• Private plans and Medicare are good for each other

    I know some readers think I have an unreasonable bias toward Medicare or government or something. In fact, my views have nothing to do with that. What I have a bias toward is evidence. When I examine it, I find that there seems to be a private plan coordination problem that Medicare solves. Likewise, there seems to be a plan design problem that the private sector solves. More in my latest post on the JAMA Forum.


    Comments closed
    • I was curious to know what private plans have done to contribute to Medicare, and this appears to be the relevant paragraph

      “For example, private plans have innovated in ways that traditional Medicare has not. Managed care, consumer-directed health plans, prescription drug benefits, and catastrophic coverage all exist or existed in the commercial market before adoption by Medicare (if ever). In some cases, the Medicare program, though not the traditional fee-for-service arm of Medicare itself, followed private plans’ lead, adding managed care plans (Medicare Advantage) and a prescription drug benefit (Part D), for example.”

      I think two points are relevant here. The first point is that Medicare provisions are somewhat legislatively driven, that is, Medicare itself has relatively little authority to implement things like prescription drug coverage by itself whereas private plans have far less barriers to innovation. Maybe the solution is greater discretionary authority for Medicare.

      The other point, the critical point is that Medicare and private plans are group insurance and both employ risk pooling to manage costs. Private plans could replace Medicare if they also results in very large, diversified risk pools. The supporters of private plans do not support this concept however, they want individual underwriting which in the absence of strict regulatory controls is health care insurance disaster.

    • When no actors in the private sector are willing to invest their own money in order to obtain a particular end – that’s normally a sign that none of them believed that the income derived from the outlay would justify the investment required to obtain it. The fact that private actors will use something provided at the public’s expense does nothing to establish that the investment made by the public has lead to outputs sufficient to justify that expense.

      Had the costs associated with the absence of a common set of billing codes, or any other hindrance to coordination, been a significant enough cost for private insurance companies to justify investment then the private insurance companies would have made the investment necessary to make coordination possible. Or actors who developed the most efficient means of surmounting such problems would have realized sufficient gains to expand, others would have copied them, etc, etc, etc.

      Lest you think this is the stuff of fantasy, ponder the emergence of common standards in manufacturing, computer operating systems, communications architecture, and virtually every other domain of human activity where there are gains to be realized by adopting standards, practices, and norms that enable widely distributed actors to coordinate their activities. How many of them owe their existence and widespread adoption to programs analagous to Medicare?

      • Are there any collective action problems you believe in? Or are they all fantasies? Do you believe that game theory has any real world application? Or is the prisoner’s dilemma just an academic exercise?

        About such things, I highly recommend The Darwin Economy, by Robert Frank. Have you read it?

        • All social animals are an evolved, emergent response to a dynamic set of contingent collective action problems. Government is one subset of the solutions that have emerged to address a particular, narrow set of common resource problems that humans face. It’s very, very rarely the only, or even the best solution to any particular common resource or coordination problem.

          The fact that Medicare is a sufficient mechanism – in some dimensions – for aggregating and dispensing resources to fund medical care for a particular subset of the population does not establish that a vast centralized bureaucracy enforcing a bizarre, top-down system of price controls was or is necessary to accomplish this end.

          Sufficient isn’t the same thing as necessary, much less optimal. The set of counterfactuals to the claim that coordination amongst insurers would be impossible without Medicare includes all history prior to the adoption of medicare, and every economic and social enterprise where some degree of coordination and cooperation has been required to bring about a particular end – whether that’s getting organic grapes from Chile to the Whole Foods in Fenway in perfect condition or establishing uniform dimensions for pipe fittings manufactured thousands of miles apart.

          On common resource problems – Ostrom trumps Frank. I invite you to consider her Nobel Prize address and ponder what implications her research agenda has for for the application of orthodox game theory to them. I’d also add Ariel Rubenstein to your reading list on this topic, and perhaps start with the paper listed below.

          Dilemmas of An Economic Theorist, Econometrica, 74 (2006), 865-883

          • When the theoretical ideal presupposes an institutional framework that deviates considerably from the current equilibrium, I think the idealist has the onus of describing, practically, how we get from here to there. You have done no such thing.

            Meanwhile, Medicare addressed a market failure in its initiation and has continued to provide value while offering beneficiaries private alternatives. Imperfect? Of course. Should we blow up either the public or private options? I don’t see a good argument for doing so.

            • Hmmm – the argument was “Private plans could never function in a particular definable capacity without Medicare,” no? IMO the onus is on the person making such a claim to demonstrate that such a claim is true, and that the “coordination” in question has benefits that exceed its costs.

              It’s not obvious that the latter is true for either ACO’s, or say, EHR’s – which explains why adoption in contexts where benefits need to exceed costs in order to warrant putting investment at risk has been limited, tentative, and incremental.

              How to modify “the current equilibrium” is a vast and entirely different topic. In the meantime – I’m interested in hearing more about how Medicare has solved technical problems that it would have been impossible for private actors to surmount, and what the costs of the said solution are relative to the benefits. It’s an interesting topic that deserves more explicit elucidation.

            • Gee, in my original post I give examples, cited literature, have concurrence from other scholars who I, at least, think have reasonable views worthy of respect, and pointed out that private enterprise adopted some of Medicare’s innovations (and vice versa). If private plans don’t find their benefits exceeding costs, they would not do so. Why do I have any additional burden?

              Meanwhile you also have made some assertions but not answered directly any of my questions. I’d love to see you articulate how, exactly, to use the concepts of Ostrom to, *practically*, make a marginal improvement to our health system, which, by definition, means taking current politically powerful stakeholder interests seriously. It’s a very hard thing to do.

              As has been documented on this blog many times, EHRs have tremendous problems as a private enterprise for exactly the reason I mentioned: coordination failure, which in fact benefits industry but not patients. The VHA has done quite well with its EHR. Your tax dollars at work. China, by the way, has adopted it for its national system, at no charge. Perhaps US practitioners do not because it doesn’t handle billing. Some view that as a feature, one obtained through a single payer or national health system. But that’s a separate debate.

              We can continue conversations such as this when you have more to offer than just contrary assertions.

            • “Medicare addressed a market failure in its initiation”

              If you read the congressional register Medicare claimed to address a market failure but actually excluded the very proterction it promised.

              “The most pressing rationale for compulsory health insurance continually put forward by government officials and echoed by the public was the specter that responsible older people could be ruined financially by catastrophic illness. Yet neither the 1963 nor the 1965 proposal provided coverage for catastrophic illness. During the 1965 Senate Finance Committee hearings, Chairman Russell Long (D., La.) asked HEW Secretary Anthony Celebrezze, whose department had written the bill, “Why do you leave out the real catastrophes, the catastrophic illnesses?” (U.S. Senate Hearings 1965: 182). When Celebrezze replied that it was “not intended for those that are going to stay in institutions year-in and year-out,” Senator Long ountered: “Well, in arguing for your plan you say let’s not strip poor old grandma of the last dress she has and of her home and what little resources she has and you bring us a plan that does exactly that unless she gets well in 60 days.”

              “Many people therefore assumed that the bills before Congress would cover all forms of medical care, including outpatient physician fees and extended illnesses. When Rep. Albert Ullman (D., Ore.) cited allegations that the “public is somehow being hoodwinked” and “being misled” and asked HEW’s Wilbur Cohen about the degree to which the public misunderstood the program, Cohen stated that “we do recognize this problem and I think it has been complicated by the use of the term ‘medicare’ which is an erroneous term when applied to this program” (U.S. House Hearings 1965: 104).”

              In 1965 13% of seniors had problems paying some of their lifetime medical bills. Today that is up to 19%. Medicare was a failure to deliver what the public was sold and has been a failure since then with uncontrolled cost and fraud.

      • Since this is medicine, you should read the linked NEJM article. Countries with central registries can find problems that we cannot. Standardization is not the rule in medicine. None of our monitoring systems are compatible with those form other countries. Look at AICDs and pacemakers. We have 4 major producers. There is no central registry and they all work on their own protocols. When someone comes to the hospital for a procedure, they rarely know what kind of device they have. (So much for the informed consumer.) I have to call every company until I find out what they have. This can take 30 minutes. If it is emergency surgery, I dont have 30 minutes, so I just guess. What a system.


    • You say “I know some readers think I have an unreasonable bias toward Medicare or government…”

      That’s not my complaint. My recurring comment — which you never seem to address (your article on the other web site referenced is no exception) is that FFS Medicare almost never stands by itself. Your analysis always seems to begin with a premise that there is only a binary Medicare world: pure Medicare FFS or “private insurance.”

      For you to say Medicare FFS does this and that without factoring in the implications of the supplemental retiree insurance and Medigap policies that 80%-90% of Medicare FFS beneficiaries use just completely misses how the market works. Similary to dismiss Part C the way you do on the other web site when 25% of us Medicare beneficiaries or more are on it just does not seem to be taking a realistic view of the market.

      CMS has recruited 25,000 volunteers to work in senior centers and like places around the country (I am one) to try to get seniors into these supplemental plans (or as appropriate Medicaid which acounts for almost all the remaining percentage not accounted for above in my comment). As a result 92% of Medicare benefitciaries are on some kind of supplement (counting C as a supplement). Only 8% of beneficiaries do what you seem to think they do.

      • We’ve been over this. It is not true I don’t address it. I have many posts on Part C and references to supplements. You seem to never acknowledge that.

    • A major impediment to private plans, with respect to the “coordination issues” is anti-trust. Look at the balancing act PPACA does with respect to ACO’s. The proposed ACO regulations were very focused on attempting to somehow maintain some version of competition.

      (see, for example:

      Then, of course, when they were panned as inflexible and without great value, magically, we saw a shift – where the most significant change from proposed to final rules dealth with antitrust. CMS initially planned to exclude ACOs that posed a credible threat of federal antitrust violations, and they reversed that position in the final regulations. which resulted in “applause” …


      Cost Shifting

      Even if private plans could overcome the coordination issues, they will be struggling mightily to cope with the next round of cost shifting. Much of that will be a shift from Medicare and Medicaid and the state based exchanges – the massive increase in enrollment in Medicaid where reimbursement rates are suppressed, the ~$500B over ten year reduction in reimbursement rates for Medicare beneficiaries, the failure to fix the “doc fix”, the substantial enrollment in state-based exchanges where rates will be “managed” or “jawboned down” – likely in turn to result in enormous pressure on provider reimbursement rates. Take those pressures, then couple them with tens of billions of new taxes on insurers, drug manufacturers and medical device manufacturers that will all be shifted to private plans.

      No wonder the average cost of family coverage, per Milliman, is > $20,000… any bets which way it is going if PPACA survives the Supreme Court and the 2012 elections?

      Anyone want to take the bet that the average family will see its costs decline by the promised $2,000 a year once PPACA is fully implemented?

    • 1. The easiest way to translate empirical research concerning the way that real human beings contend with real coordination problems into the current “equilibrium” would be to distribute the same pool of resources to the actors with the most consequential knowledge of their own circumstances, values, and preferences and let “solution” emerge from their collective weight of their decisions and actions.

      HSA’s and high deductible plans + lifetime HSA’s + means-tested deductibility for individual and small group premium + means tested premium support. All so crazy and utopian that it’ll constitute the nucleus of any legislative agenda that emerges in the wreckage of the ACA and/or the Herb-Steinesque collapse of the “current equilibrium”

      2. The notion that private actors haven’t adopted the VA system because it “doesn’t handle billing” is one possibility. Ditto for the notion that the rate of EHR adoption is best explained by recourse to a coordination problem. I suspect that I am not alone in seeing the specific arguments that underlie those assertions articulated more fully in future posts – with particular regard to how well they perform relative to more prosaic explanations. Like the fact that they don’t actually work as well as their advocates imagine that they do, and that their costs exceed their benefits. The latter doesn’t matter in either the VA or China, but matters rather more in institutions that can actually go bankrupt when operating costs exceed operating revenues.



      • Also absent from this discussion is the idea that cost-benefit with respect to private enterprise is not the same notion as social welfare. The former can be minimized (or profits maximized) while failing to address many human needs. That’s the nature of market failure. And I am not asserting that any particular government action is the optimal approach to addressing it.

        There is no privileged position here. A “government advocate” is no more obligated to prove his solutions are better than is a “market advocate”. One might be tempted to appeal to neoclassical economic theory to demonstrate market efficiency. But we both know it utterly collapses in the face of market failures, including the (now generally accepted) view that humans are not rational, and especially not with respect to health care.

        Consequently, I suspect you will remain disappointed in whatever arguments I offer in future posts. The fact that you have not accepted the hundreds I’ve offered in past ones makes me quite confident in this. On the flip side, I’m not buying what you’re selling either. That’s not to say there’s no merit in it. There is. It is only to say that it is not *the* solution, because no such thing exists. I’m surprised and disappointed that anyone thinks as much. Trust me, I don’t.

        I hope we can agree to disagree and save the time rehashing this again. It’s all rather obvious, no?

        • A few times I have seen reference to market failure and thus the need for government solutions. I haven’t seen any reference to government failure which is far more common and catostrophic. Complete failure would be programs like TennCare, partial failure would be COBRA and other bills that produced little benefit but termendous adverse unintended consiquences. Soon to be catostrophic failures like Medicare. If the potential for Market failures are so feared why doesn’t there seem to be any concern for actual government failures?

          Humans are not rational when it comes to healthcare and either are goverments, they have a 40 trillion dollar funding deficit, how much less rational can you get?

          • Many of our posts pertain to how the government is “failing.” See, for example, ones about Medicare Advantage and how its plans are paid (stupidly, in my view). Others on Part D come to mind (too tight regs on formularies), as do others that are critical of aspects of the ACA. For some reason, some readers don’t notice such things.

        • Yes- there’s a number of differences between cost-benefit in the private sector and “social welfare.” It’s considerably easier to determine whether or not an investment has generated returns that exceed its costs in the context of a commercial enterprise.

          Having said that – in a world of finite resources and infinite policy options we can and do consider the costs and benefits associated with spending, weigh them against the alternatives, and (rarely) modify or discontinue investments if the benefits they’re producing are too low relative to their costs.

          If there is a genuine public benefit associated with EHR-mandate the connection to social welfare *has* to be via increasing healthcare productivty in a manner such that the value of the increased output exceeds the costs of adopting this technology. This isn’t a matter of subjective values and preferences – it should be possible to measure both. The fact that private actors who have to do this kind of math haven’t rushed to embrace EHRs could just as easily be interpreted as a signal that we should evaluate the performance of EHR’s more carefully before spending money that could potentially be better spend elsewhere. Simply noting that it hasn’t happened is no more a demonstration that the market has failed than the absence of a viable commercial lunar tourism enterprise is an example of market failure.

          Maybe one can make a case that both EHR’s and coding mandates were coordination problems that private actors could not have solved on their own – despite many clear incentives to do so – and that the benefits associated with the government developing and imposing a particular solution have exceeded their costs.

          At a minimum that would require carefully describing the nature of the insurmountable coordination problem, measuring the costs of the intervention, tabulating the benefits to the public, and at least developing a tenable hypothesis relative to the counterfactual.

          Simply noting that private actors are willing to appropriate solutions developed by public entities isn’t sufficient.

          • The EHR debate today reminds me a lot of the EDI debate back in 96. If only we all traded claims electronically we would save billions and everything would be so much better. Congress in their infinite wisdom passed a law saying all payers were required by law to be able to accept claims electronically.

            Begrudgingly as an industry we spend billions, flip the switch…..and nothing. Without a requirement that the other end of the equation send the claims, being able to receive them accomplished nothing. All those billions in savings the politicians and experts promised, no where to be seen.

            Eventually things did come around and majority of claims were sent electronically but that to taught us some valuable lessons the politicians and experts couldn’t be bothered with.

            By forcing adoption prior to the market being ready it cost considerably more, with the advancement in computers, networks, and processing waiting a few years would have been substantially cheaper. Having just spent a fortune on Y2K upgrades it was terrible timing for a major enhancement.

            The providers that did adapt were the ones that weren’t a problem in the first place. Getting HCFA and UBs was not nearly as bag of a problem as the doctors with the handwritten custom check off bills. Those doctors still use those today. The first step should have been to standard forms then electronic delivery.

            In the good old days a provider paid postage and printing to send me a bill. Now, somehow, I pay $0.40 for a doctor to send me a bill and they usually pay nothing. As common sense would imply if it is free to send then why not send it a lot and send it everywhere. We routinely get claims for groups that left 5 years ago and see some doctors bill the same claim every other week. It’s free so what does it matter? Well free to them, it cost me $0.40 each time.

            There was a reason back then I didn’t spend money I didn’t have to implement a service people were not ready to use, that would cost me more then it saved. Washington knew better though.