Bloomberg News

Obamacare Competition Has Roots in Economist’s Passion

May 30, 2013

Economist Leemore Dafny

Economist Leemore Dafny stands for a photograph at the Federal Trade Commission in Washington, D.C. Photographer: Andrew Harrer/Bloomberg

Millions of Americans will take advantage of economist Leemore Dafny’s research on competition when they enroll in a new system this fall to buy health insurance.

Colleagues say Dafny’s examination of health-insurance markets has helped mold the state and federal exchanges that are central to President Barack Obama’s 2010 health-care law, which allows qualified individuals and small businesses to purchase coverage. Her studies show a lack of competition in insurance markets drives up premiums, part of the reason “the goal is to get more than half a dozen plans in each exchange,” said David Dranove, director of the Health Enterprise Management Program at Northwestern University’s Kellogg School of Management. “Leemore identified that just having two or three plans in a market is just not enough.”

Dafny, 39, says her career is driven by a clear mission: to use economics to guide policy. David Cutler, a Harvard University health economist and former senior health-care adviser to the 2008 Obama campaign, says she is well-equipped to do just that.

“I would not at all be surprised if someday she were the chief of antitrust in the U.S.,” he said. “I would not at all be surprised if every state government across the country calls her and says, ‘Hey, can you help us out with how we should deal with our provider systems?’”

Deputy Director

A professor at the Kellogg School in Evanston, Illinois, Dafny is involved in changing the health-care industry beyond her research. She is now on leave after being tapped last year as the Federal Trade Commission’s deputy director for health care and antitrust, a newly created role to bring an outside, expert perspective, said Howard Shelanski, director of the agency’s Bureau of Economics.

Dafny, a mother of three who grew up in Houston, Texas, has long been on a path to Washington. The daughter of a schoolteacher and a Ph.D. neuroscientist on the faculty at the University of Texas Medical School at Houston, Dafny left home for Harvard in Cambridge, Massachusetts, to study medicine.

Her plans changed when she took an introductory economics course taught by Martin Feldstein, past president of the National Bureau of Economic Research and one of President Ronald Reagan’s chief advisers.

Undiminished Fascination

“I thought it was riveting and that fascination really didn’t diminish over time,” she said in an interview with Bloomberg News. Feldstein, who Dafny says was a major influence on her early career, took her on as a research assistant. When she graduated, summa cum laude, he advised her to go immediately for an advanced degree.

“She was very bright, and she was a very good economist,” Feldstein said in an interview.

Dafny instead opted to work as a business analyst at McKinsey & Co. in Washington. She was interested in helping companies improve strategy, she said, yet found herself revising her honors thesis after work.

Her experience at McKinsey, from 1995 to 1997, and her love for economics pushed her to pursue a “fascinating and even more motivating” goal.

“I saw businesses engaging in practices that are profit-maximizing and not welfare-maximizing,” Dafny said. “It led me to want to figure out a way to marry the objectives of businesses with the objectives of society.”

She returned to school and completed a Ph.D. in economics at the Massachusetts Institute of Technology in Cambridge, did post-doctoral work at the NBER and in 2002 joined Kellogg as an assistant professor.

Influence Policy

“One of my objectives was to ensure that I had the ability to influence policy in Washington,” she said.

That ambition will be met as a major part of the Affordable Care Act rolls out this fall.

The act aims to expand U.S. health-insurance coverage while slowing the increase in medical costs. Exchanges -- government-regulated marketplaces where individuals and small businesses can compare private companies’ policies and premiums to buy coverage -- will begin enrolling qualified Americans starting in October.

States can set up exchanges, although 27 have chosen not to. The federal government is creating all or part of the exchange in these states plus seven others that have partnership arrangements. At least 15 states and the District of Columbia are building their own.

National Model

Jonathan Gruber, head of Dafny’s dissertation committee at MIT, said he consulted her about her research when he was helping to craft Obama’s health-care policy. Gruber also used Dafny’s work in refining the Massachusetts exchanges as a member of the independent agency that administers the state’s health plan, which was enacted in 2006 and served as a model for the national program.

“Leemore wrote really a classic article” showing that insurers have market power, Gruber said of her 2010 study on health-insurance competition, adding that the question had long gone unresolved. “It was very helpful to me as I thought about how to set up these exchange markets.”

Dafny began working on the topic in 2004 after a family friend at a large benefit-consulting company told her about a database developed to track health plans that client businesses offered employees. Once she took a look and began to create a methodology for analyzing the information, she said she realized the data could help her “get a handle on the competitiveness of the health-insurance market.”

10 Million Lives

Her friend “smoothed the way” for her to access the information, which spans policies offered by 800 large and medium-sized companies from 1997 to 2009. It includes more than 10 million insured lives per year, Dafny said.

She used the 1998-2005 data to determine that insurers charge more profitable businesses higher premiums, a relationship strongest in geographic markets with a small number of carriers. Beyond higher costs, scant competition also probably causes “a lack of innovation,” she said. She published her findings in the 2010 paper in the American Economic Review.

In 2012, she co-authored a paper that found increases in local concentration between 1998 and 2006 caused premiums in average local health-insurance markets to rise 7 percentage points.

“Given private health-insurance expenditures of $490 billion in our base year 1998, if this result is generalizable, then the ‘premium on premiums’ by 2007 is on the order of $34 billion per year, or about $200 per person with employer-sponsored health insurance,” the study said.

More Options

Another paper published in the American Economic Journal: Economic Policy found that consumers would benefit from more plan options. Dafny and her co-authors determined that workers were willing to give up 16 percent of their employer health-insurance subsidy for the option to apply the remainder to a plan they could select.

Dafny has tackled other topics, from tort reform to hospital mergers, and that diversity helped her land the role at the FTC, Shelanski said.

“To have a top-level researcher like Leemore Dafny here to ensure that we are always applying the state-of-the-art knowledge and techniques, that is extremely valuable,” said Shelanski, who is Obama’s nominee to be director of the Office of Information and Regulatory Affairs.

Safeguard Competition

Dafny and a co-deputy oversee a staff of more than 50 economists, investigating cases and advising on issues related to safeguarding health-care competition. Though the job restricts her from most work involving the insurance industry, her role is relevant to changes at businesses including hospitals.

“Mergers and combinations are happening more and more frequently,” said Julie Brill, an FTC commissioner who works closely with Dafny. As the Affordable Care Act continues to be implemented and health-care companies try to position themselves for integration, ensuring competition is a constant concern, she added.

While working toward a more efficient health-care market satisfies Dafny’s academic dreams, it comes at a cost. The mother of 4-year-old twins, a boy and a girl, and a 6-year-old son had to relocate her family to take her current job, and her schedule means she sometimes misses parent lunches at preschool.

“It requires trade-offs and sometimes not sleeping,” she said. Still, she said she and husband Nat Harrison, an entrepreneur and business consultant whom she met at Harvard, have made the lifestyle work. “If I want to do something, I’m not going to let anything stand in my way.”

Flexible Schedule

If she had to give advice to young women interested in economics, she said it would be that an academic’s schedule is flexible and can work well with a family life.

“I ran regressions while I was in labor,” Dafny said. She spends her weekends at play dates, driving to piano lessons and Sunday school, and makes time to run for exercise.

Her children treat the move to Washington as an adventure, she said. They play with their mother’s government badge, and her older son wonders aloud when Obama is coming to visit.

Dafny is quick to point out that her kids over-rate her importance, though Harvard mentor Feldstein says the young economist has room to make a mark.

“She’s working on really important topics,” he said. “Anyone who cares about government spending and efficiency in government spending has to care about health economics.”

To contact the reporter on this story: Jeanna Smialek in Washington at jsmialek1@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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