October 29, 2003

Medicare Reform?

The Wall Street Journal's David Wessel writes about attempts to use market competition to control long-run Medicare costs:

WSJ.com - Capital: ..."Premium support" is a misnomer. It essentially means giving Medicare beneficiaries a coupon and letting them use it to choose among competing health plans -- the traditional government plan as well as private health plans. Pick a generous plan that costs more than the coupon, and you pay more. Pick a bare-bones or particularly efficient plan, and you pay less. The federal government and some private employers do something similar already. The hope is that if the elderly bear some financial consequences of their choices and health plans compete for the business, then costs won't rise as fast and quality will improve.

That is a big switch from today's Medicare. The current system charges every participant the same premium, provides a fixed menu of benefits, and generally pays doctors and hospitals on a fee-for-service basis. About the only way the government controls spending is by squeezing those fees. The change would be akin to the continuing move away from defined-benefit pensions (for which employers promise a monthly check) to defined-contribution pensions like 401(k) plans (for which employers put aside money and workers manage investments). It would give the elderly more choices of health plans -- though not necessarily as much latitude to pick a doctor as they have today -- and force them to bear the consequences of such choices.

At root, this argument is about how much to use competition, consumer choice and other market forces to restrain health costs.... The phrase "premium support" came not from some free-market think tank but from a 1995 essay by two Democratic economists, Robert Reischauer, who now heads the Urban Institute think tank, and Henry Aaron of the Brookings Institution.

Mr. Aaron has since disavowed the idea: He now fears private plans' spending on marketing would drive up costs and worries that there still isn't a workable way to stop private plans from taking healthier folks and sticking the government program with costlier, sicker ones. Mr. Reischauer describes himself as "more agnostic," though he says he isn't convinced that private plans will offer higher-quality, lower-cost care than the government-run plan and frets that Congress isn't including adequate safeguards...

The fear is that premium support will give private HMOs and insurance companies extraordinary incentives to figure out how to skim the cream and take only the healthy low-cost elderly as their customers, leaving the high-cost sick elderly to the government. If that happens--as both Henry Aaron and Bob Reischauer fear that it might--then "premium support" becomes not a way to reduce but instead a way to blow yet another huge hole through the federal government's finances by greatly increasing Medicare spending.

My two years spent working part time on health while at the Treasury convinced me that being a health economics policy guru was like being trapped in the 11th circle of Dante's hell. The problems are just too complex. The uncertainties just too great. And I do not have any of the answers.

Posted by DeLong at October 29, 2003 08:17 PM | TrackBack

Comments

I don't see why a medicare voucher plan would neccesarily blow a hole in the budget, even with the adverse selection problem you outlined. If private HMOs were simply skimming the healthiest, least costly patients out of the system, then the voucher could be downgraded in value accordingly. Some sort of equilibrium would develop.

Of course, you could also make the system more robust by increasing the voucher for older patients.

Posted by: sd on October 29, 2003 09:17 PM

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What about having a restriction on the medicare coupon, so that if a company accepts any vouchers at all, it must accept anyone with a voucher, regardless of condition? (perhaps allowing a certain amount of price discrimination among people, but only for behaviors, not other risk factors. I.e. maybe insurance companies can increase premiums on someone who has casual unprotected sex and smokes a pack a day, but they can't increase premiums on someone with a genetic predisposition to brain cancer or has arteriosclerosis from bad dietary habits that she's since abandoned)

Is there some way in which that would be either unacceptably inefficient or would be easily evaded by insurance companies? (I realize it would be somewhat inefficient, because any situation in which insurers are forced to charge a single premium for the insurance of parties with different risk levels would generate a non-optimal result, but isn't that just part of trying to acheive universal health insurance, whether you try it through a single payer plan, a voucher scheme, employer mandates, or anything?)

Posted by: Julian Elson on October 29, 2003 09:54 PM

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I should think that the problem with health care provision is the that information asymmetry between providers and consumers of health care is by its very nature severe, on the one hand, and, on the other, that demand is undelimitable. Consumers are unable on the basis of their own experience to assess the risks involved, nor to understand the possiblities and limits of treatments available and providers must be held to qualitative standards of care, while they also need to take account of overall efficacy of outcomes and the distribution of syndromes and overall resources. This is not the sort of situation that lends itself well to private, market-based solutions. Not only does the market tend both on the supply and demand sides towards self-selection of risk groupings, but competitive processes to drive down costs conflict with the maintenence of qualitative standards and the universality of information sharing. Thus the problem of health care provision, how to provide adequate, reasonably high quality health care services equitably from available resources, while containing the growth in costs, I think, would benefit by re-defining health care as a public good. The U.S.A. is the only OECD country that does not do this.

Establish a single-payer national health care system, financed by an economy-wide tax such as a VAT at a fixed percentage of GDP. (Cigarettes, alcohol and other such risk factors should be taxed up to the level that they contribute to health care costs, so that users are forced to self-insure against the added risk, but no more so, as if to be morally punitive or promote coercively the good of others. And one might as well add automobiles to the list.) Elect from the qualified pool of voters a nation college of physicians and surgeons, to deliberate and decide upon what is to be covered by way of treatment under universal health insurance after an overall budget limit is set by the finance authority, and provide this college with a research branch to evaluate treatments and outcomes, as well as direct funds to promising new research. (And such research should be shared with other OEDC countries; there is no reason to reduplicate research based on national sovereignty). Any licensed (i.e. qualified) provider should be eligible for payments and consumers should be free to choose their provider, but administrative measures can be undertaken to enforce and promulgate "best practices" standards and operations research can be undertaken to develop them. Special outreach programs should be developed and implemented to reach disadvantaged population groups, e.g. poor and minority groups, that are liable to be less informed and treatment-compliant. Should a provider be able to provide adequate care at a cost less than the industry standard, then they would be entitled to keep the financial surplus, but information on their practices and methods should be publically available. I don't see why any of this should be regarded as impracticable or ineffective.

Posted by: john c. halasz on October 29, 2003 10:10 PM

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I should think that the problem with health care provision is the that information asymmetry between providers and consumers of health care is by its very nature severe, on the one hand, and, on the other, that demand is undelimitable. Consumers are unable on the basis of their own experience to assess the risks involved, nor to understand the possiblities and limits of treatments available and providers must be held to qualitative standards of care, while they also need to take account of overall efficacy of outcomes and the distribution of syndromes and overall resources. This is not the sort of situation that lends itself well to private, market-based solutions. Not only does the market tend both on the supply and demand sides towards self-selection of risk groupings, but competitive processes to drive down costs conflict with the maintenence of qualitative standards and the universality of information sharing. Thus the problem of health care provision, how to provide adequate, reasonably high quality health care services equitably from available resources, while containing the growth in costs, I think, would benefit by re-defining health care as a public good. The U.S.A. is the only OECD country that does not do this.

Establish a single-payer national health care system, financed by an economy-wide tax such as a VAT at a fixed percentage of GDP. (Cigarettes, alcohol and other such risk factors should be taxed up to the level that they contribute to health care costs, so that users are forced to self-insure against the added risk, but no more so, as if to be morally punitive or promote coercively the good of others. And one might as well add automobiles to the list.) Elect from the qualified pool of voters a nation college of physicians and surgeons, to deliberate and decide upon what is to be covered by way of treatment under universal health insurance after an overall budget limit is set by the finance authority, and provide this college with a research branch to evaluate treatments and outcomes, as well as direct funds to promising new research. (And such research should be shared with other OEDC countries; there is no reason to reduplicate research based on national sovereignty). Any licensed (i.e. qualified) provider should be eligible for payments and consumers should be free to choose their provider, but administrative measures can be undertaken to enforce and promulgate "best practices" standards and operations research can be undertaken to develop them. Special outreach programs should be developed and implemented to reach disadvantaged population groups, e.g. poor and minority groups, that are liable to be less informed and treatment-compliant. Should a provider be able to provide adequate care at a cost less than the industry standard, then they would be entitled to keep the financial surplus, but information on their practices and methods should be publically available. I don't see why any of this should be regarded as impracticable or ineffective.

Posted by: john c. halasz on October 29, 2003 10:10 PM

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How does this new comments thingy work?

Posted by: john c. halasz on October 29, 2003 10:26 PM

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Sorry for the double post. And the answer to the last question has been partially obviated by the sudden flashing up of the complete "Medicare" page apparently out of nowhere after 15 minutes.?

Posted by: john c. halasz on October 29, 2003 10:33 PM

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Well, I sent in my apology for the double post a while ago, so I guess my last question still stands.

Posted by: john c. halasz on October 29, 2003 11:30 PM

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I think people are capable of estimating their own health risks properly. In fact, I think that we know our own bodies a good deal better than an insurance company possibly can, and that's what creates the adverse selection problem for medical insurance in the first place. What we don't know, as medical consumers, is how good a job a particular doctor or hospital is doing.

What I really want is a good textbook on medical economics that's focused on the American institutional setting. I want to be able to figure out how the AMA's licensing authority, the FDA, Medicare, Medicaid, HMOs, the tax benefits companies get for paying in health benefits rather than cash, and all that stuff hang together. I just don't have a clear enough picture to be able to identify even the total bullshit claims in the policy debate.

However, I'm a computer scientist, rather than an economist or a medical regulator, so I don't know where to look. Any suggestions?

Posted by: Neel Krishnaswami on October 30, 2003 06:13 AM

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I think people are capable of estimating their own health risks properly. In fact, I think that we know our own bodies a good deal better than an insurance company possibly can, and that's what creates the adverse selection problem for medical insurance in the first place. What we don't know, as medical consumers, is how good a job a particular doctor or hospital is doing.

What I really want is a good textbook on medical economics that's focused on the American institutional setting. I want to be able to figure out how the AMA's licensing authority, the FDA, Medicare, Medicaid, HMOs, the tax benefits companies get for paying in health benefits rather than cash, and all that stuff hang together. I just don't have a clear enough picture to be able to identify even the total bullshit claims in the policy debate.

However, I'm a computer scientist, rather than an economist or a medical regulator, so I don't know where to look. Any suggestions?

Posted by: Neel Krishnaswami on October 30, 2003 06:18 AM

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Other countries have shown that good communication and health screening can reduce the need for expensive and invasive proceedures that are major costs of health care. For example, flu shots are inexpensive compared to the hospitalization of even a small fraction of those treated for pneumonia. Programs exist that deliver these for free and they are cost effective.

There are numerous cost savings programs that are used in other countries that are not used in the US. That is why the US can have an infant mortality rate that is as high as some developing countries that spend orders of magnitude less on health care.

The US is politically divided among those who recognize the benefits of "socialized" medical benefits and those that see personal health as a moral issue that is the responsibility of the individual. Individual responsibility assumes a medically aware and educated public. Unfortunately, this does not exist. This is why the social programs have proved more effective and efficient.

I am very pessimistic that individuals that are bombarded daily with advertisements for expensive prescription drugs can be educated on health issues when the funding and resources for that education are not forthcoming. My own mother, who is college educated, once asked me if substituting a half dose of my father's vitamin B12 would be the same a dose of vitamin B6. I can't fault the logic, but the knowledge of basic biology and biochemistry necessary to understand modern medicine is sorely missing.

In other cases, social values interfere with good medical decisions. If birth control were as available in the US as in Europe, the teen pregnancy rate could be drastically lowered and the US abortion rate could be lowered as well at substantial cost savings because abortions are more expensive than birth control. However, discussion of birth control for teenagers is political taboo. Medical technology is such that we can keep the bodies of people who are brain dead from decomposing, but at great medical cost with no real benefit to the patient. Costly life or death decisions are made on an emotional basis often for the benefit of the relatives and not necessarily in the interests of the patient. These are only two of many issues that are unresolved and contribute greatly to our health care system. Dozens of issues that could greatly reduce the costs of the system go unresolved because of an inability to arrive at a consensus on important national social issues.

Because medical care cost benefit cannot be separated from social issues, morality and values progress has been slow. As long as sufficient resources are available to float the current system, there is little incentive to debate the underlying assumptions and values that underpin our health care system.

Posted by: bakho on October 30, 2003 06:20 AM

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I think people are capable of estimating their own health risks properly. In fact, I think that we know our own bodies a good deal better than an insurance company possibly can, and that's what creates the adverse selection problem for medical insurance in the first place. What we don't know, as medical consumers, is how good a job a particular doctor or hospital is doing.

What I really want is a good textbook on medical economics that's focused on the American institutional setting. I want to be able to figure out how the AMA's licensing authority, the FDA, Medicare, Medicaid, HMOs, the tax benefits companies get for paying in health benefits rather than cash, and all that stuff hang together. I just don't have a clear enough picture to be able to identify even the total bullshit claims in the policy debate.

However, I'm a computer scientist, rather than an economist or a medical regulator, so I don't know where to look. Any suggestions?

Posted by: Neel Krishnaswami on October 30, 2003 06:23 AM

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2004 will be the fourth year in a row of 15% premium increases for my HMO. Just how is competition among such free market providers holding down costs?

Posted by: Bob H on October 30, 2003 06:33 AM

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2004 will be the fourth year in a row of 15% premium increases for my HMO. Just how is competition among such free market providers holding down costs?

Posted by: Bob H on October 30, 2003 06:38 AM

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With reference to the first comment: Cream skimming did occur in the original HMO risk program, and probably still does. Enrollees tend to disenroll at the moment that they start needing more health care services and run into red tape, and costing more money, which is paid out by the ffs program (traditional Medicare). The risk to the budget was even more pernicious because HMOs were paid based on the ffs spending (which, of course was trending higher because it more and more reflected the sikcer population), but when Congress tried to reduce premiums through the BBA of 1997 many HMOs simply exited the program. In fairness to the HMOs, they do not have the power to set fees for providers as low as the government does. It is especially difficult to set up and administer a Medicare HMO in rural areas, yet the government actually pretends that care for individuals living in these areas is cheaper than in urban areas -- even though many rural residents travel to urban locations for services. So HMOs basically abandoned these markets.

Medicare HMOs are prohibited from denying enrollment to any bennie based on health status. There are subtle and not so subtle ways around this (like marketing to employed beneficiaries -- i.e., more likely to be healthy, and not marketing in assisted living facilities, etc.). But concerns over the cost of marketing are real, because enrollment (and thus marketing) is done one individual at a time, unlike employer groups, where one account brings along hundreds or thousands of potential enrollees. You could move to an annual open enrollment style marketing, with direct to individual marketing prohibited (federal employee program style), and that would seriously improve the situation, as well as prevent the marketing abuses that are widespread in some markets.

The more I work in this world (gee, can you tell) the more I agree that unitary payer (even if accompanied by non-unitary federal employee style options) does make sense. But the real problem remains as to who will constrain demand and how.

Posted by: Barbara on October 30, 2003 06:39 AM

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" He now fears private plans' spending on marketing would drive up costs..."

This from an economist!

Posted by: Patrick R. Sullivan on October 30, 2003 07:08 AM

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Yes, it is complicated. But, take another look in 20 years or so when the tragic case of Terry Schiavo (sp?) in Florida is repeated exponentially among the aging baby boomers.

To what political party will today's right-to-life ideologues and today's fiscal conservative ideologues run.

Answer: Who knows? But, both types of ideologues largely belong to the same Party now, despite recent, temporary realignments. (I'm talking uncompromising ideology, folks) And I expect that on either side of my death bed will stand half of this ideological monster -- on one side an ideologue spitting out the epithet "Murderer" to my family members who wish to pull the plug; on the other side will stand an ideologue spitting out the epithet "Socialist thief" to my family members who wish to continue my life on government assistance, because I long ago was kicked off the private plan.

Since both ideologues signed pledges to Grover Norquist to never again raise taxes in the remaining history of mankind, my only recourse between now and then is to become a ferocious, dangerous ideologue along the lines of the fictional character Madame Defarge from "The Tale of Two Cities".

Well, I need to go and flesh this idea out a little bit.

Posted by: John Thullen on October 30, 2003 07:42 AM

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Bahko points out that medical care involves a mix of economic calculations, such as cost-benefit calculations, along with social and moral or value issues. Ever since medical care became big business, the economic calculations became more apparent. What has become less apparent is that use of the profit motive as a cost-control measure has its own costs. These include the enormous cost of the infrastructure of the big business of medical care, the need to increase profits so as to satisfy the demands of the stock market and the desire of the managers to get rich on options, and the use of advertising to distort demand for treatments of dubious health related procedures.

Perhaps more important, cost-benefit calculations are inimical to value-centered decision-making. The Schiavo case (interesting that Schiavo is Italian for slave) illustrates the problem. There are a large number of other people in her situation, but this is the case that makes the press. Is that because there is private money to pay for her upkeep? If her parents were faced with the costs of treatment, would they feel this way? Are the outsiders intruding on this piece of human misery willing to pay, not only for Schiavo, but for all the others?

Economists get to try to figure out the benefit in this setting, as I reckon we lawyers have done what we can.

Posted by: Masaccio on October 30, 2003 08:52 AM

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Bahko notes that medical care issues are a witches brew of cost-benefit calculations, social concerns, and moral or value issues. The introduction of the unadulterated profit motive and related stock market considerations into the brew as a tool for efficiency, has its own enormous costs. These include the need for ever-growing profits to satisfy the demands of the stock market and those of the managers for untold wealth arising from stock options, the use of advertising to distort the demand for services, cherry-picking of patients, and the reduction of the needed services, such as nursing and personal contact, in an effort to cut costs. The retention of the insurance industry in this brew adds another layer of costs, and every one of the new entrants into this industry seeks vast returns.

The worst part of the problem is the notion that the economic issues trump the social, moral an value considerations of medical treatment. In the Schiavo case (interesting that Schiavo is Italian for slave), the medical community has apparently retained its historic commitment to the needs of the patients. However, Schiavo has a trust which can pay for her. Many others do not. What would all those people around Schiavo think if they knew that they had to reach into their own pockets to pay for treatment? How would the rest of us feel if we had to pay for it from our taxes, or from the extra costs of insurance?

I leave it to the economists to think out the benefit side of this problem. We lawyers have done what we can.

Posted by: Masaccio on October 30, 2003 09:14 AM

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Bahko notes that medical care issues are a witches brew of cost-benefit calculations, social concerns, and moral or value issues. The introduction of the unadulterated profit motive and related stock market considerations into the brew as a tool for efficiency, has its own enormous costs. These include the need for ever-growing profits to satisfy the demands of the stock market and those of the managers for untold wealth arising from stock options, the use of advertising to distort the demand for services, cherry-picking of patients, and the reduction of the needed services, such as nursing and personal contact, in an effort to cut costs. The retention of the insurance industry in this brew adds another layer of costs, and every one of the new entrants into this industry seeks vast returns.

The worst part of the problem is the notion that the economic issues trump the social, moral an value considerations of medical treatment. In the Schiavo case (interesting that Schiavo is Italian for slave), the medical community has apparently retained its historic commitment to the needs of the patients. However, Schiavo has a trust which can pay for her. Many others do not. What would all those people around Schiavo think if they knew that they had to reach into their own pockets to pay for treatment? How would the rest of us feel if we had to pay for it from our taxes, or from the extra costs of insurance?

I leave it to the economists to think out the benefit side of this problem. We lawyers have done what we can.

Posted by: Masaccio on October 30, 2003 09:29 AM

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Re: "cherry-picking": I am a family doctor who used to work at Kaiser in Northern California.(Incidentally, Kaiser's a pretty good deal if you're a patient, but if you're an American-trained family doc,don't even think about it.)I once had a new patient tell me that his doctor at his previous for-profit HMO said that he( the patient) was getting older and sicker and so it was time to transfer to Kaiser.

Posted by: j rossi on October 30, 2003 10:32 AM

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How much of health care cost in the US are largely unrelated to health care services? As an example, inoculating an individual against tuberculosis in Hati costs around $120. The same inoculation costs $2000 in the US. (NPR interview). The organization providing the inoculations was a non-profit, so physician costs where minimal. Still, a difference of $1880 cannot be physician salaries alone.

Posted by: James on October 30, 2003 12:43 PM

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Billing alone accounts for over 20% of health care costs. There are a lot of large corporations that make huge profits in the medical sector, pharmaceuticals, physicians, executives, etc. They are a force against change. Hillary care was in part derailed by TV propaganda ads paid for by vested interests that are more concerned about maintaining their own profitablility than providing health care for all. What gets me are the ads that said "You won't be able to choose your own doctor." Well excuse me but with my current plan, I can choose my own doctor, but if it isn't one the plan chooses for me, I have to pay extra. We got the worst of both worlds. The problems that the ads addressed are with us and we don't have universal coverage. Who is going to fund the campaign to combat the vested interests opposed to reform?

There are a lot of outside the box solutions that could improve health care but the political climate makes it unlikely to happen.

Posted by: bakho on October 30, 2003 05:26 PM

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Just to make the obvious point, the projected Social Security shortfall is small potatoes compared to the projected Medicare shortfall. In a rational world...

Posted by: john c. halasz on October 31, 2003 12:43 AM

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