Treating Drug Problems Volume 2 (1992) / Chapter Skim
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The Market for Drug Treatment
The Market for Drug Treatment
Pages 245-288
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From page 245... ...
and the general public (financing the implicit tax expenditures on employer-financed health insurance and on the medical deduction from personal income taxes)
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After briefly surveying some relevant facts, the paper presents rationales for public intervention and a framework for policy analysis. A later section discusses the effects of various policies on market equilibrium, considering the interrelated markets for treatment and insurance coverage and some difficulties in empirical application.
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The remainder are self-referred, although many of these individuals have been heavily pressured by employers, friends, and family.7 RATIONALE FOR PUBLIC INTERVENTION Welfare Economics and the Pareto Standard No doubt it would be pleasanter to live in a world with less drug addiction, but from this fact we cannot automatically conclude that public intervention is warranted. Resources are scarce and social needs boundless.
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In cases of drug addiction, the economists' presumption is confronted with its severest test. First, consider the diversity of preferences evidenced by an addict who asks you to lock him up until he "kicks" the habit.
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One could argue that addicts are not perfectly informed; thus, their choices do not maximize their well-being. If they were fully informed of the consequences of drug addiction, one could conjecture that many would
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One could justify intervention by rejecting the principle of consumer sovereignty as it applies to drug addiction. Society can continue to care about the well-being of each of its citizens but still reject the notion that drug addicts are the best judges of their own well-being.
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If drug addiction causes external costs, then drug treatment causes external benefits. Thus, in a free and unregulated market, we would expect to see too little drug treatment, and some sort of subsidy may be warranted.
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From this perspective, contagion is not itself an externality, but it interacts with and worsens other externalities that result from drug addiction. The "multiple personality" theories of addiction suggest an alternative rationale in which contagion is directly the source of an externality.
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, a gift of money is far superior to a subsidized or coerced treatment program. One can argue that addicts do not know what is in their own best interest, but there are dangers in the paternalistic overruling of anyone's preferences.
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Many health insurance policies are purchased for a
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Insurance thus brings the usual gain in expected utility by reducing financial risk, but this gain accrues to the owners of the firm rather than the insured party. Yet the story is even more complicated because both parties have some bargaining power when employee drug addiction is discovered.
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Moral hazard causes individuals to consume more treatment than in their "private optimum," but this is precisely what we want addicts to do because treatment produces external benefits. Individual insurance companies would not obtain the full external benefits resulting from treatment, so they would continue to offer policies with copayment.
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Thus, mandating elimination of copayment is not a sufficient policy to induce optimal drug addiction coverage. Policy options with respect to insurance are discussed in greater detail in a later section.
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First, the benefits of externality reduction are not necessarily a linear function of the extent of drug addiction. The benefits may depend on the share of users in the population rather than the number, and there may be thresholds beyond which the problem becomes exponentially worse.
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Again, in measuring the success of a drug treatment program, we should consider the extent of externality reduction, not just the "cures rate. But if treatment programs are not very effective or are very expensive, alternative solutions (which reduce the external effects of drug addiction without attempting to cure the addiction)
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Then, equilibrium is characterized In the standard way, as illustrated in Figure 1. With the initial demand curve Do and short-run supply curve SO, the equilibrium price is PO and quantity is QO.
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261 demand curve Di and short-run supply curve 5~. Assuming, quite reasonably, that this is a constant-cost industry, the long-run supply curve (which connects long-run equilibria for different demand curves)
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If there were many more consumers and the height of the kink points on individual demand curves was uniformly distributed, then the kinks would become much less noticeable in the market demand curve. In the limit, market demand would be smooth and downward-sloping despite the kinks in individual demand.
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Immediately, we are faced by the complication of three distinct prices: the price paid by the addict (denoted Pc, for consumer pricey, the price paid by the insurer (denoted Pi, for insurer price) , and the price received by the treatment center (denoted Pp.
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From page 264... ...
, at which point the new producer price is returned to its pre-insurance level. Analytically, there is no difference between the effect of an insurance contract with copayment and the effect of a price subsidy paid for by the state.28 Either would decrease the price paid by the addict, increase the quantity of care purchased, and, by raising short-run profits, lead to longrun entry of new treatment centers.
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~ O O ° O SHORT RUN go / o ~1 \ \ O a o \ D [ I \ O1 LONG RUN ^ a_ o MOORE 4 E~cl of insuring amens or pad subsidies ~ g~emmenl on equilibrium
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The deduction amounts to a price subsidy, creating a wedge between net out-of-pocket, per-unit expenditures by the addict (the consumer price) and per-unit receipts of the treatment center (the producer price)
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Thus, the effect of current tax treatment of medical expenses is analytically equivalent to the effect of an insurance policy with copayment and deductibles, and Figure 6 performs double duty. Intertemporal Effects The demand for future treatment depends on the current supply of addicts, which, in turn, depends on current governmental policies in several ways.
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The Market for Insurance Policies In the section above on insurance, tax breaks, and other price subsidies, the discussion showed how equilibrium in the drug treatment market depends on the quantity and type of insurance policy possessed by the addict. In turn, the equilibrium quantity and type of insurance depends on the appropriate supply and demand curves for insurance.
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The set of formats offered might change when government policies alter the demand for insurance on a large scale, so we have the complication of estimating a mutatis mutandis demand curve (that is, the demand curve allowing that which will change to change) rather than the ceteris paribus demand curve (holding all else constant)
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To determine whether this reduction is worth the cost, it is critical to estimate the slope of the demand curve, which reveals the sensitivity of utilization to price. For traded goods, economists typically employ observations on prices and quantities exchanged to estimate demand and supply curves.
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In particular, we would like to estimate crossprice elasticities, which would indicate the effect on the demand curve for, let us say, for-profit hospital 28-day treatment of a decrease in the price charged by 6-month nonprofit facilities. We would also like to understand crowd-out effects between the public and private sectors.
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For example, one treatment center offered free treatment for relapsers, although this policy was subsequently discontinued.34 Suppliers face nonlinear prices when a client declares bankruptcy after paying for part of the services he received, or when a client reaches his insurance ceiling and the treatment facility continues treatment anyway on a charity basis. As long as prices follow an externally fixed schedule, supply and demand curves are well defined.
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Three categories of policies are briefly considered here: policies to increase the supply of service, policies to increase the efficiency of service, and policies to intervene in the health insurance market. The Supply of Treatment Treatment is supplied by government, nonprofit, and for-profit organizations.
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Financial subsidies to treatment centers can take the form of direct grants (as in the Hill-Burton hospital construction program) or tax breaks and can be made contingent on charity care or anything else the government wants.
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Another problem of supply stems from community opposition to new treatment centers.49 Siting an "obnoxious facility (such as a public housing project, toxic waste dump, or prison) is not an easy task for any level of government,50 and local opposition can tie up a treatment center for years.5i Thus, it would be quite useful to study the extension of eminent domain to private treatment facilities serving the public interest.
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In equilibrium, a diversity of treatment technologies would reflect the diversity of treatment needs of different kinds of patients, an outcome far from guaranteed when service is provided or contracted for by a centralized government bureaucracy. To be effective, vouchers would have to be restricted to certified treatment centers.
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However, practical and political considerations may keep these policies from achieving that potential. Insurance Options One serious proposal is to subsidize the purchase of health insurance generally or for drug addiction specifically.
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Finally, mandates add to the cost of insurance coverage. It is clear that the total cost of the wide variety of state mandates is an important deterrent to employer-provided insurance coverage, although the impact of drug addiction mandates is undoubtedly smaller.
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companies that didn't offer health insurance in 1985 would have implemented plans if their states' mandates were eliminated (Jensen, 1988:307~. A similar study released by the National Center for Policy Analysis estimated that "some 25% of the nation's 37 million people without health insurance lack coverage because of the mandates.~59 Again, companies have far less reason to oppose drug addiction coverage then other mandates, but the potential impact of a massive increase in the required coverage level should not be ignored.
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to ignore this state mandate (Michael ~ Morrisey and Gail ~ Jensen, Employer-sponsored Insurance Coverage for Alcoholism and Drug Abuse Treatments, Journal of Studies on Alcohol 49, September 1988, pp.
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Becker, "De Gustibus Non Est Disputandum,N American Economic Review 67, 1977, pp. 76-90; Laurence R
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Some individuals will receive treatment for addiction even if their insurance policy does not cover the costs of this treatment. For these individuals, future health care costs are lower whether drug insurance coverage is extended to them or not, and there are no pecuniary externalities.
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On the one hand, the personal income tax treatment of employer-provided insurance leads to overinsurance; on the other, employee turnover leads to underinsurance. See Pauly, "Taxation," pp.
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If the highaddiction community were their final destination, the cost of drug addiction to outsiders would be reflected in local property values. If the workplace were in a high-crime district, the employer would have to offer higher salaries to attract workers, and this would reduce the value of the land site to employers.
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660-662, and the references cited therein. 37The technique was originally developed in Gary Burtless and Jerry Hausman, "The Effect of Taxation on Labor Supply: Evaluating the Gary Negative Income Tax Experiment," Journal of Political Economy 86, 1978, pp.
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40Mark D Uehling, "Drug Rehabilitation: The Addict Glut: Public Treatment Centers Lack Beds and Funds," Newsweek 108, August 25, 1986, p.
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Enthoven, "A New Proposal to Reform the Tax Treatment of Health Insurance," Health Affairs 3, 1984, pp.
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288 STEINBERG ACKNOWLEDGMENT The author wishes to thank Henrick Harwood, Mark Pauly, Sharon Brown, Jacques Cremer, Stephen Sheppard, William T Smith, II, Philip J
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