Len Nichols: Why Coverage Expansion Comes First
Some budget hawks argue that we must control health care costs before enacting coverage expansion. We can’t afford the latter without the former, they say. That sounds so sensible it should make anyone wonder why it isn’t. In a 24 February 2010 article in the New England Journal of Medicine, Len Nichols provides the answer (h/t Ezra Klein).
[T]he simple answer to the hawks … is that it is not feasible to tackle costs without tackling coverage. Our delivery system could not withstand the stress. Two thirds of hospitals lose money on Medicare now. Virtually all lose money because of Medicaid underpayment. To impose serious delivery reform and incentive realignment while leaving hospitals on the hook for the mounting billions of dollars in uncompensated care would bankrupt many and strain most to the breaking point. With expanded coverage, we’ll get absolutely essential hospital cooperation. Without expanded coverage, hospitals will have to protect themselves from change, and their local communities will want them to.
… Within a decade, we will face draconian health care price controls, massive benefit cuts in Medicare, Medicaid, and the private sector, or both. This credible threat of cost slashing without coverage expansion is one reason the powerful provider lobbies, such as the American Hospital Association, the American Medical Association, and PhRMA (Pharmaceutical Research and Manufacturers of America), have embraced comprehensive reform.
Backing up to the first sentence in that quote, in what sense is it “not feasible” to implement more severe cost controls without first expanding coverage? The answer includes some dire predictions about hospital bankruptcies. But the real answer, as Nichols makes plain at the end of the quote, is political. The powerful interest groups Nichols lists would resist cost control without coverage expansion. Like it or not, those interest groups must be on board for anything substantial in health policy to occur. That’s just reality.
Hence, proposed health reform is heavy on coverage expansion and light on cost control in the near term. If there is to be any real cost control it will come later, and gradually. To think it can be done first is fantasy.
A Bit More on Premium Increases
This post is jointly authored by Austin Frakt and Ian Crosby. It is a supplement to our Kaiser Health News (KHN) column, which I also posted on this site on Sunday. If you haven’t read that column yet, do so first. This post links back to many of our prior posts on related issues. Thus it serves as a portal to further reading.
In his recent NY Times opinion piece, Reich claimed that the current antitrust exemption for insurers “is why a handful of insurers have become so dominant in their markets.” As we wrote in our KHN column, this claim is extremely dubious. Moreover, it is far more likely that premium increases are largely due to factors other than insurer concentration.
As we’ve noted previously, the exemption (under the McCarran Ferguson Act) is very narrow, and does not apply to mergers, acquisitions, and most other kinds of conduct by which companies get big. We’ve also noted that there are some types of conduct by which insurers could defend and expand their market share that arguably do fall within the scope of the exemption, but they are sufficiently modest and theoretical that is unlikely they bear much responsibility for the current state of market concentration.
We’ve also made the larger point that even if repeal of the exemption or other forms of stepped up antitrust enforcement were to have a material impact on insurer market power, there is little reason to believe it would produce tangible benefits for consumers absent parallel efforts against providers. A recent paper by Berenson, Ginsburg, and Kemper in Health Affairs documents the upward pressure on costs driven by provider organization and concentration. Based on hundreds of interviews with representatives of hospitals, physician organizations, health plans, and other stakeholders in six California health care markets, the authors conclude that
[t]he shift in who holds the upper hand in negotiating payments—once held by health insurance plans but now resting with health care providers—has had a major impact on California premium trends.
… [P]roviders are developing increased leverage through single-specialty group formation and merger-and-acquisition strategies that do not involve integration. Nevertheless, given the push in Congress and elsewhere to restructure health care delivery with accountable care organizations, it is instructive that whatever their merits in improving quality and efficiency, California-style integrated care systems currently produce higher prices that undermine cost containment.
Other work by health economists, reviewed on this blog, indicates that the high degree of market power held by insurers acts as a counterweight to that held by hospitals. Diluting the insurance market may have small downward effects on insurer profit and administrative efficiency, but it could have large upward effects on prices of health care services. Those higher prices would be passed on to consumers.
Therefore, concentration among providers, and in particular hospitals, must also be addressed. Unfortunately, permitting additional provider coordination and integration via accountable care organizations (ACOs), as envisioned in current health reform legislation, may not help matters. The bundling of payments ACOs would facilitate may save money, but only if the greater market power of additional provider integration does not act to offset those savings.
Taming health care costs will be hard. The job is made harder when we’re looking in the wrong place. Insurers may not deserve the special treatment they’ve received from the federal antitrust exemption. But they also do not deserve the level of blame they’ve received for health care costs.
Popular But Ineffective: Repealing Insurers’ Antitrust Exemption
This post is a slightly modified version of one by Austin Frakt and Ian Crosby that originally appeared at Kaiser Health News last week. Full references have been added for academic papers cited.
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.
Those who claim that the antitrust exemption is the main reason a few insurers have substantial market power don’t understand the narrowness of that exemption’s scope. The law at issue, the McCarran-Ferguson Act, shields most aspects of “the business of insurance” from federal (but not state) antitrust oversight. This means that only those insurer activities dealing directly with providing insurance–think underwriting risk, setting rates, defining benefits, and the like–are not ordinarily subject to federal antitrust scrutiny.
There are exempt insurance practices that, at least in theory and under certain conditions, could help insurers defend and expand their market share against competitors. But the exemption simply does not shield the most straightforward kinds of conduct that make companies big.
Activities not connected with the basic risk-spreading function of insurance are deemed “the business of insurers” rather than “the business of insurance” under the law, and do not enjoy any federal antitrust exemption. Thus mergers and acquisitions among health insurers are as aggressively (or passively) scrutinized as those in any other industry by federal antitrust enforcers.
Health care reform advocates concerned about the high degree of concentration in today’s insurance market cite the more than 400 mergers among health plans allowed over the last 13 years. But repeal of the McCarran-Ferguson antitrust exemption would have literally no effect on this trend. Even if other forms of stepped-up antitrust enforcement or other means of encouraging competition were to have a material impact on insurer market power, there is little reason to believe it would produce tangible benefits for consumers absent parallel efforts targeting the provider side of the market.
While there is some evidence that insurers’ market concentration plays a role in premium increases, that role is small. For example, a National Bureau of Economic Research paper [1] found that only 2.1 percent of employer-sponsored health insurance premium increases between 1998 and 2006 were due to insurer concentration.
It is far more plausible that a high proportion of premium increases are due to a combination of concentration in the provider market and adverse selection, especially in the nongroup market. After all, most premium dollars are not kept by insurers and go toward payment of health care services [2]. Insurers take a little off the top, but not enough to be blamed for anything like the perennially large rate increases.
A recent Health Affairs paper [3] describes the upward pressure on costs driven by provider organization and concentration. Based on hundreds of interviews with representatives of hospitals, physician organizations, health plans and other stakeholders in six California health care markets, the authors conclude that “[t]he shift in who holds the upper hand in negotiating payments—once held by health insurance plans but now resting with health care providers—has had a major impact on California premium trends.” And we all know what those trends have looked like lately.
Perhaps counter-intuitively, large insurers can be bulwarks against high costs driven by provider consolidation. Two papers [4, 5] by health economists in the International Journal of Health Care Finance and Economics indicate that the high degree of market power held by insurers acts as a counterweight to that held by hospitals. Therefore, diluting the insurance market may have small downward effects on insurer profit and administrative costs, but it could have large upward effects on prices of health care services. Those higher prices would be passed on to consumers.
That’s why those who understand our health care system know that costs will not be tamed by a focus on the insurance market alone. The Congressional Budget Office has scored the likely effect on premiums of health insurer antitrust repeal as insignificant. Therefore, concentration among providers, and in particular hospitals, must also be addressed.
Don’t get us wrong–we don’t think that the current antitrust exemption is good law or policy. But cracking down on insurer market power without doing the same against providers may well have the opposite of its intended effect. Taming health care costs will be hard. Attacking insurers is, by comparison, very easy, as well as popular. But in this case, what is popular will not be particularly effective.
References
[1] L Dafny, M Duggan, and S Ramanarayanan (2009). Paying a premium on your premium? Consolidation in the U.S. health insurance industry. NBER Working Paper 15434.
[2] L Dafny, K Ho, and M Varela. (2010). Let them have choice: Gains from shifting away from employer-sponsored health insurance and toward an individual exchange. NBER Working Paper 15687.
[3] R Berenson, P Ginsburg, and N Kemper. (2010). Unchecked provider clout in California foreshadows challenges to health reform. Health Affairs Web Exclusive, February 25.
[4] R Feldman and D Wholey. (2001). Do HMOs have monopsony power? International Journal of Health Care Finance and Economics 1(1).
[5] L Bates and R Santerre. (2008). Do health insurers possess monopsony power in the hospital services industry? International Journal of Health Care Finance and Economics 8(1).
Employer-Based Health Insurance: Setting Employees’ Share
The 2009 Kaiser/HRET employer health benefits survey found that employees pay 17% of the $4,824 annual premium for single coverage and 27% of the $13,375 annual premium for family coverage (all average figures). What determines the employee proportion of the premium?
A plausible purpose of the employee contribution is to take advantage of employee price-sensitivity. All other things equal, the higher the premium faced by an employee, the less likely it is that employee will purchase coverage. A firm can reduce its health care costs to the extent it is successful using price signals to encourage its workers to drop coverage, shift coverage to a less expensive plan within the firm, or to shift coverage to a spouse’s plan from another firm.
Dranove, Spier, and Baker (2000) developed a theoretical model that explains employees’ contribution levels as a source of encouragement on the part of employers for their workers to obtain coverage from their spouses’ employer. The authors found confirming evidence for their model with empirical estimates using 1993-1994 establishment data from at least one employer in each of ten states. The employee proportion of total premium is explained by firm and work force characteristics plausibly related to likelihood of spousal coverage including firm size, proportion of work force that is female, age distribution, full/part time breakdown, union status, wage distribution, flexible spending account offer, and premium level.
Gruber and McKnight (2003) also found empirical evidence based on the 1982-1996 versions of the Current Population Survey to support the hypothesis that as employees’ outside options increase their share of contributions rise. With 1997-2001 MEPS-IC data, Vistnes, Morrisey, and Jensen (2006) found a positive relationship between the proportion of two-earner spouses in the local labor market and employee premium contributions.
Abraham, Vogt, and Gaynor (2006/2007) applied MEPS-IC (1996) data to the question of how households choose among their employer-based insurance options. They found that employee contribution, marital status, wealth, household size, sector (federal vs. non-federal government), number of offers, types of offers (i.e. degree of choice of providers), cost sharing, and income are relevant to the choice. Estimates of own-price elasticity revealed that households are more sensitive to changes in price of plans with the least provider network restrictions. The investigators also note that motivating workers to exit employer plans by increasing the employee contribution may also cause the employer’s risk pool to become more adverse. The resulting higher premiums will partially offset the savings from fewer covered lives.
Finally the authors also consider instances in which firms offer a financial incentive for employees not to enroll in offered coverage (according to the 2009 Kaiser/HRET employer health benefits survey 18% of firms offer incentives for employees to decline coverage). They found that providing a $1,000 payment to workers in one- (two-) offer households is associated with a reduction of 13.3% in the average probability of taking up coverage.
Employer-sponsored health insurance is a good deal for workers, due to the tax subsidy. But the association of health insurance with employment places yet another entity–the employer–between the individual and the health care they obtain. Employers’ interests therefore exert an influence on employee behavior through price signals. That provides an opportunity for another layer of distortion in the health care system, and one that is likely to be with us for a while.
References
J Abraham, W Vogt, M Gaynor. (2006/2007). How Do Households Choose Their Employer-Based Health Insurance. Inquiry 43:315-332.
D Dranove, K Spier, L Baker. (2000). ‘Competition’ Among Employers Offering Health Insurance. Journal of Health Economics 19:121-140.
J Gruber, R McKnight. (2003). Why Did Employee Health Insurance Contributions Rise? Journal of Health Economics 22: 1085-1104.
The Kaiser Family Foundation and Health Research & Educational Trust. (2009). Employer Health Benefits: Annual Survey.
J Vistnes, M Morrisey, G Jensen. (2006). Employer Choices of Family Premium Sharing. International Journal of Health Care Finance and Economics 6(1):25-47.
Value-Based Insurance
This post has been cited in the 4 March 2010 edition of Health Wonk Review.
Here are two assertions: (1) The less something costs, the more of it you’ll buy. (2) Utilization of some prescription drugs for certain conditions can reduce use of nondrug services. Putting these two assertions together is the idea behind value-based insurance design, the reduction of copayments for some services (e.g. some drugs) for individuals with specified conditions to promote their use and obviate other types of care. The question is, do costs avoided offset the costs of increased use of services (drugs) promoted with with lower copayments?
A new paper in Health Affairs by Michael Chernew and colleagues (*) says that value-based insurance design can pay for itself, though the extent it does “will depend on the details of the program, particularly the extent to which copayment changes are clinically targeted.” Using break-even analysis, the study evaluated the reduction by a large employer in copayments for five drug classes used to treat hypertension, diabetes, high cholesterol, and asthma. Copayment reductions were available only to individuals identified as likely to benefit from the targeted classes of medication.
The authors conclude,
Our analysis suggests that it is likely that the value-based insurance program evaluated here broke even in the broadest sense—that is, when total employer and employee spending is examined, regardless of who paid. It is less likely that the program saved money from the employer’s perspective. However, some peer-reviewed evidence suggests that reductions in nondrug spending by program participants may be large enough for the program to break even from the employer perspective.
As the authors note, there is a distinction between a “cost-effective” and a “cost-saving” intervention. The former describes one that produces a substantial amount of health. The latter describes one that offsets other services to the point of paying for itself. Most interventions are at best cost-effective. Very few are cost-saving, which is why one should be skeptical of claims that a new treatment will reduce health care costs.
Also noted is the fact that most evaluations, including their own, understate the benefits of value-based insurance design because they do not consider other savings attributable to better health such as “fewer disability days, less absenteeism, and greater worker productivity.”
Study of value-based insurance designs is relatively new and the work of Chernew, et al. is among the first to suggest that they might be cost-saving. To the extent that researchers identify cost-effective, or better, cost-saving, interventions, the future of health insurance plans will include value-based designs. If and when they do a more appropriate name may be “health incentive plans.”
(*) I mean no disrespect to the other authors. It is just too long a list to include in a sentence: Michael E. Chernew, Iver A. Juster, Mayur Shah, Arnold Wegh, Stephen Rosenberg, Allison B. Rosen, Michael C. Sokol, Kristina Yu-Isenberg, and A. Mark Fendrick.
The Disproportionate Popularity of Repealing Insurers’ Antitrust Exemption
Jenny Gold’s Kaiser Heath News piece today on the antitrust exemption is worth a read. She rounds up the opinions and, more importantly, explains what the exemption does and doesn’t do. It’s pretty clear that repealing it, though popular, won’t do much to solve the health care cost problem, nor could it (as I’ve explained before).
The article quotes Scott Harrington (who, by the way, has a blog):
“This is just barking up the wrong tree for health insurance,” said Scott Harrington, a professor of health care management at the Wharton School at the University of Pennsylvania. While many lawmakers are eager to pass some kind of health care bill, they “don’t have a clue how the antitrust exemption works. It might sound good, but I can think of very few things in the bill that would be less consequential for consumers of health insurance.”
I’ve been saying the same thing to reporters when they ask me about antitrust repeal, only Harrington said far more artfully. And what does CBO think? Gold writes,
An analysis by the Congressional Budget Office estimated that repealing the antitrust exemption for health insurers “would have no significant effects on either the federal budget or the premiums that private insurers charged for health insurance.” The CBO found that premiums might increase or decrease, “but in either case the magnitude of the effects is likely to be quite small.”
Repeal of the exemption is popular, but like a lot of things done in anger, it isn’t particularly wise and won’t be very effective.
Adverse Selection in Insurance Markets
A late 2009 NBER paper by Alma Cohen and Peter Siegelman reviews the literature on adverse selection in insurance markets. Adverse selection becomes a problem when individuals of higher risk than expected (specifically, than reflected in the premium) purchase coverage. Higher risks lead to higher costs and higher premiums, which induce lower risk individuals to forgo coverage, increasing per insured costs further–a classic death spiral.
Cohen and Siegelman’s paper “Testing for adverse selection in insurance markets” includes a section on health insurance, but covers many other types of insurance as well (auto, life, long term care, crop, etc.). As for health insurance, a large body of empirical work supports the claim that adverse selection exists in health insurance markets. Cohen and Siegelman (hereafter C&S) cite a review article by Cutler and Zeckhauser as one source for accessing this literature.
Some prior reviews of the literature on adverse selection conclude that the evidence is “mixed,” “inconclusive,” or “ambiguous.” C&S
argue that one should not expect the question of whether a coverage–risk correlation exists to be answered identically in all insurance markets or even in all pools within a market. Thus, one should not regard studies that reach opposite conclusions about the existence of a coverage–risk correlation as necessarily in conflict with each other. (© 2009 by Alma Cohen and Peter Siegelman.)
This is a crucial point because it suggests important limitations in our ability to generalize from one market or sub-market to another.
C&S make brief mention of risk adjustment, a means by which the effects of adverse selection can be mitigated by compensating the insurer for the level of risk of its insureds. There is widespread misunderstanding of the degree to which adjustment solves the adverse selection problem. It is never complete, often far from it. C&S tell us why and back it up with literature citations: insurers and their regulators do not always have access to or make use of all information relevant to risk.
The paper includes a section that describes the ways in which adverse selection can fail to appear. One class of ways essentially boils down to policyholders not having an information advantage over insurers. If insurers have sufficient information relative to policyholders they can price their products to account for the expected level of risk each will draw, eliminating the problem of adverse selection.
Another way in which adverse selection can be offset is if a subset of the population that purchases insurance is a source of favorable selection. For instance if cautious people are more likely to buy insurance and more likely to prevent claims they will provide a source of favorable selection. C&S provide other examples like this. It is tempting to view this whole line of reasoning as: selection can fail to be adverse if it isn’t. The value added is the explanation of why it is not adverse.
Selection into an insurance product can be driven by non-personal factors. Institutional or regulatory factors can be the dominant factor in selection. Examples include the employer-based health insurance market, or the high rate of subsidization of Medicare drug plans. One should not expect adverse selection in such cases.
Even when selection is not adverse, coverage can lead to higher utilization of covered services, an effect known as moral hazard. C&S review the literature that attempts to disentangle adverse selection from moral hazard.
Finally, C&S conclude with policy implications of their findings:
Policy discussions should try to tailor themselves to the specific insurance market under consideration, recognizing that adverse selection and coverage–risk correlations vary across insurance markets (and even among pools of risks within a market), and that they do so in ways that are at least somewhat predictable on the basis of existing research.
This is good advice, but no doubt hard to follow. Much of the utility of empirical research flows from its generalization. If such generalizations are shown to be misleading, the import of each piece of work is greatly circumscribed. In practice, judging the credibility of generalizations is as much art as science. Knowing more of the details of the relevant market matters in getting things right (and certainly in getting published), but policy messaging that actually makes a difference rarely relies on the nuances.
Question About Employer Risk Selection
I’ve received some questions from readers via the website contact form. In general I prefer that questions or comments about a post be submitted as a comment to that post so that everyone can see it. I’m far more likely to respond that way.
Just to answer the individual who asked if employers can select the good risks and send the bad to an exchange. I see a way that could occur by benefit design. An employer could deliberately design a benefit package so that it doesn’t appeal to high risk individuals (e.g., severe restrictions on providers, poor coverage for certain conditions, etc.). If that benefits package doesn’t meet the criteria for minimum generosity then that employer’s workers would be eligible for the exchange.
But in that case all that employer’s workers would be. To keep the good risks to itself the cost of the employer’s plan to those good risks would have to be better than they could get in an exchange. Also, the employer would pay the penalty.
Though this is possible I think as a practical matter it won’t occur in everywhere and may not occur with great frequency (but I don’t know for certain). In general employers have to offer compensation packages that are competitive in the marketplace. An employer that deviates from its competitors enough will in time get the lowest productivity workers, putting it at a competitive disadvantage. It won’t be practical for every employer to game the system in this way, but some might be able to.
So, I think this is a potential issue for the exchange and could drive up premiums there, thus costing tax payers more. The problem is all the more likely since the Senate’s employer penalty is so low. That all shows that things would be far better if everyone were in the exchange. It is my understanding that over time large employers will gain access to the exchange. Maybe that will help.
Great question!
Later: Actually I don’t think selection is an issue for another reason. Insurance through an employer will be vastly cheaper than the exchange due to the tax exemption of employer-based insurance. That will keep many folks from switching even if the benefits in the exchange are better.
Health Incentive Plans
That the word “insurance” but not “incentive” appears in “health insurance plans” misses a key point and leads to some confusion. Perhaps the most accurate name would be ”health insurance and incentive plans” but I’d settle for just “health incentive plans” as a reasonable alternative and one that puts the emphasis where it belongs.
Of course, health insurance plans are insurance in that they transfer risk from the policyholder to the insurer. In most cases they really do insure against financial catastrophe due to a serious illness. High deductible catastrophic coverage-only plans serve this role and this role only. But they risk throwing the baby out with the bathwater.
Most health insurance plans do more than insure against financial disaster. They provide coverage for minor costs of less-than-catastrophic events, many of them elective. Such coverage has appropriately come under criticism since it provides an incentive for overuse of unnecessary care, a moral hazard effect. If only the patient bore more (or all) of the cost of services for minor health events there would be a greater incentive (on the part of the consumer) to use care more judiciously.
However, not all relatively low-cost care is frivolous. Some of it is genuine preventive care that preserves health and saves money in the long run. Take hypertension as an example. It can be asymptomatic, and yet is a major cause of cardiovascular morbidity for which control usually requires lifelong treatment with medications. Good adherence to medications is difficult for patients to maintain and is a challenge to successful management. Making hypertension medications inexpensive for patients removes a proven disincentive of use, namely cost.
Charging copayments that vary with the efficacy and cost-efficiency of the service is an important concept in benefit design. A “benefit-based” or “value-based” cost-sharing system sets copayment levels lower for therapies proven effective and higher for costly benefits with little or no clinical value. Today health insurance plans do a poor job of aligning cost incentives with benefits of therapy.
I don’t blame insurers. It is a genuinely hard problem, and there is a lack of data on what therapies are more effective compared to substitutes. Moreover, even when data exist attempts to change provider practice and consumer utilization patterns based on it can be controversial. Nevertheless, in time and with more research health plans and the health system in which they operate can, should, and must do a better job of aligning incentives with efficacy. Part of the solution is to think of health plans not only as insurance but as health incentive plans.
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