Econometrica has announced that the 2020 Frisch Medal—one of the most prestigious awards in economics—will be presented to Princeton Professor Kate Ho, along with her co-author Robin Lee of Harvard University.
The award recognizes their 2017 paper “Insurer Competition in Health Care Markets,” which examines how insurer competition affects negotiated hospital prices, premiums charged to consumers, and patient welfare. The paper is now available for free download on the Econometrica website for a limited time.
First awarded in 1978, the Frisch Medal is awarded every two years to the authors of the best applied paper published in the economics journal Econometrica during the previous five years. The award was named in honor of Ragnar Frisch, editor of Econometrica from 1933 to 1954 and a winner of the Nobel Prize. Princeton Professor and trade expert Steven Redding won the award in 2018, along with his co-authors Gabriel M. Ahlfeldt, Daniel M. Sturm, and Nikolaus Wolf.
Professor Ho joined Princeton in 2018 and since then has been appointed co-director, along with Janet Currie, of Princeton’s Center for Health and Wellbeing. Her research is at the intersection of the fields of industrial organization and health economics. Here, we talk to Professor Ho about her research and what inspired her work in these areas.
Let’s start with a discussion of the paper on insurer competition that earned you the Frisch Medal. What are the big-picture implications of that research for U.S. health care markets?
The paper investigates the complex price negotiations over payments from health insurers to hospitals, and also to insurers from a large employer. Rather than basing our analysis on a single policy change or difference that is observed in the data, we build on previous literature to develop a model of how insurers negotiate provider prices and premiums to help us understand the relationship between insurance competition and health care spending across a variety of settings. We estimate the model using detailed claims, enrollment, and plan data from California.
We use the model to predict detailed empirical patterns of response to a counterfactual decrease in insurer competition. Overall, our findings suggest that if premiums are not constrained through effective regulation or by negotiations with employers, then reduced insurer competition typically reduces overall consumer welfare. The results are important for health care merger policy. We hope they can also guide future research on other markets with a similar “vertically separated” structure.
Did your findings challenge any priors you had about how competition among insurers ultimately affects patients?
My prior was that, given the complexity of the health care system, it might be difficult to reach any general conclusions about the effect of competition among insurers. For example, there’s a trade-off between the impact of insurer competition on provider prices and its impact on insurer prices. While a more concentrated insurance market may allow insurers to charge higher premiums or administrative fees, it may also enable them to negotiate better reimbursement rates with medical providers and pass along savings to consumers. Which of these forces is likely to dominate might well depend in complicated ways on the characteristics of insurers and providers in the market and the sickness severity and the preferences of consumers. To some extent this is true, but overall a fairly clear picture still emerges. If managers can constrain premium increases, then reducing insurer competition can put a downward pressure on hospital prices and lead to reduced spending. But without that constraint, reduced competition between insurers can lead to large premium increases that, together with the welfare loss from reduced choice, implies a big loss to consumers.
Before your academic career, you spent four years as private secretary (Chief of Staff) to the U.K. Minister of State for Health. Why did you move into academia, and how did your work in the U.K. influence your research or work as an academic in the U.S.?
I was lucky to have the opportunity to work in government at an early stage of my career. It gave me a strong sense of the importance of the decisions made by policymakers, and their interactions with the healthcare industry, for the overall effectiveness of the healthcare system. I could see that some important decisions had to be made “blind:” if no similar policy changes had been made in the past, so there was no history to learn from, decision-makers might not have access to useful inputs to help inform their decisions. I moved into academia because I wanted to build models—ways of thinking about the world, breaking out the different possible effects of a policy change—that would help inform these decisions.
My experience of both U.K. and U.S. health care systems has also been useful. The two systems are very different, but both face the same challenge of ensuring all consumers have access to health care, at a price they can afford, while controlling overall spending growth. Comparing the strengths and weaknesses of the two systems has given me a window into thinking about healthcare market design and the trade-offs involved with regulating the market.
What are you working on now? In your mind, what are the next big questions related to the organization of the U.S. healthcare system?
There are many big questions! Let me mention two in particular. I’ve been thinking with my co-author, Robin Lee, about the problem faced by large employers designing a menu of health plan options for their employees, trying to maximize employee welfare while still controlling costs. There’s a (largely theoretical) literature focused on optimal coverage for a single plan, and another (more empirical) that looks at the problems generated when consumers can choose between multiple plans. We are addressing both issues through the lens of a model that we estimate using detailed data from Harvard University. The results are pretty interesting. Consistent with previous papers, some non-zero cost-sharing is important to address over-utilization when consumer out-of-pocket prices are close to zero. But very high cost-sharing, e.g. through a high deductible plan, does not seem to be optimal. Second, non-financial differences across plans can be valuable, both to allow employees to choose the plans that are best for their families and, if the plans are carefully designed, to help manage spending.
A second project digs deeper into health care price negotiations. Constraining health care provider markups— and hence prices—is crucial if we want to control health care spending. I want to investigate whether particular designs of the choice set offered to consumers might help, both by steering consumers to low-priced products and—maybe even more important—also by reducing negotiated prices. This might be the case with pharmaceutical formulary tiers, for example. There’s evidence that, not surprisingly, consumers tend to purchase the drugs that are offered on the preferred formulary tier (at relatively low out-of-pocket prices) in preference to other drugs. You might expect that drug manufacturers should be willing to accept low negotiated payments in return for placement on that preferred tier. If that’s the case, it might have a large effect on prices and spending. Quantifying these effects, and developing a framework that can be used to predict the price and spending effects of different counterfactual formulary designs, requires a model of negotiations over drug tier placement. That’s what I’ve been thinking about with my co-author Robin Lee.
What advice do you have for students who aspire to careers in health and health policy?
Get excited by the big questions! There are many questions to consider and many empirical and theoretical approaches to address them. Make yourself as well-informed as you can on all these dimensions, and then go after the biggest questions you can. The more we can learn from one another, the better.
Also: Don’t be afraid of complexity. If you can map out the structure of the market you’re investigating, and the incentives faced by the different players, you may well find that a clear story emerges.