Archive for March, 2010

What Good are Health Insurers?

March 6, 2010

As the health reform effort moves into the final stages, everyone seems to be taking a whack at health insurers.  Some of the insurers’ wounds are self-inflicted, such as WellPoint’s announcement of 39% premium increase for individual policies in California.  Some of the attacks are calculated to build public support for health reform, since every good crusade needs a good enemy.  Some of the criticism has even suggested that we don’t need private health insurers.  Michael Hiltzik asked the question in a recent column “What do we need health insurers for anyway?”  James Surowiecki – usually a careful and thoughtful observer of business and economic issues – said the following in a recent article in the New Yorker:

Congress [in its health reform bills] is effectively making private insurers unnecessary, yet continuing to insist that we can’t do without them. The truth is that we could do just fine without them: an insurance system with community rating and universal access has no need of private insurers.

Surowiecki goes on to comment on what the world would look like without private health insurers:

In fact, the U.S. already has such a system: it’s known as Medicare. In most areas, it’s true, private companies do a better job of managing costs and providing services than the government does. But not when it comes to health care: over the past decade, Medicare’s spending has risen more slowly than that of private insurers. A single-payer system also has the advantage of spreading risk across the biggest patient pool possible. So if you want to make health insurance available to everyone, regardless of risk, the most sensible solution would be to expand Medicare to everyone.

Not so fast.  I would feel more optimistic that this would work if we had a different political system.  One of the limitations of this approach is that Medicare’s spending is ultimately determined through the political process.  The U.S. political system – for better or worse — allows the health care industry (or any other well-funded interest group) to use its financial resources and lobbying power to increase the flow of government funds into the health sector.  The idea that Medicare has a “hammer” to force providers to accept lower payment rates is largely an illusion.  In the current system, Medicare can do this only because there is a safety valve, i.e., a large private insurance segment that pays much higher rates to providers.  If Medicare gets larger or replaces private insurance altogether, there will be less opportunity to use the safety valve, so providers will step up their efforts to use political pressure to increase payment rates in Medicare. I simply don’t see a strong countervailing political force that would exert sufficient political pressure to hold down costs.

Is there an alternative to this?  Unless we change the U.S. political system by reducing the effect of money on elections and legislation, the best potential solution lies in healthy competition in the private market.  In this approach, government has an important role in setting the “rules of the game” to ensure that the markets are competitive and will benefit consumers.  The current Senate and House bills implicitly embrace this approach.  For example, the insurance reforms prohibiting medical screening will eliminate “unhealthy” competition based on risk management.  This should help to encourage “healthy” competition based on cost, service and quality.  Another example is the creation of insurance exchanges, which should offer increased choice and information to consumers, thereby stimulating healthy competition.  If the exchanges are allowed to grow over time, this could be a significant factor in bending the cost curve downward.

In this model, there is a very important role for private health insurers.  As the successful insurers adapt their business strategies by moving from risk management to cost management, they will develop new approaches to paying providers to create incentives for efficiency and quality.  Insurers may also become more selective in contracting with providers, by including in their networks only those who demonstrate the ability to manage costs effectively.  And competitive price pressures may cause insurers to exert stronger negotiating tactics with providers.  All of this is separated from the political process and thus more likely to be effective than a government-run effort to control costs.

To put it another way, the control of health care costs depends on the existence of a strong buyer.  In the current system, buyers are in a relatively weak position vs. hospitals, physicians, and drug companies, especially in small or mid-sized markets where there are only one or two hospitals and consolidated medical groups.  (A recent article by Berenson, Ginsburg & Kemper highlighted the trend toward increasing concentration among hospitals and physician groups in California, leading to higher payment rates to providers.)  Similarly, consumers are in a very weak position, since they are dependent on physicians for telling them what kind of medical care they need, and there is a lack of useful information to help consumers compare the price and quality of physicians and hospitals.  Employers likewise have been relatively weak, since most of them seem unable or unwilling to become knowledgeable and effective purchasers.  The government’s ability to be a strong buyer is limited because of the political pressures described above.

So who will be the bad guy and become a purchaser that is strong enough to balance the power of hospitals, physicians and drug companies? Although most health insurers haven’t been willing or able to exert pressure on providers during the past 10-12 years, they are probably the best candidates.  They are already accustomed to being bad guys; it would be hard to damage their public image much further.  And they have the mechanisms to have an impact: traditional tools such as utilization management, prior authorization, and physician profiling, as well as more progressive ones such as new incentive payment models, data analytics and feedback to physicians.  If health reform passes, insurers in the exchanges will have to compete more on price, since the traditional tools of risk management will be taken away.  Healthy competition among insurers will drive them to find ways to work with providers to hold down costs.  From an overall policy and political perspective, it’s probably better to have the providers negotiating and sometimes fighting with private insurers rather than lobbying the government for higher payment rates.  And some of the insurers might actually be seen as good guys, if they can develop constructive partnerships with providers to offer affordable, high quality health care.

In the end, there is a potentially important role for private health insurers in a post-reform world.  Getting this right is hard and the results are uncertain, but it’s probably the best chance we have to design a financially sustainable health care system.

[edited 3/6/10 to add final sentence re: good guys in next to last paragraph]


The Politician as Jock: Rules of the Gym

March 1, 2010

To most people, Barack Obama is seen as a cool, intellectual man with a professorial bearing and a deep understanding of complex issues.  He has a tremendous command of facts and can win over anyone in a policy debate.   He demonstrated all of this at the Blair House summit on health reform last Thursday, but I think we also got a glimpse of another side of his personality.

At the very end of the event, after the formal closing and polite applause, Obama stood up, turned to his right and shook hands with Vice President Joe Biden.  I expected him to move on and give congratulations and support to Democratic Congressional leaders Nancy Pelosi and Harry Reid, who are responsible for most of the heavy lifting needed to pass the reform bill.  To my surprise, he turned in the opposite direction and shook hands with the Republican leaders, Mitch McConnell and John Boehner.  He smiled, exchanged a few words, patted them on their backs, and kept moving down the line of Republicans.  What’s up with that?  Why was he spending time with his opponents rather than his allies?

Then I realized that I had done the same thing the day before.  I wasn’t at the Blair House, or course; I was at the Salvation Army gym in Northeast Portland.  At the noontime pick-up basketball game for 55+ guys, my team had just won.  Naturally, I high-fived with the teammate closest to me, but then I went to each of the guys on the other team.  I shook hands, clapped them on the shoulder, and said “good game”.  I never thought about why I do this, but it always seemed like the right thing to do.

Maybe Obama was making a calculated political gesture, but I think he was simply doing the right thing when you win a contest: shake hands with the opposing team.  He was following the unwritten rules of the gym.  It’s OK to knock down your opponent, but help him back up.  Win the game, but don’t taunt the losers.  Don’t forget that you’ll be playing against these guys again next week.  Maybe all Presidents do this, but I think Obama does it better than anyone I’ve seen.  Bill Clinton and George W. Bush tried to come across as “regular guys”, but for some reason they caused their opponents to grind their teeth.  The personal resentment of Clinton and Bush fueled the opposition to their policy initiatives.  I think Obama is more effective at defusing his opponents’ anger and frustration, perhaps because he really gets it about the rules of the gym.  People used to say that they would rather have a beer with Bush rather than Gore, but I’d much rather play pick-up hoops with Obama than Bush.

Will this help to get the health reform bill passed in Congress?  I doubt that it will have a major impact in the short run, since the Republicans have already decided they will oppose the bill no matter what.  In this battle, the key to success is helping the swing Democrats in the House to see that passing the bill is the right thing to do, policy-wise and politically.  But I think this incident provides a glimpse into Obama’s personal and political style, and over the long run it will help to blunt the personal attacks that crippled previous Presidents.  In the tough contests to come, any little edge is important.