• On “doc shock”

    Since reading Kevin Drum’s post on “doc shock” — the issue of narrow networks for exchange plans leading people to “lose their doctor” — there’s something I can’t get off my mind.*

    An exchange is a market. Yes, it’s a market with constraints, but it’s still a market with genuine competition to various degrees in various dimensions including network extent. Do we trust markets such as this to work in health insurance or not?

    There’s a big debate about the question of whether markets “work” in health insurance. By “work” one generally means that the market is stable for insurers (e.g., no adverse selection death spirals), fair to consumers (e.g., they can access and comprehend sufficient information to make reasonable choices among options), and efficient for all (e.g., tolerable levels of administrative overhead and dead weight loss).

    On one end of the spectrum of the issue of whether insurance markets can work are single-payer advocates who basically think it can’t. From their point of view, there’s too much waste in marketing, profit-making, administrative complexity, and inherent in the carving up of risk pools that choice requires. When applied to the issue of “doc shock,” a single-payer advocate might point to Traditional Medicare, which has the participation of the vast majority of doctors and all hospitals: nearly universal choice of provider with no choice of plan. No “doc shock” here.

    The problem is that this point of view ignores Medicare Advantage (MA) and Part D drug plans, which are outside the Traditional Medicare paradigm and yet are very popular. Both exist in exchange-like market environments, harnessing plans in competition. MA plans have doctor and hospital networks. Part D plans have drug formularies and pharmacy networks. Beneficiaries who choose them — and many do — are generally satisfied. Competition in Part D appears to be working very well. It’s reasonable to conclude that many people prefer the option of a more narrow network at a lower price.

    On the other end of the spectrum are market-advocates who espouse lighter regulations and encourage consumerism. “Skin in the game” is the rallying cry. Let people use their own money to buy what they want from a market free of the innovation-stifling constraints of exchanges. When applied to the issue of “doc shock,” such an advocate might say that more restricted networks are precisely what one should expect after you’ve constrained the market on cost sharing (limits on out-of-pocket costs and actuarial equivalent requirements) and constrained it on benefits (essential benefits requirements). The only significant, remaining way for plans to compete is by squeezing networks.

    That all sounds reasonable. But there’s a problem here too. If one believes consumers can be savvy shoppers in a market environment — which any advocate of more “skin in the game” and less regulation must believe — then one should believe that the market will solve the “doc shock” problem on its own. If consumers are unhappy with narrow networks, plans will respond by offering options that are more expansive. Yes, those options will cost more. If consumers think that a higher premium is worth a more expansive network, they will vote with their wallets.

    Now there are all kinds of problems with this view, the most obvious of which is that consumers may not be able to rationally assess network extent at time of purchase. That’s a perfectly reasonable objection. But it applies equally well to other dimensions of the health insurance and health care purchase decisions. It’s an argument for more consumer protection, more regulation, less skin in the game, and, consequently, less consumer and market autonomy.

    Fundamentally, those arguing that “doc shock” is an issue need to decide whether they think the market can work for health insurance or not. If so, then they should have the courage of their convictions and argue that the market will equilibirate to the right set of choices with the right degrees of network extent, subject to existing regulatory constraints. If not, then consistency would dictate that an even more constrained market is in order, perhaps one with more demanding network adequacy requirements. But this will raise prices and limit choices for all, as some people prefer the option of a more narrow network at a lower price.

    So, what’ll it be? Do you trust the market or not?

    * I’m putting aside the fact that nobody literally loses their doctor due to the Affordable Care Act. You just might lose access to a plan that includes your doctor in its network. You’re permitted to go out of network at your own expense, of course.

    @afrakt

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    • ” Do we trust markets such as this to work in health insurance or not?”

      What you describe is not a real market and one should not expect it to function like one. Who controls prices? Not the willing seller nor the willing buyer. Who controls the goods being offered? Not the willing seller nor the willing buyer.

      • I’m sorry, but the seller most definitely does control the prices.

        • Sorry Bob, but you are wrong. The ACA imposed a MLR (minimum medical loss ratio) on insurers. That and other provisions clearly demonstrate that the seller is not free to sell his product at the price he chooses.

          • There’s also the fact that every insurer has to file their rates in advance with the state, and some of them face having the state lower their price. And they can’t change their prices without going through the process again.

    • I’d argue that most of the health care costs are driven by people who:
      1) need health care urgently and
      2) don’t have knowledge to make good choices and
      3) are not in a good state to make choices

      Meaning that providers can charge pretty much anything.

      But ultimately, I’d like policy to be based not on my conclusions, but on research that figures out why we pay so much more for no better care than other nations get for far less.

    • “Fundamentally, those arguing that “doc shock” is an issue need to decide whether they think the market can work for health insurance or not. If so, then they should have the courage of their convictions and argue that the market will equilibirate to the right set of choices with the right degrees of network extent, subject to existing regulatory constraints.”

      It’s that last bit that’s the problem. Remember, they had ‘markets’ in the Soviet Union too, they were just “subject to existing regulatory restraints” decided by the central planners.

      What you’re essentially arguing is that all of the market forces that operate in health care must be resolved (equilibriated) through a single allowable dimension. Actual functioning markets don’t work that way, they allow providers and consumers to make decisions on multiple dimensions. So someone might not want a narrower network, but they’re quite happy to forgo maternity care or a ‘free’ annual physical. Sorry, not allowed!

      And equilibrium would also require consumers to be paying the full premiums – if my premium is subsidized, then equilibrium point that I settle on is going to be different than what I’d settle if I were paying the full premium, while to the insurer their equilibrium settling point will be based on the revenue they actually receive.

      • I completely respect your perspective. I have no reason to believe on theoretical grounds that people would prefer or be better off with dramatically freer health insurance markets. It’s something that ought to be tested and allowed to be tested, perhaps at the state level.

        Another interesting direction would be the use of reference pricing as opposed to explicit network contracting. Are any exchange plans doing this, if only for a subset of types of care? If not, why not?

        • This is probably our biggest area of agreement – while I think we have some different ideas about how a reference pricing might be set up, I’m a big, big fan of the basic idea of “here’s X dollars, go get the healthcare you need.” That’s basically how fixed-benefit insurance works, see: http://theselfpaypatient.com/2013/08/22/fixed-benefit-insurance-policies-an-alternative-to-comprehensive-insurance/

          I’d be happy to see some state-level experience, although I’d suggest we already have some with the experience of the 8 states that enacted community rating and guaranteed issue in the 90’s. In my own view, I think that’s probably the next stage of ‘reform,’ allowing states to diverge dramatically in terms of how they address health care issues. I’d be fine with Vermont adopting single-payer so long as Texas was also free to adopt something that would, frankly, probably leave you running from the room in terror as it was described to you.

          So the question is, are enough people of both political persuasions willing to let the other side mostly do what they want in the states they control in exchange for being able to do what they want in states they control. Broadly thinking I think on the right there’s a greater willingness than on the left to let states go their own way, but perhaps I’m wrong.

          • I like what you say regardless of my beliefs regarding national health insurance. I don’t think any plan nationally should go unsupported without experimentation first. I have to admit, though, that markets seem to work in other areas so there is good rationality for market place ideas in health care.

            One of my objections to the ACA is the same as Fracts objection The ACA should have been tested first, perhaps on state levels with variations of the ACA, but we don’t see that happening and I don’t think the Massachusetts experiment is the same as the ACA even though small parts are similar.

      • Sean
        Good comment.

        A question for you (collegially). Do you believe the folks who decry the limits the exchanges place on consumer choice and the actions of the administration (via ACA), also believe in the market equilibrium you describe?

        I dont. Frankly, a majority of those who invoke the term “market” in the same sentence as “keep your doctor,” deal in fantasy baseball and platitudes. They want guns and butter, but use only rhetoric to back up their case.

        What you said needs saying, but I dont see a serious rank making a case for it. Further, if the latter existed, I doubt we would need Austin’s post.

        Brad

        • Brad: I think that’s a fair assessment when it comes to politicians. Can’t tell you how many ‘market friendly’ politicians I’ve heard espouse policies that would get them pelted with rotten fruit and booed off stage at any gathering of free-market policy wonks.

          I will say though that there are an awful lot of people who do quite seriously subscribe to the sort of things I say – wonks, doctors, entrepreneurs, libertarians, etc. I guess the onus is on the wonk community to educate the politicians who at least think they believe in markets.

    • Sorry,

      No market is a market unless you can turn your back on it and walk away without paying a penalty.

    • The open market is a valid and good theory, until all the players come in roughly at the same price range without true stimulatory competition. I think this is whats happening to the exchange insurance premium, and why perhaps we currently do not see a dramatic drop in price during a market merge as we did in MA. There’s residual effect of the old market, where new prices are set in the context of historical premiums, with some modifications to comply with new requirements, but ultimately without too much disruption. Once the urgency to comply fades, without deep and structural changes, small gains upfront may lead to large rebound effect in price later on.

      Although it may seem like we may have a lot of “choice” when it comes to plan options, the key insurance players with skin in the game are probably a little more than a handful, which lends to price inflation.

      To promote true and long standing competition, we need to look at how we can stimulate new and innovative delivery payment systems, completely detached from old price structures, and for lack of a better word, “old debt” based on technology investments, capital spending, etc. Easy to say, but I think possible if we pushed ourselves to look for an answer in this direction.

    • Hi – I forgot to make my most important point! Can I swap my last paragraph with this one?

      To promote true and long standing competition, we need to look at how we can stimulate new and innovative delivery payment systems, completely detached from old price structures, and for lack of a better word, “old debt” based on technology investments, capital spending, etc. If there is a new set up that can siphon membership volume at a lower price while also maintaining good quality, then that would make things a lot more interesting. Instead of looking at changing what we have and tackling issues head on, we can also look at ways on how to foster/develop new competition.

    • Markets are always distorted–that’s why “the market” has failed to deliver affordable health care to vast numbers of people–too few insurers, too few provider organizations, too little information to consumers, and circumstances that are difficult to predict 9when will I have a heart attack) and fairly stupid assumptions about “shopping” and skin in the game (will I be able to shop for a provider while I’m in cardiac arrest).

    • I am personally torn about the extent we can count on the health insurance market to fix this problem, if it needs fixing. I definitely see the upside. But several features work against it. After selection, for me the two most important are: (1) We are talking MANY linked markets: health insurance, hospitals, many physician services, etc. Choices in insurance affect the various care markets. And for many people, insurance market is linked to labor market. That makes the market forces clunky. (2) These are VERY complicated choices. I wrote about all the difficulties that I, a health economist, with lots of MDs in the family, a non-urgent condition, flexible schedule to investigate, money in the bank and lots of other advantages had with insurance and care choice. http://www.washingtonpost.com/national/health-science/facing-brain-surgery-a-health-economist-finds-the-health-care-market-hard-to-navigate/2012/11/05/0a931b5c-fcf1-11e1-b153-218509a954e1_story.html If it’s so hard for me to be an informed consumer in that setting, who are those informed consumers voting with their feet for lower costs and better quality?