David Dranove

Craig GarthwaiteUltimately, spending less on health care is a relatively easy task: We either need to consume fewer services, or spend less on the services that we consume. But much like we teach our Kellogg students about maximizing profits, the devil is in the details.

It’s certainly tempting to ask the government to swoop in on a white stallion and solve the all our problems by fiat. For example, we could have the government simply exploit its monopsony power and set prices, but an artificially low price will lead to an inefficiently low quantity of services and future innovation (stay tuned, we will have more to say about this next week).

Similarly, we could explicitly ration quantities (as opposed to implicitly doing it through a large uninsured population). But how could we hope to determine the right level of care? Ultimately, if we ask the government to unilaterally fix this problem, instead of a white stallion we could behold a pale horse and all that it entails.

The good part, perhaps the best part, about the Affordable Care Act is that it attempts to address this problem using market forces. The question is whether we are ready for what these market forces will entail.

We will focus today on the role of market forces in the insurance market to control prices in the newly established ACA exchanges.

This month the Obama administration announced that it would allow insurers to use “reference pricing” for insurance programs in the exchanges. Under a reference pricing system, insurers set the maximum price they will pay for a specific set of services and if patients go to a facility that costs more than that amount they are required to pay the difference.

Continue reading “If We Want Lower Health Care Spending, We Are Going to Have to Pay for It”

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Craig GarthwaiteTwo weeks ago, the Kellogg School of Management was privileged to host Joe Doyle, an outstanding economist from MIT.

In a broad research portfolio, Joe has focused on the effects from differing intensity of medical treatments.

This research is shattering some long held beliefs about the relationship between health spending and outcomes.

We think that Joe’s work is not known widely enough outside of the academic community, so we are using our blog to let you know what you have been missing and, in the process, perhaps change the way you think about healthcare spending.

It is well known that the U.S. far outspends other nations on healthcare, yet the outcomes for Americans (in terms of coarse aggregate measures such as life expectancy, infant mortality, and other dimensions) are quite average.

Of course, these outcomes are not the only things that we value in health care.

A lot of our spending is on drugs and medical services that improve our quality of life and won’t show up in these aggregate outcomes. For example, more effective pain management can decrease pain and improve quality of life – often with important economic benefits.

Despite this fact, most health policy analysts have concluded that we can cut back on health spending, without harming quality on any dimension.

This is not a new idea, of course. In a famous 1978 New England Journal article, Alain Enthoven coined the term “flat of the curve medicine” to describe how the U.S. had reached the point of diminishing returns in health spending. And for nearly 30 years the Dartmouth Atlas has documented how health spending dramatically varies across communities without any apparent correlation with outcomes.

The question has always been, what health spending to cut? Garthwaite’s previous work has shown that broad regulations requiring longer hospital stays for new mothers and their babies have provided only limited benefits and that more targeted rules could save money without sacrificing quality.

Beyond some wasteful regulations, we can always point to gross examples of overspending such as the rapid proliferation of proton beam treatments. But beyond those clear examples how can one identify what is waste and what is medically necessary?

In two important papers, Joe Doyle and co-authors ask a more fundamental question – is the often cited broad variation in health spending actually wasteful at all? They find that even in healthcare, there really is no such thing as a free lunch.

His work should be mandatory reading for everyone who believes that broad spending cuts will have no adverse consequences.

For those who lack the time to read these papers, we provide the “Cliff’s Notes” versions.

Continue reading “Is Higher Spending Truly Wasteful?”

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With the ACA exchange enrollment deadline almost behind us, this is a good time to take a look at the big picture.

Three years after the first baby steps of implementation, what has the ACA accomplished?

When we consider the ACA, we can think of two broad goals. The “easy” goal was expanding coverage to the uninsured. We say “easy” because regulators should be able to succeed by simply throwing money at the problem, and that is a task our elected officials seem particularly adept at accomplishing.

The “hard” goal was bringing down the rate of growth in health care spending.

This has proven to be a difficult task for policy makers, who have been trying (and failing) for decades and have often done more harm than good.

We first consider the goal of expanding coverage to the uninsured. From its onset, the ACA chalked up a small victory by requiring plans to continue coverage for dependents under age 26.

This provided coverage to as many as three million uninsured, albeit the healthiest members of the population. The lion’s share of the reduction in the numbers of uninsured was supposed to come from Medicaid expansions and private exchanges.

And here is where the problems emerge.

Medicaid ranks have swelled in the 27 states (including DC) that have chosen to expand the program. Republican leadership in other states continue to assert they will not expand Medicaid, but given the exceptionally generous federal funding for this expansion, we find it hard to believe that most of these states won’t soon join the expansion.

After all, even Louisiana eventually raised its drinking age to 21 to get its share of federal highway funding. Similarly, we can’t imagine that the red states will turn down billions of dollars in federal funds.

Continue reading “Taking Stock of the ACA”

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In a recent New York Times opinion piece, Obama advisor Ezekiel Emanuel attempts to ease the minds of millions of Americans who may be selecting narrow network plans in the exchanges.

In defending narrow networks, Emanuel cites the well-known example of Kaiser, which has for decades required enrollees to choose among only Kaiser-owned hospitals and Kaiser-employed physicians.

He goes on to propose some “safeguards” for plans in the exchanges such as mandating that insurers disclose the criteria used to establish their network of providers and requiring that insurers pay for second opinions from elite out-of-network providers.

Perhaps surprisingly given our previous commentary, we agree with the general thrust of Emanuel’s argument, which is that freedom of choice is overrated. And while we do not agree with many of his recommended safeguards, our quarrel today is not with his proposals for even more new rules and regulations.

Rather, our primary quarrel is with the vast majority of the individuals who chose to comment on, and often lash out at, Emanuel’s article. These comments are emblematic of the general misunderstanding of the role of narrow network plans in controlling the future growth of health care expenditures.

In a nutshell, this is the archetypal response against Emmanuel’s claim: “Evil insurers have given us narrow networks. The government must intervene in this bloodthirsty lust for profits. Give us freedom of choice! (And preferably with the government taking over the business of insurance altogether).”

Given previous comments on this site, we suspect that many readers of our blog might share similar sentiments. So we would like to take our readers on a stroll down memory lane to explain how insurers ended up creating networks, and why we are all better off for it.

Continue reading “Misunderstanding Narrow Networks”

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We will be blunt. Hidden under the cloak of expanding health insurance, the Affordable Care Act (ACA) has fostered a massive subsidization of healthcare goods and services.

These subsidies often have little or anything to do with what economists would consider the “insurance” part of health insurance – providing protection against financial catastrophe.

Perhaps more troubling, if the past is prologue these subsidies will continue to grow, transferring huge amounts of money to politically favored groups and doing very little to decrease aggregate health spending – a presumed goal of health reform.

In order to understand these claims, it is necessary to take a step back and explain why insurance (of any form) is a good thing in the first place. Simply stated, insurance provides individuals with protection against unpredictable financial hardships not of their own making.

Most of us don’t like risk, and therefore we are willing to pay other people to avoid uncertain outcomes. Therefore the benefits of insurance are to protect us from uncertain events.

The key here is the uncertainty. If something is not going to cause financial distress, or the expense is relatively predictable, then, by definition, the service is not insurable. A health plan could cover the service, but that is a subsidy, i.e. other people in the insurance pool or an outside actor such as the government are simply paying for your service. It is not insurance.

Sadly, most of the discussion around what constitutes “real” health insurance under the ACA bears only a passing resemblance to the protection against financial risk that is the hallmark of insurance. For example, Secretary of Health and Human Services Kathleen Sebelius said: “Some of these folks have very high catastrophic plans that don’t pay for anything unless you get hit by a bus … They’re really mortgage protection, not health insurance.”

What does Secretary Sebelius think insurance is? We don’t expect auto insurance to pay for our gasoline.

Continue reading “The ACA: When Insurance Isn’t Insurance”

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As the health insurance exchanges find their footing and potentially millions of Americans gain access to insurance, this may be a good time to step back and take a longer term view of the ACA. When you get down to it, expanding health insurance coverage was the easiest and least controversial part of health reform. There is no shortage of ways to expand health coverage and almost any credible health reform proposal would have done the job, provided enough money was thrown at the problem.

In designing the ACA, perhaps as a result of political pressure, President Obama opted for a combination of heavily subsidized individual insurance exchanges and generous expansions of Medicaid. Freed from political constraints, he might have instead pushed for the single payer system that many of his most ardent supporters desired. Republicans inclined to expand coverage (at least one of us is proof that unlike the unicorn these do exist) might have pushed for a pure voucher program that harnessed market forces.

All of these options would expand coverage to the degree that policymakers were willing to fund them. So while we congratulate the President for his political success (we doubt the other options could have made it through Congress), it is a simplistic mistake to evaluate the implementation of the ACA by counting the numbers of uninsured or waiting for the monthly updates on the enrollment figures from the exchanges website. Any regulator with a big enough purse can, in the fullness of time, expand access. Frankly, that’s the “easy” part of healthcare reform.

But what about the other elements of the so-called “triple aim” of health reform: cost and quality? You see, while we agree that liberal, moderate, and conservative health reforms can all improve coverage, they each will have very different effects on the other important outcomes. Consider for example the oft-discussed “Medicare for all”; i.e. a single payer system. This would increase access without the messiness of the exchanges. It would also allow the government to flex its monopsonistic muscles and quickly reduce costs – though likely at the expense of quality. In contrast, relying on markets may not reduce costs in the short run, and may not necessarily reward real quality (though it has a better short than single payer in this regard).

Evaluating health reform in the context of the “Triple Aim” is important, but even that approach is not nearly enough. There is a broad consensus among that technological change is the most important long run driver of cost and quality. It follows that the most important element of health reform is its impact on technological change.

To understand how technological change affects all of us, consider the profound impact of the top ten medical advances in the last ten years, as listed by CNN:

1. Sequencing the human genome
2. Stem cell research
3. HIV cocktails
4. Targeted cancer therapies.
5. Laparoscopic surgery

Continue reading “What We Don’t Know Can Hurt Us”

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Last week President Obama announced that he will try to keep his oft repeated promise to Americans in the individual market that they can keep their plans if they like them … for a year. The media have done an excellent job explaining why President Obama’s temporary patch to the ACA may endanger its existence; in the process the American public has learned more than it ever wanted to about adverse selection, cream skimming, and most importantly crass politics.

Though the full costs of adverse selection will be muted in the first year by risk corridors and reinsurance, it is clear that the failing website, the bad press, and the recently announced delay are placing maximal stress on even those backup provisions of the bill.

Even if the ACA survives this additional insult against the economics that support its very existence, we have witnessed yet another missed opportunity for positive reform to President Obama’s signature legislative achievement. And this time we can’t just blame intransigent tea-party Republicans and their quixotic efforts at repeal; here the buck stops at 1600 Pennsylvania Ave, NW.

While many of the plans that are affected by the President’s temporary patch might actually be plans that don’t qualify as “insurance” (i.e. they have low lifetime caps on expenditures or don’t cover hospital services), numerous others actually offer quite good coverage that just don’t meet the exceptionally high standards of the newly developed minimum essential health benefit (EHB).

In many ways, the first dollar coverage for preventive care and the wide ranging number of services covered by the ACA aren’t truly insurance either. Instead, these features amount to a very generous pre-payment plan for medical services supported by the United States treasury.

These elements of the EHB are too costly and unnecessary. Perhaps even more concerning, they are just the ante. As time goes on, vested interests for everything not included in the EHB will work tirelessly to insure that their favorite benefits are included. If you want evidence of this eventuality, you need look no further than the remarkably long and growing list of benefits mandated by most states.

Keep in mind that as the EHB grows more generous the premiums and subsidies on the exchanges will also grow. And we know who will pay their “fair share” of those increases.

Continue reading “The Real Fix? The Exchanges Aren’t Working. Here’s Why …”

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The Obama administration announced on Friday that it will require parity for mental health insurance coverage. That means that health insurers must apply the same copayments, deductibles, and visit limits to mental healthcare as they do for physical health care treatment. Call it fair, call it political, but please don’t call it a good economic or health policy.

The story about how this is fair, or at least politically popular goes something like this: Health insurers are evil and powerful firms that can and will do whatever they want. On the other hand, patients with mental health problems are politically weak and must be protected from the powerful insurers that have no interest in taking care of them.

In this story, the Obama administration rides in on its white stallion and rights the wrongs being perpetrated by the villainous insurance companies. All we need is a damsel in distress, an evil step-mother, and a catchy tune and Disney will sign the movie rights.

The problem with this simplistic story line is that you can replace “mental health” with nearly any other condition and the story would sound just as plausible.

Continue reading “Mental Health Parity and the Affordable Care Act”

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By now you’ve certainly seen the headlines: “Obama administration knew millions could not keep their health insurance,” or “Report: Millions will lose health plans as ObamaCare takes hold.”

This is not just the rumblings of right wing media outlets or scare tactics, it is now becoming clear that millions of individuals who used to buy their insurance in the individual market will not be able to keep their old plans. As a result of minimum standard for health insurance “quality,” between 50 and 75 percent of existing individual insurance plans will be canceled.

White House Spokesperson Jay Carney said that these cancellations will only affect “substandard policies that don’t provide minimum services.” But again, the devil here is in the undiscussed details. The “minimum services” bar for the Affordable Care Act is actually very high and as a result the new policies that replace those being canceled can be quite expensive.

For people who are in the unsubsidized portion of the exchanges, or even those who qualify for smaller subsidies, these minimum requirements are going to result in large premium increases. While many people might all believe that these individuals be buying better insurance, this is not the argument used to gain public support for the ACA.

We’ve both been vocal in our support of moving people onto the exchanges and away from employer provided coverage. One reason for that support has been that the exchanges allow a far better matching of individual preferences for health insurance and the products that people can purchase. Certainly that was our basis for our strong support of narrow network plans on the exchanges.

Beyond the size of the network, some people don’t want to pay for generous first dollar coverage. Instead, these consumers are willing to exchange lower premiums for higher deductibles or other forms of cost sharing. Others might not be interested in having coverage for every possible service, but instead might opt for a less generous set of benefits.

They will be thwarted by the ACA.

Continue reading “Will You Be Able to Keep Your Plan? The Economics Behind the Obama Administration’s Latest Problem”

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That past month of debate over the botched launch of the health care exchanges has brought the programming geeks, and their hired mouthpieces, out in the open to defend the indefensible. As painful as this has been for so many Americans, we cannot help but be amused to hear so many commentators doing their best impression of Captain Renault and expressing their shock that the federal procurement system could have produced such an outcome. Of course, most of this is a sideshow, the opening act to an even more serious drama in the making.

Let us be clear from the outset, the rollout of Healthcare.gov is an embarrassment. However, this only becomes a real problem if it dissuades enough people who were already marginal customers with respect to their purchase of health insurance on the exchanges to simply pay the penalty and avoid the hassle of staring at a computer screen, waiting on hold for hours, or refusing to try again once the geeks get this all sorted out.

While the self-appointed technology experts on both sides of the aisle have been debating the causes of the web site debacle, attention has been diverted away from the necessarily frank discussions we must have about the real potential benefits and looming costs of the exchanges.

In a valiant attempt to steer the conversation towards the benefits of the ACA, President Obama held a rose garden press event where he repeatedly claimed that the health insurance on the exchanges is good product. But as is all too often the case, the President talked about the benefits and side stepped the difficult conversation about the costs.

At least he is half right. If they can ever fix the web sites, people with pre-existing conditions who shop on the exchanges will gain access to insurance at a more affordable price. Enrollees may save thousands of dollars. But let’s not kid ourselves.

The exchanges do not reduce the cost of medical care; they only change who pays for it. And we all know who that is.

Continue reading “The Opening Act”

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FROM THE VAULT

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