The following is a guest post by Nicholas Bagley, University of Michigan Assistant Professor of Law.
So here’s a burning question. There’s a consensus that the primary driver of escalating health-care costs is the rapid adoption of new and expensive medical technology. Much of that technology is untested and of questionable medical value. Yet private insurance plans typically cover most any intervention that physicians say is medically necessary. There are exclusions here and there, to be sure. But it’s a decent rule of thumb that, if traditional Medicare covers a particular service or procedure, private plans will, too.
Why? Why don’t private plans compete on price by refusing to cover costly, unproven therapies? (Recently, several have announced that they won’t cover proton-beam therapy for prostate cancer. But that’s the exception, not the norm.) One answer you sometimes hear is that the law gets in the way. Plans will point, for example, to a $77 million judgment entered against a California insurer that refused to cover an expensive (and, as it turned out, brutal and ineffective) breast-cancer therapy. See? We want to contain costs, but the courts won’t let us do it.
The law can’t be the real story, however. As it stands, a federal statute—ERISA—gives employer-sponsored plans almost complete freedom to tailor their coverage packages as they like. If a plan excludes appendectomies from coverage, that’s legally unobjectionable. (Employers that don’t self-insure are subject to certain state coverage mandates. But ERISA preempts those mandates when it comes to self-funded plans, which today cover about three in five employees.) ERISA even shields a plan from liability if it negligently refuses to authorize coverage for care that it (wrongly) thinks is medically unnecessary. As safe legal harbors go, it doesn’t get any better than ERISA.
Why, then, are private plans so cautious? I’m speculating a little here, but I’ve got some thoughts. For starters, it’s really hard to make good coverage decisions. The data for making them are usually quite poor, as Peter Neumann and his co-authors have demonstrated. And, absent convincing data, a plan that excludes a promising treatment risks alienating physicians and hospitals (not to mention patients). No individual plan has the right incentives to generate that kind of convincing data because, once it does, its competitors will jump on the bandwagon and take advantage of the leading plan’s research investments.
What’s more, most coverage decisions aren’t crisp (“No proton-beam therapy, period.”). They’re qualified: if a patient has a certain risk-profile, or an identifiable need, then the intervention is covered. But once a plan has said that some patients are eligible for a particular treatment, it’s hard to stop those outside that group from getting the treatment, too. The data for denying the intervention in a borderline case won’t be great. Physicians may fudge the criteria. The plan will probably have to do some kind of utilization review, which is expensive and alienating. And a stingy plan can quickly scare off its customers, who won’t care when they’re sick and scared that their premiums are lower because their plan is aggressive about technology limitations.
Against this backdrop, piggybacking on Medicare’s coverage determinations makes good sense. Not only does it allow plans to sidestep the collective-action problem that plagues efforts to develop good coverage data. It also helps plans avoid public backlash because they can be confident that their competitors will also follow Medicare’s lead. The government’s seal of approval lends legitimacy to a coverage exclusion that might otherwise appear hard-hearted.
Employer-sponsored plans aren’t the only private plans around, of course. And, as it happens, the law has more bite outside of the employer setting. Medicare Advantage plans, for example, are legally obligated to cover everything that traditional Medicare covers. Similarly, starting January 1, 2014, the ACA will require private insurers outside the group market to cover essential health benefits.
But for employer-sponsored plans, the law isn’t the problem. Far from restraining these plans, the law enables them to tackle the rising costs of technology. There’s just not a business case for it—at least not yet.
