• 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.

    • On supply side, ACA as well as ongoing pay fors (SGR fix, etc) clip home health, hospitals, nursing homes. Not enough, and clumsily, but that seems where the light is shining. Perhaps you are referring more to commercial world, and less on public plans.

      Also, on network contracting/value networks. I dont know the answer, but even by statute, could TM lock out providers without an ugly legal fight. Thinking about CA and Medicaid battle (network adequacy), given shortage of primary care providers, could Medicare say no to even the bottom 10% (I am reminded of George Carlin’s joke: “somewhere in the US, the worst doctor is practicing…”), So long as they are not committing crimes or engaging in negligent care, that is a tough battle. I also wonder if AMA or others would make case that via tax funding, in TM any willing provider must stand (but MA is a “difft” case)–and is that a legitimate claim via some constitutional loophole. Need new laws?


      • I’m thinking beyond current law and with consideration of recent premium support proposals. We’re still unable to confront the real problem: how to pay for health technologies and procedures that work and for whom they work and how to avoid paying for those that don’t and for whom they don’t. At some point, we have to become comfortable with that conversation. Not happening!

        • This blog has given examples of treatments that were at best marginally more effective than less expensive treatments. .Do we enough about what works for whom to reduce health costs significantly if we can solve the political problems you describe or is being able to say that X does or doesn’t work better than Y still the exception rather
          than the rule.

        • I would think that the SImpson-Bowles vision of a strengthened IPAB might have the clout and independence. I am actually on clear about who has standing to sue Medicare and under what circumstances.


    • Very good post.

      I’m curious, though – what demand side management do mainstream health economists think has potential to work in healthcare? I can think of value-based cost sharing (i.e. pay less for effective treatments).

      TM is, in some ways, trying to exert broad demand side management for some services it (specifically CMS and MedPAC) thinks are being overused. Home health is one (I think I’ve heard a MedPAC commissioner say it’s “out of control”). Therapy services (physical, speech, occupational) in nursing facilities is another. Long-term care hospital services might be a third but nobody has any idea what to do about those.

    • It’s absolutely true that US payers have had a greater failure on the supply side than the demand side, though I am curious why you characterize this as about over utilization than high unit costs. My understanding is that at least half of our divergence from comparable nations comes from price or unit cost.

      Medicare and private payers have dropped the ball on value-based benefits and rate controls for somewhat different reasons. Medicare is mostly hindered by the right, while commercial insurance is mostly hindered by the left, and in both cases of course providers fuel the rhetorical fires. You get cries of rationing, death panels, and socialist control when Medicare tries to do the responsible thing. You get cries of profiteering, corporate destruction of the practice of medicine, and cruel decisions that actively harm patients when private payers try to do the responsible thing.