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Health Care Reality

September 2, 2009

Healthcare Rationing Is Good

Posted: 02 Sep 2009 03:30 AM PDT

This guest post was contributed by StatsGuy, a regular commenter on this blog.

In the current healthcare debate, Conservatives warn us that a single payer system will bring government rationing…  Progressives argue that we already have rationing, based on wealth.  Both sides are right, but both pretend that rationing is bad.  Yet as every economist knows, the allocation of scarce resources is the basis of economics itself.  The question is not whether we will have rationing – the question is how to structure a system of rationing that accomplishes our goals.

Two primary themes dominate this debate:

The Uninsured: In the past two decades, both the total number and the percentage of uninsured have increased in spite of some modest programs designed to expand coverage (like CHIP). (Original chart is here.)

The graph above, which extends through 2007, has surely worsened since 57% of US citizens are insured through their workplace (down from 63% in 2000) and unemployment increased from under 5% to 9.4% in the last couple years.

 Rising Costs: During the same time, costs have increased dramatically. (Original chart is here.)

Part of this is because of the availability of new treatments and technology in the last 20 years…  Part of this is because the population in the US suffers greater morbidity than 20 years ago.  But much of the increase is due to systemic issues caused by gross market failures in the healthcare market, as described by Baseline here and elsewhere.

However, costs and coverage interact.  Businesses (especially smaller ones) drop insurance because they cannot afford premiums.  On the other side, lack of coverage drives up costs…  The uninsured may overuse emergency room care, delay basic care until a disease worsens or fail to get vaccinated (which harms themselves and others).  At the systemic level, administrative costs (which largely consist of managing payments and coverage) are growing much faster than overall costs.

So what can we do?

1) Fix the broken incentives

The current systems for federal and private reimbursement of health care expenses (via Medicare and Medicaid) are rate of return systems – a type of cost-plus regulation.  In other words, health care providers are reimbursed for the quantity of care provided.  The more they provide, the more they are reimbursed.  Only HMOs do not compensate through this structure, and they have been credited with holding down costs vis-à-vis PPOs.  (Moreover, they are now equaling or exceeding PPOs on other dimensions than cost.)

Even worse, the reimbursement schedule in existing government programs is broken; Medicare compensates primary care services at rates that are often below costs (which have increased faster than inflation adjustments), while richly compensating certain medications (because the govt. is banned from negotiating prices) and equipment intensive procedures (which have decreased relative to inflation in the same way that microchips have gotten cheaper).  We have a vast amount of data that tells us that primary physician care is far more cost effective than treatment by teams of specialists, but the current rate schedule contributes to a substantial undersupply of primary care physicians that is likely to get worse as we see substantial year-on-year declines in the percentage of new graduates entering family medicine.  Previous government reports suggesting that everything is fine contradict what many doctors are saying.

The best of the current proposals (the House bill, with summary here) does take steps to restructure rates, but needs to do more.  We need to increase reimbursement for basic care, reduce reimbursement for the most expensive care, and set up a rational system for updating fee structures.  New legislation should:

  1. Create an independent, self-funded agency with rate setting authority.
  2. Establish a set of advisory commissions to recommend rates and coverage using evidence-based analysis; commissions should be primarily staffed by doctors (with minimal conflicts of interest) that balance across regions, private practice, hospital staff, etc.  Primary care providers should be well represented.  Patients rights, public interest, and budget-watching public interest groups should also be represented.
  3. Mandate rates that adjust for cost-of-service by region; uniform national incentives encourage over-treatment in low cost regions and under-treatment in high cost regions.
  4. Shift away from a model that compensates purely based on quantity of care.  We need a system that rewards cost-effective care (i.e. quality care that is worth the price).  What might such a system look like?

In the 1990s, HMOs experimented with capitation – rewarding doctors based on number of patients they managed rather than services.  Unfortunately, this incented doctors to under-treat and also to avoid taking on unhealthy patients.   To address this, we should deploy a hybrid system that rewards primary care doctors partly based on services they provide (with rates determined as noted above), and partly based on a risk-adjusted capitation model.  The fee-portion of the system would ensure that doctors do not lose money on patients that require more treatment than anticipated, but would not drive profits.  That way, doctors have less incentive to insist patients come in for an office visit when an email would suffice.  The risk-adjusted capitation portion of their compensation would pay providers based on the morbidity of the patients they enrolled (with sicker patients generating more income since they take more time to manage).  Electronic records would enable us to measure provider performance based on outcomes.  Properly balanced, this would help minimize both the incentives to over treat and the incentives to under treat.

2)        Focus coverage-enhancing proposals on cost-effective basic care:

Current proposals that dramatically expand coverage without focusing on cost containment (like the Senate Health, Education, Labor, and Pensions Committee version) had hoped to pay for themselves through efficiency enhancement.  The notion was simply this: if we can improve preventative care, lower administrative costs, and teach doctors that better care is not always more care, then consumption will decline by itself.  This optimistic view hit a roadblock when the CBO estimated that these proposals would not achieve their cost reduction targets due to insufficient incentives to reduce consumption.  The CBO analysis may be pessimistic, but is not easily dismissed.

As an alternative to providing the best care to everyone, an efficiency-focused regime could focus on expanding cost-effective basic coverage for everyone, and allow individuals to purchase supplemental coverage at their own expense.  This enables those who want more care to buy more care (wealth permitting); those who cannot afford to buy private supplemental insurance would be subject to government rationing.

Extending cost-effective basic care to everyone would lower costs associated with overuse of emergency rooms, administrative billing, public health issues (like failure to vaccinate), etc.  While not overly generous, it could offer a basic social safety net, and for reasons that Baseline has covered, it makes a great deal of sense for a Public Option to exist that covers cost-effective basic care.

Private supplemental insurance would need to be well regulated.  In particular, rescission should be banned outright (which would front load application costs), or tightly regulated and managed by accelerated legal review (a 6 month legal delay for a chronically ill person will create serious distortions).

Denial of coverage due to pre-existing conditions must be addressed, but not by simply banning it.  Insurance companies will attempt to evade the regulation – for example, by deploying marketing campaigns that target healthy individuals and avoid unhealthy ones (should they advertise in Cycling magazine, or Coping with Cancer?).  If we want to subsidize care for people with pre-existing conditions we should do so directly, rather than shifting the burden to insurance companies and pretending we aren’t paying it.  Indeed, we’ll end up paying more as insurers spend money on rent-seeking activities to cherry pick patients.

3) Infrastructure

The current proposals do a decent job at expanding infrastructure, so I will limit comments to:

  1. The scarcity of general care physicians is a structural issue that will take time to respond to new incentives.  Until this balance is restored, the federal government should provide tuition support (via loan forgiveness) for medical students that enter primary care and remain in primary care for at least 10 years (10% loan forgiveness per year).
  2. More needs to be done on malpractice insurance.  Many factions argue the root problem is growth in tort awards.   And in the long term the correlation is clear, but since the tort reform movement in 2001 insurance company payouts have actually declined in real dollars, even as rates have spiked by 120% so that the payout ratio is now less than 45%.  (also, here)  The problem now seems to be the insurance companies more than the lawyers.
  3. We should do more in meeting standards for physical hospital infrastructure and best-practice dissemination that reflect our current state-of-knowledge; this is a public health concern.   These types of efforts can have a huge payback.
  4. The current proposals hit the mark on building a nationwide electronic system for managing patient records, and the CBO review does not give full credit to this initiative.  While the administrative savings would be substantial, the greater value is in knowing what actually works, what is a waste of money, where the problems are, and which providers are performing well.  Imagine monitoring the H1N1 flu in real time.  Comparing the efficacy of treatments and drugs with statistically robust samples of hundreds of thousands of patients.  Measuring whether costly new procedures yield better outcomes.  Tracking drug interactions.  Monitoring whether hospitals are following best practices at infection control. The decentralization of information that usually helps a free market system work so well is working against us in health care.

In conclusion…

Some of the proposals in Congress that focus primarily on expanding coverage (especially the Senate HELP committee version) are likely to incur massive costs by subsidizing the growth of a system with underlying structural problems.  This is precisely the same critique that Baseline has leveled against the currently weak proposals to fix regulation in the financial system.  The House bill does much better (which CBO acknowledges), but should do more.   The painful truth is that if we are going to seriously keep health care costs from destroying our federal budget, we are going to need to accept rationing.  Unless the political will suddenly emerges to move wholesale to a Canadian system of rationing, health care reform may have a better chance of success by fixing the broken incentive system, focusing public subsidies on cost-effective basic care, and augmenting infrastructure.

By StatsGuy

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