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Hutchins Roundup: Cost-sharing, business debt, and more

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Studies in this week’s Hutchins Roundup find higher cost-sharing for prescription drugs increases patient mortalitybusiness debt is riskier for financial stability than household debt, and more.   

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Increased cost-sharing lowers demand for life-saving prescription drugs, increasing patient mortality  

Policies that increase cost-sharing lower the demand for prescription drugs, but measuring the health impacts of such policies can be difficult. Amitabh Chandra and Evan Flack of Harvard and Ziad Obermeyer of the University of California, Berkeley, exploit the effect of patients’ birth month on the annual spending threshold of Medicare’s prescription drug benefit program to observe random variation in higher cost-sharing across the program—and find that an increase in out-of-pocket price of 33.6% (or about $10.40 per drug) results in a 22.6% drop in demand and 32.7% increase in monthly mortality. This is driven primarily by lower demand for life-saving medicines like statins and antihypertensives, which falls more for high-risk patients than low-risk patients. Furthermore, price increases cause 18% more patients to purchase no drugs at all—rather than just cutting back on some drugs to save money—regardless of their health risks or usual drug consumption. These distortions in patients’ decisions to fill their prescriptions are “large and deadly,” the authors say, and should be considered when evaluating the impact of health care policy.   

Business debt presents a greater risk to financial stability than household debt  

Nonfinancial business debt and household debt were at roughly the same level ($16.1 trillion or 74% of GDP) at the end of 2019. Since the onset of the pandemic business debt has increased by about $1.25 trillion and household debt by less than $100 billion, intensifying pre-Covid concerns at the Federal Reserve about the risk that business debt poses to financial stability.  Fan Cai and co-authors from the Federal Reserve Board say that this concern reflects the potential that, in the event of a ratings downgrade, institutional holders of bonds and business loans will rush to sell those assets, pushing down their prices in a downward spiral known as a fire sale.  In contrast, a large share of household debt, which includes mortgages and student loans, is held or guaranteed by the government so the likelihood of fire sales is much lower. In addition, business debt is more likely to be illiquid than household debt, amplifying the consequences of fire sales. The authors predict that businesses will emerge from the pandemic more leveraged than they were before, suggesting that the potential for fire sales will be a growing concern.   

Republican governors spend less federal aid to states than Democrats, limiting its impact   

Partisanship affects how federal aid to state governments is spent, say Gerald Carlino of the Philadelphia Fed and co-authors. By observing state spending after close gubernatorial elections—where the outcome was unlikely to have been decided by broader economic trends—the authors find that Democratic governors tend to spend their federal aid, while Republican governors use it primarily to reduce taxes. This significantly affects the impact of federal fiscal stimulus, the authors say: if Republican governors spent as much of the aid as their Democratic counterparts, the impact per dollar of federal to state transfers on aggregate income would be 61 cents higher. Republican-led states that allocate the aid to tax relief over spending see lower resulting increases in state output than Democratic states do, with spillover effects on other states’ output as well. These partisan differences in aid spending appear to have first emerged during the Reagan presidency, and risen with increased political polarization over time.  

Chart of the week: $15 minimum wage is almost $3 higher than previous inflation-adjusted peak

Line graph of the minimum wage over time, in nominal terms and adjusted to 2020 dollars.

Quote of the week:  

“Two lessons from the Great Recession are relevant to today’s economy. First, we must stop underestimating the current crisis. Second, assistance shouldn’t be too targeted… In 2008, our housing assistance programs were carefully designed to target only deserving families—but ended up helping relatively few. While it is, of course, important to be prudent with taxpayer resources, we learned that it is better to err on the side of being generous to successfully extinguish the crisis and provide the support that families need. Unemployment benefits are targeted at those who need help because they lost a job, but the program often misses the lowest-earning and least-educated workers—those who most need support,” says Neel Kashkari, President of the Minneapolis Fed.  

In comparison, one-time direct payments from the government are a blunt policy tool. But they have the advantage that aid reaches more needy families. Families who receive payments but don’t need the money are likely to pay down debt, which is not inflationary. Unemployment benefits and one-time payments are complementary tools that help ensure families in need get assistance.”   

Sophia Campbell

Senior Research Assistant - Hutchins Center on Fiscal and Monetary Policy

Kadija Yilla

Former Senior Research Assistant - Hutchins Center on Fiscal & Monetary Policy, The Brookings Institution

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