The Incidental Economist passes along an interesting study on the positive net social benefit of increased substance abuse treatment provided by expanded public health insurance:
A new NBER working paper by Hefei Wen and colleagues finds that public insurance expansions increases substance use disorder (SUD) treatment, and that treatment may reduce crime….
The study findings highlight that a relative 10 percent increase in the SUD treatment rate can reduce the robbery rate by 3 percent, reduce the aggravated assault rate by 4 to 9 percent, and reduce the larceny theft rate by 2 to 3 percent. […] A back-of-the- envelope calculation shows that a 10 percent relative increase in the SUD treatment rate at an average cost of $1.6 billion yields a crime reduction benefit of $2.5 billion to $4.8 billion.
Substance abuse treatment seems to produce a positive externality for society. An externality is a benefit that is produced by an actor which is not captured by that particular actor. There are lots of different externalities; Facebook benefits from network externalities as each additional person who goes on Facebook makes the entire network more valuable; I benefit from the externality of having a great bakery two blocks from my house and twenty feet from my bus stop as the fresh bread smell in the morning is an amazing pick-me-up. There are negative externalities as well with pollution being the classic case. Positive externalities tend to lead to the underproduction or underprovision of a good as the cost of production of the good can’t match up with the benefits it providers. Negative externalities lead to too much of something as the producers don’t pay the full cost. That is why there is such a strong argument for either cap and trade or a carbon tax from economists as it corrects a negative externality by appropriately pricing carbon dioxide to the damage it does.
There are quite a few medical externality situations where the insurers don’t capture the full benefit of a treatment through reduced future claims so they don’t provide as much of a medical service as they should from a societal perspective. The classic case is vaccination as a vaccine to an eighteen month old is unlikely to prevent the vaccinated disease within the benefit year. Birth control is another classic example. And now it is looking like substance abuse treatment could fall into this category.
For a society to capture the full benefits of effective treatment, there are a few policy options. The first is to go to a single payer system where the shadow of the future is long and the scope of expenses and benefits are broad. The VA has this incentive structure to some degree as they are responsible for life long medical costs, but their scope of concern is primarily limited to medical costs. The VA can’t care too much about greater social costs.
The second best step would be a quasi-single payer system with massive risk adjustments and transfer mechanisms between plans to discourage cherry picking and preserve a long shadow of the future. PPACA has this to some degree as insurers are operating in a risk stabilized environment with large transfers to minimize cherry picking. A healthier pool for insurer A benefits everyone including Insurer A. However this is insufficeint as it may just bring treatment up to the net medical social benefit level not the net social benefit level. And this is where essential health benefits comes into play. EHBs are mandates that every pays for services that have large social and medical benefits even if those benefits don’t directly accrue to the payer. It removes the stable negative social value equilibrium and should allow for society as a whole to capture the benefits of having more people who need substance abuse treatment get substance abuse treatment.
Baud
I find externalities interesting. The conventional wisdom is that conservatives value the free market and liberals hate it. But an idealized efficient free market is one in which there are no externalities, and such a market would be far more in line with liberal policy objectives than the actual market we currently have.
RaflW
Well, SUD lowering the crime rate is just all bad. It costs taxpayers money and it works, which will be denounced as gubmit social engineering. Mark my words.
And if crime is going down, there’s less to be fearful and angry about. Republicans want to be squeezing your amygdala on a daily (if not hourly – hello Fox Nooz!) basis. That’s their main turnout tool – fear the drug-addled black man lunging for your purse/wife/car/anything.
MomSense
@Baud:
QFT
OzarkHillbilly
Sounds like a Win/Win to me. Therefor, it’ll never happen here.
NJDave
I think another factor is that the outcome of SA treatment is highly variable. The statistics I’ve seen suggest that the ‘cure’ rate is about 10% per cycle. Those who can afford it can go through multiple rounds of treatment. With results so unpredictable, it’s reasonable to expect SA claims to be subjected to additional scrutiny/skepticism.
schrodinger's cat
@Baud: I find economics jargon to be Orwellian, efficiency, externalities are some examples. Economists like to act like externalities are tiny corrections to the main theory when many times that is just not the case.
jl
I wonder what RM thinks about the only ‘free-market’ solution that I have seen to the health insurance externalities, which was proposed by John Cochrane (an infamous name now, but he is as good a microeconomist as he is a bad macroeconomist).
Basically side payments between insurance companies when an enrollee switches between insurers. Say an enrollee moves from company A to company B. If the expected future health care costs increased whilr enrolled with A, then A has to make a side payment to company B when enrollee switches. if expected future health care costs decrease while enrolled with A, A gets a side payment from B. Most states have insurance regulations that prohibit this.
A limitation to this approach is that it would not take care of non health care externalities.
Cochrane did a careful analysis, but let his free market freak flag fly when at the end of the paper when he had to discuss how such a side payment market would arise and be regulated. Cochrane asserted that you just needed to get rid of state regulations that prohibited side payments, and such a side payment market would arise spontaneously and no regulation would be needed because of ‘free market’. But he did a careful analysis of the concept, assuming such a side payment market existed and was functioning.
Certainly would provide good free market employment for armies of actuaries. I have no idea how much of the risk evaluation in such a market would be purely wasteful from a social point of view (i.e., would it be as socially wasteful as insurance companies and providers playing reimbursement Slides and Ladders games, gaming networks marketing, and similar things).
But, I think an interesting idea. I think, unlike Cochrane, a side payment market would need to be designed and heavily regulated.
Richard Mayhew
@jl: Agreed with the last sentence, there would need to be some extremely careful market design features plus some way of getting every insurer involved otherwise we’re just racing straight to the bottom on data quality as well as avoiding risky people.
What he is proposing is effectively a spin-off of current risk adjustment modeling where healthier pools pay sicker pools (see this most prominently in Medicare and Medicaid, and it is an ongoing project for PPACA) but instead of retrospective lookbacks, it is prospective health. I think Cochran’s idea is that we need to align incentives to pay for net improvements in probable future health and that is one hell of a good idea.
Speaking as a plumber though, the best risk adjustment models are barely adequate for retrospective risk adjustment, usable for quick and dirty purposes on concurrent risk modeling and suck hind tit on prospective health status. There are too many confounding factors to get a clean model that everyone agrees accurately represents a future health risk score to a degree where companies are willing to send $5,000 side payments to their competitors.
Mnemosyne
@NJDave:
IMO, SA treatment cannot be separated from overall mental health care, and people who undergo SA treatment need to be carefully screened to see if they have an underlying mental health problem that needs to be addressed in addition to the SA problem. I suspect that at least part of the high failure rate is that people have underlying problems that don’t get addressed, and it’s easier for them to fall back into SA than to try and pursue further mental health treatment.
Some of the toughest SA cases to treat are people who turn out to also have a serious mental illness, like schizophrenia, bipolar, or depression, that they’ve been self-medicating for, because now it’s doubly hard to get someone to stick with their mental health regimen.
jl
@Richard Mayhew: Thanks for your thoughts. I have same concerns about how much precision can be expected from prospective risk adjustment models. The market Cochrane envisions may not exist because at individual level, information on future expected costs too imprecise, so risk adjusted return from the proposed trades not large enough for market based on individual transactions to exist.
I think you make good point about how something similar is done with risk adjustment and side payments for large pools.
mclaren
As soon as someone starting talking about “positive externalities,” you know he’s an asshole.
The Germans produced huge positive externalities by murdering and cremating 6 millions Jews in WW II. Think of all the jobs the Germans created building crematoria, staffing the death camps, running the railroad cars full of people…employment up the wazoo.