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

November 13, 2014

The Republicans Ask: What Do We Do Now?

Filed under: Uncategorized — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 12:15 pm

In the classic 1972 film The Candidate, Robert Redford portrays Senate candidate Bill McKay, who wins a surprising victory over the incumbent Crocker Jarmon. In the final scene, a stunned McKay escapes the victory party with his campaign adviser Marvin Lucas  in tow.   The movie ends with McKay asking “Marvin…What do we do now?”

Buoyed by their recent election gains, Congressional Republicans must be asking themselves the same question. Part of their answer is sure to be a renewed attack on the Affordable Care Act (ACA). Understanding that outright repeal is impossible for the foreseeable future, Republicans appear to be targeting (at least) two perceived flaws of the ACA: individuals cannot always keep their doctors, and individuals cannot always keep their health plans. We are hardly the biggest supporters of the ACA, as many prior blogs will show. But we think choosing these targets is not just a waste of effort but actually counterproductive to good health policy.

For the past three decades, Americans with private health insurance have gotten used to the idea that they do not have unfettered choice of doctors. In fact, Americans have time and again voted with their wallets for plans with networks. The majority is enrolled in PPOs, and most of the rest are in even more restrictive HMOs. Even in the exchanges, where individuals are not bound by their employers’ offerings, the plans with the broadest networks have lost out to narrower network plans that offer lower premiums in exchange for less choice. Like all goods, access is costly, and most Americans would rather sacrifice some access to save money. This doesn’t mean they won’t complain about it after the fact! In economics we call this a “revealed preference” and we believe that these revealed preferences are far more accurate than what people say they want. Put simply, if Americans prized access as much as Republicans seem to believe then why do they continually opt to save money by enrolling in limited access plans?

Given we know that Americans prefer money in their pocket over choice, any Republican effort to force all plans to broaden their networks will only serve to drive up health spending without a commensurate benefit. Republican lawmakers should keep in mind that we already have one prominent plan that promises nearly unfettered access – fee-for-service Medicare – which is a close as this country has to a single payer model. Is this what the Republicans really want?

Turning to the issue of plan turnover, we suppose this started when President Obama promised Americans that they could keep their health plans. We suppose Republicans were right to turn this into a campaign issue, but as a practical matter, it is not worth fighting. Yes, the ACA imposes minimum benefits standards and has encouraged some employers to drop coverage. In addition, some of the insurance plans offered in individual markets before didn’t meet these minimum standards and can no longer be sold. As a result, some individuals have been forced to switch plans.

While we have taken issue with some aspects of the benefits standards, we see no virtue in some sort of stasis in private insurance plan enrollments. Americans may value their relationships with their health care providers, but it seems unlikely that they would be equally loyal to their insurers. More to the point, it is high time that we weaned ourselves away from employer-sponsored coverage and therefore we should seize the opportunity provided by the ACA. By tweaking exchanges and the Medicaid program, as we describe below, Americans can take control of their insurance purchases, find coverage that better meets their needs, in a competitive market that encourages innovation without excessive regulatory oversight. Indeed, any new legislation that promises Americans can keep their existing coverage is likely to limit market competition; this hardly seems in keeping with the best of what Republicans claim to offer.

So if the Republicans’ current attacks on the ACA are misguided, what should they try to do? In the rest of this blog we summarize a few areas for reform. In subsequent blogs we will provide a more detailed blueprint for ACA reform.

Eliminate the employer mandate. There is no need to perpetuate employer sponsored coverage, which is an artifact of World War II wage controls and has persisted primarily because we lacked a well-functioning individual insurance market. One of the greatest benefits of the ACA is that it has created a well-functioning individual market, eliminating the primary reason the employer provided market has survived for so long.

Permit and encourage greater flexibility in health plan design. One of the greatest problems with the ACA is that it greatly limits innovation in plan design. For example, we would like to see a greater use of the lessons from the Value Based Insurance Design initiative. We understand that some of this is already being considered by CMS rule makers – a sharp push from Congress could make this a reality.

Encourage greater innovation in Medicaid. An exceptionally large number of the individuals who gained coverage through the ACA are enrolled in Medicaid. As a result, nearly 70 million Americans are now covered through this program. While many states have used managed care programs to serve this population, these systems have so far shown limited innovation. In exchange for agreeing to the ACA Medicaid expansion some states such as Arkansas and Indiana have implemented unique expansions that leverage the private market. We think that Republican lawmakers should encourage additional waivers that allow states that have not yet expanded Medicaid (or even those who already have) to adopt similar systems.


1 Comment

  1. I’m fine with #1, and I think a combination of reference pricing, targeted P4P and bundled pricing can do a lot of good for #2, but as an insurance industry bureaucrat, we’re already moving in that direction. I think there is a lot of potential for #2 to be enhanced with the 1/1/17 Wyden waivers — are any states working on waivers for reference pricing only plans? That is where some serious innovation and cost savings could come into play.

    As far as #3, Arkansas is coming in over budget because they are using a private broad network at private rates when most other states can pay significantly below commercial rates and still achieve adequate networks…. a little more detail rather than handwaving here would be useful

    Comment by Richard Mayhew — November 13, 2014 @ 4:37 pm

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