In April, Kent wrote of a woman who had signed up for a “consumer-directed health plan.” While the plan saved her money, she yearned for days when she didn’t have to think about the cost of a doctor’s visit or a prescription.
Traditional health insurance insulates us from the visit-by-visit, script-by-script cost of care. That’s a problem. Facing only a fixed co-pay (or not even that), we don’t look at the “right side of the menu.” In our health care “restaurant,” the menu doesn’t tell us that the Lobster Thermidor costs twice as much as the Chicken Piccata. And we don’t care, because “insurance” will pay for it.
Last week we explored regulatory approaches to slowing health care spending growth. Today we discuss changing the incentives for consumers, providers and insurance markets.
Consumers. Over our lives, most of us will pay ALL the cost of our own health care (if you include what your employer spends on your behalf). There is no “someone else” to foot the bill. There are exceptions, of course—some of us experience catastrophic events that cost more than our lifetime contribution to health coverage. But health cost inflation is OUR problem. We have to help with the solution.
A consumer-directed health plan (CDHP) gets consumers involved by putting pocketbook pain back into health care through a high deductible. Polly Patient pays “first dollar” for her care, forcing her to think twice about getting care and to ask about prices: “So, Doc. How much is this going to hurt (my checkbook)?” With traditional plans, prices are hidden—we don’t know that the same procedure can cost twice as much in one setting as another or that a 90-day supply of a drug costs only slightly more than a 30-day supply. (See http://blog.cgr.org/kent-gardner/making-sense-of-health-savings-accounts-2/ for a longer discussion of CDHPs.) But who likes pain? Take-up rates for CDHPs have been disappointing. Yet CDHPs save money (when they are the only option—Kent will explain why in a later column).
Graduated co-payments also change behavior. A generic drug may be cheap or free; an expensive drug (like a biologic) has a higher co-pay. A primary care visit is cheaper than a specialist visit.
Providers. Provider incentives affect behavior. Since 1983, Medicare has paid hospitals a fixed sum based on the patient’s condition, the “diagnosis-related group” or DRG. Paid the same amount whether the patient is in the hospital for one night or five, these “bundled rates” reward hospitals for efficiency. Still, hospital readmission rates among Medicare patients are high. DRGs may encourage hospitals to push patients out the door too quickly.
Physicians, however, are paid by Medicare according to a complex schedule of fees with over 7,000 billing codes. Some version of a “bundled” payment system—like hospital DRGs—could be applied to physicians. For chronic disease, for example, physicians could be paid a single fee for all of a patient’s needs for a period of time. Under a fee-for-service system, physicians do better financially when chronic disease is not well controlled. Instead, they should profit from keeping patients healthy rather than for treating them when they get sick. We are a long way from being able to put such a complex reform in place. Instead, Congress attempts to cut Medicare costs by promising to cut physician fees—then changes its mind under pressure. Cutting fees encourages physicians to do more and “game” the fee schedule.
Managed care organizations slowed cost growth in the 1990s by use of “capitation.” Provider groups and physician “gatekeepers” are paid a fixed sum per member per month, instead of getting paid each time the patient member receives a service. Backlash from consumers forced a retrenchment. Insurers replaced many of these plans with models that are based, again, on fee-for-service payments and place fewer limits on accessing specialists.
Capitation (and the gatekeeper) may be back. Massachusetts is exploring the use of “Accountable Care Organizations” that sounds remarkably like the unpopular HMO. Provider groups would receive a fixed fee per enrollee, thus would be encouraged to keep the member healthy and receiving fewer, not more, services.
Insurers. One group we’re freely permitted to blame in this discussion is the health insurers. They are certainly caught in the middle. Employers cry foul when they raise premiums. Consumers complain whenever coverage is denied. Providers criticize them for playing God (providers only, please).
Some insurers take advantage of a dominant market share and are highly profitable. Yet according to Hoover’s, the sector earned net profit of 3.3% in the most recent quarter (as reported at http://biz.yahoo.com/p/522mktd.html). Of the five largest firms, Cigna did the best at 9.7% and Humana was #5 at 3.7%. The smaller firms were less profitable.
That they are not fabulously profitable does not mean that they are as efficient as they could be. Competition—through the creation of health insurance exchanges—could improve their effectiveness. One hope for the “health insurance exchange” that is likely to emerge from Congress would be the de facto creation of national standards and a national market for health insurance, weakening the Balkanized system of state regulation the industry now confronts and promoting competition across state lines. Standardization would be welcome and likely reduce cost. The task of comparing the cost of health insurance policies within states is difficult; across states it is nearly impossible.
Would including a public option cut cost further? This question is not easily answered and depends on how such an option is designed. We’ll address it later if a public option emerges from Congress.
The scope for cost reduction through the creation of insurance exchanges is limited. Most of the cost of health care is the care itself, not the administrative cost and profit of health insurers. The simple arithmetic of health care remains: Cost=price X quantity. We must pay less or do less. Nothing less will cost less.
Next week we’ll look at the issues around expanding health insurance coverage.
Kent Gardner, Ph.D., President & Chief Economist with Guest Columnist James Fatula, Ph.D., Chair & Assoc. Prof., Dept. of Public Administration, SUNY Brockport
Published in the Rochester (NY) Business Journal October 23, 2009