Code Red: Two Economists Examine the U.S. Healthcare System

April 26, 2010

The Cambridge Cabal

Filed under: Competition,Efficiency,Health insurance,Health spending — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 1:28 pm

It is hard to imagine that fifteen years ago the private sector seemed to have figured out how to contain health spending. One third of privately insured patients were in HMOs and nearly all the rest were in PPOs. While insurers were experimenting with tight networks and capitated payments, providers were responding by forming integrated delivery systems and offering capitated models of their own. Private health inflation was nearly flat, even as Medicare and Medicaid spending continued to grow by double digits annually.

Everyone should know what happened next. Americans rebelled against managed care (the Boston Globe quipped, “People hate its guts.”) HMOs fell by the wayside, PPOs expanded networks to include even the least efficient providers, and powerful hospital systems emerged to dominate markets from coast to coast. Providers struggled to implement integration and capitation due to a lack of performance data. Why make the effort when insurers had reinstated no-questions-asked fee-for-service payments? We now suffer through the purgatory that is managed care “lite.”

Today’s Wall Street Journal calls for the private sector to again take the lead on cost containment. I am afraid that ship may have sailed. Private insurers have been made out as the villains in this drama and are reluctant to do much more than implement pathetic pay-for-performance schemes while standing back and waiting for the government to act.

And act it will. Don Berwick, a Harvard professor who was just nominated to take the reins at the Center for Medicare and Medicaid Services, is a big admirer of the British National Institutes for Clinical Excellence. NICE is a rationing board run by academics who study cost effectiveness data before deciding what services the Brits can receive. David Cutler, the brilliant Harvard economist who is likely to head the Independent Medicare Advisory Review Board, is another scholar of cost-effectiveness methods and is philosophically opposed to price controls. So when it comes time for Medicare to trim spending, you can bet that they will ration a la NICE. This will provide cover for private insurers to do the same. (I predicted all of this in my 2003 book What’s Your Life Worth? which was read by about 25 people who were not family members. I also called for a public discussion of rationing methods; it appears that NICE-style rationing will instead be implemented by stealth.) Medicare is also experimenting with bundled payments and stronger quality incentives; expect the private sector to again follow suit.

The future of cost containment is no longer in the hands of the private sector. Instead, a few bright, well-intentioned academics will call the shots at Medicare, with private insurers playing Monkey See, Monkey Do. Only the academic community cannot agree on the best course of action. Many of my colleagues believe that the state of the art of cost-effectiveness analysis – what they do at NICE and are likely to do at IMAB – is rather pathetic. I tend to agree. Academics also disagree about whether and how to implement bundled payments.

So a few Harvard scholars will soon get to decide what is the best way to control health spending. Except they don’t know what is best, they can only guess. Whatever they do will be an experiment; the entire health system will be their petri dish.

In my world, private insurers and providers would conduct their own experiments. Some would succeed, others would, and resources would flow to those that worked in practice and not just those that made sense in the seminar room. But I afraid that world no longer exists. By demonizing private insurers, the Democrats have made sure that cost containment will be the sole purview of the federal government. I hope that Don Berwick, David Cutler and the rest of their Cambridge cabal get it right. Unfortunately, there will be no way from them or anyone else to know whether they did or not. We will soon find out where their ideas will take us. We can only imagine where else we might have gone.

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