• In which I disagree with Alain Enthoven

    I think there is a lot to admire in Alain Enthoven’s concept of managed competition. If one is going to build a health insurance system that includes private plans (and, possibly, public ones as well), a more sensible set of guidelines would be hard to find.

    Last week, in The New England Journal of Medicine, Enthoven again sketched out the principles of managed competition, placing them in the context of recently proposed and passed legislation to reform Medicare. In doing so, he wrote the following,

    In 1978, I proposed that government bring about a fundamental change in incentives by offering everyone a range of choices of standard health plans with distinct provider networks and by replacing the tax exclusion of employer health insurance contributions with universal fixed-dollar “premium support payments” toward the (risk-adjusted) premium for the health plan of the consumer’s choice. Government would pay the price of the least costly plan serving each geographic area, making everyone cost-conscious in their choices. [2,3] In 1993, I explained in greater detail how the market should be organized to reward economical choices and protect consumers.[4] […] In my formulation, managed competition is not “vouchers” that turn defenseless people loose in a “free market.” [Bold mine.]

    As I’ve said before, it is critical how “premium support payments” (subsidies) are set. Tying them to the price of the least costly plan permits beneficiaries affordable access to at least one plan. It also harnesses market competition in setting the subsidy levels. I’ve recommended this approach before.

    Later in Enthoven’s NEJM Perspective, he writes,

    Ryan’s proposal to index premium-support payments to the Consumer Price Index has drawn attack from experts who believe it will result in subsidies that are too low, making coverage unaffordable. A better place to start might be growth in the GDP, or GDP growth plus 1%, as in the Domenici–Rivlin proposal. Congress can always make adjustments. In any case, differences of opinion about the appropriate level of premium-support payments should not become a cause to reject the reform of incentives that is inherent in a move toward managed competition. [Bold mine.]

    Here’s where I differ. The manner in which subsidies are set is not a small detail. It is the whole ballgame. It makes the difference between a program that protects beneficiaries from rapidly rising health care costs (Medicare Part D) and one that does not. It makes the difference between a program that consumes more of taxpayers’ money than it ought to (Medicare Advantage) and one that does not.

    For these reasons, I do not see any problem in objecting to a plan for Medicare that calls for a departure from Enthoven’s full concept of managed competition. His proposal says that plans should compete for beneficiaries and, crucially, for the taxpayer-financed subsidy they will receive. Without that element of competition, it’s a very different beast and not one that adhere’s to the principles Enthoven espouses.

    Yes, Congress can always make adjustments. In fact, that’s been part of the problem.

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    • Given the recent posts about consumers’ level of “skin in the game,” it goes both ways. The Ryan plan (or any other attempt to fix government spending over time) means that the government has no (marginal) skin in the game. If program costs rise faster than the formula, it’s the beneficiaries’ problem. Then the question is whether a large gap between actual and formula costs would be sustainable or would lead to Congress’ increasing the subsidy in response to the inevitable outcries (putting their skin back in the game).

      • I agree. Other than politicians themselves or those arguing on their behalf, I think the majority of policy wonks believe Congress should have less discretion to tinker with the program. They have not done such a good job to date! It is possible to establish a program that doesn’t require or invite congressional meddling. We’ve done it before. FEHBP and Part D are both examples. Medicare Advantage is not. Nor, likely, would be Rep. Ryan’s plan.

    • A question from a non-economist. My recollection is that Enthoven was a promoter of the Kaiser model–the managed care model that is the prototype of the Accountable Care Organization of today. Managed competition was the mantra of the Clinton Administration. My recollection is also that he was on the Board of Directors of the Kaiser organization.

      There is no doubt that his credentials are impressive. One problem that will complicate the healthcare reform movement is t hat the three major industries have entered into the decline stages of their respective life cycles. These industries are the US Dental Services Industry, the mainspring US Physician Services Industry, and the mammoth US Hospital Services Industry.

      Prominent economists may not know what happens when an industry enters into the decline stage of its life cycle, but seasoned managers do know. It’s chaos and high turbulence.

      As a 40-year veteran and privileged insider what is clearly demonstrated is that the leaders and the managers in these three industries have ignored every critical stage in the evolution of the industry life cycle, going back to the planned federal deregulation of the industry back in 1972-1978.

      The scientific evidence demonstrating the imminent collapse of the industries is now irrefutable and the historical evidence is compelling. They are the strongest types of evidence.

      Nevertheless, getting the real story of what is about to happen has been absolutely impossible to get through to the political and the healthcare establishments. It’s a repeat of the crash of the US housing industry and the financial debacle that negligence and mismanagement has already foisted on the American people.

      Frank