Uncategorized – Michael Sykuta

Medical Malpractice Data and Inquiries

The current issue of Journal of Empirical Legal Studies includes an interesting data resource and survey by Bernard Black, et al., titled Medical Liability Insurance Premia: 1990–2016 Dataset, with Literature Review and Summary Information. Having just talked briefly about med mal premia and healthcare regulation last week, I was interested to read through the review and description of some of the data and trends. The authors have compiled data from the Medical Liability Monitor, “the only national, longitudinal source of data on med mal insurance rates.” But they don’t stop there.

We link the MLM data with several related datasets: county rural-urban codes (from 2013); annual county- and state-level data on population (from the Census Bureau); number of total and active, nonfederal physicians, with a breakdown by specialty (from the Area Health Resource File, originally from the American Medical Association); annual state-level data on paid med mal claims against physicians from the National Practitioner Data Bank (NPDB), available through 2015; and data on direct premiums written by med mal insurers from the National Association of Insurance Commissioners (NAIC), available through 2015. We also provide a literature review of papers using the MLM data and summary information on the association between med mal insurance premia and other relevant features of the med mal landscape.

The data appendix, public data, and STATA code book (for cleaning the dataset) are also available from SSRN here. The survey includes a summary of some research into possible explanations for and consequences of medical malpractice premia: effect of med mal risk on healthcare spending, effect of med mal reform on med mal premia, effect of med mal rates on C-section rates and physician supply, effect of med mal payouts on med mal premia.

Noticeably absent from the literature they summarize, which they claim are the principle prior studies using MLM data, is any attention to or focus on market structure issues. Doubly so since there has been a consistent drop in rates over the past 15 years that is generally unexplained in the cited literature. Now, I don’t specialize in health care industry research, but I do know that in the past 15 years there has been an ongoing trend of consolidation among both health insurance companies and medical providing companies (e.g., hospital networks, physician groups, both). I could easily hypothesize a couple potential dynamics:

Increased consolidation among insurance companies may lead to contractual incentives (by way of contract rates and performance measures) that affect the expected cost of med mal insurance.
Increased consolidation among hospital networks and physician groups leads to more consistent or standardized practices across larger populations of patients/services, thereby reducing uncertainty or volatility of medical service provision/quality and, thereby, expected cost of med mal insurance.

I suspect there are several potential channels, but it would seem a potentially fruitful area of research–and now there is a more convenient data set with which to play.

Calling a Cost a Cost: NY Anti-Free Speech Edition

Seems the State of New York is going to the Supreme Court for another of its protectionist regulatory policies. Yesterday the US Supreme Court granted a petition to hear the case of Expressions Hair Design v. Schneiderman. As the WSJ explains, at issue is whether New York’s regulations concerning credit-versus-cash retail prices constitute a First Amendment speech violation.

The problem stems from the fact that the State of New York has attempted to have its cake and eat it to by ignoring economic realism and prohibiting retailers from calling a cost a cost. The State prohibits retailers from charging customers a fee for using a credit card, but allows retailers to give customers a discount if they use cash. A group of hair salons, led by Expressions Hair Design, sued the state for infringing on its right of free commercial speech. The salons won their initial case, which was reversed on appeal. Now SCOTUS will have an opportunity to weigh in.

The Cost of Using Credit
From an economic perspective, the issue is fairly simple. Credit card companies charge vendors a fee every time a consumer pays with plastic. How much depends on the credit card company, whether the transaction is run as debit or credit, and the amount of the transaction. But typically, the fee is around 2-4% of the amount of the purchase. This reduces the amount of revenue retailers receive when the customer uses plastic. Put another way, when customers choose to use plastic, it raises the retailer’s cost of doing business for that sale.

In a free economy, retailers could choose one of three options: 1) force the credit card user to pay the additional transaction fee, which raises the price at the point of sale, 2) charge the same price for all buyers, implicitly charging cash users more for the product to subsidize the costs of the plastic users, or 3) pass the transaction fee savings on to cash users by giving them a discount. The only economic difference between 1 and 3 is what the sticker price is relative to the price actually paid. In #1, credit card users pay more than the sticker price; in #3, cash users pay less than the sticker price. In #1, the credit card fee is made explicit by adding it on just for those consumers who use plastic. In #3, the sticker price includes (i.e., hides) the cost of using a credit card and by default is the price everyone pays unless they are aware of the cash discount. In either case (1 or 3), the retailer is price discriminating between cash and plastic users. Or the retailer could simply post two sets of prices, one for credit and one for cash, which would then beg the question of “why the difference?” And that is where the NY regulations become a problem.

The NY regulation prohibits retailers from choosing #1 but allows them to choose #3. In other words, the regulation allows retailers to price discriminate, but only if they present it as a discount for cash users rather than a surcharge for credit card users. In short, NY allows the exact same price discrimination between two sets of consumers, but restricts the speech of retailers in how they are allowed to describe that price difference. As Expressions Hair Design argues in their complaint, this places a burden on the business in how it is allowed to explain or justify what is otherwise a perfectly legal two-price pricing system since the regulations make it illegal for employees to explain that the difference between the cash price and the credit price is due to the cost of the credit transaction. It would be like passing a law prohibiting a restaurant from explaining the cost of its steaks went up relative to its pork chops because the price of beef rose.

Framing matters
Why would the State of New York prohibit credit card surcharges but not prohibit cash discounts? Consumers respond to price signals, so how those signals are presented matters. If consumers are charged an extra fee for using their credit card, it makes the cost (price) of using the credit card very obvious to the consumer and she is more likely to change her behavior by using cash instead. This would be bad for the banks that make a significant amount of money on credit card swipe fees. Not surprisingly, banks support laws prohibiting explicit credit card surcharges. However, as noted in #2 above, charging cash and plastic users the same forces cash users to subsidize the purchases of plastic users, which also tends to penalize lower income persons relative to wealthier shoppers. So allowing retailers the opportunity to provide cash discounts is socially superior to not allowing differential pricing. However, the NY’s prohibition on calling a cost a cost and explaining the price difference for what it is, is not only an infringement on speech, but unjustifiable as anything other than an attempt to mislead consumers and protect credit card issuers.

A win for the auto cartel, a loss for Missourians

The Missouri Auto Dealer Association (MADA) has been exercising its political muscle for at least a couple years to protect its antiquated state-supported cartel over new car sales. It seems they have finally succeeded in court where their lobbying efforts have failed. In an opinion last week by Cole County Circuit Judge Daniel Green, the court ruled that Missouri state statutes governing automobile distribution prohibit Tesla from operating its own retail stores in the state.

The case, which the MADA filed against the Missouri Department of Revenue, contested the State’s issuance of two franchise dealer licenses to Tesla for Tesla to open its own “franchise” retail stores. Basically, Missouri statutes have implemented a circular argument that prohibits auto manufacturers from owning new vehicle dealerships. § 301.550.3 RSMo specifically limits new car dealers to being franchises, statutorily side-stepping the possibility of a non-franchise new car dealer. The court essentially argued (perhaps rightly) that Tesla’s self-dealing of the franchise to itself was merely a rhetorical ploy to circumvent this failure of the statutes to allow for non-franchise dealers. However, even if that side-step were permissible, § 407.826.1 RSMo specifically prohibits auto industry franchisors from “owning or operating a new motor vehicle dealership in this state.”

Judge Green’s opinion basically means the laws of the state of Missouri preclude the possibility of any auto manufacturer selling its cars in Missouri directly to consumers. While Tesla can continue to operate its two service centers in the state, it cannot make car sales there. Instead, the company must continue to sell to Missourians over the internet with a point-of-sale in another state. (So much for more sales jobs.)

I and others have written previously (here, here, and here) why bans on Tesla’s direct-to-consumer sales model are bad for consumers and for society in general. This most recent ruling in Missouri just highlights how fundamentally flawed the regulation of commerce can be. Missouri’s laws, to the extent they ever made sense, are rooted in an antiquated industry and technological setting. Advancements in information technology alone have undercut many, if not all, of the economic justifications for an auto manufacturer to use a franchised distribution system. Laws that were written to protect franchisees in a 1950s-era distribution system do nothing now but raise consumers’ costs and thwart technological and organizational innovation that make everyone better off. Everyone, that is, except the franchised auto dealer cartel that sees all too clearly how little value it now adds in the sale and distribution of new cars.

Hopefully Missouri’s legislature will have the gumption to fix the flaws in its statutes that limit all new car retailers to “franchises” and instead let auto manufacturers (or any other manufacturer) choose the model they find best for themselves and their customers.

How mergers affect innovation…maybe?

Justus Haucap and Joel Stiebale with the Düsseldorf Institute for Competition Economics (DICE) at the University of Düsseldorf have a recent paper analyzing the effects of mergers on innovation in the European pharmaceutical industry. The develop a model that suggests mergers reduce innovation not only in the merged firms, but among industry competitors as well. Their data bear this out, as explained in the abstract:

This papers analyses how horizontal mergers affect innovation activities of the merged entity and its non-merging competitors. We develop an oligopoly model with heterogeneous firms to derive empirically testable implications. Our model predicts that a merger is more likely to be profitable in an innovation intensive industry. For a high degree of firm heterogeneity, a merger reduces innovation of both the merged entity and non-merging competitors in an industry with high R&D intensity. Using data on horizontal mergers among pharmaceutical firms in Europe, we find that our empirical results are consistent with many predictions of the theoretical model. Our main result is that after a merger, patenting and R&D of the merged entity and its non-merging rivals declines substantially. The effects are concentrated in markets with high innovation intensity and a high degree of rm heterogeneity. The results are robust towards alternative specifications, using an instrumental variable strategy, and applying a propensity score matching estimator.

While I haven’t yet read the paper in detail, a cursory examination suggests they have ignored another possibility: mergers in high-intensity R&D industries could be a leading indicator of decreased innovation productivity (i.e., lower returns to investment in R&D). Consider that as research advances, the “low hanging fruit” are collected first before the more difficult (and lower return) investments are pursued. As companies in a high-intensity R&D industry exploit all of the low hanging fruit, particularly internally, one might expect mergers as a way of expanding the available set of lower-cost/higher-return R&D investment opportunities. Since firms are competing in the same science space, a slow-down in one firm is likely to be spuriously correlated with slowdowns throughout the industry.

“Affect” is a word of causation. To suggest that mergers cause a reduction in innovation is a strong statement–especially when paired with a merger policy implication. This may be something that bears more scrutiny since, as the authors note, the entire subject is one on which relatively little light has thus far been shed.

Flipping a Coin for Happiness

Steven Levitt of Freakonomics fame (and professor of economics at University of Chicago) has a new paper out on a not-so-new research project. In “Heads or Tails: The Impact of a Coin Toss on Major Life Decisions and Subsequent Happiness” (gated at NBER, a summary article is available here), Levitt finds that individuals who made important life decisions based on a coin flip were more likely to be happy two or six months afterward. Based on these findings, Levitt suggests that individuals may be too cautious in making major decisions. The abstract reads:

Little is known about whether people make good choices when facing important decisions. This paper reports on a large-scale randomized field experiment in which research subjects having difficulty making a decision flipped a coin to help determine their choice. For important decisions (e.g. quitting a job or ending a relationship), those who make a change (regardless of the outcome of the coin toss) report being substantially happier two months and six months later. This correlation, however, need not reflect a causal impact. To assess causality, I use the outcome of a coin toss. Individuals who are told by the coin toss to make a change are much more likely to make a change and are happier six months later than those who were told by the coin to maintain the status quo. The results of this paper suggest that people may be excessively cautious when facing life-changing choices.

So if in doubt, maybe you should reach in your pocket for a coin. Or you could do it like this guy:

NSF Funding for Economics Research: Good or Bad?

The latest Journal of Economic Perspectives includes a pair of papers debating the social value of economics research funding from the National Science Foundation, featuring Robert Moffitt from Johns Hopkins and Tyler Cowen and Alex Tabarrock from George Mason. The abstracts of their respective viewpoints follow:

Robert Moffitt: “In Defense of the NSF Economics Program“
The NSF Economics program funds basic research in economics across all its disparate fields. Its budget has experienced a long period of stagnation and decline, with its real value in 2013 below that in 1980 and having declined by 50 percent as a percent of the total NSF budget. The number of grants made by the program has also declined over time, and its current budget is very small compared to that of many other funders of economic research. Over the years, NSF-supported research has supported many of the major intellectual developments in the discipline that have made important contributions to the study of public policy. The public goods argument for government support of basic economic research is strong. Neither private firms, foundations, nor private donors are likely to engage in the comprehensive support of all forms of economic research if NSF were not to exist. Select universities with large endowments are more likely to have the ability to support general economic research in the absence of NSF, but most universities do not have endowments sufficiently large to do so. Support for large-scale general purpose dataset collection is particularly unlikely to receive support from any nongovernment agency. On a priori grounds, it is likely that most NSF-funded research represents a net increase in research effort rather than displacing already-occurring effort by academic economists. Unfortunately, the empirical literature on the net aggregate impact of NSF economics funding is virtually nonexistent.

Tyler Cowen & Alex Tabarrock: “A Skeptical View of the National Science Foundation’s Role in Economic Research”
We can imagine a plausible case for government support of science based on traditional economic reasons of externalities and public goods. Yet when it comes to government support of grants from the National Science Foundation (NSF) for economic research, our sense is that many economists avoid critical questions, skimp on analysis, and move straight to advocacy. In this essay, we take a more skeptical attitude toward the efforts of the NSF to subsidize economic research. We offer two main sets of arguments. First, a key question is not whether NSF funding is justified relative to laissez-faire, but rather, what is the marginal value of NSF funding given already existing government and nongovernment support for economic research? Second, we consider whether NSF funding might more productively be shifted in various directions that remain within the legal and traditional purview of the NSF. Such alternative focuses might include data availability, prizes rather than grants, broader dissemination of economic insights, and more. Given these critiques, we suggest some possible ways in which the pattern of NSF funding, and the arguments for such funding, might be improved.

11th Annual Conference on Empirical Legal Studies

11th Annual Conference on Empirical Legal Studies (CELS)
Duke Law School, Durham, North Carolina
Friday, November 18 and Saturday, November 19, 2016

Duke Law School is pleased to host the 11th Annual Conference on Empirical Legal Studies (CELS) on November 18-19, 2016. CELS is a highly regarded interdisciplinary gathering that draws scholars from across the country and internationally and is sponsored by the Society for Empirical Legal Studies. The conference brings together hundreds of scholars from law, economics, political science, psychology, policy analysis, and other fields who are interested in the empirical analysis of law and legal institutions. Papers are selected through a peer review process and discussion at the conference includes assigned commentators and audience questions.

Paper submissions are due by July 31, 2016.

For more information about the conference click here (https://law.duke.edu/cels2016/).