Supply- and demand-side cost control

This post picks up where I left off eariler this week, characterizing what I wrote in a different way.

For the most part, commercial insurance plans control their costs through demand-side management, attempting to rein in what consumers do on their dime. Things like pre-existing condition exclusions, rescinding coverage, denying renewals, cost-sharing, utilization review, referral requirements, and the like all attempt to reduce exposure to certain types of patients and the amount of care they may otherwise consume. There is some supply-side management too, targeted at providers, but it is fairly blunt; network contracting is the principle tool.

It’s this demand-side management that consumers object to and that causes some patients actual harm. And that’s the appeal, to some, of traditional Medicare. With the exception of cost sharing, which most beneficiaries largely avoid with wrap-around coverage of one type or another, TM exerts no demand-side care management. (I’m not saying this is all for the good.) Naturally, consumers have little ground to object if they’re not feeling controlled. However, TM exerts no supply-side management either, not even network contracting.

What’s actually needed is more supply-side management from both plan types, public and private. It’s not just network contracting that we need. It’s actual scientific scrutiny of what works and doesn’t and excluding the latter from coverage. I’m calling this “supply-side” management because it isn’t management of what conditions are covered or what broad benefits are available, things individuals really care about. It’s management of what specific treatments that providers can actually sell, through the insurance products. Of course provider groups care deeply about this, which is what makes it controversial.

What we tend to see in health care debates is that every type of management, whether on the supply or demand sides, is framed as harmful to patients. Some of it actually is, and we should rid the system of it (e.g. pre-existing condition exclusions and high cost sharing for cost-effective preventive care). However, when we, collectively, believe that all manner of control is to be abhorred as “rationing,” we end up with insufficient control. We end up with a spending problem. All the incentives line up in the direction of overuse of ineffective care, at least for the well-insured. The third-party payers become impotent in all dimensions, including that in which we need them to be more powerful, saying no to the delivery of wasteful care.

I wrote recently that Medicare could lead the way, using comparative effectiveness research to inform coverage design. Private plans tend to follow its payment reforms and coverage decisions. Thus, Medicare holds real promise for cost control without patient harm. That promise is yet to be fulfilled in large part because we keep getting distracted by more demand-side cost control and hung up on the pronouncements of the demagogue of the day. The supply side deserves some attention too. Notice how little mention it receives. Notice how it is left out of almost every Medicare reform proposal. It cannot be correct to ignore it nearly 100% of the time.

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