thinking about high-cost patients in a given year offer some guidance for holding down health care costs? As a starting point, think about those who have a high-cost event in one year, but not in the following year. One can imagine a survivor of a severe accident. Or as Aldridge and Kelley write: "Some examples of this illness trajectory might include people who have a myocardial infarction, undergo coronary bypass graft surgery, and return to stable good health after a period of rehabilitation; individuals who are diagnosed with early stage cancer, complete surgical resection and other first-line therapies, and achieve complete remission; or people who are waiting for a kidney transplant on frequent hemodialysis and then receive a transplant and return to stable health." They follow up by saying: "There may be relatively less opportunity for cost reductions in this population because many high-cost events may be unavoidable." Indeed, one might go farther and argue that this is exactly what health insurance is supposed to provide: you make payments year after year, hoping that nothing terrible will happen to you, but if it does, you have some financial protection.

What about health care practices and reimbursement policies directed toward those who had high health care expenditures in the last year of life?

The gains from reducing costs of end-of-life care shouldn't be overstated. The proportion of Medicare spending that goes to end-of-life care has been roughly the same for the last few decades at about 25%. This regularity suggests that while overall health care costs have been rising, end-of-life care is not an increasing part of that overall issue. Intriguingly, Aldridge and Kelley report: "Medicare expenditures in the last year of life decrease with age, especially for those aged 85 or older ... This is in large part because the intensity of medical care in the last year of life decreases with increasing age." Indeed, older adults as a group are a minority of those with the highest health care costs in any given year:
Our analyses of the association between older age and higher health care costs suggests that although individuals aged 65 and over are disproportionately in the top 5 percent of the population in terms of total health care spending ..., almost two-thirds of the top 5 percent spenders are younger than age 65. Although older age may be a risk factor for higher health care costs, older adults make up the minority of the high-cost spenders. Furthermore, the proportion of total annual health care spending for the population aged 65 or over (32 percent) has not changed in a decade despite the growth in the size of that population.
However, some evidence does suggest possibilities for reducing end-of-life costs. For example, in Appendix D of this same NAS report, Haiden A. Huskamp and David G. Stevenson discuss "Financing Care at the End of Life and the Implications of Potential Reforms." They point out that spending on end-of-life care varies a great deal across the country, in ways that don't seem to have anything to do with the health of patients. They write (citations omitted for readability:
Although spending on end-of-life care is uniformly high, the Dartmouth Atlas documented substantial geographic variation in use of end-of-life care services and spending by hospital referral region (HRR) over time, which researchers and policy makers viewed as evidence of wide regional differences in physician practice patterns. For example, in 2007, the average number of days spent in an ICU [intensive care unit] for chronically ill Medicare beneficiaries in the last 6 months of life varied from 0.7 in Minot, North Dakota, to 10.7 in Miami, Florida. In this same population, the percentage dying in a hospital varied from 12.0 percent in Minot, North Dakota, to 45.8 percent in Manhattan, New York, and the average number of days spent enrolled in hospice varied from a low of 6.1 in Elmira, New York, to a high of 39.5 in Odgen, Utah.
The standard prescription for reducing spending on end-of-life care is to make more use of care delivered through hospice and at home, and less use of expensive  hospital and ICU care. Many people favor such an approach in theory, but in practice, when you or your relative are involved, it can be hard to implement. One issue that should always be acknowledged in discussions of end-of-life care is that all the evidence is based on hindsight: that is, on looking back after someone has died. At the time health care decisions are actually being made, it's very difficult to figure out whether someone has a life expectancy of less than a year. As Huskamp and Stevenson write: "It is also important to note that calculations of spending in the last year of life can be made only by looking backward from the decedent’s date of death. These calculations do not necessarily reflect “real-time” decision making by patients and families about care in the final year of life, as 1-year survival is extremely difficult to predict."

For me, the biggest lesson in looking at this breakdown of the highest-cost patients is one that I've touched on before in this blog (for example, here and here), which is the importance of rethinking how the health care system deals with issues of chronic disease, especially when it is accompanied by functional limitations on behavior. Here's a breakdown from Aldridge and Kelley, showing that well over half total health care costs are attributable to those who have both chronic conditions and functional limitations.

One clear-cut example is that a large share of those in nursing homes fall into these two categories: indeed, the average person in a nursing home has health care costs that put them into the top 5% of all high-cost patients. Aldridge and Kelley write: "As of 2011, there were 1.4 million Americans residing in nursing facilities. Thus, we estimate that the average annual health expenditure per nursing home resident is more than $200,000, which is significantly higher than the $17,500 minimum average annual health expenditure required to be in the top 5 percent of health care
spenders ..."

More broadly, a lot of chronic conditions have the characteristic that if they are well-managed--say, with appropriate diet, drugs, and exercise--they will often have relatively low health care costs. However, if not well-managed, they can lead to high-cost episodes of hospitalization. The US health care system has traditionally been a lot better at providing the high-cost hospitalization than at supporting the best possible management of these conditions. Thus, Aldridge and Kelley calculate (citations omitted):
Analyses of data on chronic conditions and health care costs have found that, of the population with the highest health care costs, greater than 75 percent have one or more of seven chronic conditions, including 42 percent with coronary artery disease, 30 percent with congestive heart failure, and 30 percent with diabetes. The U.S. Department of Health and Human Services ...  reports that more than 25 percent of individuals in the United States have multiple chronic conditions, and the care of these individuals accounts for 66 percent of total health care spending. ... A recent commentary in the Journal of the American Medical Association suggests that an estimated 22 percent of health care expenditures are related to potentially avoidable complications, such as hospital admission for patients with diabetes with ketoacidosis or amputation of gangrenous limbs, or for patients with congestive heart failure for shortness of breath due to fluid overload. Reducing these potentially avoidable complications by only 10 percent would save more than $40 billion/year.
Changes in end-of-life care and in managements of chronic conditions both require cultural change in the field of medicine, with more emphasis on non-hospital, non-high-tech alternatives. But the possibilities for improved patient health and satisfaction, along with substantial cost savings, seem substantial.

Monday, June 29, 2015

The Internet of Things

Like most people, I tend to think of the Internet as digital, carrying information, images, text, music, and the like. But we seem to be standing on the edge of what is commonly called the "Internet of Things," in which physical objects--including machines, electrical systems, land, people, and animals--all become increasingly connected to online networks. A group of researchers at the McKinsey Global Institute--James Manyika, Michael Chui, Peter Bisson, Jonathan Woetzel, Richard Dobbs, Jacques Bughin, and Dan Aharon--discuss some of the possibilities and pitfalls in their June 2015 report: "Unlocking the potential of the Internet of Things." They write:
The Internet of Things is still in the early stages of growth. Every day more machines, shipping containers, infrastructure elements, vehicles, and people are being equipped with networked sensors to report their status, receive instructions, and even take action based on the information they receive. It is estimated that there are more than nine billion connected devices around the world, including smartphones and computers. Over the next decade, this number is expected to increase dramatically, with estimates ranging from 25 billion to 50 billion devices in 2025.
What are the potential gains from the Internet of Things? Here's a list, inevitably somewhat speculative, of nine areas where gains from the Internet of Things could be large. For example, sensors seem likely to help people manage illness and improve wellness. they seem likely to help retail stores with layout, checkout, and in-store customer support. It will help factories run equipment and manage supplies in ways that add to efficiency. It will help cities with traffic management, as well as managing resources from water to infrastructure repair to police time.

Some aspects of the Internet of Things may feel like science fiction. As the McKinsey writers emphasize, the development of Internet of Things capabilities will require continued dramatic developments in computing speed, wireless communication, and interoperability and interconnectedness across many systems and devices. But perhaps more difficult than the technological changes are some of the social risks and legal issues involved. Here are three examples:

ƒƒPrivacy and confidentiality. The types, amount, and specificity of data gathered
by billions of devices create concerns among individuals about their privacy and among
organizations about the confidentiality and integrity of their data. Providers of IoT [Internet of Things] enabled products and services will have to create compelling value propositions for data to be collected and used, provide transparency into what data are used and how they are being used, and ensure that the data are appropriately protected.
Security. Not only will organizations that gather data from billions of devices need to be able to protect those data from unauthorized access, but they will also need to deal with new categories of risk that the Internet of Things can introduce. Extending information technology (IT) systems to new devices creates many more opportunities for potentialbreaches, which must be managed. Furthermore, when IoT is used to control physical assets, whether water treatment plants or automobiles, the consequences associated with a breach in security extend beyond the unauthorized release of information—they could potentially cause physical harm.
Intellectual property. A common understanding of ownership rights to data producedby various connected devices will be required to unlock the full potential of IoT. Who has what rights to the data from a sensor manufactured by one company and part of a solution deployed by another in a setting owned by a third party will have to be clarified. For example, who has the rights to data generated by a medical device implanted in a patient’s body? The patient? The manufacturer of the device? The health-care providerthat implanted the device and is managing the patient’s care?
My own sense is that these kinds of issues will tend to push us away from a world in which everything is continuously interconnected, because 24/7 interconnectedness is just too susceptible to problems of privacy and security, with too much information floating around loose. I can  more easily imagine a world in which many objects connect and then disconnect from the Internet on an occasional basis as needed for their functionality, or a world in which the connectedness of things is mediated through local networks. This approach would allow most of the gains from the Internet of Things, but without setting up a situation where someone who hacks the local electricity company can looking into individual home and turning the lights on and off.

Friday, June 26, 2015

Expanding Health Insurance in 2014: How Much Progress?

One of the most prominent claims made by supporters of the Patient Protection and Affordable Care Act of 2010--now commonly called "Obamacare" both by many supporters and opponents--is that it would substantially reduce the number of Americans without health insurance. How is that working out? Probably the best source of information is the National Health Interview Survey that is conducted by the National Center for Health Statistics. The survey asks about a full range of health and insurance issues, and it is carried out continually through the year, so that results can be reported on a quarterly basis. In 2014, the sample size includes about 110,000 people.

The most recent NHIS reports came out earlier this week. Robin A. Cohen  and Michael E. Martinez authored "Health Insurance Coverage: Early Release ofEstimates From the National Health Interview Survey, 2014," with a focus on annual data for 2014. However, the expansion of health insurance "exchanges" and expansions of Medicaid coverage under the Affordable Care Act started in January 2014. As the authors note: "The 2014 estimates after implementation are based on a full year of data collected from January through December2014 and, therefore, are centered around the midpoint of this period." So in looking for patterns in the extent of health insurance coverage that are emerging through 2014, it is also useful to look at the more detailed NHIS data broken down by quarter--with the fourth quarter of 2014 being the most recent data available.

Here's the overall pattern for those lacking health insurance on an annual basis. The proportion of uninsured had peaked back around 2009 and 2010 in the immediate aftermath of the Great Recession, and had been declining since then. The decline does look more rapid in 2014, although of course the figure doesn't reveal how much is due to the improving economy and employment situation and how much is due to the provisions of the 2010 legislation that started to be enacted in January 2014.

For a different perspective, here's the share of people in various age groups who received health insurance through the exchanges in the four quarters of 2014. It looks as if the share rose after the first quarter of 2014, but hasn't shown much trend since then.

Here's a more detailed quarter-by-quarter look through 2013 and 2014. the proportion of uninsured is already dropping in 2013, from 17.1% in 2013:Q1 to 16.2% by 2013:Q4. It then keeps falling in 2014, down to 12.1% by 2014:Q4. (The numbers in parenthesis are "standard errors." For those not initiated into the mysteries of statistics, it provides information about the precision of the estimate by telling you that the number given is accurate, plus or minus the amount in parentheses.)

Again, sorting out how much of this is due to the legislative changes and how much is due to an improving economy is a challenge. But a quick-and-dirty approach would note that the share of people receiving public health coverage rose by 0.8% from 2014:Q1 to 2014:4, and the share of people getting exchange-based private health insurance rose from nothing to 2.5% by 2014:Q4. You can't just add these percentages to get an effect from the 2010 legislation. In some cases, private firms may have decided not to offer health insurance in a way that pushed people into the exchanges. The share getting public health insurance would also have been affected by employer choices and the economy, along with the legislation. But until a more systematic study comes along, it seems fair to say as a rough estimate that during 2014, the Affordable Care Act increased the share of Americans with health insurance by 2-3 percentage points.

Those who favored the legislation will call this "success." Those who opposed the legislation will raise questions about the cost, emphasize that the law is nowhere near assuring health insurance for all, and point out that if the legislation had been sold as a moderate expansion of Medicaid and building up private insurance exchanges, the law could have been a lot shorter. But for either side, this relatively modest reduction in the number of uninsured shouldn't come as a big surprise. Even supporters of the 2010 legislation predicted that it would only solve about 60% of the problem of uninsured Americans, while nonpartisan sources predicted that it would solve about 40%. So far, reaching that lower prediction of reducing the share of uninsured by 40% is a goal not yet met.

Thursday, June 25, 2015

Banning Bottled Water: Unintended Consequences

Starting in 2012, the University of Vermont began a process of requiring that all campus locations selling beverages provided 30% "healthy" beverages, and then that all locations phases out all sales of bottled water. There were two hope: 1) reduced use of bottles, when bottled water was no longer available, and 2) that healthier beverages would be consumed. In a vivid demonstration of the law of unintended consequences, bottle use rose and fewer healthy beverages were consumed. Elizabeth R. Berman and Rachel K. Johnson tell the story in "The Unintended Consequences of Changes in
Beverage Options and the Removal of Bottled Water on a University Campus," appearing in the July 2015 issue of the American Journal of Public Health (105:7, pp. 1404-1408). This journal isn't freely available online, although some readers will have access through library subscriptions.

As a starting point, here's the description of the policy change  from Berman and Johnson (footnotes omitted:
Policy changes related to the types of bottled beverages sold at the University of Vermont in Burlington, Vermont, provided an opportunity to study how changes in beverage offerings affected the beverage choices as well as the calorie and total and added sugar consumption of consumers. First, in August 2012, all campus locations selling bottled beverages were required to provide a 30% healthy beverage ratio in accordance with the Alliance for a Healthier Generation’s beverage guidelines. Then, in January 2013, campus sales locations were required to remove bottled water while still maintaining the required 30% healthy beverage ratio.
They collected data on the beverages shipped to the sellers at the University of Vermont campus, and used that data as a basis for estimating consumption of bottled beverages. The study didn't try to estimate consumption of other beverages, like fountain drinks or coffee served in cafeterias. They found:

The number of bottles per capita shipped to the university campus did not change significantly between spring 2012 (baseline) and fall 2012, when the minimum healthy beverage requirement was put in place. However, between fall 2012 and spring 2013, when bottled water was banned, the per capita number of bottles shipped to campus increased significantly. Thus, the bottled water ban did not reduce the number of bottles entering the waste stream from the university campus, which was the ultimate goal of the ban. Furthermore, with the removal of bottled water, people in the university community increased their consumption of other, less healthy bottled beverages. ...
Per capita shipments of bottled beverages did not change significantly between spring 2012 and spring 2013 but did increase significantly from 21.8 bottles per person in fall 2012 to 26.3 bottles per person in spring 2013 (P=.03; Table 1). Calories, total sugars, and added sugars shipped per capita also increased significantly between fall 2012 and spring 2013, as shown in Table 1 (P= .02, P = .02, and P=.03, respectively). Calories per bottle shipped increased significantly over the 3 semesters by an average of 8.76 calories per bottle each semester.
(For those who don't read statistics, the P numbers in parenthesis are telling you that these changes after the policy took effect are statistically significant--that is, unlikely to have happened by chance.)

Here's a visual of the change, looking at patterns of different drinks. The orange line that drops to zero shows bottled water being phased out. The rising line at the top shows the rise in sugar-sweetened beverages. The red line in the middle that rises sharply shows the rise in sugar-free beverages. 

This finding is not an enormous surprise, because a reasonable amount of survey data suggests that many people switch from sugar-sweetened drinks to bottled water, and that if bottled water isn't available, many of them will switch back. Of course, one can always argue that with more time and better community education, more people will shift to carrying their own water bottles, so that bottle usage will indeed eventually fall and people will shift to healthier drinks. But remember, this policy change was enacted among university students in Burlington, Vermont, which as the authors say is " "a midsized city that is notoriously invested in both environmental and physical well-being." Moreover, the authors report: "The university made several efforts to encourage consumers to carry reusable beverage containers. Sixty-eight water fountains on campus were retrofitted with spouts to fill reusable bottles, educational campaigns were used to inform consumers about the changes in policy, and free reusable bottles and stickers promoting the use of reusable bottles were given out at campus events."

It seems to me that true believers in the power of community education should see no particular need for proposals to ban water bottles or mandate a healthier mixture of drinks. It's only if you doubt the power of such education that bans on bottled water become a plausible option. The authors report that "[m]ore than 50 colleges and universities have banned the sale of bottled water." Time for a few more studies to find whether such bans are having any environmental or health benefit.


Wednesday, June 24, 2015

Raisins: When Insiders Set the Rules

Earlier this week, the US Supreme Court in Horne et al. vs. Department of Agriculture overturned an arrangement that had stood since 1937 for the sale of raisins. The case turned on what is apparently a non-obvious question, given that this program had been around for eight decades and lower courts had ruled differently: Does taking 47% of someone's crop count as a a "taking" in the legal sense prohibited by the 5th Amendment to the US  Constitution, which ends with the words " ... nor shall private property be taken for public use, without just compensation." Chief Justice John Roberts wrote the decision for an 8-1 majority. He begins with a compact overview of past practice:

The Agricultural Marketing Agreement Act of 1937 authorizes the Secretary of Agriculture to promulgate “marketing orders” to help maintain stable markets for particular agricultural products. The marketing order for raisins requires growers in certain years to give a percentage of their crop to the Government, free of charge. The required allocation is determined by the Raisin Administrative Committee, a Government entity composed largely of growers and others in the raisin business appointed by the Secretary of Agriculture. In 2002–2003, this Committee ordered raisin growers to turn over 47 percent of their crop. In 2003–2004, 30 percent. 
Growers generally ship their raisins to a raisin “handler,” who physically separates the raisins due the Government (called “reserve raisins”), pays the growers only for the remainder (“free-tonnage raisins”), and packs and sells the free-tonnage raisins. The Raisin Committee acquires title to the reserve raisins that have been set aside, and decides how to dispose of them in its discretion. It sells them in noncompetitive markets, for example to exporters, federal agencies, or foreign governments; donates them to charitable causes; releases them to growers who agree to reduce their raisin production; or disposes of them by “any other means” consistent with the purposes of the raisin program. 7 CFR §989.67(b)(5) (2015). Proceeds from Committee sales are principally used to subsidize handlers who sell raisins for export (not including the Hornes, who are not raisin exporters). Raisin growers retain an interest in any net proceeds from sales the Raisin Committee makes, after deductions for the export subsidies and the Committee’s administrative expenses. In the years at issue in this case, those proceeds were less than the cost of producing the crop one year, and nothing at all the next. 
Readers who want to plow through the discussions of "takings" and "just compensation" in the decision can feel free to do so. What's interesting to me, from an economic point of view, is that the marketing arrangement for raisins embodies a certain misguided notion of how to create a healthy economy--a notion that still has some resonance today.

In the midst of the Great Depression, firms were losing money and wages were falling. For politicians, the answer to low profits and low wages straightforward. Form organizations of producers that would limit competition and hold down production, thus pushing up prices and helping producers earn profits. On the labor side, set industry guidelines and later minimum wage laws to prevent wages from falling.

This economic philosophy was embodied the National Industrial Recovery Act passed in 1933. Back in my undergraduate days, I took a class in US economic history with Michael Weinstein, who had recently published his 1980 book, Recovery and Distribution Under the National Industrial Recovery Act. The book offered a careful statistical analysis to illuminate the underlying economic themes. When producers all group together to hold down output, the remaining incumbent firms might make higher profits on the sales that remain--but this is literally the opposite of economic growth. Also, it forces consumers to pay higher prices. Trying to push up wages in the middle of a Great Depression can help those who manage to keep their jobs, but when employment is in the neighborhood of 25%, it doesn't help the economy expand, either.

It is revealing that the Raisin Administrative Committee, which sets the proportion of "reserve raisins" to be taken from growers and handlers, lacks any meaningful representation from consumers, or other firms in related industries, or the public more broadly, or those who might wish to enter the market for raisins. Here's how the US Department of Agriculture described its membership:
Committee Structure: The Raisin Administrative Committee is comprised of 35 members representing producers; 10 members representing handlers of varying sizes; 1 member representing the Raisin Bargaining Association (RBA); and 1 public member. Members serve 2-year terms of office that begin on May 1. Producer and handler members are nominated at meetings and by mail ballots.
In short, the economic arrangements for raisins are an example of what so often happens when economic policy is set by a combination of government and existing firms: the focus tends to be on profits for those existing firms, backed up either by government regulations that function like implicit subsidies or by explicit subsidies. Economic growth ultimately comes from innovation and productivity, not from attempts to tilt the market to favored incumbent firms.

Finally, I'll just add that it's an opportune time to end Raisin Administrative Committee and its National Raisin Reserve. The Raisin Administrative Committee reports in its Marketing Policy & Industry Statistics 2014 - 2015 Marketing Season:

The Committee met on August 14, 2014 and recognized the computed Trade Demand for Natural (sun‐dried) Seedless and all other varietal types ... The Committee voted to not establish volume regulations, thereby declaring Natural (sun‐dried) Seedless and all other varietal types 100% Free. This resulted in no trade demands or volume regulations for the 2014/15 crop year.
The Supreme Court case refers to the situation in 2002-3 and 2003-2004. But If I'm reading the bureaucratese correctly, the percentage of reserve raisins now being taken by the US government is zero. The Court decision presumably means that it will stay at zero.