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Looking for lessons from the US health care system

Nobel laureate McFadden at the Center for Advanced Studies

Munich, 04/02/2009

Nobel laureate Daniel McFadden, professor of economics from Berkeley, comes to the Center for Advanced Studies (CAS) of LMU Munich as a visiting fellow. During his visit, the microeconomist shall be intensifying his long-standing cooperation with the LMU Munich economics faculty, and shall be working on a research project regarding the US health care system together with Professor Joachim Winter of the Seminar on Empirical Economics Research. These economists are analyzing the consequences of introducing prescription drug insurance coverage for the elderly or chronically ill, and intend to follow this up with another project investigating whether the new findings and empirical methods can be applied or extrapolated to the German system.

In the USA, people over 65 and patients with certain severe illnesses or disabilities are covered by the Medicare health insurance program. Until a few years ago, however, Medicare did not cover the costs of prescription drugs. This could be a considerable financial burden in particular for those with chronic illnesses. It was for this reason that a new prescription drug program was added to Medicare at the beginning of 2006, which goes by the name of “Medicare Part D”. Participation in this insurance program is voluntary.

Those entitled to this coverage, however, still have to choose an insurance company – which often puts them in a difficult situation. The problem is that there is a menu of insurance contracts offered by a plethora of private insurance companies. While they all fulfill the prescribed base standards, they all differ in their degree of coverage and premiums. That makes the decision extremely complicated for the individual. “Our research project deals with the question of how elderly insurance holders cope with this challenge, and whether they make decisions that are appropriate for their personal financial and health situation,” explains Professor McFadden.

Another problem Medicare Part D has to account for is "adverse selection”. This phenomenon is seen in every insurance market, and arises because higher risk people – in this case patients who spend more money on prescription drugs than average – are more likely to sign up for insurance than lower risk people. In response, the insurance companies then often raise their premiums, which in the extreme case can lead to the collapse of an insurance market. The US government has introduced many institutional measures to reduce adverse selection in the market for Medicare Part D insurance plans. The research group working with Professor McFadden, which includes Professor Winter, Dr. Florian Heiss and several Munich PhD students, is evaluating these reforms, and working on concrete recommendations on how the reforms can be optimized.

“The problems for making decisions on private insurance markets, which we are investigating for the USA, will start to show up more frequently in a similar form in Germany as private complementary insurances become ever more standard,” says Professor Joachim Winter, who is heading the research project for LMU Munich. “We will be investigating in a following project to what extent the results obtained in the USA and the empirical methods used there could also apply to Germany.”

To give PhD students a chance to talk with the Nobel laureate, the CAS will also be putting on a PhD workshop during Professor McFadden’s visit. During this workshop, five doctoral candidates from the economics faculty dealing with the empirical analysis of individual decision behavior – especially in the field of health economics – will present their projects and discuss them with the Nobel laureate.

About Professor McFadden
Daniel McFadden was given the Nobel Prize in economics in 2000 for his groundbreaking work on microeconometrics. He has developed theories and methods for statistical analysis of the behavior of individuals and households that are now established instruments used in social sciences. After earning his doctorate in economics in 1962, Daniel McFadden started teaching as professor of the University of California, Berkeley. In the late 1970s, he switched to the economic faculty of the Massachusetts Institute of Technology. In 1991, he returned to Berkeley, where he established the Econometrics Laboratory, which he heads to this day.

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