The 8th chapter of John Goodman’s book Priceless covers a lot of important concepts, most of which I think John explains well and gets right. He covers some of the history of the US health system, a lot more of which you can learn by reading Paul Starr’s The Social Transformation of American Medicine. I’ve posted plenty on it as well.
I have only a few questions and concerns about the rest of the chapter. First, John characterizes managed competition as a market that would otherwise be free were it not constrained by “artificial rules.” Don’t fall for this. All markets have rules and all those rules are “artificial.” I’m not saying we need to like managed competition’s rules. I’m just saying calling them “artificial,” isn’t saying anything.
Anyway, the main rule John doesn’t like is community rating. He explains the problems with community rating, leading to a seeming take-down of risk adjustment. One problem with risk adjustment is that no methods predict costs all that well. Of course, some of health care, probably most of it, is unpredictable, the very part John thinks we should insure against.
John’s proposed solution to risk adjustment is that, upon switching plans, an individual’s “original health plan would pay the extra premium being charged by the new health plan, reflecting the deterioration in health condition.” There are two things about this I do not understand. First, how would this extra premium be calculated in a way that is different from risk adjustment payments? If we knew a better way, we’d have better risk adjustment now.*
Second, this idea seems no different than risk adjustment by another name. Think about it from the new plan’s point of view. Would the plan manager act any differently if the payment is called a “change of health status offset” and paid by the original insurer or a “risk adjustment payment” and paid via a market administrator of some sort (funded, for example, by assessments on low-risk bearing plans)? A dollar is a dollar. The same limitations of risk adjustment apply, don’t they?*
Dispersed throughout Chapter 9 is an excellent summary of HSAs, HRAs, and FSAs. This can be a confusing area and John explained it well. He breaks it up with a bit of history on their development. I particularly like this quote:
Good ideas should stand or fall on their own merits. They should not be adopted or disowned, depending on the party of their advocates and opponents.
I could not agree more. But, I have to add, good ideas do not require exaggerated or selective interpretation of the evidence. The alternatives need not be seen as less than worthless for a good idea to shine. Moreover, even good ideas have limitations, and especially so when they must pass through the political process to achieve implementation.
What did you think of Table 9.2 and related discussion? Were you impressed with how much could be saved in premium by ratcheting up a deductible? I was. It reminded me of my experience a year or two ago when I considered switching to a high deductible plan. Fortunately, I had access to a good bit of data about the plans available to me and, using it, I learned that I would not likely save anything by switching. I wondered why.
The answer is that the degree to which premium trades off against deductible has as much or more to do with the differential risk of enrollees in the plans being compared as it does with the amount by which a higher deductible causes more prudent use of health care. That is, if healthier people are more likely to enroll in higher deductible plans (either because of the deductibles or because of other features and benefits of the plans), that also causes a lower premium. Or, if sicker people do, it could cause higher premiums.
In a prior chapter (or two), John impressed upon us how well plans are able to risk select. In light of this, don’t take the evidence in Table 9.2 at face value. It isn’t risk adjusted. It is highly likely that every dollar saved in premium is not offset by a dollar in deductible in part because healthier people choose the higher deductible plans. The answer to my puzzle of a couple of years ago (per the prior paragraph) is that the risk selection of the plans I was comparing must have offset whatever effect a higher deductible had on spending and premiums. Another possibility is that there was little risk difference across the plans and high deductibles didn’t lead to much resource use reduction. Therefore, for the plans I was comparing, every dollar I could save in premium, I’d expect to pay right back in deductible.
Also in the chapter, John describes some findings from the RAND health insurance experiment. I’ve written about those too. One thing I’ve written that John left out is that
The poorest and sickest 6 percent of the sample had better outcomes (including mortality) under free care for certain conditions or types of care (hypertension, vision and dental care) and serious symptoms were less prevalent for poorer people on the free plan (chest pain when exercising, bleeding, loss of consciousness, shortness of breath, excessive weight loss).
So, there may be heterogeneous effects of higher deductibles, affecting lower income and sicker individuals differently than others. Isn’t that something we should care about or at least mention? I think so because John claims that HSA’s don’t favor the healthy and wealthy. This is an empirical matter and, methodologically, the RAND HIE was a superb, though by no means perfect, test.
This was nice to see acknowledged:
The problem with a deductible is that although the incentives are ideal as long as spending is below it, they become completely perverse once you reach it. That is, below the deductible, every dollar you spend is yours, but above the deductible, every dollar you spend belongs to someone else, except for your co-payments.
It was in the opening paragraph of my favorite section of the book so far, “A Third Simple Way of Controlling Healthcare Spending.” I found every word in this section reasonable, from how to split care that a patient could be responsible for and fund with an HSA vs. care that should be third-party billable to the use of value-based purchasing (reference pricing). About the latter, see also the latest paper by James Robinson. It’s well worth a read.
They key point that moved my thinking about John’s vision is that he’s not really talking about high deductible health plans. He’s talking about treating two categories of health care differently. There’s a category for which it is reasonable to think standard market theory is applicable (a lot of low-cost, elective stuff) and a category for which it is not (emergency surgeries, for example). For the former, paying more or all of the cost at the point of purchase could motivate valuable innovation. For the latter, catastrophic plans are his proposed solution. Completely reasonable.
My next post on Chapters 10 will appear on Wednesday. All posts on Priceless are found under the Priceless tag. The book has 18 chapters. We’re half-way done!
* By email, John says he doesn’t have any issues with what I wrote here. What’s most important to him is that private entities work out the risk-sharing arrangements among themselves, rather than a government-imposed solution.
