The Incidental Economist

My latest Kaiser Health News column is out. It’s about the bad political consequences of the good policy to cut payments to Medicare Advantage plans. It begins,

The Obama administration seems worried. In an election year, any change to Medicare that adversely affects beneficiaries is a political liability for incumbents. And big changes to Medicare are coming, beginning with Medicare Advantage, the program that provides private insurance alternatives to traditional fee-for-service Medicare, the program’s public option.

Read the rest here.

My latest Kaiser Health News column bids farewell to employer-sponsored health insurance. It will erode. And that’s a good thing. It begins,

One of the latest criticisms of the new health overhaul law is that it will encourage employers to stop offering health insurance. In fact, it will.

We should welcome this, provided the decline in employer coverage is gradual and good alternatives exist. There are several advantages to the way in which the new law promotes severing the connection between employment and health insurance. One of them is that it will make more visible the biggest looming health care problem: costs.

More here.

See also, today’s Health Wonk Review for a roundup of recent posts from around the blogosphere on health policy.

The following originally appeared in Kaiser Health News on 17 May 2010 and has been cited in the 27 May 2010 edition of Health Wonk Review.

I agree with those who think the Patient Protection and Affordable Care Act doesn’t do enough soon enough to control the rate of increase in health insurance premiums. But I disagree that the solution is simply to pass more laws that regulate health insurance rates (as suggested in a May 9 New York Times editorial) or just to increase competition in the health insurance industry (as suggested in a May 6 Washington Times commentary). Such measures would be insufficient on their own and could even do some harm.

Our frustration with the soaring cost of health care is like a mother upset with the increasing price of bread. When her son returns from the market with another high-priced loaf she hatches a plan. The following week, when bread costs $5 a loaf, she attempts to control the price by sending him to the market with only $4. The family spends less on bread that week, but they also don’t eat any since the boy couldn’t find a merchant willing to sell below the market price.

The next week bread is selling at $6 a loaf, and the mother tries another plan. Thinking her son lazy, she attempts to discipline him with competition. She sends her daughter with him to the market. Whichever of the two can obtain the lowest bread price will win the family’s respect. This winning price, paid by the daughter is $7. She and the boy competed, but the additional competition on the buyer side sent the price up, not down (as one should expect).

What the mother isn’t noticing about the bread market, and many don’t recognize about health care, is that suppliers (bread sellers, health care providers) play a role in establishing prices. Regulating the price paid by buyers or the level of competition among them isn’t likely to produce the outcomes we might hope for without parallel action on the provider side of the market.

Take increasing insurer competition, for example. Results presented in two papers in the International Journal of Health Care Finance and Economics and another in Health Affairs indicate diluting insurers’ market power would cause prices to rise, not fall. The reason is that hospitals maintain such high degrees of market power that high concentration in the insurer market is necessary as a counterweight. Weaker insurers would be less able to counteract the market clout of hospitals at the bargaining table. Clearly just decreasing concentration among insurers while ignoring that of hospitals is unlikely to be the solution to escalating health care premiums.

If concentrated insurers negotiate lower prices, what compels them to pass the savings on to consumers? Here, regulation can help, and it is already in place. The Patient Protection and Affordable Care Act regulates medical loss ratios (MLRs), the proportion of premium revenue that must be spent on health care claims, as opposed to administration and profit. Specifically, it requires insurers to spend 80% and 85% of premium revenue on claims in the individual/small and large group markets, respectively. That puts a cap on what insurers can retain for non-medical expenses.

If MLRs are computed fairly and regulated adequately (things to watch), the only source of health insurance rate increases would be medical costs. In principle one could regulate medical costs themselves by blocking insurers’ proposed rate increases if they were deemed excessive. Once insurers have already negotiated prices down as far as their market power will allow, and with the MLR minimums in place, the only substantial remaining driver of premiums that insurers can do anything about is utilization volume. The last time insurers made a serious effort to control that was during the era of managed care in the 1990s. We all know how much consumers loved their mid-90s HMOs (not very). Therefore, rate regulation above and beyond MLR minimums isn’t likely to get very far on its own.

At this point, we’re in the same position as the mother who wished to pay less for bread. Pressuring and regulating buyers (her children or our insurers) alone isn’t fruitful. To make headway, some attention must be paid to the seller side of the market. In the case of health care, changing how providers are paid–more on quality, less on volume–is a sensible idea. In fact, there are provisions in the Patient Protection and Affordable Care Act to do just that (e.g. payment bundling, accountable care organizations), but they won’t kick in for years, a political concession.

Our greatest hope for lower premiums is for those provider payment reforms to be allowed to work. Rather than continue to throw stones at insurers (or, at least in addition to doing so), we should be supporting political leaders who will not cave in to what is likely to be heavy industry pressure to weaken those reforms. The mother in the parable of bread prices kept proposing doomed solutions because she didn’t recognize the problem, dominant seller power. Are we any different?

My latest Kaiser Health News column is posted. It includes this parable:

Our frustration with the soaring cost of health care is like a mother upset with the increasing price of bread. When her son returns from the market with another high-priced loaf she hatches a plan. The following week, when bread costs $5 a loaf, she attempts to control the price by sending him to the market with only $4. The family spends less on bread that week, but they also don’t eat any since the boy couldn’t find a merchant willing to sell below the market price.

The next week bread is selling at $6 a loaf, and the mother tries another plan. Thinking her son lazy, she attempts to discipline him with competition. She sends her daughter with him to the market. Whichever of the two can obtain the lowest bread price will win the family’s respect. The winning price, paid by the daughter, is $7. She and the boy competed, but the additional competition on the buyer side sent the price up, not down (as one should expect).

Read the rest here.

This is a re-post of my Kaiser Health News column of Monday, 26 April 2010.

The Patient Protection and Affordable Care Act continues the American tradition of privately provided, publicly subsidized health insurance. It’s how most Americans’ health insurance is financed today. But despite its advantages, there is a hidden cost to this arrangement: insurers have more information about health care coverage, spending and utilization than the taxpayers that help fund them. The system’s opacity gives insurers the upper hand in debates over government payment rates.

Public funding of private health insurance is ubiquitous. Employer-sponsored coverage is provided by private insurance companies and is publicly subsidized through the exemption of premiums from payroll and income taxes. Recently, private insurers announced their interest in increasing their participation in state Medicaid programs. Private plans participating in Medicare Advantage or Medicare’s prescription drug program are taxpayer-subsidized, as are those offered through Massachusetts’ Health Connector–the precursor to state exchanges that will be established in 2014 under the new health law.

Recent events in Massachusetts and years of experience in Medicare reveal that the opacity associated with public financing of private coverage is a set-up for conflict. A few weeks ago, Massachusetts insurance companies filed suit after the state’s Division of Insurance rejected proposed rate increases of hundreds of insurers.

In justifying their proposed rate increases, one of the claims made by Massachusetts health insurers is that they’re experiencing adverse selection (enrollees are sicker than expected). They claim that individuals are taking advantage of the state’s ban on preexisting exclusions and low penalties for violation of the state’s individual mandate. The way the game works, insurance firms say, is that an individual signs up for insurance in advance of an expensive procedure, paying the premium for just a few months. After the procedure the individual drops coverage and pays the lower penalty.

Unfortunately, no publicly available data are sufficient to test Massachusetts insurers’ claims or those of the Division of Insurance. The data exist of course. Insurers have it; the public does not. Survey data sources are a second best, but no surveys with a sufficient sample ask the right questions to measure the degree of adverse selection experienced by Massachusetts plans.

With no way to validate the assertions of insurers or regulators, the public–those that actually fund the low-income insurance subsidies–can’t know the extent to which insurers are exaggerating the level of adverse selection or if regulators are unfairly dismissing it. Since Massachusetts’ health reform is so similar to that which will be implemented nationally under the new health reform law, it is a tremendous loss that we don’t know more about precisely how it is working (or not).

A similar lack of data prevents researchers from fully analyzing the risk selection experience of private Medicare plans. There is indirect and self-reported evidence that Medicare Advantage plans experience favorable selection (enrollees healthier than expected). Because plans are not required to release all utilization data the issue cannot be analyzed head-on. As a consequence, the perennial clashes over payment between the industry and budget-conscious politicians and watchdog groups occur in a climate of incomplete information. Medicare Advantage plans are overpaid, but by how much? Taxpayers can’t fully know.

At the heart of these conflicts are empirical questions: Are payments sufficient to cover costs? Are taxpayers getting a fair deal, a bad deal or a bargain? Not surprisingly, insurers and regulators generally provide opposing answers.

How can we tell who is right? With the necessary data so closely guarded by insurers and not available to the public, academics and consumer and taxpayer advocacy groups, who might provide valuable checks of claims made by insurers and regulators, are locked out of the debate.

The hidden data imposes a hidden cost on taxpayers. Though it can’t be fully quantified, there is a likely cost in the form of inflated payments. Insurance companies know far more about their costs and enrollee characteristics than regulators or academics. The information asymmetry plays to their advantage and can only drive up taxpayer costs. Unless plans are compelled to provide data, their advantage is likely to continue as the public begins paying a substantial sum to subsidize exchange-based coverage in every state.

The American tradition of public financing of private coverage is alive and well, and so is the practice of hiding the facts about what taxpayers are getting for their money. Wouldn’t you like to know what you’re paying for? Me too.

My latest Kaiser Health News column is online today. It begins,

The Patient Protection and Affordable Care Act continues the American tradition of privately provided, publicly subsidized health insurance. It’s how most Americans’ health insurance is financed today. But despite its advantages, there is a hidden cost to this arrangement: insurers have more information about health care coverage, spending and, utilization than the taxpayers that help fund them. The system’s opacity gives insurers the upper hand in debates over government payment rates.

Read the rest here.

My Kaiser Health News opinion column is posted today. It begins,

Few Americans should be satisfied with the way the government pays private health insurance plans that participate in the Medicare Advantage program. Taxpayers pay 14 percent more to insure a beneficiary through the Advantage program than through traditional, fee-for-service Medicare, the program’s “public option.” The new health reform law–the Affordable Care Act–will reduce, but not eliminate, the additional payments to Advantage plans. Medicare beneficiaries are concerned about the reductions in Advantage plan availability and generosity that will result from those payment cuts.

It then continues to explain how a competitive pricing payment system–the one that would have been established by the Senate health reform bill–could address concerns of both taxpayers and beneficiaries. Sadly, such a system was only law for a week. The budget reconciliation amendment replaced it with administrative pricing, the very type of system that has caused so much trouble in the program.

Interested? Read the whole thing.

Ian and I have a co-authored Kaiser Health News opinion column out today. We argue that repealing insurers’ antitrust exemption won’t change things much and isn’t likely to help consumers significantly. Further, a focus on competition in insurance markets has the potential to distract policymakers and the public from the principal source of increases in premiums: concentration in the provider market.

Here’s the opening paragraph:

It is well known that concentration in the health insurance industry is to blame for rapidly rising premiums. Well known, but wrong. Taking political advantage of this common misconception, last week the House passed a bill to repeal insurers’ antitrust exemption. But even if that bill becomes law it won’t do much good, and politicians’ distraction could actually harm consumers. It’s far more likely that premium increases are largely due to other factors.

Kinda makes you want to read the whole thing, right?

Jon Cohn just published my guest post on The New Republic’s The Treatment blog. In it I continue my exploration of lessons learned from the health reform effort to date. One conclusion is that government may not be a solution, though for a different reason than is meant by most people who make that claim.

Usually proponents of markets or libertarian ideals view government as an impediment to good outcomes. The experience of health reform has revealed another sense in which government may not be the solution–because it can’t get out of its own way. That is, our government is improperly structured to solve the problems we face. It isn’t necessarily that government can’t be a solution or that government can’t propose a solution, it is that government can’t pass a solution, at least not very often. Even if health reform ultimately passes, it is clear that an historically rare level of single-party control was required to pull it off.

Please read the whole post. Also, if you’re a health policy junkie consider subscribing to The Treatment. It’s another low volume/high quality blog.

Continuing Catharsis Week, my colleague Steve Pizer and I wrote a Kaiser Health News opinion column that appears today. In it we note the rare demonstration of responsibility of congressional Democrats and the Administration that brought us so close to health reform. Then we explain the forces that contribute to the scarcity of responsible government and to the near collapse of the health reform effort. Just a taste:

Our system of government is designed to produce an abundance of great speeches about sweeping reforms and a pittance of actual reform delivered. So, except for frustratingly brief moments, we really have no government, just a collection of perpetual campaigners, focused on the next election and accepting no responsibility for the country’s long-term problems. In 2009 it was comforting to believe that the leaders of the majority party would use their power to govern responsibly. They tried and failed. The campaigners have taken over, again.

Please read the whole thing.

Though I agree with what we wrote, I’m still disappointed in Democrats for not (yet?) finishing the job they started. The design of our government certainly makes it far harder for leaders to govern responsibly. I get that. But I’m not willing to give the Democrats (or Republicans) a free pass. Perhaps it is because some of them certainly appeared to want to do the right thing. That gave me hope. Then it was crushed, maybe to be revived once more (I still can’t tell).

The last time I was so disappointed in a political party and a president was when George W. Bush took us to war in Iraq. Like the abandonment of compressive health reform, that too was an unnecessary and costly decision that resulted in loss of life. It is hard to forgive, and harder yet to forget, leaders who trade blood and treasure for political gain. I understand why they do it. I just don’t like that they do so. I never could. And that’s why I do what I do and not what they do.

But few of us are 100% free of responsibility and power, small though it may be. Most of us can vote. We can also write or talk to our representatives and/or their staff members. We can demonstrate, volunteer, and contribute money. In small ways we can do something toward making our dysfunctional government and the actions of our leaders ever so slightly better.

Last week I called my Democratic congressional representatives and urged them to continue to fight for health reform. (You can too. Here’s where to find contact info.) If I perceive for a moment that they are not seizing opportunities to make progress on coverage and costs they will lose my full support, and possibly all of it. The same goes for our president.

I don’t expect to have my way on every issue. I understand political realities and the limitations of our government. But I do expect my representatives to do their job within the constraints of our system. When, despite the incentives for irresponsibility, there is a chance to do the right thing, to begin to address a pressing national problem, and when the (super) majority exists to carry it out, then it should be done. On health care it wasn’t, or hasn’t been yet. Democrats defeated themselves once last week. But it is within their power to change course. If they throw in the towel for good that will be a loss for which we will all pay.