Have you ever read about the waste in our healthcare system and wondered why insurers cover so many apparently wasteful services in the first place? You’d think they could just refuse to cover those things and save themselves and the entire system a lot of money.
In Wendy K. Mariner’s Rationing Health Care and the Need for Credible Scarcity: Why Americans Can’t Say No, published in Health Law and Ethics in 1995, she discusses this issue. Even though the article is from 1995, I think her insights still apply.
“When the media report that a woman is dying of advanced breast cancer and her insurer will not pay for high dose chemotherapy and autologous bone marrow transplantation because it considers the procedure experimental or unsuitable for her, the insurer is widely viewed as depriving the woman of a chance at life to which she is entitled. Insurers may argue that the insurance policy expressly excludes such procedures and that the woman agreed to its limits. Such arguments, even when correct, do little to assuage feelings that the insurer is depriving people of care to which they should be entitled. This feeling is exacerbated by the suspicion that the insurer could pay for the treatment if it chose, that it has enough money to buy services that are readily available. Thus, what looks to the insurer as sensible budgeting may appear to the patient as unnecessary and unfair rationing.”
If the insurer chooses to refuse coverage, it saves the cost of that service, but it risks losing a whole lot of its good reputation and future enrollees if the woman goes to the media with her story. I’m sure she could find a journalist willing to jump on that story and write it in a way that convincingly makes the insurer seem like the villain.
So, insurers are rationally covering things that could be considered wasteful. This is just one more example of how parties in the healthcare system respond so rationally to incentives. Which means if we can fix the incentives, we can fix the behaviours in the healthcare system.
You know the word “travesty”? People who want to sound smart sometimes use it instead of tragedy, as if it’s the smart person’s version of tragedy. But it’s not. They use the word even though they don’t know what it actually means.
People do the same thing with “competition.” Many think it’s either the solution to everything or the cause of all evil . . . even though they don’t seem to know clearly what it means.
It turns out, I can’t fault them. This is a longstanding issue. Maybe I’m just ignorant of some classic economics textbook that has the grand master definition in it (you’d think they would have covered it in the econ classes I took), but man is it hard to find a definition of this word! I was especially hoping to find one from at least one of the classic economic thinkers. This is the best I could come up with . . .
Adam Smith didn’t use the word very much. Here’s the main example of how he thought of it, taken from The Wealth of Nations, Book IV: “The competition of producers who, in order to undersell one another, have recourse to new divisions of labour, and new improvements of art, which might never otherwise have been thought of.” So, in his mind, competition was simply improving manufacturing processes to undersell competitors?
And Joseph Schumpeter, who even still has a type of competition named after him (“Schumpeterian competition”), didn’t offer up a definition that I could find either. The closest thing is what he wrote in Capitalism, Socialism, and Democracy: “But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest-scale unit of control for instance)—competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.” He’s taking the term as a given and focusing on a specific type of it–the type related to how new innovations impact competition.
Even Michael Porter, in his book Redefining Healthcare, never provides a definition. He says things like this though: “The way to transform health care is to realign competition with value for patients. Value in health care is the health outcome per dollar of cost expended. If all system participants have to compete on value, value will improve dramatically.” He felt the need to define value, but never competition, and, like the others, took the term as a given.
And I’m completely skipping over all the definitions of “perfect competition,” which describes everything around a special case of competition without actually defining it either.
How about Wikipedia? It at least offered a definition! In the article Competition (economics), it says, “Competition is a scenario where different economic firms are in contention to obtain goods that are limited by varying the elements of the marketing mix: price, product, promotion and place.”
Competition is a scenario? And the main focus is that firms are trying to obtain goods? This one sounds really smart, but I disagree with it. I also believe it doesn’t facilitate a clear understanding of the concept.
So it’s time I offer up my own definition. Maybe I’ll change it over time as I learn more. But for now, this is what I’ve got:
Competition is a state in a market where there are multiple companies trying to win more profit by convincing potential customers to choose their product or service because it will meet their needs in a higher-quality and/or lower-priced (i.e., higher-value) way than other companies’ offerings.
I’ll unpack that.
First, it’s a state of being. Markets can exist in a state of competition or not. Really, it’s a continuum from no competition at one end to perfect competition at the other end. But the bare minimum needed for it to exist is for there to be multiple companies fighting for limited profits, which are the prize. If this is a non-profit environment, then we’ll call profits “surpluses.” Same idea. And to win those profits, they need to convince potential customers to choose them over their competitors. There’s always a mix of strategies–high-profit low-quantity vs. low-profit high-quantity–but the end goal with all of them is to win the most profit. I recognize that more and more companies are “mission driven” rather than “profit driven.” That’s great and all–I guess they’re willing to give up some profit to achieve their mission. But the stark reality is that they need to earn enough money to continue achieving their mission, which means they still have a strong profit motive if they want to sustain and grow.
I’m deliberately not defining which companies count as being in a market because it depends on the needs of people. For example, Ford’s new F-150 Lightning (an electric vehicle that can even use its battery to power your house) technically is filling the same need as people shopping for an emergency back-up generator, which means for that customer segment Ford is competing with generator companies. Competition often spans the traditional boundaries of markets.
And I said “convince” potential customers because people make a purchase decision based on the information they have. It’s not enough to be objectively better in every respect. It only matters if you convince people who are looking for a solution to fill their need. Long-term, yeah, you generally need to actually be higher-value to keep customers, at least if there’s enough information available to potential customers to make the market somewhat transparent.
So there you go. An actual attempt at a definition of competition. And, thinking about it now, isn’t it a wonderfully desirous state to strive for? I hope this definition is useful in helping you think about what you are meaning when you use the word.
In last week’s post, I summarized this article, which is the last in the Fundamentals of U.S. Health Policy series published by The New England Journal of Medicine. The article was written by Michael Chernew, Ph.D., and discusses the role of market forces (more specifically, competition) in improving our healthcare delivery system.
I’m heavily biased toward using competition inasmuch as it is possible (for good reason), but that doesn’t mean I’m blind to our failed attempts at improving competition in healthcare. And Dr. Chernew does a great job summarizing many of those failed attempts while remaining optimistic that competition still has a role in improving our healthcare delivery system.
I completely agree with his conclusion that where the market fails, we need government involvement. It’s a conclusion that is commonly agreed upon amongst researchers in this field.
But the difference between me and most other health policy researchers is this: I believe the market will work to a much greater degree than others do. Maybe this is because my original bias toward decentralized decisions and efficiency led me to question harder why all those supposedly market-improving reforms failed.
Others may say, “Well, all these reforms failed, so I guess the market just won’t work in healthcare, so let’s see what the government can do to fix this mess instead.” But I say, “Let’s figure out why they failed. And if the reason they failed is because markets just won’t work in healthcare, great! Let’s turn to the government for help.”
The answers I’ve found over the last several years about why all those competition-improving efforts have failed tell me that markets can work to an extensive degree in healthcare, we’ve just never created the environment for it to happen.
I’m passionate about this because if we don’t understand that environment and then create it, the future fiscal health of most countries will sooner or later be ruined because the non-market government solutions they’ve come up with so far are insufficient at stimulating the cost-reducinginnovation necessary to make healthcare systems sustainable.
My concerns with Dr. Chernew’s paper are in the section where he lists all the ways transparency efforts and benefit design change efforts have failed and then gives as the explanation for these failures that, “The core problem is that for markets to work, patients must face the economic consequences of their choices, but labor-market concerns dampen employers’ enthusiasm for adopting plans that impose such consequences.”
Translation: Employers don’t want to force employees to face big out-of-pocket spending in the plans they offer them because that’s not popular among employees, which will lead to employee dissatisfaction and possibly even lead to the best recruits choosing other jobs. And so employers are unwilling to adopt the insurance plan benefit designs that are necessary to make competition work in healthcare.
I disagree for a few reasons. First, an insurance plan does not have to make the patient pay the entire price out of pocket for them to be price sensitive. They only have to make the patient pay some of the price difference between their provider options. Second, employers can offer a few plan options to employees, only one of which would impose such requirements. Third, if there were multiple plan options to choose from, the one with such requirements would likely be fairly popular because the premium would be much lower on account of all the savings generated by those requirements leading enrollees to choose lower-priced providers.
The main potential limiter to the popularity of such a plan would probably be in its implementation. Is there an app that the patient can use that would easily tell them the provider options in their region and what their out-of-pocket cost would be for each one? Better yet, does that app also integrate patient-relevant quality information? Such apps are out there. And providing an explanation about the benefit design purpose and the accompanying app in the plan’s description would probably overcome a big chunk of the issues causing people not to use transparency information.
So I disagree with Dr. Chernew’s implication that competition in healthcare is going to be fairly limited because employers are unwilling to implement such plans. I actually wonder if there aren’t already groups of large employers banding together in different regions of this country making plans to all make such benefit designs available to their employees at the same time in an effort to get so many people in the region choosing based on quality and price that the providers are forced to respond in value-improving ways. (If any employers are out there considering such an attempt, I am happy to advise!)
But I do think that this last topic was the perfect one to end the series with, and Dr. Chernew was one of the best people they could have chosen to address the topic so effectively. How to increase the efficiency of the delivery system is the big challenge that neither the Republicans nor the Democrats seem to have an answer to, but it’s the issues that is going to loom larger in the future, especially if we turn to more administrative pricing and quickly discover that the price floor (the point at which the price is too low because it makes providers unprofitable) is actually incredibly high.
Well, that wraps it up for this series. I learned a ton and I appreciate NEJM’s efforts to educate more people about health policy!
It’s a market. Photo by Mark Stebnicki on Pexels.com
This is the last part of the Fundamentals of U.S. Health Policy series! And it’s a super interesting one. Michael Chernew, Ph.D., wrote about the role of market forces in U.S. health care. Since this is squarely in my area of focus, I have a lot of thoughts. Thus, this week I’ll stick to summarizing Dr. Chernew’s article, and then next week I’ll provide some commentary.
Forewarning, I’m following the paper’s logic flow, which, to my brain, is a little meandering, so it’s easy to lose one’s place, but I’ll clarify as much as I can now and then attempt to provide additional insight next week.
Remember how Total Healthcare Spending = Price x Quantity? (Well, actually, it’s the sum of the price x quantity of all the different services being provided in our healthcare system.) Dr. Chernew is basically using that equation when he starts out by saying that our challenge is to reduce the quantity of low-value services provided and to lower prices.
And then the big question . . .
What role should markets play in doing that?
He finally gets to the answer at the end, which is that markets and government should both be used to complement each other. Markets can be leveraged inasmuch as they will help, and this should be paired with the government regulations needed to help them work as well as they can.
I won’t list his specific recommendations quite yet about how we could do that because first I need to review what he says in the rest of the article about markets and how they work.
First, he says that markets are the “foundation of our economy,” and they promote efficient production and cost-reducing innovation. He doesn’t exactly give the step-by-step explanation of how they do that, but you can gather it from his next several paragraphs. Markets create competition, which is when consumers (in this case, patients) have “the ability and incentives . . . to seek low-price, high-quality providers. . . .” And because of that competitive pressure to win consumers, the players in a market are forced to innovate in ways that make production more efficient.
Great, so a good healthcare market will help patients choose low-price, high-quality providers. Unfortunately, healthcare markets are more imperfect than other markets. Want a big piece of evidence for this? Look at the extent of unwarranted price variations that exist in healthcare. It’s way more than in other markets.
But why is the healthcare market so bad?
“Competition in health care fails for several fundamental reasons. First, patients often lack the information needed to assess both their care needs and the quality of their care. Second, illness and health care needs are inherently difficult to predict, exposing people to financial risks that they must insure against. This risk gives rise to an insurance system that shields patients from the price of care, dampening their incentive to use care judiciously and to seek care from providers offering high-quality care at affordable prices. The information problem, amplified by insurance, reduces the ability and incentives for patients to seek low-price, high-quality providers and impedes well-functioning markets. This problem has been magnified lately by consolidation of health care providers.”
So, basically, it’s difficult for patients to really know what care they need, they have a hard time assessing quality of care, they’re shielded from prices because of insurance, and consolidation has limited their options. The result of all that is they have neither the ability nor the incentives to choose low-price, high-quality providers.
This, by the way, sounds almost exactly like what I’ve written (or linked to) a thousand times before, which is that patients need to start making value-sensitive decisions, and to do that they need (1) multiple options, (2) the ability to identify the value of each option, and (3) the incentive to choose the highest-value option.
Regarding consolidation, he gives some interesting data, which show that only 51% of markets have 3 or more hospital systems.
Based on all of that, many would conclude that we should abandon markets altogether in healthcare. But he says, “The weaknesses associated with market-based health care systems are severe, but that does not mean the market should be abandoned.”
And then he proceeds to give a few examples of beneficial things that have come from markets already, such as new payment models, telemedicine, a shift from inpatient to outpatient care, and narrow networks (which allows for lower prices).
Those, however, end up being overshadowed by the list of ways we’ve tried and failed to bolster market function by providing patients with better information about quality and prices and by changing insurance benefit designs.
The summary of this section of the paper is that giving patients better information about quality and prices have had very little success because . . .
Patients rarely use price- and quality-transparency tools
These sorts of decisions are complex
Patients fear disrupting their relationships with their physicians
Changing benefit designs to get patients to directly pay for more of their care (e.g., implementing high deductibles) has had a larger effect on utilization, but it hasn’t significantly impacted the market because . . .
What tends to happen is higher-value and lower-value care both decrease
Not enough patients end up getting steered toward higher-value providers to actually impact market prices.
He provides his explanation for all these failures: “The core problem is that for markets to work, patients must face the economic consequences of their choices, but labor-market concerns dampen employers’ enthusiasm for adopting plans that impose such consequences.”
In the realm of getting patients to choose higher-value insurance plans, there’s been a little bit of headway with insurance exchanges, although there are many drawbacks to those, too . . .
Beneficiaries make poor plan choices
Insurance exchanges induce more price sensitivity, which leads people to choose lower-premium plans that impose greater financial risk on them, which they often cannot bear
And, to make things worse, many of the downsides of insurance exchanges can worsen inequity.
Dr. Chernew is not exactly giving a glowing review of market-based reform attempts, is he? His comments are all accurate though.
Next, though, he says that “in evaluating their merits, we need to compare them with other systems, such as government-run models.” And government-run models have their own set of limitations.
Luckily, we are not facing an either-or decision. The important question is how government and markets can complement one another. “We do not need to abandon markets–we can make them better.”
Finally, getting to his recommendations about how to use markets and government to complement each other, he says we could work to increase the effectiveness of transparency initiatives, limit provider consolidation, and impose gentle regulations to prevent the most severe market failures (like limits on surprise billing and instituting price caps on the most excessive prices).
Dr. Chernew’s conclusion is that, “If we fail to improve market functioning, stronger government involvement will most likely be needed.” Agreed.
There was a recent 60 Minutes episode with a segment that talked about why healthcare prices are so high, and I learned a couple new things.
The segment focused on Sutter Health, which is a large healthcare system in Northern California. Sutter Health was the bad guy in this episode, but the American Hospital Association dutifully provided a counter-argument to the story here.
For context, remember that the price negotiations between hospitals and insurers are not based on costs but rather bargaining power. The more bargaining power the hospital has over the insurer, the higher the prices they win.
Here is Sutter Health’s strategy to win more bargaining power, according to the 60 Minutes segment:
First, buy up other hospitals to become a monopoly in as many markets as possible. If you cannot be a complete monopoly somewhere, find a way to become a monopoly over a key service line, such as maternity care. Next, require two things in every contract you make with an insurer–a gag clause (so nobody can divulge the prices agreed upon) and an all-or-nothing clause (so the insurer has to have all the system’s hospitals and services in network or none of them).
The combination of all that leads to the hospital having much greater bargaining power.
How?
The insurers are kind of forced to have Sutter Health in their networks to avoid having important gaps in coverage (either a regional gap if the one hospital in that county isn’t in network, or a service-specific gap if Sutter Health is the only provider of that service in an area). They leverage that foot in the door with the all-or-nothing clause, so now basically every insurer is compelled to include every Sutter Health hospital, so Sutter Health can demand very high prices and get away with it. And, for Sutter Health’s protection against the bad PR they would get by charging such high prices, they have the gag clauses in place.
Pretty clever I’d say. Unfortunately for them, the government tends to notice when a hospital system becomes a monopoly in multiple ways, and they also notice when a hospital system is making a lot more money than others around it. So they get investigated, reporters dig up the juicy story, and the government slaps a few wrists with lawsuits and new regulations.
Is there a better, long-term solution to these tactics? I have a few thoughts on the matter. First, there’s nothing like monopoly rents to draw competition to a market, so allowing healthcare entrepreneurs to enter those monopolized markets/service lines would be a great start. And if Sutter Health’s competitor hospitals start doing some thorough cost accounting, they could know how much their different services cost and be able to start setting competitive “out-of-network prices.” When those competitors start winning market share, Sutter Health will have to respond with lower prices and more price transparency to become competitive again themselves.
So many market failures are solved by price transparency.
This week’s post is a little later than usual, but next week will be back on track with a Tuesday post about Hayek’s book about socialism, The Road to Serfdom, and how it fits into my framework for categorizing governments.
Something I have noticed for many years now is that many good and important healthcare reforms are touted by experts for the wrong reasons. Supporting a good reform for the wrong reason may seem harmless, but without a clear understanding of the principles behind why the reform is important, the implementation may undermine much of the benefit of the reform, or it may not be evaluated based on the right expected impact (and, therefore, cause the reform to be incorrectly judged as a failure). Either one of these mistakes could ruin the reform.
Example 1 – Quality metrics reporting: This refers to making providers track and report a variety of quality metrics, which are then usually used to give quality-contingent bonuses. These quality metrics are also often reported publicly with hopes that it will add some accountability to providers and motivate the lower-quality ones to improve.
What many experts don’t realize is that quality-contingent bonuses are not going to make a big dent in our healthcare problems. They also don’t realize that the main purpose for quality metrics should be to help people make value-sensitive decisions, which means the tracked and reported metrics need to enable people to do this. Commonly used metrics these days, such as aggregate mortality numbers and overall patient satisfaction scores, aren’t super useful at achieving this goal.
Example 2 – High deductibles: Some experts say that if people have high deductibles, they’ve got some “skin in the game” and will therefore stop being such spendthrifts, which will decrease overutilization and total healthcare spending.
It’s true that a high deductible will reduce healthcare spending;, although, unfortunately, people tend to decrease unnecessary AND necessary care. That’s what the classic Rand Health Insurance Experiment demonstrated. But lowering spending is not the main purpose of high deductibles. The primary benefit of them is that they make people actually consider price when they are choosing where they will get care, which allows people to start preferentially choosing higher-value providers (i.e., make value-sensitive decisions). Of course, this only applies to services that cost less than the deductible.
Example 3 – Bundled payments: These are seen as a way to get providers to integrate more and, through that integration, “trim the fat” (what’s with all the flesh metaphors?). Usually the reduction in total episode costs comes from providers becoming less likely to discharge people to skilled nursing facilities.
Bundled payments do get providers to send fewer patients to nursing facilities and to find other superficial ways to decrease total episode costs, but the primary benefit is that they allow people to compare, apples to apples, the total cost of a care episode. Again, it’s all about removing barriers to value-sensitive decisions. This will lead to complete care process transformations as providers become motivated to improve value relative to competitors and are assured they will win greater profit as a result. So implementing bundled payments with a single provider in a region will likely result in only very modest benefits, which will come from those superficial low-hanging-fruit types of changes.
That’s enough examples for this week! Merry Christmas, and may everyone do good things for the right reasons.
Last week, I evaluated President Trump’s healthcare platform. The problem is, he doesn’t seem to have one. At least, he doesn’t say anything about one on his official campaign website. This is in stark contrast to Joe Biden, who gives many details on his healthcare plan (see my evaluation of it here).
So, to help President Trump out, I decided to write a healthcare plan for him. Let me be clear from the outset that this is not my personal healthcare plan–it is just one of many possible ways to implement the principles outlined in the Healthcare Incentives Framework, and it’s a way I could see Republicans going about it.
One other reminder: The President doesn’t make laws! But the modern reality in this country is that people want to hear a President’s plan for fixing all sorts of problems, so there we have it. He does have the power to set the agenda and influence his party, so this is by no means a useless endeavor.
Ok, now on to his brand new healthcare plan, which I am pretending to write on behalf of his staff, with a little rhetoric mixed in just for fun . . .
The problem with policies designed to increase access is that they usually create market distortions that become barriers to improving value, so his plan starts by addressing how he will improve value, after which he will show how he has crafted a way to increase access that will not undermine his other efforts.
First, he intends to enable patients to act as consumers and make informed choices. This applies to their ability to shop for the best insurance plans and their ability to shop for the best providers.
Take the insurance side first. To facilitate patients shopping for insurance plans, he has a unique approach for each segment of the insurance market.
For Medicaid, which is administered state by state rather than nationally, instead of allowing states to create and administer a single Medicaid plan, he will require them to contract with multiple insurers to each offer a Medicaid plan. This gives Medicaid enrollees more choices, and their insurance is provided by private businesses rather than government beaurocrats. The good news is, more than 2/3 of all Medicaid enrollees are already such plans (known as Medicaid Managed Care), and when these policies are combined with the other policies described in this plan, they will start to generate significant savings.
For Medicare, President Trump will make a similar change. Instead of the government offering a traditional Medicare plan, Medicare will shift over to relying exclusively on private insurers to create Medicare-compliant plans, and Medicare itself will simply pay those private insurers for each enrollee they have. This is called Medicare Advantage, and 34% of Medicare enrollees are already on such plans. But, again, increasing this number to 100%, when combined with the other changes in this plan, will create greater competition and cost savings.
For the private insurance market, President Trump will continue to rely on healthcare.gov as the marketplace for private health insurance plans. Even though this website was poorly rolled out, it has become a well-known source for health insurance, and now it will rise to its full potential because Medicare Advantage and Medicaid Managed Care plans will be rolled into it, meaning every American who does not get insurance through their employer will be able to shop for their health insurance on healthcare.gov. This will simplify the experience of buying health insurance, and it will strengthen Americans’ ability to find the best plan for them.
On the topic of employer-sponsored insurance, President Trump will take a historic first step in decoupling health insurance from employment because someone who loses their job should not lose their health insurance along with it. He will take this step by extending the employer health insurance tax exemption to all people buying health insurance on healthcare.gov. Employers will also have the option to stop paying for health insurance on behalf of their employees and instead give that money directly to their employees in the form of a pay raise, which allows employees the freedom and choice to use that money to shop for an insurance plan that fits their needs better than their employer’s plan.
President Trump will also get rid of Obamacare’s innovation- and competition-destroying medical loss ratio rule, which will become unnecessary after the changes described here fix the broken insurance markets and allow them to start pricing more competitively on their own.
He will also instruct the Centers for Medicare & Medicaid Services to sponsor bundled payment and reference pricing pilots. These are alternative payment models that enable patients to more easily compare apples to apples the prices of their healthcare provider options and then decide for themselves if they think it is worth it to pay more to go to a more expensive provider (which, in healthcare, usually does not mean better quality!). These pilots will help spread these new payment models as (1) insurers discover it saves them (and their enrollees) money and (2) providers discover that they can also make more money by lowering their prices and winning more patients.
These common-sense policies will transform the healthcare insurance market into one of honest competition and innovation.
President Trump will also make changes to improve the healthcare provider market and allow patients to more easily find the best providers.
First, he will build on the progress he has already made with healthcare price transparency by requiring all healthcare facilities to publish their cash prices for the most common shoppable services. The required price reporting will include bundled prices, when applicable. Over time, as more bundled prices become available, patients will have an even easier time shopping for the best deal because they will be able to compare up front, apples to apples, prices between providers for the same bundle of services.
In additon to price data, patients need quality data. President Trump will require healthcare providers to start tracking and reporting quality metrics that are more useful in helping patients be good shoppers. This means there will be a shift in focus away from aggregate quality ratings and toward the specific metrics that patients need to know most when deciding between different providers.
President Trump will make all those price and quality data publicly available so that entrepreneurs can use them to design creative and simple shopping websites, similar to what we see with flight booking websites.
All those changes to the insurance market and the provider market will help people become better consumers of healthcare. And when our nation has consumers shopping for the best value in healthcare, it will stimulate the kind of competition we have never gotten in healthcare–competition over value. In other words, these changes will shift insurers’ and providers’ focus of innovation onto ways to improve value for patients, and as a result quality and price improvement dividends will accumulate long after these policies have been enacted.
Joe Biden’s plan is costly, and it is fiscally irresponsible because it has nothing in it that will make a major dent in the cost of healthcare, which is the biggest contributor to our growing national deficit.
President Trump also wants to ensure everyone has access to affordable health insurance. How can he make affordable insurance to everyone without interfering with the market changes described above?
His solution is to take the guaranteed renewable insurance approach. Here is how it will work:
At the time of implementation, everyone in the country will have the option to purchase health insurance without their pre-existing conditions being considered. Insurers will only be allowed to set premium prices based on the individual’s age and smoking status.
As long as an individual maintains continuous coverage, they will always be able to continue with the same insurance plan or even switch to a different plan without any of their pre-existing conditions being factored into their premium price.
However, if an individual chooses not to maintain continuous insurance coverage, insurers have the freedom to take pre-existing conditions into account and charge them a different price. If the individual is healthy, they could still be offered a price as low as others their same age and smoking status who maintained continuous coverage. But if the individual has pre-existing conditions, they could be charged as much as the maximum premium, which would be the premium a 64-year-old who smokes would be charged.
Once they have again maintained 12 months of continuous coverage, the prices available to them will revert back to the continuous coverage price being offered to others their same age and smoking status.
This will encourage healthy people to make the choice to maintain insurance coverage without any draconian or unconstitutional big-government mandates. Personal accountability will be maintained.
However, for these changes to work, President Trump will have to solve one more problem that Obamacare created.
Currently, people up to 400% of the federal poverty level (FPL) qualify for subsidies to make sure insurance premiums are not financially grievous. What the middle class above 400% of the FPL has found, however, is that their premiums have rapidly become unaffordable.
President Trump will eliminate that 400% FPL limit and instead switch it to a flat limit of 9% of a family’s income, enabling anyone to afford health insurance if they choose to purchase it.
In summary, President Trump’s plan to fix healthcare starts by making changes to the insurance and provider markets to refocus healthcare competition on innovations that improve value for patients, which will lead to billions of dollars saved. And at the same time, his plan will encourage and enable all Americans to purchase health insurance at affordable prices in a way that does not create market distortions that interfere with value-improving innovation.
And he will accomplish these changes all for a much lower cost than Joe Biden’s foolhardy plan to strengthen the unpopular Obamacare policies and force more people onto government insurance.
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Well, Mr. President, there you have it. A ready-made health policy platform, complete with rhetoric, to win over those last few independents and propel you into another four years as President. Let’s just hope you have congress on your side with this plan or it will go nowhere.
Bundled payments are a proven strategy in non-healthcare industries, only we call them by different names. We say we’re paying for a “hotel room” when really we’re paying for the use of the room, the cleaning of the room, the “free” wifi, the “free” continental breakfast, access to the concierge, etc. We say we’re paying for a “cruise” when really we’re paying for the cabin, the unlimited food, the port fees, the access to the shows, use of the onboard pools, etc. These terms (“hotel room” and “cruise” are just two examples) are shorthand terms that refer to the bundle of goods and services you get when you pay that single price. That’s how it works in every industry.
Except healthcare. When we get a bill for a knee replacement, it only contains the surgeon’s cost (okay okay, including the hardware). But there’s also a bill for the anesthesiologist. And for the operating room. And for the hospitalization if you need to stay.
Why would all those things be listed individually if you know you will need a surgeon, an anesthesiologist, and an operating room every single time you get a knee replacement?
Enter bundled payments. They finally turn healthcare a little bit more into a normal industry by allowing patients to pay a single price for the bundle of services that should always be included in that one upfront price.
Sidenote: yes, healthcare is and should always be different from other industries in many important ways. For more details on that, read Arrow’s seminal article on the topic. None of this is incompatible with those insights.
When I see a paper like that, I appreciate the effort to summarize the evidence, but I cringe thinking about all the headlines and misinterpretations and misconceptions that it will perpetuate. People are going to start saying that our large-scale efforts to implement bundled payments are a waste of money . . . and they have evidence to back them up!
But that’s totally the wrong conclusion. This is how I interpret this study: I first think about the overall purpose of bundled payments. When you put their role into the context of the Healthcare Incentives Framework, their purpose is to allow patients to know up front the full price for accomplishing the job they have (get their knee functional again). This enables the patient to compare the price of different options. If they also have quality information of those options, now patients have the ability to shop for the best value (Value = Quality / Price). And when patients start choosing which provider to do their knee replacement based on value, market share starts to shift to the higher-value providers, thus forcing the lower-value providers to change in ways that either raise their quality, lower their price, or (hopefully) both! This is the potential benefit of bundled payments–it is an essential component in stimulating a newfound evolution toward higher quality and lower prices in the market for that specific service.
Compare that to how these studies evaluated the utility of bundled payments: They implemented them for a single procedure and usually with just one of many insurers a provider contracts with. Thus, in most cases the providers were still reimbursed the old fashioned way by all their other insurers. And I would guess that very few competitors in any given region were participating in the same bundled payment program. Therefore, there was no way providers were going to completely shift how they deliver the service because of the narrow scope, a lack of uniform incentives, and a lack of any strong financial imperative to do so (their biggest risk was only of losing a percentage of revenue on small portion of their patients–enough to motivate them to try to do some things a little differently but not to completely redesign how they deliver care–and the risk of losing market share to their competitors due to low value was almost nil). In short, these studies did not get even close to creating the environment for an evolution toward higher value.
With this as context, it’s a surprise to me that any of these bundled payment studies found any benefit at all!
Now, if I could perform my dream study (the design details here and here), that would make a splash. It would get us much closer to the true estimation of how impactful bundled payments could be in healthcare. And until a study like that is done, remember the importance of context, and take any evidence on the impacts of bundled payments with a large grain of salt.
Next week I’ll start looking at Joe Biden’s healthcare plans, so look forward to that!
This is the paper that generated the most media attention, much of which incorrectly asserted that the ACP endorsed “Medicare for All.” So let me, at the outset, clear this up: The ACP doesn’t endorse Medicare for All in this paper. It endorses a couple different options to achieve universal coverage, one of which is a single-payer system. There are many ways to achieve a single-payer system, and Medicare for All is just one way to do that. Maybe this sounds like semantics, but I think it’s important to be accurate here because the term “Medicare for All” carries with it a lot of specific ideas about how a single-payer system should be implemented, and it also carries with it specific political affiliations. The ACP was not committing to any of those specific ideas or political affiliations; the writers were only endorsing the general single-payer system approach as one of two options for how to increase insurance coverage.
Now, on to assessing the details of the paper.
Part 1 of this paper reviews the state of insurance coverage and healthcare spending, which sets the stage for Parts 2 and 3 to talk about ways to expand coverage and lower care costs.
Part 2 is mostly what I want to talk about. First, it asserts unabashedly that the ACP feels that universal health insurance coverage is essential. And since having insurance coverage is pointless if its spending requirements are not affordable or if providers are unavailable, it adds those access details in as also being essential.
Then it lists two options that it sees as being able to achieve that goal: a “single-payer financing approach” and a “publicly financed coverage option.” Let’s look at each one.
Single-payer financing approach. This means a single government-run insurance company provides insurance for everyone in the country. It doesn’t necessarily prevent people from purchasing private supplemental insurance, but it would cover everything considered to be essential. The paper then discusses some of the well-known benefits and concerns that come along with having a single-payer system. The interesting part to me, which makes sense coming from a physician organization, is their particular concern about how this would affect physicians. It could decrease administrative burden and uncompensated care, but it could also decrease autonomy. And the big concern is that if it relies on “Medicare’s flawed payment system,” it would perpetuate a few undesirable things, including bad incentives (such as an over-reliance on fee for service), the overvaluing of certain services (procedures), and unsustainably low reimbursements (that would make some providers go bankrupt). Any prior “Medicare for All” proposal I’ve seen relies on Medicare’s payment system, so this is a good example of why the ACP is not endorsing Medicare for All specifically.
Publicly financed coverage option. Another name for this is a “public option.” Basically it’s a government-run insurance plan that will be offered alongside private insurance plans. It would be available for employees to opt into rather than use their employer-sponsored insurance as well. An essential part of this insurance plan is that it would have premium and cost-sharing subsidies (so that, again, lower-income people don’t end up with useless coverage). Later on in this paper, they say that no matter which option is chosen, it needs to have included with it a mandatory or automatic enrollment component. I’m not sure how premiums would be paid for by people auto-enrolled into the public option plan–possibly through filing their taxes–but isn’t this looking more and more like the Affordable Care Act? Require people to have insurance coverage and subsidize lower-income people to be able to buy it? Yes, that’s the ACA. The one difference is that one of the insurance plans people can select from will be run by the government (which, incidentally, was originally part of the ACA plan).
So those are the two options the ACP supports. They also mention another approach: convert all insurers to non-profits and require everyone to have health insurance (another variation of the ACA, but this time there’s no public option and instead all the insurers are non-profits). But they say there is not enough information on how such a system could be applied to the U.S., so they don’t endorse it. And all the other options for reform that are out there (such as “market-based approaches”) would not achieve universal coverage, so they were eliminated from consideration.
Even though the ACP is politically neutral, you can see that their foundational beliefs and priorities line up much more closely with modern liberal thinking rather than conservative thinking/beliefs/priorities. This is what I expected, and I discussed it in my intro to this series.
Part 3 discusses strategies they support to lower healthcare costs. There are 5 of them: invest more in primary and comprehensive care, reduce excessive pricing and improve efficiency, reduce low-value care, rely more on global budgets and all-payer rate setting, and use more reference pricing.
Rather than get into the merits and drawbacks of these different policies here, lets finish this series with a brief discussion about whether the two options they endorse to attain universal coverage will get in the way of the ideas we talked about in Part 2.
If you will recall, the second ACP paper we discussed gave 6 different recommendations, the two main ones being to (1) give patients price and quality information to help them choose higher-value providers and (2) getting providers to shift to value-based purchasing arrangements (especially different forms of capitation) with insurers.
With a single-payer system, usually the implementation involves setting a uniform nationwide price for each service (adjusted by region for cost of living). This would completely ruin their idea of getting patients to choose providers based on value because the price would be the same for all providers. I will not get into detail on how, but setting a price floor like that completely distorts providers’ innovation incentives. It would kill pretty much any cost-lowering innovation that results in slightly reduced quality, even if the innovation could result in drastically lower cost.
But, on the upside, since there’s only one insurer to deal with, a single-payer system would allow for perfectly uniform incentives for any provider that chooses to enter a VBP arrangement!
With a public option like they have described, there is the exact same problem with distorted/ruined incentives due to uniform pricing, but at least the extent of the problem is limited to the number of patients who are on the public option plan. And, as for providers’ efforts to enter into VBP arrangements, it would probably make it slightly easier to get uniform incentives because I assume VBP arrangements would be harmonized between Medicare and this public option. But any provider who wants to design their own VBP arrangement is going to have to have an even harder time attaining uniform incentives because I suspect they would have to convince the plan administrators of Medicare and the public option independently, which means they’re trying to win over yet another public payer to be able to move forward with their idea.
Am I saying that the ACP’s efforts to accomplish universal coverage will interfere with their efforts to improve the care delivery system? Yes. The two options they endorse don’t necessarily need to be implemented in a way that does that, but I see nothing in what they’ve written that specifies that they should be implemented in a way that mitigates those problems. (For details on how this could be done, see what an optimal single-payer system would look like here and what an optimal ACA-type system would look like here.)
I think different groups of people were working on each paper, and even though they were reporting their findings and recommendations to the same group of ACP leaders for approval, it’s quite a difficult task as one of those ACP leaders to be presented with complex recommendations from two different groups and figure out exactly how they might conflict with each other.
Well, there we have it. The ACP endorsed some things that would be very beneficial, but they fell into the same trap of not thinking about these things from a complete system perspective, so their efforts to get more people into the system will interfere with the changes the system needs to deliver better value over time. This is why any healthcare reformer first needs to have a firm understanding of the core causes of low value and how those can be resolved before deciding on the details of how to enact universal coverage.
But I am happy the ACP jumped directly into this arena. It shows that powerful physician groups are also interested in figuring out how to fix the healthcare system. Maybe the biggest benefit from their efforts of researching and releasing these papers (and then having them critiqued) is that it will make the ACP and other provider groups more likely to recognize and support policies that will truly move us closer to fixing our healthcare system.
Next week I’ll finish looking at the ACP’s papers on fixing healthcare. But this week, I wanted to say one more thing about alternative payment models (APMs)–how to transition to them.
They would probably start by saying, “We need to find a way to give incentives to providers and payers to try out these different APMs.” This would be fairly easy to do through Medicare, so they would create some Medicare APM programs and structure them in a way that makes the benefits of joining large enough that lots of providers will want to participate.
They would also encourage private insurer-provider diads to start using APMs. How could they do that? They would probably just have to offer them money to do so.
These two approaches are what we’ve seen policy makers do. Medicare has the Medicare Shared Savings Program to get providers to enter into ACO contracts with Medicare, and the Bundled Payments for Care Improvement initiative to get providers to enter into bundled payment contracts with Medicare.
And to encourage private insurer-provider diads to start using APMs as well, I am only aware of two initiatives:
Medicare joined up with a bunch of private payers to institute a patient-centered medical home program called Comprehensive Primary Care Plus.
In 2015, congress passed the Medicare Access and CHIP Reauthorization Act (MACRA). A major part of this law is something called the Merit-based Incentive Payment System (MIPS). MIPS applies to all providers receiving reimbursements from Medicare, and it says they will now get a bonus or penalty based on a few criteria (quality, cost, EHR use, and quality improvement efforts) UNLESS they are actively participating in enough APMs (including qualifying programs with private payers!), in which case they are exempted from MIPS bonuses/penalties and instead they get an automatic 5% bonus.
I don’t think congress has passed any direct-to-private-insurer incentives to create APM programs (unless you count the Comprehensive Primary Care Plus program), but congress is influencing private insurers indirectly through providers because providers who want to get the 5% bonus and be exempted from MIPS will be pressuring private insurers to sign APM contracts with them.
So there we see the evidence of how policy makers not using the Healthcare Incentives Framework are approaching this effort to shift to APMs.
What would I do, knowing the principles illustrated in the Healthcare Incentives Framework?
First, I would discard the assumption that, for APM usage to increase, artificial incentives need to be created. The Healthcare Incentives Framework makes it clear that if an APM could truly offer increased value to patients, it would naturally arise in the market IF there are no barriers to it doing so. Next, I would go about looking for barriers and eliminate them. And only after doing that, if I want to accelerate the uptake of APMs, I could also offer artificial incentives.
APMs are a contract between an insurer and a provider, so let’s look at both parties.
Providers: Their incentive is to provide care of all kinds–this is how they make money. And any investment that enables them to raise their value relative to their competitors and that is not too risky will be desirable to them AS LONG AS they can be reasonably assured that patients will be able to identify their value as being higher than competitors’ and also have an incentive to choose the highest-value option. So, from a provider perspective, as long as any APM contract being offered by an insurer meets those requirements, they will be happy to participate.
Insurers: Their incentive is to minimize the total cost of care because they are getting a fixed amount of money in premiums, so any expenditure that is prevented is money that stays in their pocket (assuming those frustrating medical loss ratio rules instituted by the Affordable Care Act don’t come into play). The problem is, insurers don’t have much control over the total cost of care. Sure, they can try to negotiate the lowest prices possible, but providers are the ones that largely determine the total cost of care because they are the ones with the ability to prevent care episodes and to determine how much care is needed for care episodes that cannot be prevented. What I am saying is that insurers have the incentive to reduce the total cost of care, but providers are the ones able to make that happen. Therefore, insurers need to pass along their incentives to providers with these APM contracts. And insurers are happy to give money to providers to institute and run these programs if they can reasonably expect to save a lot more money than what they are giving.
With all that as context, what would I do to transition our healthcare system to APMs?
First, I would make sure providers are willing to join APM contracts by reasonably assuring them that if their investments into the program successfully increase their value, they will win more market share (and, therefore, profit).* How can I do that? By enabling patients to identify the highest-value provider up front and also ensuring that they actually have an incentive to choose the highest-value provider. I won’t go into details here on how to accomplish those things because I’ve written extensively about them before. But the result of those changes is that it would make providers see APMs as a potential for being very beneficial not only to their patients but also their profitability, which would probably result in them taking the lead in designing many of the APMs since they’re the ones who know best what changes could make a difference.
Next, I would make sure insurers are also willing to sign on to these APM contracts. Since insurers don’t like investing a lot of money into a program and then being required to give away all the financial benefits of that investment, I would eliminate the Affordable Care Act’s medical loss ratio requirements.
Next, lest you worry that insurers will forever keep all the savings generated by these APM contracts, I would enhance the ability for patients to compare the cost and quality of different insurance plans. That way, insurers will want to lower premiums because they will be assured that patients shopping for insurance will see that they are offering higher value (particularly in the form of lower premiums), so more patients will choose them, thus raising their profit as a result of increased market share.
Next, I would probably continue the programs Medicare is already doing, but I would also allow Medicare to sign on to other APM contracts happening between private insurers and providers. This would enable providers to get all insurers to reimburse them using the same contract, which would give them uniform incentives and make a huge difference in how much they are able to optimize toward that program.
Finally, if I do all that and am still unsatisfied with how fast this shift to APMs is happening, I would offer bonuses paid through Medicare to providers who are working hard to implement APMs (like the 5% bonus Medicare already implemented, described above). And if all that fails at getting this shift to happen as fast as I want, I would consider also offering grants to providers and insurers to try out APMs so that they don’t have to risk their own money designing and implementing them.
This approach is very different than the one currently being used by policy makers, and it would require changes that might be more difficult to make, but it would also not be limited by our current understanding of the “best” APMs. Instead, it would create the right environment for our healthcare system to continually shift toward better and better payment models as they are invented and refined.
* I know that an increase in market share does not automatically increase profitability, but this is my shorthand way of saying that it will increase their market power, which leads to increase profit either through a low-margin high-volume pricing strategy or through a high-margin low-volume pricing strategy. And my prediction is that, given where prices in healthcare are these days, the vast majority of providers would find that the profit-maximizing pricing strategy would be a lower-margin higher-volume option inasmuch as provider capacity allows.
Clear Thinking on Healthcare 