Jamie Robinson is one of the best and brightest of the “younger” crop of health economists in America, and certainly has his ear to the ground of what’s going on in American health care in a way that few others (aside from Uwe Reinhardt who anyway I’d classify as being in the “elder” generation of health economists) seem to understand. He was one of the first in academia to see the potential of the capitated physician groups, and was also one of the first to understand the end of managed care. Most academics spend forever mining the archaeology of the longly dead. Jamie sticks closely to the recent past and hints at the future.
His latest, one of numerous articles in a bursting at the seams Health Affairs, is on Managed Consumerism. It’s an attempt, and not a bad one, to put a unified framework around both the CDHP movement and managed competition:
“consumerism and managed competition often are proposing different solutions to different problems, not different and incompatible solutions to the same problems.”
Robinson spends a little time explaining that the two come from different philosophies. Consumerism from individual consumers making choices at time of care mostly from solo docs paid fee for service and therefore, (not that he says it) politically promoted by those doctors. Managed competition relies on consumers making choices among different integrated HMOs/health plans which use multi-specialty groups that are incented to keep costs down (or at least neutral) by use of capitation and pre-payment. He goes onto note not why managed competition failed, but instead that health plans stopped using the techniques of managed care (such as small networks and utilization management). What he doesn’t say but what is true is that the regulation (the management part of “managed competition”) was never in place to force plans to do so, despite the fact that Alain Enthoven had worked out the mechanism a decade earlier. (BTW for those of you who care, the mechanism involves pooling large numbers of people, forcing health plans to offer them the same set of benefits, and making the people choose between health plans with actual post-tax dollars, thereby giving the health plans the incentive to reduce overall costs per population). That never happened in any population, because it requires substantial reform of the insurance market (We’ll get to that later, even if Robinson doesn’t). Because that never happened, managed care never put the mechanisms in place that consistently would reduce costs, and instead when push came to shove (and the system pushed back) managed care meekly gave up. And then the managed care plans noticed that they could make more money just being old fashioned insurance companies.
Five years into that inflation spiral, employers and consumers are moaning again, and so now we get the plan that looks like a 1970s major medical with a high deductible, but we can dress it up and call it a consumer-directed plan…and it’s much better. Of course it remains a high deductible plan that is basically unmanaged beyond the deductible, and it by definition doesn’t do much to control the costs of the expensive people on whom (as all you THCB readers should know by now) 80% of the money is spent on.
So what is going to happen. I’m skipping his optimistic bit but here’s the pessimism
“Ever-higher consumer cost sharing and ever-tighter provider networks would threaten the efficiency and equity of the health care delivery system. Excessive consumer cost sharing reduces the social pooling of risk, transferring financial responsibility from the healthy to the sick, and potentially reduces efficiency by reimbursing episodic and acute care services more generously than preventive and chronic care services. Excessively narrow provider networks frustrate patients’ ability to match their preferences with provider characteristics and limit providers’ ability to compete broadly on the basis of price and quality at the time of care”
What Jamie thinks is coming next is of course the managed high deductible plan
“It is not hard to envisage high-deductible, narrow-network, tightly managed product designs where choice of providers and procedures is limited by consumers themselves in favor of affordability. “
What comes next in his analysis is at once very useful and interesting, and also misses the point. He provides a schematic about how insurance companies should buy medical care from providers. He argues that they should change their benefits based on whether or not the service being received is either demand or supply inelastic….i.e. whether changing the way its paid for can influence the patient the provider or both.
As witnessed in this chart (Exhibit 2–click on it to see it more clearly), this is pretty innovative stuff, and I’m sure that lots of big consulting shops are even now stealing it to take to their insurance clients.
Robinson does something similar for the clinical care market by dividing it up into acute and chronic care episodes and whether or not there are efficiencies of scale in delivery systems or not. And there are some good additions that his confluting together the consumer world (the 80% of the people) with the managed care world (the 80% of the dollars) provides. Rightfully, he accuses the proponents of managed competition and CDHC of extrapolating essentially from the institutions they know, and his framework at least covers the real world.
But he starts to lose me when he concludes that the market has spoken and rejected the managed competition approach.
This is the moment for a second generation of consumer-driven health policies and products. The shortcomings of HMOs, capitation, IDSs, and the other components of managed competition have opened the way for alternative approaches to using market mechanisms for improving the health care system
Writing in the same issue of Health Affairs in an excellent piece that points out many of the foibles of consumer directed health care Bob Berneson of the Urban Institute points out what was right about Enthoven’s original vision
In the right hands, market competition ideas can be made consistent with this ethos. Alain Enthoven’s managed competition approach, for example, in the words of Uwe Reinhardt, was an attempt to “fuse a price-competitive framework for health care with production processes designed to produce medical treatments efficiently and with income transfers designed to achieve a desired level of social equity.” This sounds fine to me, because it might have been done in ways that did not threaten the foundation of trust. It’s just that markets haven’t followed Enthoven’s vision—for lots of reasons.
So Enthoven’s vision required regulatory reform that was not allowed to happen, because in the end it would have been bad for the providers of health care’s fiscal interests. Robinson knows that the real world won’t let theories like his work. He even notes (even before it’s fully happened, not that it’ll be a secret to THCB readers) what’s going to go wrong with consumer-directed care.
However, consumer-driven health care suffers from its own shortcomings. Blunt cost-sharing provisions, unadjusted for the patient’s income or health status, will penalize the poor and the sick while allowing their wealthier and healthier compatriots to retain higher balances in their HSAs. Nonselective network designs, the dismantling of utilization management, and a reversion to fee-for-service payment will encourage spending for high-cost services that fall above the insurance deductible.
But while he believes that there is a chance for managed consumerism, he’s ignoring two factors that will cause managed consumerism to be the failure that both managed care has been and consumer directed health care is about to be.
First, the market for clinical care is dominated by policies and regulations set in the 1930s and 1960s, and that’s why we have the institutions (solo practice docs, FFS medicine, and more latterly physician-owned surgicenters and now specialty hospitals) that fit neatly into Robinson’s new chart but don’t make any real sense for the way health care ought to be delivered in any rational market, or for that matter in a state-designed system. So in the absence of massive reform, there is still no real way that we are going to have a system that does any better than provide the players in the system with what they think will be best for them. Hence the strongest proponents of HSAs have forever been the solo practice docs who in their delusion believe that it will enable them to directly bill their patients and get the insurance companies out of the middle. The political power of the providers (sometimes aligning the docs with and sometimes opposing them to the hospitals) will continue to push against any rationalization of their organization or behavior. So the management part of managed consumerism is seeking a fix from the workings of an invisible hand that providers will just bite off.
Second, and this is the crucial bit, the market for insurance — irrespective of how insurers pay doctors and providers — is rigged so that insurers are better off insuring healthy people. Robinson calls his section on how insurers pay providers The Market For Insurance Coverage. But he’s wrong, the market for insurance coverage is about how people buy health insurance, not how health insurers buy or contracts for care. In the US most people are going to continue to have insurance covered by their employer or the taxpayer irrespective of how much it costs. This drives to the heart of the problem. Because we live in a rich country with a virtually inelastic demand for care, and because upper income employees receive health care for which they are not aware of the cost at the insurance level or the provider level, the system can always increase its prices — knowing that it will increase its revenue more from the price increase than it will lose it by the price effect.
Of course some people can’t afford it (or their employers can’t) and they get tossed into the uninsured numbers. But because no-one is responsible for them, and no-one (i.e. no central government) has to concern itself with the overall costs, no one cares. The provider keeps doing more, and the insurer has the choice of doing the hard things and beating them down (which is expensive and inefficient) or the easy thing which is selecting its risks better and jacking up its rates to its clients. It’ll lose a few, but no matter as it’ll stay more profitable on the ones it keeps. Robinson know this very well, as it’s a story he told about Aetna in Health Affairs last year.
And as Paul Krugman wrote yesterday in the NY Times in his “Healthcare Economics 101” column, the real issue is that the market for health insurance cannot be solved in an efficient or frankly humane way if we don’t have a universal pool. In other words it needs to be “rigged” so that insurers are no longer better off insuring healthy people. That at least was the concept behind managed competition, and it’s the same concept behind single payer, et al. It was not the concept behind market-driven managed care and is the complete anathema to consumer directed health care as exists now (and will in the future given that United has bought Golden Rule). And that is the elephant in the room that Robinson fails to note, for all the innovation in his schema.
Without real insurance reform, whatever we do we are never going to solve the core problems of cost (or even cost-effectiveness) and uninsurance. Anything else is lipstick on the pig.
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Matthew, I have looked at your piece on Aetna and have previously read the article in Health Affairs (I thought it was a glory piece). What Aetna did was simply bring its pricing inline with actual costs. Your own piece admitted that Aetna was using data up to 2 years old in projecting costs. So you would fault a payer (Govt or Private) for employing pricing discipline in setting prices sufficient to cover projected costs?
I am not sure I was advocating any significant of level consumer understanding. Quite the opposite, I believe that lack of understanding has contributed to exorbant prices. In Florida, the dominant carriers (BCBS and UHC) are also the most expensive carriers. Yet, they have the largest market share while having the same benefits and provider networks as smaller competitors. No backlash!
However, I do believe you underestimate consumer’s market power. Place a 500, or even a 250 employee account out to bid and watch the carriers circle like hungry sharks. The power is there. Unfortunately, the lack of understanding has the employer easily swayed by sound bites like “Open Access”.
Lastly, maybe I am missing your point. How do you define cherry picking in a guaranteed issue environment?
Matthew, I think that when employer-based insurance terminates a young woman’s insurance with ovarian cancer, the employer-based insurance company is cherry picking who to cancel. You don’t like to call that cherry picking. You suggest that it’s perfectly ethical to cancel young womens’ health insurance when they are diagnosed with cancer. It just seems evil to me what your clients, or old clients, do to the American consumer. Did you hear about what the Gov of IL is doing to poor children? Democrats can be sooo mean to little children. You should switch to Republican.
John C. You assume a level of intelligence and market power from your customers (“no backlash against rising prices”) that has never existed, and you seem to have missed the entire phenomenon of Aetna’s turnaround. Look elsewhere in THCB or in Health Affairs for more about that. And if you think “guaranteed issue” means no cherry picking you have a very different definition of cherry picking than I do!
As someone who has worked at a managed care organization for more than a decade, I strongly agree agree with the forecast of CDHP benefits. Unfortunately, the hype surrounding them has created a buzz among consultant and employers that is hard to ignore from a competitive standpoint. If my company does not offer CDHP benefits we will lose enrollment because perceptially clients would see us archane. I am not a proponent of CDHP benefits and have sought to develop alternative designs that can compete on price points without becoming a major med policy.
However, I disagree with you comment regarding insurance companies:
“…the easy thing which is selecting its risks better and jacking up its rates to its clients.”
Although insurance are deserving of their fair share of criticism, the criticism about insurance companies cherry picking risks is primarily a stereotype. It is true that in the Individual market insurer’s can select risks in most states, but it is not true in the group market. Every state has some sort of guarantee issue requirement for the small group market, thereby making impossible to “select risks”. In the large group market, the environment is so competitive it would be fool hardy to turn business away.
Managed care did die. It died a few years ago in the backlash against limited choice and restrictions. In response the insurance companies simply backed off and gave consumers what they wanted. The pendulum of negotiating strength swung back toward hospitals and providers. In response, insurance companies simply passed the costs on to consumers. And when the companies realized their was no backlash against rising prices they continued the practice. Look at United, when they took the PR leap and softened their UM controls and then switched to Open Access it was a marketing coup! Consumers didn’t care that they were going to pay 6-10% more. As competiting companies we had to compete, so everyone followed suit.
Insurance companies respond to market demand, if the market chases low cost, restrictive product it will provide those products. If the market wants expansive, less restrictive expensive products, insurance will provide those as well. Like any industry, consumer dicate what the value proposition is. Unfortunately, in health care service and quality are not easily measure or understood by most consumers. Hence, why it is easy to offer an “Open Access” product and have most people equate it with better quality. Its foolish!
Hmmmmm. I kinda think “behavior changes induced by the mere existence of insurance” really is welfare-reducing. Whether “moral hazard” is therefore an appropriate term for every case of this could be debated.
I think welfare is reduced when we involve the insurance apparatus with small, relatively predictable expenses. The instant it gets involved, we all start paying for it. The HSA idea is a way out of this part of the problem, but it doesn’t address anything else.
Great post, Matt. A colleague and I are wrapping up some primary research on CDHPs and this is very timely.
I like Jamie’s work very much, but the thing that has really stuck with me of late was John Nyman’s 2003 monograph “The Theory of Demand for Health Insurance”, which breaks moral hazard into two components: positive, or patients with coverage using greater volumes of appropriate care (ACE inhibitors, etc.) and negative, when patients either take greater risks or overconsume unnecessary care. Since Pauly’s article on moral hazard in 1968, the insurance market has assumed that all moral hazard was welfare-reducing. Nyman argues that the conventional theory is wrong. Of course, CDHPs reflect conventional thinking.
You posted enough for me Tom. So saving for retirement health care expense with America’s first tax-free savings account doesn’t trip your trigger huh? Maybe you think money that [is taxed] will last longer in retirement. This might be a little too complicated for someone who has already thrown in the towel and supports an unconstitutional single-payer system like Canada. So Tom, think we should ban the sale of private insurance in America like Canada? Canada’s Medicare doesn’t cover Rx does it? Would America stand for a sloppy unconstitutional Canadian plan with no Rx coverage? Dream on Tom. HSA individual insurance replaces over-priced employer-based dangerous coverage with no Socialism. Besides, Democrats won’t be in power again for 1000 years.
Jamie Robinson’s article is a much more sophisticated version of something I have been thinking about with respect to insurance/benefit design. To the extent we think of medical services as “necessary” we want to reduce underutilization. To the extent we think of medical services as “discretionary” we want to reduce overutilization. But this means we can’t have a one-size-fits-all mentality: utilization is controlled in “utility space” — the space created by the roughly log-linear relationship between wealth and happiness. Utilization cannot be controlled on the wealth axis by itself.
The current crop of HSA arrangements ignore this, and create a “flat benefit” — giving everyone the same (additional) wealth and ignoring the effect in “utility space”. For this reason and for many others, they cannot do what their public-policy proponents want them to do, especially for the 50% of us who have by definition below average natural gifts. In this sense they are no better than what they replace.
The HSA is philosophically a step in the direction of decoupling certain notions:
1) “unpredictable needs/insurance” and “relatively predictable needs/pre-paid services”
2) “social charity” and “medical services financing”
It used to be that providers did the “social charity” bit more or less well in exchange for their monopoly position in the market, but this arrangement has broken-down with nothing to replace it. This seems to me to be the fundamental problem, and there is no consensus on what to do about it. So nothing happens.
I fear we are stuck, and that medical services will become public utilities strictly, by federal fiat. This will keep forever intertwined financing and social charity. It has the potential of controlling utilization through pricing mechanisms because the single (governmnet) payer can see each individual’s income/wealth level and keep things approximately flat in utility space. It has the potential to improve efficiencies and outcomes because providers can no longer hide behind the veils of uncompensated care and fragmented reporting. I suppose I should go put some further thoughts over the the Reform Competiton article…
I couldn’t agree more with your analysis. The key point that even insured people don’t seem to understand is that our non-universal system doesn’t just lock out the poor from reveiving care–it ensures that substandard care is provided for everyone, even the insured!
Arguably, the reason the well-off insured should want a universal system isn’t just their fear of losing their insurance, it’s because quality is better in a universal system. As long as insurers have the option of throwing the expensive/sick under the bus, the incentives just don’t line up. We won’t have a healthcare system that has the proper level of integration for high quality healthcare until we force the system to prioritize finding a way to care for hard cases over finding a way to throw hard cases under the bus.
And, of course, I now get to use my new favorite phrase–in the US, so many of our healthcare policies are designed to deal with moral hazard. But healthcare is really not normal good. Consumers have phenomenal incentives against overconsumption, incentives that really make money pale by comparison–there’s nakedness and needles, and pain, and humiliation.
People don’t treat healthcare like an all-you-can-eat shrimp buffet–they treat it like an all-you-can-eat cod liver oil buffet!
There you go again Matthew. I come from a long line of pig farmers. Billionaire Ronald A. Jensen told me in 1992, “Think of Managed-Care as a pendulum. America will swing in, then just as rapidly at some point, Americans will swing out.” We are now there, Managed Care is DEAD. Along with employer-based health insurance, sorry. Golden Rule won’t help United either. All the lies are coming home to roost on Democrats. I wrote about it today, It’s called, “The Future.” You know how quiet we are, like church mice. In New York they noticed that we have “cornered” the North American tax free HSA market. We try to fly low, under the radar, as you wags say.