POLICY: Enthoven on the rational place for consumer choice in health care, and why CDHC is missing the point

It was a little while back that I heard a webinar from Michael Porter, and I described him as the next great business school professor to get lost in the health care quagmire. At Stanford Alain Enthoven has been stuck there for many, many years, (mind you, so am I!) but he at least has a deep and systemic understanding of how health care works, and how it could work better — even if he never enjoyed the satisfaction of seeing his ideas adopted on a national scale. You’ll recall that some of his ideas were at least partly behind the Clinton plan. (Incidentally Porter was pretty dismissive about Enthoven in the Q&A section of his talk). After I wrote my article (and another on Regina Herzlinger) I got some complimentary email from Enthoven, and I suspected that he wasn’t going to let the "consumer-directed" academics have it all their own way.

His response to Porter et al (with Laura Tollen from Kaiser Permanente’s Research Institute) is in an article at Health Affairs (free in its web only edition) called Competition In Health Care: It Takes Systems To Pursue Quality And Efficiency. What he does is to analyze what we need to do to create a rational market in health care, and then contrast that to Porter’s suggestions.

First up. Will high deductibles and personal HSAs really act as a market force on providers’ behavior?

Porter and Teisberg’s answer to these failings of the FFS indemnity system—“reasonable copays and large deductibles combined with medical savings accounts [that] would let patients take some financial responsibility for their choices”—is insufficient. Copays give patients some responsibility for the frequency with which they demand doctor visits but leave them insensitive to the costs of services provided during those visits. Deductibles aren’t a solution because health care expenses are concentrated among patients whose costs exceed reasonable deductibles. By most estimates, the most costly 30 percent of patients account for 90 percent of total health care spending.

This kind of insurance leaves patients cost-unconscious once they anticipate reaching the deductible or out-of-pocket spending limit. Coinsurance helps, but only to the point where limits on out-of-pocket spending—typical in most health insurance arrangements—are reached. Ironically, though, it is the very people who will exceed these limits (those who need expensive treatments) for whom Porter and Teisberg expect regional centers of excellence to compete on cost and quality.

Bingo.  Nothing more needs to be said, and I have never heard anything from the pro-HSA/personal account crowd explaining how to deal with that issue. Meanwhile despite the pro-consumer directed lobby’s idea that information is all that is needed it’s clear that information is necessary but not sufficient. Enthoven gives a couple of examples of why incentive change is needed for the information availability to work:

First, the most high-profile CABG patient in the nation—former President Bill Clinton—chose to undergo this procedure at New York–Presbyterian Hospital/Columbia University Medical Center in 2004, although this hospital ranked twenty-second in risk-adjusted CABG mortality rates among thirty-six hospitals performing the procedure in the state. In a more disappointing example, the Pennsylvania Health Care Cost Containment Council published a consumer guide to CABG surgery with risk-adjusted mortality data. In a random sample of 50 percent of Pennsylvania cardiologists, 87 percent said that the guide had little or no influence on their referral recommendations.If referring cardiologists do not use this information, it is unlikely that patients will. Although it is important to provide this kind of information, much more work must be done to make it useable for patients.

And then there’s the key issue of how to manage the chronically ill — the ones who we spend 70% of the money on — using care coordination between providers.

Under a completely free-choice model such as that of Porter and Teisberg, a patient with diabetes would seek out the best providers for diabetes, and a patient with congestive heart failure would do similarly. Putting aside doubts that ill patients will regularly travel far from home to centers of excellence, the problem remains: Many patients have multiple chronic conditions. In addition, people with chronic illnesses also need primary care. It simply cannot be good medicine for people with multiple chronic diseases to receive primary care and care for each of their conditions in separate locations, with different sets of doctors who don’t communicate regularly about the patient.To be fair, under the provider-level competitive model, one could imagine regional specialty centers that treat a variety of conditions that often coexist with one another (for example, the diabetes center would include experts in hypertension and heart disease). However, this raises the question of whether there are natural limits to the expansion of that expertise that stop short of a fully integrated delivery system. We do not think so.

Enthoven has me convinced that structured provider systems with virtual or real integration and their incentives alignment to produce the best care at a defined price per capita are the best way to deliver medical care to populations. That was the original goal of the HMO movement, even though it was destroyed when the HMO went from being a real organization to being just another insurance product for benefits consultants to sell. So why did this all get thrown out with the bathwater in the managed care backlash? Enthoven again gives the right answer, and this is confirmed by survey data from Harris that I was using at the time in the mid-1990s.  People wanted a choice, and when they were forced from free-to-them open access to managed care plans that used the same doctors but paid them less and pissed them off (the doctors that is), they didn’t like it. My doctor use to call PruCare (Prudential’s HMO "ZooCare") and I’m sure his patients noticed.  Enthoven is correct when he explains the consequences this way.

Conventional wisdom now has it that people don’t like managed care. The more nuanced truth is that they don’t choose managed care when their employers pay practically the full premium of whatever they choose. Then, there is little to be gained financially by accepting a limited provider network. In contrast, when employers pay a fixed-dollar amount and each employee can keep the full savings, experience shows that high percentages of employees choose economical care. For example, 70–80 percent of active employees and dependents covered by the University of California, CalPERS, and Wells Fargo in California choose HMOs.Another reason markets have not produced competition among IDSs is the widespread employer practice of offering only one insurance carrier, which, in turn, offers only one delivery system (although this is changing; see the discussion of tiered networks below). Seventy-seven percent of insured employees are offered only a single carrier.

So you can get consumers to make a choice within the context of real differences in the insurance product that they buy. But in a world where that’s going to work you really need to have organizations affiliated with the insurers that can actually manage the kind of team-based, guideline-driven medical care that is needed.

For a delivery system to market its superior efficiency, it usually needs to be affiliated with its own or a partner carrier. Thus, offering different carriers is a necessary but not sufficient condition for competition among delivery systems. Ten carriers all offering every FFS doctor in town is not competition, nor is one carrier offering three plan designs (HMO, PPO, point of service), all using the same doctors. Competition to serve whole employer groups on a single-carrier basis has historically resulted in all-inclusive networks. But for these to be effective, carriers must select providers based on quality, efficiency, and willingness to work in teams and with evidence-based guidelines. However, people want to choose their own doctors. In a world of competitive delivery system–based managed care, therefore, people must have a choice among managed care organizations as well as “unmanaged care”—if they are willing to pay the excess cost

In other words there needs to be a cooperative arrangement between payer and provider, and probably an exclusive one too. Sadly for all of us, that only appears to exist here in communities and states where there’s a long history of it (e.g. urban areas of California, Minnesota and Seattle). Otherwise managed care is the same gong show as FFS, with the money going to different places (insurance executives rather than specialist physicians).

Of course the overall problem that I fear Enthoven has shrunk away from over the years is that creating this kind of an incentive structure means creating an environment where consumers/employees/enrollees pay for membership of a system, and have the tools to judge whether that system is worth the extra money they need to pay for it at an open enrollment period. To my mind that really necessitates putting all small and medium businesses into a buying pool, And not just that. But now you need to know a little about buying pools, and I’ll use an example that I know well. Me.

I’m in a buying pool that called PacAdvantage, and it gets me a high deductible "non-system" plan from Blue Shield for about $200 a month; if I bought that same plan via eHealthinsurance.com it would be about $80 a month, until Blue Shield notices (as it did) that I had had knee surgery a few years back and was probably going to have knee problems again, and the price went up to over $400 a month. Of course for that price I could probably buy into an HMO with better coverage if it wasn’t using underwriting, but then again I probably wont use $400 a month’s worth of care (unless I have more knee surgery) so what would be the point?

What’s behind all my quibbling?  In the buying pool get a huge choice of benefit packages, and I will tailor the one I want to my situation. If I can get a better deal outside the pool I’ll take it. So inevitably the pools/buying groups will attract the sicker people (i.e. those who think they will have high health costs) and the healthier ones will take their chance on the individual market and increasingly on high-deductible plans, perhaps with an HSA attached. And of course those high-deductible plans won’t let in anyone who may be sick.  (Our good buddy Ron’s latest commercials which he sent me all state clearly that "medical underwriting is required")

So we have to bite the bullet here. If this is going to work to create the level playing field for integrated provider systems to compete on everyone has to to in a buying pool of some type, and the buying pools must offer the same benefits package. There must also be (as Enthoven mentions in the Oregon BENU pool) real-risk adjustment between the insurers so that they are dealing with the same level of acuity in the population. If that were to happen, and people were to choose their IDS (and plan which would be essentially the same thing) based on a combination of value for money and what trusted authorities (not that they exist here yet) say about their ability to deliver the co-ordinated, cost-effective, informed and evidence-based care that Enthoven’s talking about, then you’d slowly see a market driven alignment of providers to serve that outcome.

We are of course miles away from that outcome, and let’s not beat around the bush here. That arrangement is so close to a single payer universal insurance system that its opponents are able to tar it with the same brush. Enthoven objected to the Clinton plan mostly because it put Medicaid into its big buying pools. But, in the end, everyone has to go into them if this system is going to work–it cant be restricted just to the small business part of the commercial population and "everyone" includes Medicaid, Medicare, the uninsured and everyone else apart from possibly big businesses and the very wealthy. And that is of course how it’s done in Japan, Germany, and most other countries that use this type of a group approach to buying health care (And by the way their governments all also regulate price and provider supply).

And this intellectual "big tent" isn’t so crazy. After all it’s only in the UK where Enthoven’s ideas have ever been implemented at a policy level, and they were moving away from pure global budgeting single payer to an "internal market". Policy wise the "voucher/buying pool" group and the single payer group are so much more aligned than the other side, which really doesn’t give a rat’s arse about care quality or universal coverage. So given that the non-sense of Porter, Herzlinger and the Galen crowd is in the ascendancy, even if it doesn’t cure any of our fundamental problems and probably makes them worse, can we get Alain over to join in a truce between the "voucher" crowd and the "single payer" crowd.

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13 replies »

  1. Wrong again Matthew,
    I have clients that are 64 years old paying less than $200 a month for insurance that pays 100%, including Rx, after the deductible. It is you Matthew that supports cherry picking. Your clients simple put to COBRA their sick insured who can’t work for insurance termination. That’s what I call cherry picking.
    It is true I’m in the underage market but tax free HSAs will be in Medicare soon Matthew, you know that. It’s much different than your article that consumer directed health care is missing the point. You can make the underage market sound bad, you are a pro Matthew in your spin.

  2. Bob–you should undestand that this problem is concetrated in those who have already blown through their deductibles and max out of pockets. It’s not about getting people to avoid the doctor visit. It’s about limiting the spending on the very sick and getting that to adhere to what is (to the best of our knowledge) evidence based medicine. This is especially the case in older and sicker populations — particularly the ones that group health plans will be covering (as our pal Ron picks off the younger healthier ones).

  3. Theora posted “Consumers start out brain dead with regard to medical services.
    You’re suggesting that if we make them pay the financial costs of care more directly, they will semi-magically know what is a smart thing to do and what isn’t a smart thing to do in order to get better.
    This is because, apparently, you think the incentives are wrong–people will spend on frivolous healthcare because it doesn’t cost them anything. But um, that’s just flat wrong”
    – – – –
    I am giving the consumer more credit than you, and I disagree that they are totally brain dead. Some make informed decisions, especially when their own wallet is at stake.
    When it only cost $10 to see a doc and another $10 for the latest whiz-bang Rx, consumers will go to the doc at the drop of a hanky and think nothing of it.
    Inflict a little pain by asking them to pay $80 or so for the visit and then when the doc whips out his pre-printed Rx for a $200 med, suddenly the patient becomes absolutely brilliant. “Uh, doc, you got anything cheaper that works just as well”?
    Take away the copays and health care is rationed. Superflous visits disappear. Doc offices are no longer over-crowded and their health insurance is used only for those things that are really necessary.
    Look at it this way.
    If you had unlimited access to any restaurant and a meal would only cost you $10, how many times would you eat out? Would you dine at McD’s or a 5 star restaurant if both meals only cost $10? Would you order just a salad or the 5 course meal if it only cost $10?
    Medical care with low copays encourages over-utilization which drives claims and in turn premiums.
    I have seen enough claim reports over the years to know what happens to a plan, or a block of business, when low entry points are introduced. Utilization spikes and never comes back down.
    Very little can be done to control the magnitude of a particular claim (short of writing a policy with annual caps on specific items which is totally unacceptable). Shock claims just happen.
    But a carrier can control utilization via plan design. It cost just as much to adjudicate and pay a $40 claim as it does to cover a $400 claim. The more $40 claims that can be eliminated by plan design, the lower claim totals are which result in lower premiums.

  4. Matthew- you have never called me beautifully anything…
    Theora- as has been pointed out by our host on many occasions on this site, the affordable choice often has the same outcome as the expensive one…
    It is worth noting your comment about emergency rooms and ob/gyn losing money. That is certainly not the case— otherwise, why would all the hospitals around Phoenix be paying for unbelievable upgrades to their labor and delivery areas– making them look more like the Marriott? Also, the emergency department is the main source of admissions for many hospitals– thus income. And- while technically emergency department clinical care might be negative, that does not account for the money that all of the lab tests, mri’s, ct scans, etc. that are performed on patients who are in the emergency room.
    Re: the RAND Study (1970s… hmmm study never repeated or confirmed…) here is commentary recently from the much-maligned here Galen Institute:
    “Gladwell cites the famous RAND Corporation study, excerpting one finding regarding people with hypertension to argue that those in the high-deductible group had a higher incidence of death. Aside from the difficulty of treating hypertension in the 1970s when the study was conducted, the overall conclusion of the RAND study was that there were no overall measurable differences in health outcomes between those in the zero and ninety percent copayment groups.”
    Finally, please get me the citations for “the 90% or so of healthcare spending which happens after people hit their maximum out-of-pocket”.
    From my discussions with Jeff Hansen of Bridges to Excellence– in the outpatient setting, 5 diagnoses account for 60% of spending. By merely incentivizing doctors to meet process measures and some incentivzing of patients for healthy behavior, BTE has found that for each dollar in incentives paid, 3 dollars are saved in direct spending.
    And another finally- if people are so inept about their own healthcare- why should we allow any over-the-counter medicines to be sold? Why should supplements remain mostly unregulated?

  5. Don’t worry about me Matthew, I’ll be gone in a minute. Then nobody will argue with liberal comments except Dr. Novack, and he is way too nice.
    “Auschwitz was a public, government-run enterprise.”

  6. theorajones,
    You wrote,//”You don’t buy health insurance with money, you bye [sic] it with good health.”
    Fascinating sort of product whose selling point is that it only works well for the people who don’t actually intend to use it.//
    My friend with bone cancer, who can’t work anymore, had no idea he was going to be diagnosed. Insurance pays for an unforseen claim or expense. With your bias you could say that nobody needs auto insurance because nobody is expecting to have an accident. Of course you say this is all backed up by the Rand study, which of course isn’t true. But Matthew loves it so that’s cool.
    And of course Matthew my friend with bone cancer, who is a doctor, insurance is paying 100% so I doubt if he cares if one procedure is cheaper than another because insurance is paying 100%, including Rx. Now your insurance Matthew is a little different than his, that’s an understatement. First of all, he has no networks, unlike you. If he did have a network PPO his penalty would be 20% capped at $1,000 for going out of network. Please Matthew tell us what your penalty for using non-network providers is if your survival odds went up 20% by going there. Oh, I forgot, Matthew never answers a question.
    I suppose that if your penalty for going out of network was 40%, like some Blue Cross plans, you would really care how much the procedure costs after the deductible. What is 40% of $600,000 Matthew? I bet these admission clerks with out of network facilities ask some of the Blue Cross plan insured that don’t cap penalties, “Did you bring your checkbook with you Matthew?”
    When people wait until they have cancer to get insurance – it’s not insurance, it’s a health care delivery system. Of course if people could pay premiums to one insurance company for 10 year and then get cancer, then now realize they want the best, and we had to take them with no medical underwriting, our rates would go up a lot.
    In Vermont, where they actually adopted theorajones and Matthews ideas, they are having a few problems that they are now dicussing with their Governor it is reported just today:
    Area Residents Tell Governor Their Ideas On Health Care
    BY JEANNE MILES, Staff Writer
    Thursday September 8, 2005
    LYNDONVILLE — More than 150 people packed into the training room of the Lyndonville Fire Department for a chance to let Gov. Jim Douglas know how they felt about the rising costs of health care in this state.
    Many were small-business owners who are strapped to meet the increasing insurance premiums. Area state representatives were also on hand to hear what their constituents had to say.
    Lynette Courtney of Greensboro Bend said she was self-employed. “That means I am the employer as well as the employee,” Courtney told Douglas. She said last year, 60 percent of her income went to health insurance. “What I’m paying now I can’t afford.”
    Others echoed Courtney’s complaint, saying they were paying about $7,000 a year in premiums with $5,000 deductibles. Businesses are being hit hard by insurance premiums, they said, and all of them are striving to maintain just what they have.
    Much talk centered on Canada’s universal health care coverage, with some people praising the plan and others condemning it.
    Still others said Vermont should not be looking at Canada, but should focus on itself. There are a multitude of ways to have universal health care – it doesn’t have to be based on the Canadian system, they said.
    “We can design our own system,” Zarina Suarez O’Hagen, an attorney from Hardwick said.
    Some people argued that a government-run health care system would not be efficient or save money. St. Johnsbury attorney Deb Bucknam said it would also be an invasion of privacy. She advocated health savings plans which she provides to her employees. With increased competition, she said, insurance premiums would go down.
    Others argued that all health savings accounts do not work the same. One woman said she had to spend the money by the end of the year or lose it.
    “Savings accounts are OK for employers who have 1 cent left over,” small-business owner Linda Lavaletta of Lyndonville, said. Many small businesses do not have that luxury. “Change is good,” she said. “Vermont needs change.”
    Steve Pitman of Lyndonville said Vermont pays four times more for health insurance than other states. That is because, he said, everyone pays the same regardless of lifestyles. People who don’t smoke or drink, but do exercise should be given a “healthy choices discount.” Insurance companies left Vermont when they were told they had to cover everyone.
    Lucky, the ideas that the Liberals have proposed, like here, have been tried and failed. Matthew you should have put this article up instead of me if you were to be fair and balanced.
    Go with the Liberal ideas and pay 5 times more with a $5,000 deductible per person.
    I was commenting on Bob’s comment because it was very well written. Bob wasn’t talking about costs above the deductible. Bob was explaining the cost of health insurance, medical underwriting and disintegrating policy forms. Bob makes much more sense than theorajones.
    Matthew if you were King of the USA we would all just do what you command. But because you are not King you will need to get politicians to pass what you want and you my friend, don’t have a chance.
    Everybody in one large pool, right.
    The law is medical underwriting in most states, sorry.

  7. Response to commenters
    Eric has some intersting points that I will jump into next week, but although he doesn’t mean it that way, the lack of EBM has been taken as a indication to do whatever they like by doctors.
    Bob is correct. Adverse selection is rife in voluntary pools, that’s why they should be large and IN-voluntary. I don’t know if Bob has made that logical leap.
    Ron–what are you talking about? Your own ads that you sent me said “medical underwriting required” and the policies you sell cut in at $2600 of spending per individual. It’s the spending IN EXCESS of that level that we’re discussing.
    Theora….as ever you are both correct and beautifully vicious.

  8. “You don’t buy health insurance with money, you bye [sic] it with good health.”
    Fascinating sort of product whose selling point is that it only works well for the people who don’t actually intend to use it.
    “Specialty hospitals and surgery centers do have costs that are, on average, about 30% less than general hospitals for similar care– why? efficiency.”
    Really? I thought it was also because they didn’t have money-losing services like ERs or OB/GYN, and because they focused their service delivery on patients’ ability to pay. That’s not efficiency–that’s free riding.
    “once a consumer it taken out of the loop financially they become brain dead with regard to medical services…If someone else (read the carrier) is paying the tab the consumer no longer cares how much it costs, just do it”
    Um, no. Consumers start out brain dead with regard to medical services.
    You’re suggesting that if we make them pay the financial costs of care more directly, they will semi-magically know what is a smart thing to do and what isn’t a smart thing to do in order to get better.
    This is because, apparently, you think the incentives are wrong–people will spend on frivolous healthcare because it doesn’t cost them anything. But um, that’s just flat wrong.
    See, the incentives already line up–being sick sucks, and the things we allow physicians to do in order to make us feel better are, quite frankly, torturously painful.
    If the pain and suffering of being sick isn’t enough to motivate people to only undergo the painful and unpleasant procedures that are necessary to actually make them better, how will paying a little more out of pocket be a more powerful motivator? Because maybe I’m weird, but given the choice I’d rather spend $30,000 unnecessarily than have my ribcage literally cracked open unnecessarily.
    Last time I checked, being a doctor was considered such a specialized skill set that only really smart people with 4 years of specialized postgraudate study and a multi-year gruelling internship could master it. Now you’re suggesting that specialized medical knowledge can be gleaned by upping the co-pays?
    To me, it’s logically obvious that upping the co-pays will ensure not that consumers will make the SMART decision, but that they will make the AFFORDABLE decision–they will be pennywise and pound foolish, becuase they don’t have the knowledge to be pound-smart. Because if they did, they’d be using it already to avoid getting their chests cracked open for unnecessary bypasses, not to save a couple grand!
    And, of course, my opinion is actually backed up by all the evidence, most notably the RAND study.
    Which doesn’t even address Matthew’s point that has, as he correctly states, never been properly addressed–even if your theory worked (which it doesn’t), how will it deal with the 90% or so of healthcare spending which happens after people hit their maximum out-of-pocket?

  9. Well said.
    I never “bother” my wife with the spew that people say here, except Matthew, rarely, because he’s pretty good. But, I broke into what she was doing and said, “Read this. This guy is pretty smart.” Then I gave her Bob’s comment above. She read it and said, “Consumers go brain dead when someone else is paying the bill, boy, he’s right there.”
    I can see Bob said a whole lot more than just that. So Bob, you do know what you are doing, that’s refreshing.
    Bob wrote, //” As long as those premiums are sufficient to cover claims and admin fees, the plan is stable.”//
    I assume you lump “Profit” into administration fees.
    My wife says, “You don’t buy health insurance with money, you bye it with good health.” I would add, “If you smoke you will pay 40% more.” Same with being fat. If you weigh 250LBs and are female, 30 years old, and only 5′ 6″ tall, you will pay 50% more. If you are 6′ 5″ tall, you are perfect. Most insurance companies don’t rate up smokers as much as we do.
    Group employee health plans have already started down the slippery slope of medical underwriting now anyway, with smoking status and age. They just don’t disclose Medical Underwriting Required.
    The good news is if you quit smoking or lose your weight, down to a very liberal number, we remove your rate up and it can never be added back on, so start eating at McDonald’s again and blow up like a balloon. Paying 40% more, compounding annually, with double digit inflation, for 35 years until you are 65 years old, is a high price to pay to smoke. So stop for a year, drop your premiums, then light up a smoke and you will save a mountain of money over a lifetime.
    It’s all in the math.
    Those couples paying $2,100 a month for health insurance that I talked to yesterday are lucky they weren’t smokers or over-weight. The younger couple was only 41 years old.
    I can’t believe Matthew that Blue Cross of CA would rate up your knee surgery over 500%!! In Michigan we would probably rate that up 25%. See why I say that the competition in CA is a bunch of rookie local yokels? Tell us what your Out-Of-Pocket (OOP) is so we can all have a good laugh. I would sum up Blue Cross of CA HSA Qualifying health insurance as needing a few more options, choices and freedoms if they want to keep playing the game, that’s for sure.

  10. I’m going to have to digest this a bit more, but I do have a couple of preliminary thoughts.
    I liked Porter and Teisberg’s argument in favor of no-balance billing. It may be that patients are less price-sensitive when they’re no longer on the hook, but I don’t think that people who are wheeled into the operating room for an emergency bypass are particularly price sensitive anyway. (When your doctor tells you that you’ll die if you don’t get the surgery, you get the surgery.) And coming home from the hospital with expensive and difficult-to-decode bills doesn’t speed your recovery.
    I want to believe in integrated care, but I have to say that I don’t trust Kaiser. I wouldn’t want anyone I know with either endocrinological or psychiatric problems treated by them. (They’re probably okay at dispensing contact lenses or making sure that you take your beta blockers.)
    I’ve heard a bit about the “internal market” in the NHS. Did Frank Dobson put a stop to that in 97? Did it work well? What’s a good, brief introduction to how that system worked?

  11. Several points, just hitting the high spots . . .
    With any plan, not just HDHP’s, once a consumer it taken out of the loop financially they become brain dead with regard to medical services. Doesn’t matter if you are talking about a $20 office copay, or 100% coverage above the deductible (or so-called “stop loss” point), the results are the same.
    If someone else (read the carrier) is paying the tab the consumer no longer cares how much it costs, just do it.
    Your (Matthew) example of choosing the PacAdvantage plan over an individually underwritten plan is an example of adverse selection. The PacAdvantage plan is designed (consciously or otherwise) to accept adverse health risks without penalty. Eventually the PacAdvantage plan will have more sick people than those who are well and rates will rise accordingly.
    As claims continue to spiral in relation to premiums the plan will have to adjust its’ selection process and/or premiums, else it will cease to exist.
    The third party payor system is not magic. Premiums are charged in relation to the risk transferred from the individual to the carrier. As long as those premiums are sufficient to cover claims and admin fees, the plan is stable. Once claims start to overtake the premium revenue the plan will deteriorate.
    Just look at what has happened to high risk pools, states where individual underwriting is prohibited, conversion plans and employer sponsored group plans. All of these outlets have high premiums (relative to a fully underwritten plan) and justifiably so.

  12. Matthew- well written, even if I do not agree.
    I ask again for an explanation about “risk-pooling” in home and auto and life insurance. Please tell me how an individual insurance market can function in those areas?
    If Kaiser in CA or Group Health in Seattle can actually prove better outcomes- please let me know.
    Specialty hospitals and surgery centers do have costs that are, on average, about 30% less than general hospitals for similar care– why? efficiency. If there was evidence that these hospitals had worse or objectively inferior outcomes, we would read about it here and elsewhere.
    More employers are moving toward “bonuses”- financial or otherwise- for healthy behavior. Why? incentives for prevention on the patient side are the most cost effective for the system (sounds like safe driver discounts or home security discounts in other areas).
    In your whole posting, not once is responsibility placed at all on the end user– the patient.
    As I discussed in our podcast– the mythical “evidence-based medicine” does not exist for the vast amount of medicine. Medicine is not mathematics (perhaps leading to origin of the term ‘practice’ of medicine). Remember, the medicare system that many favor currently has 10,000 different diagnoses, and the government is chomping at the bit to update to the new diagnosis book, with 40,000 diagnosis codes.
    Most problems have multiple right answers (just think about problem solving in your own life, career). That does not mean, however, that there are not wrong answers. The goal of the medical community must be to establish ways to identify when wrong answers are being used, and then deal with the doctor in an appropriate fashion.
    The current system that exists to do this is the current tort system- which is a near total failure.