Posts Tagged ‘cost containment’

Five Big Ideas that Shaped Health Reform

September 18, 2010

During the Great Health Reform Debate of 2009-10, much of the public discussion and media analysis focused on the political battles, the legislative process and specific elements of the health reform bill.  We talked a lot about daily public opinion polls, the futile search for bipartisanship, the political implications of the Massachusetts special election and the impact on the upcoming mid-term elections.  We also learned more than we probably wanted to about filibuster rules, reconciliation bills and CBO scores.  And we were inundated by detailed descriptions and analyses of the public option, abortion, payment reductions to Medicare Advantage plans, excise taxes on “Cadillac” health plans, and many other specific policy issues.

Future historians, however, will want to look more deeply for the policy frameworks and political forces that shaped the health reform bill.  From a high level vantage point, there are Five Big Ideas that established the fundamental framework for the bill.  With some exceptions, these ideas were not the subject of much public discussion or formal debate in Congress, but each of them shaped the reform bill in fundamental ways. As Ezra Klein[i] and others have observed, much of the form of the health reform bill was established long ago.

1. Managed competition

Why didn’t we go down the path of a single-payer health system?

For many years, a single-payer system was the holy grail of the liberals, and it was the driving force behind the campaigns of many of the current reform advocates.  To the disappointment and frustration of those advocates, however, the battle had already been fought and lost long before the 2009-10 debate.  In 1978, Alain Enthoven published a two-part article in the New England Journal of Medicine entitled “Consumer Choice Health Plan: A National Health Insurance Proposal Based on Regulated Competition in the Private Sector.”[ii] The title said it all.  It was a proposal for national health insurance (i.e., providing coverage to everyone) through a structured marketplace of private insurers and providers.  As Enthoven described it in a 1993 Health Affairs article, “The History and Principles of Managed Competition,” his concept built on earlier work by Paul Ellwood, Walter McClure and Scott Fleming, as well as the experience of the Federal Employees Health Benefits Plan (FEHBP).[iii] In the 1992 Presidential campaign, both of the candidates endorsed this approach to health reform, and it was one of the foundation elements of Bill Clinton’s reform proposal in 1993.  In the work of many policy experts since then, it became the de facto consensus approach.

Managed competition appealed to many liberal policy analysts who had training in economics.  It offered the best of both worlds: expanded coverage, but with cost controls achieved by the use of market forces, i.e., cost-sensitive consumer choice and healthy competition among insurers and providers.  It also was appealing politically, because the most serious opposition to health reform – especially to the single-payer version of reform – came from the established economic interests who do quite well in the current system.  The pharmaceutical manufacturers, health insurers, physicians and hospitals were fearful of government price setting under single-payer reform.  They saw managed competition as a potential way to maintain their ability to set prices, albeit within a more competitive framework.

By the time of the 2007-08 Democratic primary campaigns, all of the leading candidates (first John Edwards, then Hilary Clinton and Barack Obama) used the managed competition framework as the basis for their reform proposals.  The language had changed, of course, because it was associated the defeat of Bill Clinton’s plan in 1993-94.  (In addition, the phrase “managed competition” was often confused in the public’s mind with “managed care,” which was successful in slowing the rate of increase in health care expenses but created a political backlash in the late 1990s.) During the 2009 health reform debate, the single-payer concept survived in two slimmed-down versions (the public option and Medicare buy-in for those age 55+), but it died in the negotiations leading to the passage of the Senate bill in late 2009.

The final bill falls far short of Enthoven’s ideal, since it retains the existing Medicare and Medicaid programs, which are essentially single-payer systems for the elderly and poor.  In addition, the reform bill’s version of health insurance exchanges – the core mechanism for managed competition – is weak, even though exchanges are mentioned prominently as a key element of cost containment in testimonials to the legislation.  But the President and Congressional leaders never seriously considered applying a single-payer approach to employed, middle-class, working-age people.  In essence, the fight between the managed competition and single-payer approaches to reform was over many years ago.

2. “If you like your plan, you can keep it.”

Why are we stuck with the employer-based system for providing health benefits?

Many policy experts have pointed out the shortcomings of the employer-based system and have developed reform proposals to move away from it.[iv] [v] Sen. Ron Wyden’s Healthy Americans Act, introduced in 2006, would have created a new system in which employer-based health benefits would be replaced by tax credits for individuals who could purchase coverage through a national insurance exchange.  But the policy ideal ran up against political realities.

When Sen. Hilary Clinton began her run for the Democratic nomination for President, there was great anticipation about her health-reform proposal.  She had been badly burned politically by the defeat of Bill Clinton’s plan in the 1990s, and she did not want to repeat the mistakes that led to that debacle.  The plan she put forward in September 2007[vi] contained much of what was in the old Clinton proposal, but with one big exception.  The plan did not disrupt employer-based health benefits, which is the way that the majority of Americans receive health insurance.  The infamous “Harry and Louise” advertisements had helped to kill Bill Clinton’s bill by preying on the fears of those with employer-based coverage.  Although many people felt dissatisfied and anxious about their existing employer-based coverage, most of them simply were not willing to make the switch to some unknown and untested plan.  Hilary Clinton – a savvy politician as well as a policy expert – saw the writing on the wall.  In order to be politically viable, her new proposal had to leave the current employer-based system largely intact.  It became an article of faith among political experts that this was a key element of any reform plan.  Barack Obama’s plan endorsed this approach during his campaign, and the reform bill was built on this foundation.

3. Health reform is needed to reduce the federal deficit

Why didn’t attacks on “tax and spend liberals” doom health reform?

In the past, most health reform advocates focused on the need to provide access to care for the uninsured.  This was framed as a moral issue – “How can the richest nation on earth let millions of people go without access to decent health care?”  To provide universal access, however, would require a lot more government spending.  This created a political barrier, because every reform proposal had a big price tag. Few politicians during the past 30 years of conservative ascendency were willing to support a program that dramatically increased government spending.   Many advocates believed that expanding coverage was worth it, but they faced very difficult obstacles due to concerns about the rising government deficit.

Peter Orszag changed all of that.  As Director of the Congressional Budget Office in 2008, he pointed out that Medicare and Medicaid expenses were the primary causes of increased federal government spending in the future; in contrast, spending for Social Security was projected to grow much less, and other existing programs were expected to remain stable as a percentage of GDP.[vii] As a December 2008 CBO report stated: “The rising costs of health care and health insurance pose a serious threat to the future fiscal condition of the United States.”[viii] In other words, not reforming the health care system would cause federal deficits to expand.  This meant that health reform – if done right – would not make the deficit problem worse; in fact, we needed health reform in order to tame the long-term deficit.  This transformed the debate about health reform.  No longer could it credibly be attacked as just another “tax and spend” proposal.  Health reform was seen as not just a desirable social policy; it was a necessary tool for fiscal discipline.

The Obama administration quickly picked up on the opportunity to re-frame the debate on health reform and fiscal responsibility.  First, the President chose Orszag to lead the Office of Management and Budget, assuring that Orszag’s views would continue to have significant weight.  Second, the President’s early statements on health reform established a goal of deficit neutrality or reduction over 10 years (a much longer period than previous reform efforts had attempted).[ix] Taking a long-range view of the federal deficit made sense, both policy-wise and politically.  Policy-wise, it would not be feasible to implement reform in one or two years; it would take at least 10 years to see anything like the full fiscal effects.  Politically, it gave the President and Congressional leaders a defense against attacks about fiscal irresponsibility.

4. Shared responsibility

How did the Administration and Congress spread the burden of financing health reform?

In the years leading up to the federal reform effort, many policy experts and advocates embraced the principle of “shared responsibility”.  Briefly, the underlying belief is that the problems of our health care system are not due to the actions of a few villains; the problems are systemic.  In various ways, all of the key stakeholders – individuals, employers, providers, health plans and government – are part of this systemic problem, so all of them should accept their responsibilities for improving the system.  Rather than financing health reform from one source, it should be done with contributions from all of the stakeholders.

The idea of shared responsibility was a foundation of the Massachusetts reform bill in 2006.[x] Earlier versions of reform in Massachusetts had been blocked or limited by reliance on narrower sources of financing; shared responsibility was credited with the political success of the new bill.[xi] Similarly, the California reform effort led by Gov. Arnold Schwarzenegger in 2007 used the principle of shared responsibility, although the political outcome was not as successful as it had been in Massachusetts.[xii] Shared responsibility also played a role in framing Barack Obama’s campaign proposal for health reform, although he seldom used that phrase explicitly.[xiii] Immediately after the 2008 election, Sen. Max Baucus published his Call to Action[xiv], which formed the basis for the bill that emerged from the Senate Finance Committee in 2009.  This report explicitly identified shared responsibility as one of the critical principles in health reform.

The use of the concept of shared responsibility had several significant impacts.  First, it shaped the policy framework of health reform, reflected in a series of specific requirements for each of the stakeholder groups.  These included a requirement for all individuals to obtain health insurance, an expectation for large employers to offer health benefits, the elimination of medical screening and related insurance practices, reductions in Medicare Advantage payments, increased Medicare taxes on high income people, a reduction in the growth rate of Medicare payments to hospitals, the extension of drug discounts, an excise tax on high-cost employer-sponsored health benefits, fees on drug and medical device manufacturers, fees on health insurers and similar provisions.  Without these spending reductions and revenue increases, the bill would not have achieved the goal of net deficit reduction.  Second, the fact that these elements were spread broadly among many stakeholders helped to neutralize political opposition to the bill.  In creating the bill, the Administration and Congressional leaders had discussions with every one of these groups about how they could contribute something to cover the costs of expanding coverage.  None of them could claim that they would be shouldering the entire burden; all of them would be sharing in the financing elements of the bill.  And in the end, most of the key stakeholders felt, in varying degrees, that they would be receiving a net benefit from the bill.

5. Coverage first, then cost

Given all of the above, why didn’t the health-reform proposal include stronger cost-containment features?  And why didn’t we start with cost containment, and then move on to expanding coverage financed by part of the savings?

First, we should clarify that making the reform bill deficit-neutral does not mean that it significantly slows the rate of cost increases.   In the health reform bill, the costs of expanding coverage to 32 million uninsured people are offset by the wide range of government revenue increases and expense reductions described above.  While the bill does contain a number of initiatives that may eventually help to reduce costs, the underlying trend in health spending – both public and private – is not expected to change dramatically in the foreseeable future.[xv]

The reason that the health reform bill does not include strong cost containment provisions is fundamentally political.  As a number of people have said in various ways, while it is impossible to have real health reform without cost containment, it is also impossible to pass a health reform bill with cost containment.  In the past, health insurers, physicians, hospitals and drug companies have defeated reform proposals because of their concerns about the impact of cost controls.  Early in his administration, President Obama and his staff met with health industry leaders to discuss ways to head off this problem.  In exchange for support or neutrality on a health reform plan with limited cost controls, the health industry offered to accept some reductions and to pay limited fees.  Although critics from across the political spectrum attacked this process, the agreements effectively muted the industry opposition that had defeated earlier reform efforts.

Implicitly, the President adopted the strategy of “coverage first, then cost.”  For better or worse, this approach pragmatically accepted the current political limits on including strong cost containment features in a health reform bill.  The hope is that after the initial bill is passed to expand coverage, the political calculus is likely to change.  Once we have established the principle of covering nearly everyone, public and private sector decision-makers will have a stronger stake in managing system-wide costs.  Medicare and Medicaid cannot simply cut provider payment rates, because physicians will refuse to see these patients.  Employers cannot simply drop employee health benefits, because they will be penalized if the employees are eligible for public benefits or subsidies.  State governments cannot simply cut back eligibility for Medicaid programs, since the federal legislation establishes a floor.  Ultimately, it is hoped that purchasers recognize that cost containment can be achieved only by addressing the underlying costs of medical care.  Once it is accepted that nearly everyone will have coverage, it becomes imperative to tackle the cost issue in order to keep the system financially sustainable.  Massachusetts explicitly used this sequenced approach in its health-reform initiative.[xvi]

Impact of the Five Big Ideas

Although the health reform debate focused primarily on the specific policies in the proposed bills, the boundaries of the debate were established long before any legislation was introduced.  The five big ideas that had been developed in the years leading up to the reform debate in 2009-2010 formed the framework of the specific proposals.  Although these ideas did not receive a lot of attention in the general media, they had a significant impact on the resulting reform bill.

Did these big ideas make the health reform bill better or worse?  On one hand, they provided a reasonably coherent policy framework for the bill, without which it could easily have become a chaotic patchwork of inconsistent and contradictory policies.  The big ideas also enabled the political success of the bill by avoiding or overcoming the obstacles that defeated earlier health reform attempts.  On the other hand, the big ideas severely limited the options that were considered.  One obvious casualty was the single payer option, which many liberal advocates believed was the best solution.  In addition, Sen. Wyden’s Healthy Americans Act, which many policy experts believed was the best approach, never received much serious consideration in Congress.

Finally, the constraints imposed by the five big ideas left at least two important questions unanswered.  First, will the reform bill allow our health insurance and delivery system to evolve toward a more comprehensive approach, or does it freeze in place the existing system?  The structure of coverage categories in the bill — Medicare for seniors, Medicaid for the poor, employer-sponsored coverage for employees of medium and large businesses, and the exchanges for individuals and employees of small businesses — represents an advance over the past by filling in the gaps and reducing the number of uninsured, but it remains a fragmented and uncoordinated system.  Second, will the reform bill address the need for cost containment?  The long-term financial sustainability of Medicare, Medicaid and the employer-based system depends on our ability to bend the cost trend downward.  Although the bill includes many innovative approaches and pilots that may have an effect on costs, the real impact of these specific initiatives remains to be seen.  Depending on the cost trends we see over the next 5-10 years, we may want to reconsider some of the big ideas that shaped the current reform bill and open up our thinking to different approaches.

[i] Ezra Klein, “What Obama Did, and Didn’t Do, on Health Care Reform,” Washington Post, December 21, 2009.

[ii] Alain C. Enthoven, “Consumer Choice Health Plan: A National Health Insurance Proposal Based on Regulated Competition in the Private Sector,” New England Journal of Medicine, 298 (March 23 and 30, 1978): 650-658 and 709-720.

[iii] Alain C. Enthoven, “The History and Principles of Managed Competition,” Health Affairs 12, supplement 1 (1993): pp. 24-48.

[iv] Committee for Economic Development, Research and Policy Committee.  Quality, Affordable Health Care for All: Moving Beyond the Employer-Based Health-Insurance System. Washington, DC, 2007.

[v] Ezekiel J. Emanuel.  Healthcare, Guaranteed: A Simple, Secure Solution for America. New York: Public Affairs, 2008.

[vi] Hilary Clinton For President. “The American Health Choices Plan: Ensuring Quality, Affordable Health Care for All Americans.” September2007. Quoted in Kelly Montgomery, “Senator Hillary Clinton’s Healthcare Reform Proposal”, June 5, 2008. [accessed April 11, 2010].

[vii] Peter Orszag, “Health Care and Behavioral Economics:  A Presentation to the National Academy of Social Insurance”, May 29, 2008.

[viii] Congressional Budget Office. Key Issues in Analyzing Major Health Insurance Proposals. December 2008.

[ix] “Medicare Fact Sheet” [accessed March 22, 2010]

[x] Jon Kingsdale, “Implementing Health Care Reform in Massachusetts: Strategic Lessons Learned.” Health Affairs 28, no. 4 (2009): w588–w594.

[xi] Robert Seifert and Paul Swoboda. Shared responsibility: government, business, and individuals: who pays what for health reform? Boston (MA): Blue Cross Blue Shield of Massachusetts Foundation. March 2009. [accessed April 11, 2010].

[xii] Marian R. Mulkey and Mark D. Smith, “Reflecting on California’s ‘Year of Reform’,” Health Affairs 28, no. 3 (2009): w446–w456 (published online 24 March; 10.1377/hlthaff.28.3.w446); R.E. Curtis and E. Neuschler, “Affording Shared Responsibility for Universal Coverage: Insights from California,” Health Affairs 28, no. 3 (2009): w417–w430 (published online 24 March 2009; 10.1377/hlthaff.28.3.w417); and R.E. Curtis and E. Neuschler, “Designing Health Insurance Market Constructs for Shared Responsibility: Insights from California,” Health Affairs 28, no. 3 (2009): w431–w445 (published online 24 March 2009;10.1377/hlthaff.28.3.w431).

[xiii] Obama-Biden campaign materials, “Barack Obama and Joe Biden’s Plan to Lower Health Care Costs and Ensure Affordable, Accessible Health Coverage for All”, October 2008.

[xiv] M. Baucus. Call to Action: Health Reform 2009. November 12, 2008.

[xv] Richard S. Foster, “Estimated Financial Effects of the ‘Patient Protection and Affordable Care Act,’ as Passed by the Senate on December 24, 2009,” Centers for Medicare & Medicaid Services, January 8, 2010.

[xvi] Jon Kingsdale, “Implementing Health Care Reform in Massachusetts: Strategic Lessons Learned.” Health Affairs 28, no. 4 (2009): w588–w594.


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]

Improving the Harvest: Farming and Health Care

December 15, 2009

I love Atul Gawande’s writings on health care.  He has a rare talent for describing technical details of health care, insurance and finances in terms that most people can understand.   His recent article in the New Yorker discussed the current health reform bills’ approach to curbing costs, using the agricultural industry as a potential model.

One of his basic points is similar to one I have made before.  He describes two kinds of problems: “those which are amenable to a technical solution and those which are not.  Universal health care coverage belongs to the first category . . . Problems of the second kind [referring to rising health care costs], by contrast, are never solved, exactly; they are managed.” I would frame it somewhat differently.  The two basic kinds of problems are those which are amenable to a government solution, and those which are best addressed using decentralized market forces.

There are two serious shortcomings in our current health care system: lack of access to health care and insurance coverage for many low-income people, and the rising costs of health care.  While private market forces do have the potential to address cost issues –”efficiency” in the jargon of economists – they don’t do very well at handling issues of “equity”.  Specifically, private markets can’t do the following very well in the health care system:

  • Provide access to insurance or health care to low-income or very ill people
  • Ensure that reliable standardized information is available to consumers
  • Maintain the appropriate balance of power between providers and consumers

This means there is an important role for government:

  • Ensuring that coverage or care is available to low income and very sick people
  • Providing information is reliable and available
  • Maintaining healthy markets.

In the latter role, it is appropriate for government to establish the rules for the structure of the market in order to create:

  • Real choice
  • Healthy competition
  • Incentives for improving value (quality/cost)

Government can also play a role in providing financing for innovations (i.e., start-up funding for pilots).  After this point, however, it’s probably better for government to get out of the way and let the market do what it can do best – drive improved value for consumers.

So far, so good.  I basically agree with Gawande’s observation that different problems should be addressed by different means.  But is Gawande correct in using the developments of the agricultural industry as a model for what might occur in health care?  While there are a lot of parallels (e.g., fragmented and inefficient production, resistance to change), I am concerned that there are some important differences between agriculture and health care.  I won’t offer a critique of the outcomes of U.S. agriculture (lower prices, yes, but also the growth of corporate farming at the expense of family farms and small town economies, as well as serious concerns about food safety); I want to focus on two other issues about the relevance of the agriculture model to health care.

First, the economic incentives in agriculture seem much more direct and consistent with consumer welfare.  If the farmer can find more efficient ways to produce crops, it will result in higher net income.  Lower production costs also allow the farmer to reduce prices, gain market share and increase revenue.  Other farmers then have a strong financial incentive to adopt better production methods; otherwise they will lose market share, revenues and profits.  This healthy competition results in lower prices and improved value for consumers.

In the health care world, however, the financial incentives for improving efficiency are much weaker.  The knowledge about how to be more efficient is available, but the adoption of these methods is very limited.  Simply introducing the health care equivalent of USDA extension agents and financing a lot of pilot projects are unlikely to change this.  The incentives are weak for a variety of well-known reasons: health insurance, which shields most consumers from the real costs of health care; federal tax policy, which excludes employer-sponsored health benefits from personal income taxes; the ability for insurers to use risk management strategies to avoid high-risk enrollees; the ability for providers to use payer-mix strategies to avoid low-reimbursement patients; the well-entrenched use of fee-for-service payments that reward volume instead of outcomes, etc.  Unless we make structural changes to address these issues, the financial incentives will not be aligned in a way that will cause the health care industry to embrace more efficient production methods.

The second potential problem is the difference in relative market power of buyers and sellers.  In agriculture, the sellers (farmers) are much weaker than the buyers (consumers and middlemen), which forces the farmers to compete aggressively on price and quality.  In health care, however, the sellers (physicians, hospitals, drug manufacturers) are more powerful than buyers.  There are several reasons for this: providers have professional knowledge and expertise that consumers rely upon, and many areas have a high concentration or even monopolies of providers.  Even if the provider payment incentives were aligned with consumer interests, health care providers would probably still be able to charge relatively high prices.

How do the current Senate and House bills line up with the issues raised by Gawande and my analysis?  The underlying philosophy of the legislation is consistent with the two-sector approach described above: government helps low-income people to get access to health care and sets the rules for the health care market, while private sector providers and insurers compete to offer the best value to consumers.  The bills also begin to address the issue of financial incentives, by encouraging alternatives to fee-for-service, eliminating the use of risk skimming by insurers, and taxing high cost health plans.  Not surprisingly, the bills do not directly address the market power issue, although the proposed strengthening of the Medicare payment commission would be a small step toward curbing costs.

Will all of this work?  We don’t really know, but at least the bills are built on a framework that has some chance of success.  We do know, however, that the current system is cruel in human terms and unsustainable in economic terms, and we have to try something.  We will have more work to do to get this right.

Vitality vs. Security? Not So

November 26, 2009

David Brooks gets it partly right in his recent column – the health reform debate is fundamentally about values – but he is wrong about the trade-offs.  His framing – “vitality or security” – sets up a straw man, a false choice.  How can anyone say that allowing 18-22,000 people to die each year due to lack of health insurance (according to the IOM and Urban Institute) represents “vitality”?  The tremendous loss of life as well as needless suffering and lost productivity in our current health system are surely a drag on our nation’s vitality.  And as Jon Cohn points out in his response to Brooks, the current employer-based system creates job lock for many people, stifling entrepreneurship and job mobility.

Of course, the Congressional health reform proposals could be stronger on cost containment, but they would be politically DOA.  The choice is simply between the status quo – with continued rising costs, rising uninsurance, inconsistent quality and more needless deaths – or an imperfect reform bill that expands coverage, reforms the insurance market, reduces mortality and suffering and establishes a framework for future cost containment initiatives.  It’s not about vitality vs. security – it’s slow death vs. possible cure.  Or in terms of values, it’s “we’re all in this together” vs. “you’re on your own”.

A “Third School” of Cost Containment?

October 28, 2009

Is there a “Third School” of reformers that could help us resolve the long debate about how to contain health care spending?  Drew Altman’s recent column describes the history of the debate between the “Regulators” and the “Marketeers”, and he suggests that a new school of thought – the “System Reformers” – is in the ascendance.  According this Altman:

The Systems Reformers believe that the best way to bend the cost curve is not through external market incentives or regulatory controls, but from the inside out, by creating a smarter health care system with the information base, new delivery models and payment incentives that will improve quality and lower costs. . . .

The Systems Reformers’ paradigm is reflected in the “bending the curve” elements of the health reform legislation currently in Congress, which mostly come in the form of pilot projects and experiments. These include tests of ideas like Accountable Care Organizations, “pay for performance” and “bundled payments,” as well as efforts to create a smarter, evidence-based health delivery system through comparative effectiveness research.

He describes the Systems Reformers’ approach as a  “third leg of the stool of cost containment strategies”.

While Altman is right about the importance of the Systems Reformers’ ideas, I don’t consider this to be a new paradigm.  We’re really talking about two different things.  The debate between the Regulators and the Marketeers is a philosophical disagreement about the fundamental political economy of the health care sector.  The use of System Reforms, however, is simply an issue of how deep we go into the health care system in order to bring about reforms.  The former issue is about which fork in the road we should take; the latter is about how far we can go down that road.

The debate about the merits of regulation and markets is very important, and we do need to make a choice.  This issue is not unique to health care; it’s been raging in other sectors as well – for example, regulatory limits vs. cap and trade mechanisms to reduce air pollution.  In health care, the Regulators point to the failure of markets to contain costs, and they advocate regulation of supply and prices.  In the U.S. political debate, the ultimate model of the Regulators’ approach is a single payer plan.  Marketeers, on the other hand, point to the failure of past regulatory approaches (e.g., price controls, certificate of need) and the fact that health care markets haven’t been structured in a way to provide incentives for cost containment.  Intelligent and well-intentioned people can find good reasons to support either approach.

In the current national debate, we’ve largely made the choice to go down the Marketeer path.  Despite the protests of disappointed single payer advocates, all five major bills in Congress are based on a market-based approach.  If we did a word count of Congressional speeches on health reform during the past six months, it’s likely that “competition” and “choice” would be near the top.  And even wonky phrases like “cost conscious consumers”, “financial incentives”, and “transparency” have leaked into Congressional speeches, demonstrating that the Marketeers are in ascendance.

How does the “System Reform” approach fit into this?  As Altman says, it looks at the health care system from the “inside out”, and the System Reformers deserve credit for helping us understand how the health insurance and medical care markets really work.  But the solutions that Altman points to are tools, not systemic solutions.  These tools, such as electronic health records, comparative effectiveness research, and alternative payment mechanisms, have been around for a long time.  The problem is that they haven’t been used widely within the health insurance and medical delivery system. For example, most physicians have not been quick to adopt electronic health records, since there is little reward for making improvements in efficiency and quality in the current system.  The solution to this lies outside, i.e., with the purchasers, consumers and/or regulators.  In order for the system reform tools to be used by health insurers and providers, there needs to be pressure from the outside.  One way to do this is a Regulatory approach, e.g., establishing a single payer plan and requiring all physicians to accept salaries or capitation rates set by the government.  Another way is with a Market approach, e.g., establishing health insurance exchanges and reforming the individual and small group market to encourage healthy competition and provide incentives for improved cost, quality and customer service.

The Congressional bills have used the work of the System Reformers to turn the Marketeer approach from a guiding principle into something meaningful and practical in the health care system.  For example, using the information that John Wennberg, Elliott Fisher and their colleagues have documented in their enormously important Dartmouth Atlas, the bills in Congress include pilots for Medicare payment reforms, such as bundling and pay-for-quality, which should reduce the geographic variation in costs and the inflationary effects of the current fee-for-service payment system.  Another example: System Reformers have pointed out that much of the medical care provided is not supported by evidence-based research; many physicians rely instead on simple protocols, community norms and what they were taught in medical school decades ago.  The lack of good clinical information has led to overuse as well as underuse of medical services, creating high costs and inconsistent quality of care.  Based on this finding, the bills in Congress include funding for comparative effectiveness research.  In a well-functioning market, good information is essential; CER will nudge the system toward more efficiency and higher value.

The work of the System Reformers is tremendously valuable, since it shows us what specifically needs to be done to improve our health insurance and medical care system.  This doesn’t, however, make it a “third school” of cost containment.  The current direction for health reform in Congress can be best understood as a Marketeer approach that is more likely to be effective in containing costs because it incorporates the System Reformers’ deep understanding of health markets.

Winners and Losers: Strategy in a Post-Reform World

September 3, 2009

Most health policy experts are focusing on the daily ups and downs in the political battles over health reform.  Within the health care industry, however, there is a buzz about who will be the winners and losers after health reform passes.  A.M. Best’s U.S. Health and HMO Insurance Index has been volatile since last November, reflecting high uncertainty about the effect of health reform.  Earlier this summer, there was some speculative analysis about the potential impact of reform on health care stocks.  Will health insurers come out as winners?  What about hospitals, doctors, drug manufacturers, and insurance agents?

It’s good to look ahead, but I think most people are asking the wrong question.  Each of these health industry sectors – in aggregate — will probably do just fine in the post-reform world, as Bob Laszewski points out in his recent blog.  The more important question is: who will be the winners and losers within each sector?

Change is coming.  After all of the political maneuvering this fall, some kind of health reform bill is likely to pass.  The basic shape of the post-reform world is coming into focus, and it is likely to include:

  • Insurance reform: guaranteed issue (no medical screening), along with rating rules and standardized benefits in the individual and small group markets.
  • Broader coverage: expansion of Medicaid, subsidies for low-income people and an individual mandate.
  • New market structures: an insurance exchange for individuals and employees of small groups.
  • Cost containment: increased attention to costs, transparency and accountability for insurers and providers.
  • Payment reform: a gradual shift from fee-for-service to bundled payments, as well as incentives for quality outcomes.
  • Emphasis on prevention, primary care, chronic disease management, and the use of comparative effectiveness research.

These changes in the regulatory and market environment will create changes in the dimensions of competition within the health care industry.  In the PRW (post-reform world), health insurers and providers will require different skills and strategies to be successful.

Health Insurers:  In the past, the key to financial success was risk management, i.e., making sure that the expected medical costs of enrollees were predictable and not too high.  Insurance CFOs focused on the “loss ratio” — medical claims payments as a percentage of premiums – as a key measure.  Insurers used medical underwriting, targeted pricing and benefit design to manage the risk profile of their enrollees.  Many insurers also tried to hold down medical costs and administrative expenses, but it’s much harder to do that.  (No one likes being yelled at by doctors.)  Most insurers have deep expertise and experience in risk management, so it’s not surprising that this would be the primary tool for achieving their financial goals.

In the PRW, however, the usefulness of risk management tools will be greatly diminished.  Medical screening won’t be allowed, and insurers will be limited in their ability to use pricing and benefit design to attract only low-cost enrollees.  Even if they do, risk equalization mechanisms within the new health insurance exchange will reduce the financial benefits of cherry picking.  Insurers will need to put more effort into managing expenses, for both administration and medical services.  In other words, insurers will need to move from risk management to cost management.

The second major change for insurers will be in the small employer market segment.  In the past, insurers focused on the employer as the customer, not the employee.  They worked through brokers to get access to employers, to whom they offered coverage on a sole source basis.  Insurers – rightly concerned about adverse risk selection in a multiple choice arrangement within a small pool – insisted on being the only health plan offered within a small group.  The employees could only join the plan offered by the employer, so there was little need for consumer-oriented marketing.

In the PRW, the employees of most small businesses will purchase their coverage through a health insurance exchange.  The employer will have a minimal role, and the employee will have a choice of multiple health plan options.  Insurers will need to focus their sales and marketing efforts to consumers rather than brokers and employers.  In other words, insurers will need to shift from employer-based to consumer-based marketing.

Health Care Providers:  Hospitals and physicians face similar changes.  The analogy to insurers’ risk-management strategies is providers’ payer mix strategies.  An important factor in providers’ financial performance has been the mix of commercially insured, Medicare, Medicaid, and uninsured patients.  Since the payments for commercially insured patients have been much higher than for the others, many providers have systematically minimized or avoided patients in the other three categories.  Even not-for-profit safety net clinics have been forced to increase the proportion of commercially insured patients to stay afloat financially.  Many providers have also tried to hold down medical expenses, but it’s much harder to do that.  (No one likes being yelled at by staff physicians and nurses unions.)

In the PRW, the effectiveness of payer-mix management strategies will be reduced.  Most people will have insurance coverage, which will provide new revenue to providers who had been serving the uninsured.  There probably will still be payment differences between commercially insured vs. Medicare and Medicaid patients, but the importance of payer-mix management will be reduced.  In response, providers will need to focus more on managing their costs of delivering care.  In other words, providers will need to move from payer-mix management to cost management.

The second major change for providers will be in provider payment formulas.  In the past, the fee-for-service payment system rewarded a higher volume of services, regardless of the patient’s health outcomes.  The CFOs of provider organizations used key indicators such as the number of hospital admissions, the number of medical procedures, and billable physician time.  There was increased pressure for improved physician “productivity”, and billing systems were upgraded to maximize fee-for-service revenue.

In the PRW there is likely to be a movement away from fee-for-service payments — although it will probably happen gradually — and the incentives for increased service volume will be dampened.  Instead, providers will be paid for a “bundle” of services, and there will be a greater emphasis on quality processes and outcomes.  Hospitals will not be paid for a patient’s readmission for the same medical condition or for correcting medical errors (“never events”).  Physicians will be paid to take care of patients with chronic conditions via a specialized capitation or case rate.  Providers will need to coordinate their services and improve the management of chronic disease patients.  There will be stronger incentives to invest in electronic health records, use evidence-based clinical guidelines, and develop integrated delivery systems.  Providers will need to move from increasing service volume to improving patient care.

These are only a few of the changes that will be driven by health reform; the effects of reform are likely to be far-reaching.  The new legislative and market landscape will be very different from the one that insurers and providers have been accustomed to.  Smart health care organizations are already thinking ahead and developing strategies to be successful. The ones that don’t adapt will be moving against the tide.  Some insurers will gain, and others will shrink.  Some providers will thrive, and others will struggle.  Within a few short years, we’ll be able to sort out the real winners from the losers.

Are “Cadillac” health plans the problem?

August 3, 2009

The debate over proposals to tax health insurance plans is confusing and frustrating.  The proposals are usually described as a tax on “gold plated” or “Cadillac” health coverage.  According to the media and many spokespeople on the Hill, these health plans with “overly generous benefits” supposedly encourage overuse of medical services and drive up the overall costs of health care.  People express outrage that Wall Street executives have expensive tax-subsidized health benefits that include coverage for cosmetic surgery.  Is this really a problem?  If we fix this, will it raise lots of revenue and bend the cost curve?  I don’t think so.

The problem is not “Cadillac” coverage, whatever that is.  I know that some economists believe that people ought to have more “skin in the game” by paying a significant share of the costs of medical services they receive.  I agree, but only up to a point.  Health care services are not like other goods and services.  If you give me more money, I might build a fancier house, buy a new car, go to more concerts, fly first class, etc., because I like all of these things.  Frankly, I don’t particularly like going to the doctor, and I wouldn’t spend my extra income on more blood tests, CT scans, colonoscopies, or surgeries (ouch!).   It’s fine to have modest copayments to discourage unnecessary doctor visits or to encourage use of generic instead of brand name drugs, but onerous cost sharing when someone is seeking medical care won’t solve our problem.  A tax on “Cadillac” plans won’t raise much revenue, and it won’t bend the cost curve in any significant way.

A recent article by Alec MacGillis in the Washington Post makes the same points.  Most of the experts he interviewed agreed that increasing copayments and deductibles is unlikely to slow the growth of health care costs.  But I think this misses the point, or – to be more precise – mixes together two different issues.

When people are making decisions about health care that affect their pocketbooks, there are two steps.  Before deciding whether to go to the doctor or to undergo surgery, people have to decide which health plan to choose. Most people who work for large employers usually have a choice among multiple health insurance plans, usually an HMO and several PPOs.  (For example, federal government employees in Portland, OR, can choose among plans offered by Blue Cross Blue Shield, Aetna, United, Kaiser Permanente, and several others.)  The real issue is that most people don’t have much financial incentive to choose the efficient, high value health plan that is offered to them.  Most large employers pay the full premium for employees (or a % of the full premium), regardless of the cost.  These employers are, in effect, subsidizing the inefficient health plans and providers.  And this is encouraged by the open-ended tax subsidy for employer-paid health benefits.  If the tax exclusion were capped at a reasonable level, people would have to pay more for higher cost health plans, and they would benefit if they chose a lower cost plan.  (For more background, there are some useful articles about this issue by Jonathan Cohn, Ezra Klein, and Paul N. Van de Water.)

When I say “higher cost health plan”, I’m not talking about richer benefits; this is about higher costs for the same benefits.  How can some insurers’ premiums be lower, even for the same benefits?  Some have made investments in IT and streamlined their claims processing systems, so their administrative costs are lower.  Some work closely with groups of physicians and hospitals that are committed to using evidence-based clinical practices and reducing unnecessary medical services.  But why would an employee join one of these more efficient plans if they don’t get to keep the savings?  And why would a health plan go to all the trouble of becoming more efficient if their customers are not price sensitive?

The bottom line: the proposal to tax “Cadillac” plans has populist appeal, but it is attacking the wrong problem.  Instead of making people pay more when they need health care, we should provide incentives for people to enroll in more efficient health plans.  A cap on the tax exclusion of employer-paid health benefits – ideally, adjusted for income – would allow people to benefit from choosing a more efficient, high-value health plan.  It would also encourage healthy competition and help to bend the trend of health care costs overall.

Saving Two Trillion Dollars – What’s Missing?

May 13, 2009

Can we bend the cost curve without covering the uninsured?  Slowing the growth of health care costs seems to be the focus of the current political debate; undoubtedly, this is an essential element of health reform.  If we don’t get costs under control, the strain on government budgets, employer benefit expenses, and individual budgets will be immense.  We also know that increasing costs have been driving the rise in uninsurance.  Zeke Emanuel made this point nicely in his 2008 article (“The Cost-Coverage Trade-off”, Ezekiel J. Emanuel, MD, PhD. JAMA, February 27, 2008 – Vol. 299, No. 8)).

Efforts to bend the cost trend downward – such as the May 11 announcement by health care industry leaders – are admirable, but the results will be limited until we fix the problem of the uninsured.  While rising costs are a primary cause of the rise in uninsurance, the reverse is also true:  the rise in uninsurance contributes to rising costs. Why?

It starts with the cost shift problem.  As the number of uninsured increases, the amount of uncompensated care costs increases.  In response, hospitals and providers shift costs to privately-insured patients, which causes insurance premiums to increase.  This cost shift adds to the problem caused by the underlying rise in health care costs.

There is one other important factor in the link between rising uninsurance and rising costs.  In the current environment, the easiest way for most insurers and providers to achieve their financial goals is not by being more efficient.  Managing expenses by improving efficiency is hard; insurers face provider backlash, and hospitals and physicians face internal management and political obstacles.  Managing revenues is an easier path.  For insurers, it is easier to “manage” their risk profile.  For hospitals and providers, it is easier to “manage” their payer mix.  Until we minimize the incentives for insurers to use risk selection strategies (e.g., by legislating guaranteed issue, rate pooling for individuals and small groups, and risk adjustment mechanisms), they are unlikely to pursue greater administrative efficiencies.  And until we minimize incentives for providers to use payer mix management strategies (e.g., by reducing the number of uninsured), they are unlikely to develop more efficient care delivery processes.

In summary:  Emanuel’s article stated, “without controlling costs, any attempt at universal coverage will be transient”.  I agree, and I would add: without universal coverage, any attempt at controlling costs will be unsuccessful.

The Two Trillion Dollar Promise: Can We Trust It?

May 12, 2009

President Obama described it as a “watershed event” in the journey toward comprehensive health reform – and it might very well be.  But many people are suspicious of the health industry leaders who promised to slow the trend in health care costs and save $2 trillion over the next ten years.  Should we be hopeful or skeptical?  The answer is both.

The joint statement by health insurers, hospitals, physicians, drug and medical device manufacturers on May 11 was very encouraging.  At no time in recent history has this group agreed on a savings target and specific steps to achieve it.  In the 1990’s, most of these industry groups made the cold, rational decision that they were better off with the status quo than under a Clinton-style reform plan.  Now, all of them know that the current path is unsustainable, and they believe that the mainstream reform proposals by President Obama and Sen. Baucus are much better for them than the other options (do nothing or single payer).  They also know that these savings are achievable; for the last 15+ years, academic experts and consultants have been pointing out opportunities for improvements in affordability and quality.  There is plenty of “low hanging fruit”.

But there are plenty of reasons to be skeptical.  In the past, no one ever lost a bet that health care costs would continue to increase rapidly.   The title of Altman & Levitt’s 2002 article in Health Affairs says it all: “The Sad History of Health Care Cost Containment as Told in One Chart”.

The most basic problem is that there is little incentive for anyone in the health care industry to be efficient.  From the consumers’ perspective, price competition is great, but no business leader likes to compete on price; that’s the recipe for low profits and low growth.  As a business strategy, it’s much better to compete by “differentiating” your product or service (Apple), targeting a high-income, price-insensitive segment (Neiman Marcus), or building brand image and loyalty that allows you to charge a premium price (Nike).  Every MBA program is filled with case studies about this, and it’s not surprising that health care industry leaders follow suit.  And the health care market has some additional characteristics that make price competition even more elusive: the lack of transparency and information to allow us to easily compare price and quality, the large tax subsidy for employer-paid health benefits that reduces our incentive to buy less expensive health plans, and the fact that we are dependent on physicians (the “suppliers”) to help us make decisions for the most expensive forms of medical care.  A senior physician executive at a large, well-respected, not-for-profit health care system once said to me in a moment of candor, “Improve efficiency and lower our prices? Why bother?”

It’s all well and good for the health care industry to make a pledge to improve efficiency and slow the cost trends, but someone else will have to hold them accountable.  Who?  The people and organizations that pay the bills: employers, government purchasers (Medicaid, Medicare, and public employee plans), and individuals like you and me.  Unless we want Congress to establish formal cost controls (which are likely to be ineffective, for political as well as economic reasons), we have to rely on the purchasers to inject some cost consciousness to the health care system.  There are many ways to do this – some of them easy, some hard.  Here are a few ideas:

  • Large employers – both private and public sector — could stop treating health benefits as an uncontrollable “cost of doing business” and start applying good purchasing practices, like they do for materials and other inputs to their products and services.  To do this, they need to “create a market” by
  • Offering real choices among competing health plans
  • Setting rigorous standards for health plans offered to employees, including quality thresholds and incentives to improve efficiency and quality
  • Providing transparent information on providers’ quality and cost
  • Establishing employer contributions to monthly premiums that allow employees to keep the savings if they choose a more efficient health plan
  • Establishing benefit structures that encourage employees to seek out the most effective and efficient medical care
  • Small employers and individuals could purchase their health benefits through an insurance exchange or connector.  This would allow them to offer choice to employees (and encourage competition among health plans), reduce insurers’ administrative and selling costs, and get the same level of purchasing power that large employers have.
  • Congress could modify the federal tax treatment of employer-paid health benefits to reduce the subsidy for expensive and inefficient health plans.
  • Congress could introduce reforms to the insurance market to eliminate medical screening and risk-based pricing.  One of the effects of these tactics is to reduce healthy price competition.  From an insurer’s perspective, “managing risk” – avoiding the enrollment of high-cost patients – has always been an easier path to profitability than improving efficiency.  At the same time, insurers would need to be protected from adverse selection through risk adjustment mechanisms.
  • Government could provide support for basic information and infrastructure development that would benefit everyone:
  • Transparency and public reporting on the cost and quality of insurers and providers
  • Comparative effectiveness research that would encourage the use of evidence-based best practices
  • Information technology standards for electronic health record systems and secure information exchange

The bottom line: we should embrace the health industry’s commitment to reduce costs, but purchasers must take steps to hold them accountable.