Promoting Better Public Policy

“I see a lot of bad public policy being made because of a lack of good evidence,” said Robert Kaestner, professor in the Department of Economics and the University of Illinois Institute of Government and Public Affairs. “I really want to provide policy makers with solid research and firm evidence so that they can make better public policy decisions.”

Robert Kaestner

Robert Kaestner. Photo by Micki Leventhal

Kaestner did not always tow the hard empirical line. As an undergraduate “at the end of the hippie era” at Binghamton University, Kaestner studied labor history with both Melvyn Dubofsky and Immanuel Wallerstein; he became fascinated with economics in the context of the early radical labor movements. Pursuing economics in graduate school, Kaestner got a reality check.

“There is a great old saying, ‘you want to have a soft heart and a hard head.’ That is what separates economists and gives us a bad name among people in the humanities and some social science disciplines,” he said. “They often conflate economists’ having hard heads with having hard hearts. That’s not really the case—it just takes a very analytical approach to make real progress.”

When health care policy began to emerge as a pressing national concern, Kaestner shifted his focus from labor economics to health care. “We have passions, but we also are driven by market economics,” he said. “You build up areas of expertise and specialty, one idea moves to another, and you become well known for your work. That’s how my life in academia has unfolded.”

Kaestner’s recent study, “Does Prescription Drug Insurance Affect Use of Inpatient and Outpatient Services? Evidence from Medicare Part D,” provides an illustration of how a lack of evidence can result in well-intentioned but economically-costly public policies.

Medicare Part D, which came into effect in 2006, provides prescription drug coverage for the elderly. The rationale for instituting Part D was the theory that affordable access to prescription drugs would reduce use of more costly inpatient and outpatient medical services. In 2011, the combined annual cost of Part D at the state and federal level was $67.7 billion.

Kaestner’s study looked at two groups: individuals who had no prescription drug coverage prior to Part D and a ‘control group’ of individuals who had coverage through their purchase of private supplemental insurance. In 2006, both groups, as well as individuals previously covered by Medicaid, were moved into Part D.

Using data from the National Health Interview Survey, Kaestner demonstrated that while there was a 40 percent increase in the use of prescription drugs across both groups after the implementation of Part D, there was no corresponding decrease in the use of inpatient or outpatient medical services. Simply put, more seniors were taking more drugs because they now had insurance coverage, but everyone was still going to the doctor and getting hospitalized at the pre-2006 levels. The cost savings envisioned by Congress were based on intuition rather than evidence. “Good public policy is sometimes counter-intuitive; bad public policy is very intuitive,” said Kaestner.

“We created this program to target one-third of the elderly population of 40 million. Prior to 2006, only 12 million elderly did not have supplemental prescription insurance, but to get those folks insured, we created a program that gave a subsidy to all 40 million,” explained Kaestner. “It is similar to the policy in Illinois that gave all seniors free bus and train rides. There is a group that really would benefit from this and a much larger group that really could pay, but everyone got the subsidy. So, for every one person we helped, we had to pay for two or three others who did not need it.

“From one point of view that’s fine because you’re treating everyone equally; that’s called horizontal equity, but it is a very expensive way to proceed in government. Plus, before Part D, the truly poor among the elderly were getting free prescription drug coverage through Medicaid. In 2006 they were moved into Part D, which in some ways is not as generous, so those individuals are actually worse off.”

Kaestner’s current study, funded by the National Institutes of Health, looks at whether increasing Medicaid payments—and therefore access—to primary care physicians will improve health management among the elderly and decrease the costly use of specialists and hospital admissions.

“This is built into the Affordable Care Act in which it is mandated that every state pay its Medicaid primary care doctors more,” he said. “The belief was, ‘We’re going to pay them more, more poor people are going to see them earlier, get proper care, and stay out of the hospital.’ That sounds nice, but there is not one shred of evidence to validate that this is true. It may be true, it may not be true. We need to find out.

“Too much of public policy is made with soft hearts and soft heads,” Kaestner concluded. “You want to feel and have compassion and understand the problems, the importance and the consequence of those problems, and you want to do something good about it. You want to be a do-gooder, that’s our soft heart, but you know what they say: ‘the road to hell is paved with good intentions.’ That’s what economists want to avoid.”