Posts Tagged ‘managed competition’

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.