Successive Australian governments have rested on their laurels regarding reforming health insurance. However, Stephen King and I have always maintained that there was more to be done to ensure welfare gains at the margin. This is why we re-released our book, Finishing the Job, this year ($1 at Amazon and free on iBooks). Our theory (published in the Economic Record in 2003) was that Australia could gain from moving from a system where private treatments were paid for at full cost to one where they were a ‘top up’ over public treatments.
Liran Einav, Amy Finkelstein and Heidi Williams have just released a paper that provides support for this. Here is the abstract.
We present a simple framework to illustrate the welfare consequences of a “top up” health insurance policy that allows patients to pay the incremental price for more expensive treatment options. We contrast it with common alternative policies that require essentially no incremental payments for more expensive treatments (as in the United States), or require patients to pay the full costs of more expensive treatments (as in the United Kingdom). We provide an empirical illustration of this welfare analysis in the context of treatment choices among breast cancer patients, where lumpectomy with radiation therapy is a more expensive treatment than mastectomy, with similar average health benefits. We use variation in distance to the nearest radiation facility to estimate the relative demand for lumpectomy and mastectomy. Extrapolating the resultant demand curve (grossly) out of sample, our estimates suggest that the “top-up” policy, which achieves the efficient treatment decision, increases total welfare by $700-2,500 per patient relative to the current US “full coverage” policy, and by $700-1,800 per patient relative to the UK “no top up” policy. While we caution against putting much weight on our specific estimates, the analysis illustrates the potential welfare gains from more efficient reimbursement policies for medical treatments. We also briefly discuss additional tradeoffs that arise from the top-up and UK-style policies, which both lead to additional (ex-ante) risk exposure.
These are quite large estimates for just a single treatment type. It provides strong support that health insurance reform should still be on the Australian policy agenda.
Core Economics 
Well, only having read part of the paper, it only looks at patients with Stage 1 and Stage 2 cancer where lumpectomy is a good option. Stage 3 patients may be eligible for lumpectomy, but if that isn’t sufficiently clear, move on to mastectomy and radiotherapy as well. It seems ridiculous to place much reliance on 15% as an evidence of some kind of demand curve when the difference between patients with this stage of cancer within 10 miles of a radiotherapy facility choosing mastectomy at 43% and those at further than 50 miles at 58%. In Australia, maintaining some kind of body image is recognised as part of treatment for recovering BC patients given that reconstructions are subsidised in the public system.
Interesting that this kind of analysis could point to a reduction in treatment alternatives to BC patients in the public system in the long term. I guess this paper is a proxy for trying to give the public price signals for medical procedures for what the society is prepared to subsidise and procedures for which it is not. In Australia, I’d like to think we give a better outcome. Breast cancer is difficult because it affects predominantly women and their physical and social identity. It’s not like diabetes or bowel cancer. Mastectomy should not necessarily be privileged over lumpectomy just because it’s cheaper. Distance from medical facilities should not be considered a proxy measure of the individual’s preparedness to pay, but an example of social and economic disadvantage. Rural Australians already pay a price for isolation in poorer health outcomes altogether.
I guess I think this paper is not a fantastic example of how to ration medical subsidies because it taps into other social issues rather than just survival.
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