To identify the impact of PPS on cardiac procedures, I exploit the discontinuity in Medicare eligibility at the age of 65. Utilizing data from before-and-after the PPS [prospective payment system] reform, I find a discontinuous change in CABG [coronary artery bypass graft] use at age-65 after the reform that implies an increase of 50 to 60 percent. Nearly all of the increase is driven by a composition change in the patients who receive CABG, with treatment expanded to patients who are observably healthier (i.e., fewer grafts or no comorbidity). Possible competing hypotheses do not exhibit changes at the age-65 threshold (e.g., disease incidence, insurance rates). The increased CABG use was not cost effective - the lower bound estimate of the cost per quality-adjusted life year was over one million dollars. The average cost payments of PPS provided incentives for hospitals to expand the use of technologies that have high fixed costs; an expansion that increased health care costs with possibly little health benefits.
The idea of PPS was to reduce costs. It did not work. The idea of the health insurance mandate in Massachusetts was to reduce costs (of uncompensated emergency room care). It did not work. The great technocratic hope these days (e.g., David Cutler) for reducing costs is pay-for-quality. It has already been tried in the UK. It did not work.
The problem is analogous to the problem of financial regulation that I described as a chess game. The regulator looks at existing behavior and sets up a set of regulatory incentives to try to achieve a result. However, the regulated entity does not respond passively. Instead, the health care provider (or the bank, if that is what we are talking about) figures out how to achieve its objectives within the new regulatory framework. The net result is that the intended consequences of the regulation are not achieved, while unintended consequences crop up.
Noah Millman finds that if you compare by decade the growth in per capita health care spending in the U.S. and other countries, the 1980s is the outlier period. Before the 1980s, we are within the ballpark of other countries, and after 1990 our spending grows at the same rate as other countries. We attained our status as a high spending in the 1980s. Tyler Cowen provided the pointer.