• Wussinomics

    Hey, homo economicus, you looking for a good time? Then try a little bit of Mark Pauly’s Wussinomics: the state of competitive efficiency in private health insurance. I’m not kidding, this is a fun read. Some quotes:

    • “I believe that, in theory, a competitive insurance market should lead to efficient levels of care and efficient rates of growth in medical spending for the great majority of Americans, who are not poor and not stupid.”
    • “The contentious data on the rates of growth of private versus Medicare premiums shows at best equivalent growth for private premiums; private insurers have not been more successful than government in cost-containment.”
    • “[C]ut the price, see what happens to quantity, and if it does not fall enough (or even does not fall), cut the price further.”
    • “As an antidote to this kind of story of timidity in the face of the obvious, private insurers are always happy to recount their latest creative steps in redesigning insurance for cost containment. […] Without being a total wet blanket, as an honest observer I can say that more of these initiatives have failed than succeeded.”
    • “What is even more troubling is that this history has not sunk in; instead new ideas (or retreads of old ideas) are offered as ‘evidence’ that a political goal of improving quality by controlling cost is within our grasp. Of course, the world needs cheerleaders, and it is hardly surprising that advocates pass by downsides and risks. But, since a new crop of politicians desperately wanting to avoid painful tradeoffs appears every few years, the attraction of magical thinking and doing the impossible continues not just to resonate but to distract policymakers from the hard choices.”
    • “I think the failure so far to focus on cost reducing but slightly quality reducing innovation is a large share of the problem—at least as it applies to new technology.”
    • “[A]part from varying the size of networks, plans have never systematically varied other dimensions of care, like the amount and form of new technology, and competed vigorously on that basis. Instead they waste their time trying to get people to exercise and eat less.”
    • “Guaranteed renewability, group to individual conversion, and some decent high risk pools are all we need, plus the hope that exchanges if they happen will not make things worse.”
    • “Given the general unpopularity and logical disconnect associated with measures that save on cost but irritate consumers, it may be no surprise that private insurers want Medicare to break trail—thus providing them a safe path as they follow along.”
    • “I believe it is not outside the realm of human ingenuity to design a program with political and legal safe harbors, and (if things get bad enough) even get such a program into law. It will require a lot; politicians will have to say that it is all right for your insurer to mistreat you if that is what goes along with the low cost plan you voluntarily chose.”
    • “We moderately well-off are still numerous enough that our preference drove the style of care, but the resulting cost increases, more or less uniform across the board, that took an affordable bite out of our income growth cut much more for lower income people and even caused some of them to drop out of the insurance system entirely and put their children on Medicaid or SCHIP. […] A fundamental solution, which I would favor if I knew how to bring it about, would be to alter the pattern of income growth going forward toward one with a more equal distribution of gains.”

    For his forthrightness, I tip my hat to Pauly. Too few who favor more market solutions will admit that, to date, the private sector has disappointed as much or more than government. Too few of them will say that one of the reasons is that the private sector looks to government (Medicare) for CYA. Too few build into their reform proposals safe harbor for insurers to deny claims based on sanctioned evidence (in some way to be defined). And, clearly, it is not universally believed that we need a more equal distribution of the growth in incomes. Apart from the last point, do any political leaders say any of these things? If they do, it is both rare and obfuscated. Do you think Pauly speaks the truth here? Can you (we) handle the truth?


    • For healthcare reform, its time to insert the concepts developed by Professor Elinor Ostrom, 2009 Nobel Prize winner in economics. Assuming that we all agree that we are exhausting the resources available from our economy for healthcare, what are the institutional attributes necessary to preserve the “commons” without exhausting it?

      I propose that the cost of our nation’s healthcare should not exceed 13% of the GNP. These resources should be divided between the healthcare for Basic Health Needs and for Complex Health Needs. Basic Health Needs should be considered a prepaid expense rather than true insurance which would apply to Complex Health Needs in the usual sense. For true efficiency, then, Basic Health Needs would be capitated. Complex Health Needs would be fee-for-service with a risk-sharing over-ride, such as, the ACO concept. The key to such a framework would be a nationally focused plan to establish augmented Primary Health Care, neighborhood by neighborhood and community by community. Again, the concepts developed by Professor Ostrom would apply to the institutional processes necessary for the transition.

      Many supplementary issues would require national action, such as requiring all compounding pharmacies to follow FDA requirements for quality control. The company in Massachusetts was not. For now, it is likely that more resources for our nation’s healthcare will follow Parkinson’s Law without changing the underlying deeply entrenched inefficiency of our nation’s healthcare industry. As indicated by the highly variable maternal mortality rates from state to state, uniformly available and justly accessible Primary Health Care for each citizen must be the first step for reforming the healthcare industry.

    • A review of the evolution of national systems of health care since the end of WWII is enlightening. Somehow the countries of Western Europe along with Japan managed to devise systems that are by most measures superior to US health care. It should be remembered that both Western Europe and Japan had to rebuild their societies from scratch and that the US was essentially untouched. In the US a mostly private system was selected that evolved by limiting access to those with employer provided coverage or those with substantial economic means. In the US access limitation is essentially “all or none”. By the mid sixties it was seen that this mostly private system was failing the elderly and the poor and political pressure resulted in the adoption of Medicare and Medicaid. Western Europe and Japan selected systems that provided close to universal care that limits access across the entire spectrum of the population. This limited access was accomplished by limiting some expensive therapies as well as increased wait times for patients. By most measures, however, these systems provide better outcomes at less cost.

      The US system of majority private insurance has failed when compared to other highly evolved countries.

    • Paul:
      I agree with Professor Ostrom’s idea regarding separating health care into basic needs and catastrophic needs.
      There needs to be 2 separate risk pools to cover these expenses.
      I envision the basic needs being covered by paid-up insurance, utilizing part of the reserves of the insurer, when the insured is unwilling or unable to pay out of pocket.
      The catastrophic needs would be paid for by pay-as-you-go premiums.
      The splitting into two separate and distinct pools is important.
      As Milliman stated in its final report a few weeks ago, “It is anticipated that this policy would be available to policyholders at rates less than traditional comprehensive coverage due to the separation of comprehensive coverage into low cost and high cost partitions, and the inherent incentives not to file smaller claims.”
      Don Levit

      • Paul, Don, can you point to a paper by Ostrom or someone else that covers what you’re discussing in greater detail? Thanks.

        • My Blog would be the most complete, especially the “Initiative” page and its subpages. http://nationalhealthusa.net/

          The HOME Page and the TRADITIONS Page give the most background information. The TRADITIONS Subpages offer a set of root causes for the current paralysis afflicting healthcare reform. Also, the Personal Health Stories Subpage of the APPENDIX describes the extreme complexity in the coordination of health care for certain citizens, healthcare issues that current reform proposals do not accomodate.


    • Austin,

      Do you have reference to where Pauly argued why health insurance does not function like casualty insurance?

      Sorry for the non-sequitor.

    • “Assuming that we all agree that we are exhausting the resources available from our economy for healthcare, what are the institutional attributes necessary to preserve the “commons” without exhausting it?”

      I’m only guessing here, but it seems to me that much of what the US spends on “health care” doesn’t really go to actual health care. Instead it goes to billing bureacracy, advertising and promotion, CEO executives, etc.

      Is what people spend on health insurance part of the health expenditure?

    • Amnesty International USA published a study of our nation’s maternal mortality problem in 2010. Among the developed countries of the world, USA ranks 41st worst out of these 43 countries. The problem is that our healthcare industry does not have the “social capital” to achieve justly accessible healthcare community by community. Besides maternal mortality, this problem then applies to all citizens with high cost Complex Health Needs: the 30 million citizens who use 70% of the healthcare cost. Since this popoulation shifts from year to year, accessibility needs to apply to all citizens. Thus, we have hospitalizations that last 10 days rather than 6 days. Therein lies the greatest level of “waste” by the healthcare system. With an adequate capitation to support augmented Primary Health Care and a good nurse (R.N. level) to answer the phone, triage becomes more responsive for all their patients. High quality Primary Health Care should be able to reduce total hospital days by 30% as compared to the usual matrix of healthcare. Most of the other issues are familiar to anyone: Pharma’s business model, physician equity ownership in hospitals, professional liability reform, graduate medical education for Primary Health Care, immigration, et cetera. As a Primary Physician observer for 35 years, the number of citizens who are capable of negotiating complex financial incentives to seek healthcare is very, very small. Sorry, but thats reality.

      Professor Ostrom has never published any specific studies of healthcare economics. Essentially, she studied the institutional characteristics that support collective action to preserve a commons. For instance, the city of Los Angeles sits on a fresh water aquifer. Beginning in the 1930s, the local goverments (city and counties) developed collaborative agreements to limit use of the aquifer and bring in supplementary fresh water to preserve the aquifer from salt water contamination. It took 30 years. It functions successfully without the involvement of Sacremento or Washington, D.C. Her initial writings began in 1991 with “Governing the Commons.” I particularly like “Understanding Institutional Diversity” published in 2005 and “Foundations of Social Capitol” published in 2003. She died in May of this year.

      The division of health care between Basic Health Needs and Complex Health Needs underlies much of the conceptual basis for health economics, maybe not explicitly. I develop the concept for health care reform using the concepts developed by Professor Ostrom on my own wordpress blog: