JAMA Forum: The innovation vs consumer protection tug of war in health policy

This post originally appeared on the JAMA Forum.

In the overheated political environment surrounding the Affordable Care Act (ACA), it’s easy to miss the fact that conservative and liberal health policy proposals exist along a coherent continuum: each strikes a different balance between the desires to promote innovation and protect consumers.

For convenience, let’s situate the ACA at the political center. (In doing so, however, I am not claiming it strikes a perfect balance between liberal and conservative ideas.) To promote innovation, the ACA establishes marketplaces in which many private health plans with different design characteristics can compete for consumers. This ACA’s promotion of market-based innovation is a conservative principle, even if it is not implemented in a fashion all conservatives find appealing.

To protect consumers, the ACA prohibits plans from offering deals that are too good to be true. As such, plans are not allowed to leave out basic protections that a reasonable consumer would presume would be included. Among other things, plans must cover 10 categories of “essential health benefits” and pay for at least 60% of the average costs of its policyholders’ medical care. These consumer protection provisions reflect liberal ideals, even if they’re not implemented in ways all liberals would prefer.

To the left and right of the ACA we can find proposals for changes that strike a different balance between innovation and protection.

To the left are policies that would add additional consumer protections and further constrain the insurance market. Imagine, for example, a requirement that plans cover more than 60% of the average medical costs of their policyholders. Or, alternatively, the essential health benefits requirements could be expanded. As it stands, for example, plans need not cover more than 45 days of care in a skilled nursing facility or more than 20 days of inpatient services for treating a mental or substance use disorder. If one believes that policies should cover longer stays for such services, one might change the rules and make these benefits “essential.”

More stringent requirements in the name of consumer protection necessarily limit the scope for plans to innovate in ways that might better serve diverging preferences. Go far enough down this path and one ends up at a single-payer regime: 1 government-established plan with a uniform set of benefits for all consumers. A single-payer scheme wouldn’t rule out the possibility that some consumers could buy supplementary coverage. If the mandate remains in place, however, consumers would have no choice but to purchase the government plan for basic coverage and accept whatever constraints it imposes on the delivery system, the nature of its customer support, and so forth.

Clearly, aside from it potential virtues, a single-payer model poses a severe constraint on choice and, therefore, innovation. On these grounds, one might object to the very idea that this approach protects consumers; consumers are potentially harmed because they can’t choose a different plan for basic coverage. But a single-payer system is just market regulation taken to an extreme. The constraints imposed by the ACA on the insurance market also limit choice and innovation, just less severely. Although these constraints may indeed protect consumers in some ways, they impose harms by limiting innovation as well.

Before you think I’m advocating against government regulation, let’s look to the right of the ACA. There we find conservative thinkers, such as Paul Howard, PhD, and Yevgeniy Feyman; Ramesh Ponnuru and Yuval Levin, PhD; andJames Capretta, MA, advocating for fewer requirements on insurance products and even, in some cases, a jettisoning of exchanges themselves. Their logic is that regulation constrains innovation and therefore leads people to make different choices and buy different products than they’d otherwise prefer. As Richard Epstein, LLB, and David Hyman, MD, JD, write:

[The ACA’s] preexisting regulations and subsidies have already misaligned the incentives within the health care system. […] All else being equal, the greater the level of market freedom, the higher the level of innovation and the wider the range of choices will be. When government regulators seek to place certain arrangements out of bounds, they restrict the scope of this inventive behavior. The fewer remaining options for potential trading partners means that the search for joint gains will be subject to constraints that produce two kinds of large social losses: (i) increased costs of public oversight, and (ii) inferiority of the private responses that are acceptable in light of that oversight.

Epstein and Hyman are right that innovation can be good for consumers. But they’re wrong that all innovation is. Health plans sometimes innovate, for example, by configuring features to appeal more to the healthy and less to the sick. But that just changes who buys the plans. It doesn’t improve the care anyone receives, enhance financial protection, or make anyone healthier. This sort of innovation isn’t broadly valuable to consumers.

The increased choice necessary for innovation can also be self-defeating. Too many choices can lead to suboptimal decision making. The myriad dimensions in which products can vary in a freer market can overwhelm consumers’ ability to process it and lead to selection on less substantive factors like brand recognition. In addition, the fracturing of markets across too many products can lower incentives for plans to improve quality and reduce their market power to negotiate lower prices with high-clout providers.

All of which is to say that there are no absolutes here. Greater regulation constrains choices, but may, in some ways, improve the options available and the choices people make. Market innovation encourages more options, including both helpful and harmful ones, and also allows more scope for people to make poor choices. A balance must be struck, and the left-right/protection-innovation tug-of-war that we see in health policy today reflects a debate about where to strike it. The ACA offers just one potential balancing point. We’ll be arguing over whether it’s the right one for years to come.

Author note: I thank Nicholas Bagley for his comments on an earlier draft.


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