Economics

Three Reasons Uwe Reinhardt Blames Purchasers for Everything

Uwe Reinhardt is one of the nation’s most respected health care economists, professor at the prestigious Woodrow Wilson School at Princeton, fellow of the Institute of Medicine, and one of the shining lights in health policymaking circles.

But alas, even the best and the brightest are wrong sometimes. Case in point: Reinhardt’s recent comments in the New York Times on the role of the American business community in fueling our nation’s health care problems. To paraphrase, Reinhardt believes that employer purchasers of health care are 1) dim bulbs and 2) responsible for the escalating costs of care.

This seemed puzzling coming from Reinhardt, whose views are widely respected by purchasers.  But I was able to diagnose the problem by drawing on insights from social psychology.

Social psychology investigates “attribution,” our mind’s process for inferring the causes of events or behaviors. It’s how we describe why things happen — to us or to someone else. It turns out, we humans aren’t very accurate in our attribution processes because all of us suffer from at least one of the following problems. In his New York Times piece, poor Professor Reinhardt appears afflicted by all three at the same time. Let’s take a closer look at each:

1. Actor-Observer Bias: This is the notion that when it comes to explaining our own behavior, we tend to blame external forces more often than our own personal characteristics.

Reinhardt is rightfully troubled by a decade of escalating health care cost growth under employment-based health insurance. But seized by Actor-Observer Bias, Reinhardt blames this problem not on the world of health care that he played such an influential role in over the past few decades, but on external forces, the employers who purchase health care.

In Reinhardt’s thinking, employers did two things wrong. First, they were stupid: “For more than half a century, employers have passively paid just about every health care bill that has been put before them, with few questions asked.” Second, they were sneaks: “All along, they have been party to a deal to keep the chaotic price system they helped create opaque from the public and even from their own employees.”

Employers in my acquaintance fight tooth and nail for more transparency from our reticent colleagues in the provider community; I have never had the privilege of meeting these low-IQ, scheming employers who are desperate to hide prices. Nor have I met an employer who looks forward to a day of mindlessly paying escalating health care bills; the ones I know try everything in their power to get those bills down.

In fact, these employers aren’t real people; they are straw men created to justify the Professor’s contortionist logic that health cost inflation has nothing to do with actions of the health care industry itself.

2. Self-Serving Bias. This is a variation of Actor-Observer Bias, focused on attributions of success and failure. We humans like to think our success is our own, while failure comes from factors outside of our control.

The failures of American health care are well known. We lag behind other industrialized countries in every known indicator of health status or quality, while we pay more per capita than any of them. Errors, accidents, injuries and infections are rampant: one-third of dollars are likely wasted on these, as well as misdiagnoses and overuse, and one out of four patients will be harmed in some way during a hospital stay.

Reinhardt, one of the titans of American health policy and among its most influential leaders, blames not himself or his colleagues, but health care outsiders (employers) for all of this, and credits his own success for telling it like it is. As he describes his own sagacity: “In the early 1990s … at the annual gathering of the Business Council, I bluntly told the top chief executives assembled there, ‘If you want to find the culprit behind the health care cost explosion in the U.S., go to the bathroom and look in the mirror.’ After years of further study, I stand by that remark.”

This is like blaming the closing of Lehman Brothers on Lehman customers. After all, Lehman customers had the nerve to open accounts, take out loans and buy securities. Obviously these customers failed to use the bank wisely, so when the bank failed they should be looking in the mirror to figure out why.

Reinhardt’s attribution bias leads him to point fingers outside of health care, at business leaders who spend their day opening factories, manufacturing minivans, baking bread, making computers, selling distributor caps, designing toys, producing movies, owning restaurants, etc. These people, in his mind, are more to blame for the problems in health care than, say, doctors, or hospital administrators — or revered Ivy League health economists.

3. Fundamental Attribution Error. When faced with other people’s woes, we tend to attribute their problems to something intrinsic to them and minimize external variables that might have caused the problems. This results in the phenomenon better known as “blaming the victim.”

Reinhardt knows that cost growth in health care troubles employers, but he thinks they brought it all on themselves. “A decade of health care cost growth under employment-based health insurance has wiped out the real income gains for an average family with employment-based health insurance,” he observes. “One must wonder how any employer as agent for employees can take pride in that outcome.”

Indeed, it makes me wonder, too. I’m left wondering where Dr. Reinhardt finds this crowd of witless yet diabolical employers, who take such pride in undermining their employees’ well-being. Do they live under rocks in the storied halls of Princeton? No, alas, this is a flare-up of Fundamental Attribution Error, assigning weird and frankly illogical qualities to employers in order to evade the obvious culpability of his own health policy community.

I’ve poked some fun at Professor Reinhardt, but in truth his leadership and courage over the years has made a major difference in U.S. health care. Many of us look to his wisdom to help navigate our country through the many changes and challenges ahead. Undoubtedly, we need more action from the business community to solve some seemingly intractable problems in health care. But scapegoating employers won’t get us there.

Leah Binder is the CEO of The Leapfrog Group, a voluntary program aimed at mobilizing employer purchasing power to alert America’s health industry that big leaps in health care safety, quality and customer value will be recognized and rewarded.

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Mighty CaseyHu Willistontom@cascadia Sherry ReynoldsAnn Robinow Recent comment authors
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Uwe Reinhardt
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Uwe Reinhardt

I am well familiar with that graph, Tom. It’s an Al Dobson special and also featured annually in the Medpac report.

Oddly enough, Medpac has a quite different theory on the cvost shift. Their argument os that when private payers pay generously high prices, hospitals concert one year’s profits into next year’s cost and thus drive up costs, which then makes the Medicaid paymet-to-cost ratio fall. You can Google Medpac’s view on the cost shift.

Austin Frakt in his Milbank paper also explains away the Dobson chart.

So you can see why economists are skeptical on the cost shift theory.

tom
Guest
tom

Uwe,

In the past 30 years there has been a nearly perfect inverse relationship between Medicare reimbursement as a percent of hospital billed charges and private plan trends. Medicare cuts payments and private trends increase. I’ve had discussions with CMS about that over the years and they acknowledge that is going on. I do not have a good theory for that but have observed it empirically.

Mighty Casey
Guest

Love this discussion – it’s the conversational equivalent of a grass-fed Porterhouse. One factor that contributes to the Crazy Train that is US employer-backed group insurance is the state-by-state nature of the game. Insurers have to be certified to sell health insurance by state insurance commissions … who are in the same cohort that Uwe mentioned in his 2nd comment above: actors influenced by blandishments from vendor lobbyists. Call me simple-minded, but wouldn’t it make more sense to make “all US legal residents” the primary group, and allow us to negotiate our way, based on health status/fiscal status/preference, into sub-groups… Read more »

Mighty Casey
Guest

“with better health demographics” … I always need an editor.

Hu Williston
Guest

I agree that there is no incentive for insurance companies to have health care cost less. Does Aetna prefer 20% profit and operating costs of someone paying $1000 a month or someone paying $8,000 a month? Does the administrator of DMS or of a public option health plan make $20,000000 a year? Rewarded for making more profit, paying stockholders and having the stock price rise, not for providing quality health care. There must be affordability, accountability and availability for any national health plan. There should also be universality, transparency and evidence based reimbursement. To this end we need to know… Read more »

Bob Hertz
Guest

Back during the debates about Medicare in 1965, the thought (at least among Democrats) was that Medicare would take of seniors, employers and unions would take care of their workers, and Medicaid would take care of the poor. This was not an evil formulation, although even then it left out a large number of low wage workers in retail, food service, hospitality, etc., especially but not solely in the South and West. The ACA for all its faults was in fact the first law since 1965 to help this large bloc of workers. I have said for many years that… Read more »

tom
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tom

Uwe, if most economist fail to see the obvious connection between high care cost in the private sector and Medicare cost shifting, then they are wrong. Economists need to think more in terms of Occam’s razor and less about Rube Goldberg contraptions.

I’m reminded of the Ivy league “luminaries” who were extolling the virtues of collateralized mortgage obligations up until the day CMOs collapsed.

Uwe Reinhardt
Guest
Uwe Reinhardt

So, Tom, don’t just give me an assertion and say that if I don’t buy it, I am wrong. Give me a plausible theory — or explanation if you like that word better — of how the cost-shift process works. Suppose Medicare pushes down on the DRG update. Hospitals then go to private insurers and say “You’ve got to pay more.” And the private insurers then just roll over and pay more. Now, if private insurers can’t say NO to the Medicare cost shift, can say say No when asked to cover added expenses from the medical arms race? So… Read more »

Bob Hertz
Guest

It may indeed be a good idea to move away from the employment based system, but the transition period seems pretty scary to me. You can get an idea of how scary by following the debate in Vermont over installing a single payer system and how to finance it. The first estimate from consultants is that a payroll tax of 12 to 14 per cent would be needed to replace the employer system and go universal. (this is not far at all from German or French taxes) Such a tax would be a cash relief to big employers like the… Read more »

Uwe Reinhardt
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Uwe Reinhardt

Bob:

Such a transition would be so difficult that one could probably not accomplish it in even a decade.

Instead, we should run a dual system and let more and more people tumble out of employment based insurance into the other system that offers permanent and portable insurance. The ACA could actually be a down payment on such an approach.

The tumbling would be faster, of course, if the tax preference to employment based insurance were taken down — also gradually, over time.

But I do agree with you — eliminating employment based insurance would be a daunting task.

tom
Guest
tom

Uwe, let’s not blame the victims. Blaming purchasers because health care is riddled local local monopolies and oligopolies is a like blaming a mugging victim for living in the wrong neighborhood. Further government payers have been cost shifting to the private sector for decades.

Uwe Reinhardt
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Uwe Reinhardt

Tom: You are telling me that in our health system, the payers are fragmented and so weak vis a vis the supply side that they have become victims of it. I am actually sympathetic to that view and have expressed it in writing — once in a paper that I could never have published in the US — hence in England (see here -http://www.bettmartinezinsurancesolutions.com/uploads/MAYNARD_PAPER_25TH_JAN_2012.pdf – I hope it opens for you. The first page tells you why I published it in the UK). But your theory is just one more reason to get rid of the employment based system. Who… Read more »

Jeff Goldsmith
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Jeff Goldsmith

Tom’s point is only partly accurate. Payer markets are even more concentrated than hospital markets are. We already have single payer healthcare- in Hawaii, Alabama, Tennessee and across the upper Midwest, Blue Cross is the single payer, with 60-70% market shares and in some cases, Medicaid and Medicare Advantage as well. In nineteen states (including DC), two payers have 70% or better of market share. Have the Blues in these “single payer: state used that market share to lower costs, or, rather, to keep competitors out? Future doctoral dissertations, fodder for the “market concentration scholars, etc. Not clear that even… Read more »

Bob Hertz
Guest

I believe that the vast majority of doctors are sensitive to the ability of their patients to pay their bills. My uncle was a doctor in St Paul for 50 years, and I came to understand that he practiced a rough form of socialism. If a patient could pay, he billed them the full fee. If not, he accepted less. One does read about incredibly selfish doctors who are called on for emergency surgery and then send outlandish bills. Their own profession should be disciplining them. I do not feel we need a national fee schedule for doctors. I have… Read more »

Bob Hertz
Guest

Some large employer plans pay their actual claims at low rates that would feel right in place in Europe.

Of course this does not help the persons who are self employed, or work part time, or have no job at all.

Joseph White has made this point several times. America relies on selective contracting — each payer goes for their own discount. If you have a weak payor, too bad.

As Uwe points out, Medicare is not a very good bargainer either.
However, I feel he is sympathetic to collective contracting, in White’s phrase.

Uwe Reinhardt
Guest
Uwe Reinhardt

Bob: I am sympathetic to collective contracting as an alternative to the unseemly price-discriminatory system we now have, coupled with the opacity on which it rides. If someone could tell me of a better system of transparent prices, I’d certainly be willing to learn. If truth be told, however, we wonks have not done much to even think of a more transparent price system for health care. Clearly, we can’t work with physician fee schedules containing 9,000 items or hospital charge masters containing 20,000 items. We have to aggregate prices into meaningful aggregates, and that needs yet to be done.… Read more »

Leah Binder
Guest

Ann, Very insightful post. I agree it will be interesting to see what happens on the exchanges. I think the reasons for employer purchasing behavior are complex, and I agree they need to do more. But I don’t think purchasers are the cause of the problems in health care.

Ann Robinow
Guest
Ann Robinow

I think employers are a huge part of the problem, while having the best of intentions, of course. Every stakeholder in healthcare has responded to the incentives that apply to them. Employer purchasers aren’t accountable within their organizations for creating a health care market that really works. They are accountable for doing the best job of purchasing from what is available to them at the time with the leanest possible staff and the least possible disruption. There are a few notable attempts at exceptions to this, and some current activities that seem hopeful, but these one-off efforts are dwarfed by… Read more »

@cascadia Sherry Reynolds
Guest
@cascadia Sherry Reynolds

Nearly all major employers (including govt) are actually self insured so I wonder why they don’t implement the ideas you mention?

Al Lewis
Guest

Because they’re busy doing wacky stuff like this that drives up their costs while actually harming some of their employees…and winning awards for it http://www.thedoctorweighsin.com/nebraska-state-employee-wellness-program-motto-first-do-harm/

Bob Hertz
Guest

Several points here: 1. Employers do take steps to lower health costs. If they are non-union, they gradually (or suddenly) get rid of older employees. Having been in the benefits field myself, I can say that getting a younger group of employees is a much faster way to lower health care costs than intensive cost control. One cancer case or one heart transplant can wipe out all the savings from higher deductibles or tighter networks. 2. Why can employers lower the cost of the steel that they buy, but cannot lower the cost of health care that they buy? That… Read more »

JD
Guest
JD

OK, so Ms Binder took offense at Prof Reinhardt singling out employer-purchasers for abuse. Getting past the rhetoric, they both agree, as should we all, that every major part of the health care sector shares blame. I could pick at the characterization of employers as highly informed, active purchasers (IBM and Safeway, sure, but not the vast majority of smaller firms). But I think the most important distinction to start with in apportioning blame and continuing to work to fix things is to distinguish between those who deserve blame because they were too strong and drove costs up, and those… Read more »

Leah Binder
Guest

Good points JD.

Boris Katz
Guest

Mike: employer tax deductions is slighly another subject. Even if the tax deductions for employers are to be preserved they may contribute this money to individual flexible spending accounts (available to all people regardless of employment) out of which people will spend them to buy insurance policies which work best for them. In other words, contribution of money may be allowed for employers, but not control of spending.

Jeff Goldsmith
Guest
Jeff Goldsmith

Uwe is a classic European social democrat. The solution in his essay: a government managed single payer system. The problem with this venerable and increasingly moldy prescription: health costs have risen just as rapidly, albeit from a lower base, in the OECD countries as they have here, with our chaotic multi-payer system. And of course the government that would have to manage our single payer system here in the US recently brought us the Affordable Care Act. Maybe we could outsource the development and management of our single payer system to Sweden or Holland. . . Many elements of Uwe’s… Read more »

Al Lewis
Guest

Me too.

All of us middlemen can easily show the ROI on our services, calling to mind the immortal words of the great philosopher Pyrrhus: “Another such victory and we are ruined.”

Uwe Reinhardt
Guest
Uwe Reinhardt

So here’s your homework assignment for the week, Jeff: Find me the article in which I have advocated a single-payer health system for the United States — say, Medicare for all. I did recommend a single-payer health insurance system to Taiwan in 1990 — successfully — as that nation researched alternative approaches to universal health insurance and I strongly urged policy makers there not to follow the US example, as Taiwan was not then (or now) rich enough to afford such foolishness. I have not regretted that advice, nor have policy makers in Taiwan. The system there gets high satisfaction… Read more »

Jeff Goldsmith
Guest
Jeff Goldsmith

Thank you for this assignment. I have mischaracterized your position. You did NOT in fact advocate a “single payer” system in your article, but rather a “single price” system enforced by government mandate on multiple payers. This mechanism enables governments to cap the rate of growth in health spending by setting a spending target (the so-called “global budget” everyone talks about) while private plans and those who fund them, including the government thru subsidies, bear the actual risk. Germany has done a consistently better job constraining costs thru such a system than we have, though my comment about the rest… Read more »

Al Lewis
Guest

Jeff, I know this is a bit off-topic but this is a terrific post. “I was wrong” and “I’m sorry” are two of the most underrated and underused phrases in business, not just healthcare. As a further aside to my off-topic post, the entire wellness industry should take note of this, as should Milliman in their pathetic and now disproven defense of Community Care of North Carolina. Instead they pile lies upon lies, and have lost a lot of support as a result. In my case, I was the biggest advocate (and very profitably so) of disease management, but when… Read more »

Uwe Reinhardt
Guest
Uwe Reinhardt

Jeff: Tks. for your comment. Appreciate them. I agree that Wyden-Bennett could be made to work for the US. Alain Enthoven had a similar idea which became the plan favored by the CED (Committee on Economic Development). I think Vic Fuchs and Zeke Emmanuel had a similar plan, and also Lawrence Kotlikoff. All of these plans basically eliminate the employment based system or kill it with their song softly, so to speak. All of these plans represent reference pricing for health insurance. It is an alternative to reference pricing at the nexus of patients’ receiving care, although one could have… Read more »