• The Hamilton Project: Why a cost-effectiveness based plan market won’t work

    On Wednesday, Nicholas Bagley, Amitabh Chandra, and I are presenting a paper at Brookings as part of its Hamilton Project. Our paper explores ways we might change the market signals—shaped by our laws, regulations, and insurance designs—we send to manufacturers about what health care technology to develop, pushing them more strongly toward cost-effective therapies.

    There are several reasons why you might want to read the paper. In this and forthcoming posts, Nicholas and I will convey them. In this first post, I want to encourage you to read it because it elaborates on limitations of an idea Amitabh and I enthusiastically wrote about on The Upshot:

    Health plans could define themselves at least in part by the value of technologies they cover, an idea proposed by Professor Russell Korobkin of the U.C.L.A. School of Law. For example, a bronze plan could cover hospitalizations and visits to doctors for emergencies and accidents; genetic diseases; and prescription drugs that keep people out of hospitals. A silver plan could cover what bronze plans do but also include treatments a large majority of physicians find useful. A gold plan could be more inclusive still, adding coverage, for instance, for every cancer therapy shown to improve patient outcomes (no matter the cost) as long as it was delivered at a leading cancer center. Finally, a platinum plan could cover experimental and unproven cancer therapies, including, for example, that proton beam.

    This way, nothing would be concealed or withheld from consumers. Someone who wanted proton-beam cancer treatment coverage could have it by selecting a platinum policy and paying its higher premiums. Someone who did not want to pay higher premiums for lower-value care, in turn, could choose a bronze or silver plan.

    In our piece, we noted the adverse selection problem this would invite.

    [A]s people become sick, they will prefer plans that cover more treatments, including experimental ones. As sick people disproportionately choose more generous plans, their expenses and premiums will have to rise. This phenomenon, known as adverse selection, is familiar in most health insurance markets, including those for employer-sponsored plans, private plans that participate in Medicare and in the Affordable Care Act’s new marketplaces. One common way to address it is to permit individuals to switch plans only once per year, during an open enrollment period. This locks people into their choice for some time, so they can’t suddenly upgrade their plan after getting sick. If a once-per-year enrollment period proves insufficient in this case, a longer period could be imposed.

    We now understand that the adverse selection problem would be even more severe than we had imagined. In our Hamilton Project paper we explain why.

    Consider [] a young, married couple with no children [and] with a modest demand for technology, both because they’re healthy and because they value exotic vacations more than exotic treatments. They select the low-technology (high cost-effectiveness) option and use the savings to travel abroad. Now suppose that they have a child who needs treatment for cystic fibrosis. Novel therapies for this condition have an incremental cost-effectiveness ratio in the hundreds of thousands of dollars (Whiting et al 2014). The family may rationally want to switch from their plan with stingy coverage rules to an expansive plan that covers high-cost therapies with low cost-effectiveness. Since the reason for the parents’ plan switch is to offset the cost of a particular therapy, the plan to which they switch will incur its cost with certainty. Because the parents’ change in technology preference is intimately linked to a change in diagnosis, applying standard, diagnosis-based risk adjustment approaches would spread this additional cost to low-technology plans. Forcing low-technology plans to pay for the expensive technology they exclude would destroy the entire point of this kind of market.

    There are solutions to this, but they’re grossly unpalatable. They include a return to pre-existing condition exclusions or very long, possibly lifetime, commitments to level of insurance for health care technology. Thus, we’re skeptical that a market centered on plan competition on the cost-effectiveness of health care technologies is culturally or politically feasible. But, we have other ideas! Read the paper for more.


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