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

June 29, 2012

What Do We Do Now?

Filed under: Uncategorized — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 7:26 am

Those of you from my generation may recognize the title of this blog as the last line from the movie “The Candidate.”  Robert Redford’s character has just won election to the U.S. Senate and ponders his future. 

 Supporters of the Affordable Care Act should be asking themselves the same question.  They worked hard to get the bill enacted and then had to sweat out (literally in much of the nation) the Supreme Court decision.  But the bill as it stands will only go so far to cure our nation’s healthcare woes.  Yes it will expand coverage.  And the push for Accountable Care Organizations might reintroduce some of the cost savings incentives enjoyed by HMOs.  But this is legislation that relies on competitive healthcare markets yet does precious little to promote competition. There is a lot more work to be done.

 I doubt that the current Congress has the stomach to consider any more healthcare legislation, but here are some recommendations for the next Congress (and for any states that want to make the ACA work for them.)

1)  Limit the tax deduction for health insurance.  Economists have been preaching this for decades and the justification is as valid as ever.  If individuals want insurance that pays for every last dollar of every last medical service, let them buy it with after-tax dollars.  Why should everyone else subsidize their profligacy?  It has been said that Congress can never muster enough votes for legislation limiting the tax deduction.  They said the same thing about comprehensive health reform.  Get this done!

2)  Require all health insurance exchanges to include at least one narrow network plan and set enrollment goals for narrow network plans.  Let’s face it, some providers are more efficient than others, often lots more efficient.  Efficient providers would pass on their lower costs to insurers that could guarantee them high volumes, but this requires narrow networks.  But narrow networks may be a hard sell politically because the most powerful insurers and providers in most states prefer large networks.  (The exception is when the powerful provider decides to offer its own insurance plan, but this introduces a host of other problems.)  A federal mandate would trump political opposition at the local level.

3)  Ban “Most Favored Nation” contracts between insurers and providers.  Large insurers in many states secure these contracts ostensibly to guarantee low rates to their enrollees.  Instead, MFNs often leads to higher rates and, more importantly, serve as a powerful barrier to entry.  MFNs are one of the biggest reasons why smaller health insurers do not enter the market with low cost, narrow network plans.  Providers won’t lower their rates to get into these plans because if they do so, they have to pass along the lower rates to the large insurer with the MFN.  MFNs also protect powerful insurers from competition, assuring them a cost advantage over all rivals.  I have seen first-hand how this has a chilling effect on innovation.  Why should the dominant insurance plan in a market experiment with payment incentives, quality measurements, narrow networks and who knows what else when it can rely on its MFNs to sustain its advantage. 

4) Double the funding available to the Federal Trade Commission and Department of Justice to break up powerful providers and insurers.  We need a healthcare market where firms win by creating value, not by exercising power.  Banning MFNs will help make insurance markets more competitive, but powerful insurers can still use their sheer size to stay ahead of their rivals.  And many metropolitan areas suffer under the yoke of powerful, expensive medical providers.  The antitrust agencies have the data and methods required to go to court and restore competition; a recent string of successful antitrust challenges bears this out.  But there are far more powerful insurers and providers than there are resources to fight them.   The amount of money required for additional antitrust enforcement is a drop in the healthcare ocean (perhaps tens of millions of dollars annually, but the return on this will be astronomical.  Full disclosure – I occasionally serve as an expert witness in healthcare antitrust cases and could stand to benefit from additional enforcement activity.

 5) Change the rules governing exchanges and Medicare ACOs to facilitate the entry of disease-specific options.  DaVita is considering introducing an ACO for diabetes patients.  One can imagine similar entries for cancer care, COPD, mental health, and so forth.  I don’t know if these will deliver more value than traditional ACOs but if we can get the incentives right, the market will be the judge.  Current exchange rules, with caps on experience rating, all but rule out such ventures.  ACO rules were not written with such specialization in mind and need to be reexamined to be certain they neither block innovation nor facilitate favorable risk selection. 

6)  Develop and publicize usable health insurance quality measures.  Consumers will soon be able to comparison shop for health insurance (through the exchanges) in the same way that they can comparison shop online for auto insurance.  But competition can backfire when quality varies and is hard to measure.  If consumers only have information about the price of insurance, there could be a race to the bottom in terms of quality.  For years the National Committee on Quality Assurance has released HEDIS quality measures.  But these are complex and only measure fragments of the overall quality of care.  We shuld use marketing research methods to create meaningful and understandable composite quality metrics.  Fund the systematic measurement of Patient Reported Outcomes in order to create disease-specific global quality scores. Full  disclosure redux: I am a big fan of the Patient Reported Outcome Measurement Information Set, which was developed at Northwestern University.

A final thought: Is Obamacare safe from Mitt Romney?

Mitt Romney’s biggest line on the campaign trail is that once elected, he will repeal Obamacare.  Thanks to Justice Roberts, that possibility remains on the table.  But can he do it?

 The conventional wisdom had been that if the Court upheld Obamacare, there was little that a President Romney could do to block it.  Oh, he could be lax in enforcement (sort of like Obama’s lax enforcement of immigration laws) and block funding for some minor parts of the law.  But it would take an act of Congress to overturn Obamacare and that would require at least 60 votes in the Senate.  And no one thinks that 60 senators will vote to overturn. 

But with a semantical sleight of hand, Justice Roberts has changed all of that.  By correctly pointing out that the mandate is enforced through a tax, Roberts changes this centerpiece of Obamacare from insurance regulation to tax regulation.  Under current Senate rules, tax regulation cannot be filibustered.  Will this give an opening to the Republicans if they manage to wrest control of the Executive and Legislative branches?  I am just asking.

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