Issue Summary: Health Costs, Competition, and Chronic Care
updated 4/29/2004
Detailed Issue Summaries contain a quick reference to Centrists.Org policy ideas. They will be revised and updated periodically for clarity and usefulness, and as events and policy ideas change. Questions or comments? Please contact us at information@centrists.org .
Health (Basics) Issue Summary
Government-Run vs. Private Health Insurance
Federal Employees Health Benefits (FEHB) Program
Association Health Plans (AHPs)
Prescription Drug Prices
Price Controls vs. Market Solutions
Reimportation of Drugs from Other Countries
Switching Health Care Toward Chronic Care
Government-Run vs. Private Health Insurance: The underlying political debate on health care almost always boils down to control. Who will control the health care system: the government or the marketplace? Debates that may at the surface seem to be about prescription drug benefits for seniors, or covering the uninsured, are almost always really about control.
Liberal health care scholars believe that the private health care system does not work well, and that the government should provide a universal Medicare program or other form of "single-payer" system. Some single-payer advocates believe in government-run health insurance, but privately-run health care delivery. Other single-payer advocates tout government budgets for health delivery as well, and government oversight of technology and capacity decisions. Single-payer advocates believe that the inconsistency and high administrative costs of the private health care system are wasteful, and that a government-run system would be more rational and efficient, as well as fairer to all classes of people.
Conservative scholars acknowledge the fact that private sector health care can be chaotic, but point to the innovations that it creates as well worth the cost. Without a profit motive and entrepreneurial freedom, the health sector would stagnate and become bureaucratic, they believe. Conservative health care advocates believe that market competition among private health plans and health providers should control the health system, providing a more appropriate equilibrium of prices, technology, and capacity than would be possible by government decision. Conservatives generally approve of government-provided subsidies to help low-income people purchase health insurance and other "safety net" programs for the poor.
Centrists generally believe in a public/private partnership on health care. Often, centrists don't take sides in the debate between public and private health insurance, preferring instead to allow fair competition between both approaches -- a so-called "level playing field" for both government-run and private health insurers. That way, consumers would choose which type of insurance they preferred on its merits, and government policymakers would not be forced to choose for them.
Centrists almost always prefer private delivery of health care, with a strong profit motive and attendant incentives to innovate and create higher-value health systems. However, centrists are aware of anti-trust and other legal/economic issues that could thwart the proper function of private markets in the health sector. Centrists usually tout the value on government-collected information on the quality and other measures of health care performance, so that consumers and consumer advocates, patients and their relatives, and health providers will be well informed and can make sound decisions.
Links:
Progressive Policy Institute McDonald's v. Burger King (Testimony before the Senate Special Committee on Aging, May 6, 2003). This testimony directly addresses the scholarly debate over which is better: government-run or private health insurance.
The Federal Employees Health Benefits (FEHB) Program, A Centrist Model for Health Reform: The FEHB system is a public-private partnership. The public roles are organization, pooling, premium and benefit negotiation, risk-management, and oversight. FEHB enrollees have choices of several private insurance plans, ranging from strict HMOs (in urban and suburban areas) to looser “PPO” or fee-for-service health plans that are available nationwide.
The FEHB model is flexible enough to allow improvements in information, accountability, and chronic care. FEHB is accountable to patients via choice and information, and to the public via direct oversight and negotiation.
FEHB enrollees can choose from among several national plans, and most federal employees may also choose from several local plans, especially in they live in cities or suburbs (few local plans extend into rural areas). FEHB provides extensive consumer information and protections, including a flat premium rate that applies regardless of an enrollee's age or health status.
For most federal employees, the enrollee share of an FEHB plan's premium is between 25 and 30 percent of the total cost of coverage, which provides a sufficient subsidy to entice most workers to enroll. However, the enrollee share is large enough to create a strong incentive for federal workers to choose wisely -- they have a significant financial stake in their choice.
FEHB's virtues are even more compelling than the program's specifics. The program actually does some things wrong. For example, there is no risk adjustment mechanism to compensate plans that attract a disproportionate number of sicker-than-average enrollees. Yet because each plan has a drug benefit, with the potential to collect near-realtime data on enrollees drug spending, a risk adjustment mechanism could probably be efficiently and quickly devised. For example, the drug data would allow FEHB to know which patients were on chemotherapy for cancer or anti-rejection medications (after a transplant surgery), or other indicators of poor health and likely high health costs. Then payments to plans could be adjusted appropriately.
Second, the FEHB system gives enrollees strong reasons not to choose plans with higher-than-average premiums, because the enrollee has to pay 100 percent of the extra cost. However, FEHB does not give enrollees a very powerful incentive to choose cheaper-than-average plans, since the government garners most of the savings. This combination of incentives causes premiums to cluster close together, and dilutes the potential of the FEHB system to reduce the growth of health costs.
Over time, however, FEHB plans have been able to add benefits and control costs (at least to some extent) in spite of these and other disadvantages: a rapidly aging federal workforce, a large group of retirees with expensive Medicare supplemental coverage, and a large group of early retirees not yet eligible for Medicare as their primary coverage.
Links:
The most comprehensive summary of FEHB spending trends is probably the recent publication from the Joint Economic Committee (JEC) Republican staff. Centrists.Org commentary on the FEHB spending debate, particularly with respect to comparisons with Medicare trends, is at Medicare vs. FEHB Spending: A Rare Reasonable Analysis (June 23, 2003) and contains links to the JEC and other original research.
Association Health Plans or AHPs (a preliminary assessment): For almost a decade, the Congressional debate on health care has included proposals to free certain Association Health Plans (AHPs) from some state-based regulations. (Prior to the 1990s, AHPs were referred to by a more generic pension term: Multiple Employer Welfare Associations, or MEWAs.)
AHP health plans would be formed by groups like local and national Chambers of Commerce, small business associations, professional organizations, and the like. Indeed, AHP-like purchasing groups currently exist in some states under state laws. In some cases, they have been very successful and filled an important gap in coverage for workers whose employers couldn't afford or otherwise obtain health insurance.
In general, the concept of pooling small employers and individuals together to acquire health coverage is sound. But the specifics of the AHP proposals in Congress are somewhat murky, and could have unforeseen effects.
The first question is: What exactly would the Congressional AHP proposals do? The following interpretation is based on preliminary discussions with Congressional staff and staff of Congressional analytic agencies. However, it may need to be revised for accuracy if the interpretations of the bills are clarified or change.
Under the AHP proposals, self-insured AHP plans (those that take the risk of health insurance upon themselves and contract with health plans to administer benefits on a cost basis) would not be subject to state laws stipulating that certain benefits or health providers' services be included in all health plans. Self-insured AHPs would also generally be free of state insurance regulations, premium rating rules, guaranteed issue rules, and solvency requirements, although over time, new federal regulations could be established under the law to address those questions.
Fully insured AHPs -- that is, AHPs that do not accept insurance risk but instead purchase health insurance from health plans that accept the risk behind the cost of coverage -- would generally be free of state benefit mandates as well. And in many cases they would probably not have to abide by state premium, rating, and consumer protection dictates. Fully-insured AHPs would continue to abide by state solvency and "prompt pay" requirements.
Advocates for AHP proposals claim that onerous and certainly highly variable state laws governing health insurance make it impractical to offer association coverage over wide areas. Understandably, the associations would like to be free of as many state regulations as possible. Moreover, some incidences of fraudulent or poorly managed AHP-like groups or MEWAs have occurred when it was unclear which state was responsible for regulation, the state where the insurance was purchased, or the state in which the insurer's base of operations was located.
However, the AHP proposals would create a two-tier system of regulation, with non-AHP insurers forced to abide by state rules, and AHP health plans able to avoid the state's regulations. That would give an unfair advantage to AHP health plans, which could use their relative freedom to under price other health plans, or, more ominously, to restrict coverage to enrollees with few health problems, and thereby limit coverage options for people with chronic health conditions to high-priced, state-regulated coverage.
On balance, AHP-like purchasing pools should be encouraged, but they should not be given unfair marketplace advantages. It is reasonable for all health plans or pools, whether self insured or fully insured, to be given a federal forum in which to appeal for relief from certain state benefit mandates. Those mandates are sometimes appropriate, helping to insure that health plans do not skimp on needed coverage in an attempt to block high-cost patients from enrolling in their plans. But on the other hand, some benefit mandates simply reflect the local lobbying clout of certain health providers whose services should not be mandatory coverage in all health plans. Some benefit mandates are clearly inappropriate.
However it would be unreasonable and possibly quite disruptive to immediately exempt AHPs from state premium conventions, rating rules, solvency requirements, and consumer protections. Since AHPs would draw from the small employer and individual markets for enrollees, their products should be roughly subject to the same laws faced by state-regulated plans. Certainly the federal government is not equipped or motivated to provide alternative regulations for AHPs at this time.
Over time, creating a set of federal regulations for health plans may be preferable to those of the states in some cases. Certainly the federal government could help health plans pressure states to lower their regulatory burdens and adopt premium and rating systems that are compatible with well-functioning health insurance markets. But health insurance is a product that must to some extent be regulated and subsidized by government -- the pure free market does not work well to create comprehensive coverage options needed by people with chronic illnesses.
Therefore, states and the federal government should cooperate in creating improved purchasing systems. It is too simplistic to just free certain politically favored types of health coverage from state regulations without a thorough analysis of the consequences. To the extent the federal government subsidizes health coverage provided under state supervision or control, those funds should be apportioned based in part on the success of the state in creating robust and health markets for health coverage that are as fair as possible to both healthy and sick residents.
AHPs are a difficult issue for many centrists, because the idea of creating new opportunities to pool workers in small businesses into larger purchasing pools has great appeal. However, it is equally important to make sure the actual AHP law doesn't create such an unequal system that current coverage is threatened.
An analogy in the health care area is tax credits to help low- and moderate-income people purchase health coverage. Centrists are generally strong supporters of the tax credit approach. However, not all tax credit proposals would work the same. Some would hurt employer-based coverage, others would not. The best tax credit approaches would mesh seamlessly with existing employer-based coverage, by allowing recipients of the credits to use their subsidy on either work-based coverage or individual coverage. Tax credit approaches that would disrupt employer-based coverage could do more harm than good.
Likewise, AHP proposals should not tilt the market toward AHP plans in ways that would inappropriately disrupt current small business and individual coverage, and disadvantage people who would not qualify to join AHP plans.
Prescription Drug Prices: Drug and biotech companies explain that they price drugs to cover their large capital costs for research and product development. That is true, but it can give casual observers the impression that drugs that cost a lot to develop will automatically be priced higher than drugs that didn't cost so much to bring to market.
Actually drug companies price all their products based on what the market will bear. Once a product is developed, it doesn't matter what the R&D costs were -- companies will price the product to bring in the maximum possible "contribution" toward those previously spent, and now "fixed" or "sunk" costs.
Contribution is the gap between revenues and direct production and marketing costs. For most drugs, the costs of production and distribution are relatively low. However, companies often choose to spend large amounts on marketing and advertising for some products. In all cases, the gap between revenues and direct costs represents the funding stream that "pays back" fixed development costs and can subsequently add to profits.
Like most companies with high fixed costs, relatively small changes in revenues can lead to fairly large swings in profits. Winning firms in the pharmaceutical industry can make enormous profits. Losers can disappear quite rapidly.
Price Discrimination. Price discrimination is a fact of life in the U.S. economy. Sellers attempt to charge buyers the exact amount they are willing to pay. For example, airlines sell seats with multiple restrictions at huge discounts to leisure travelers. If they didn’t, those potential passengers wouldn’t fly. But they charge high prices to business travelers who need flexible schedules and must buy their tickets at the last minute.
In the U.S., consumers who have no health insurance pay the highest prices for medicine. Without an insurance company or discount card plan to negotiate a good deal on their behalf, consumers must pay full retail prices at the pharmacy. In countries with government price controls, or the equivalent social insurance payment system, prices are more uniform.
Price Controls vs. Market Solutions. In the pluralistic, chaotic U.S. system, drugs are priced along a widely varying scale. There is no central authority that restricts or controls the prices of drugs. As a result, price discrimination is widely practiced: large purchasers like some private health plans or government agencies have the market power to extract deep discounts on behalf of their enrollees. By contrast, retail prices for consumers without insurance -- and therefore without group purchasing power -- are generally very high.
The most important problem with price controls is that government might not set the prices appropriately for various products. For example, a well-meaning government agency might set the price of vital life-saving drugs lower (out of sympathy for desperate patients), and might not strictly regulate the price of "quality of life" medications that can help people relieve minor symptoms, but are not absolutely necessary. That would give drug companies an incentive to shunt research from life-saving medicines (which would face stricter price controls) toward quality of life products (which could be priced at the market). Needless to say, that might not be the incentive the even a well-meaning government agency would want to create.
Even if price controls are not appropriate, however, that doesn't necessarily mean drug prices always are. Policymakers should insist that all U.S. consumers have access to group discounts of some sort. And we should pay extra careful attention to marketing arrangements between drug manufacturers and health care providers that tilt away from pure education and basic salesmanship toward defacto monetary rewards or kickbacks for prescribing certain drugs.
Reimportation of Drugs from Other Countries. Safety should be the main consideration when Congress and the Food and Drug Administration (FDA) decide whether or not to allow U.S. pharmacies to import foreign pharmaceuticals for sale to U.S. consumers.
However, the economic questions surrounding importation of drugs at foreign prices are also interesting, and much more complex than many politicians or consumer advocates would have us believe.
To advocates, allowing Americans to purchase drugs at foreign prices is a simple proposition: for many medicines, foreign governments either control or negotiate prices that are considerably cheaper than U.S. retail prices. Therefore, importing drugs at foreign prices could save money for many U.S. consumers, despite the extra shipping and transaction costs.
But medicines are not the only products that are cheaper in other countries. There are many reasons why medicines are priced at different rates in different parts of the world. And there are many differences between the pluralistic U.S. health system and the social insurance systems used by other countries, some of which may make American consumers wistful -- others of which Americans might not wish to import.
Advocates for price controls in the U.S. argue that American consumers are paying more than their fair share of the R&D costs of medicines, compared with other relatively rich countries. This is probably true, but the solution is not readily apparent. Canada, for example, has procedures to strip patents from firms that refuse to offer their products at the government-set prices. That sort of restriction on the intellectual and private property rights of U.S. firms would probably not be considered appropriate in the U.S. under almost any circumstances.
Moreover, the U.S. probably benefits greatly -- both medically and economically -- from the research and development that occurs in the U.S. That research and development is based on the hope for large profits if the product succeeds, because the U.S. system generally allows drugs and other health products to be priced at market levels. To some extent, we want drug development firms and their investors to believe that their products might one day strike it big.
Purchasing Power Parity. According to the OECD, in 2002 Canadian prices of all products and services averaged about 15-20 percent less than U.S. prices. For example, according to the latest "Big Mac" survey from The Economist, a signature McDonald's sandwich cost an average of $2.71 in the U.S. and $2.21 in Canada (in U.S. dollars), an 18 percent difference. This difference has persisted for many years.
Usually, when products are tradable between countries, and when they are produced and sold in competitive markets without government price controls or quotas, exchange rates and markets gradually adjust toward "purchasing power parity," that is, a dollar buys roughly the same thing in different countries.
However, sometimes differences persist for many years. And in poor countries, even if a dollar bought the same amount of hamburgers or dental floss as in rich countries, the people simply don't produce very much, have low incomes, and couldn't hope to purchase goods that rich nations take for granted.
Drug companies -- pricing as the market allows -- generally try to sell their products in poorer countries at much lower prices than in rich countries. This can allow them to at least garner some contribution toward fixed costs and profits in countries where they would otherwise be able to sell very little. (Often humanitarian concerns also prompt companies to sell products -- such as expensive AIDS medications -- at zero-contribution prices in very poor countries.)
Even abstracting away from the obvious safety concerns, if governments allow more active cross-national trading in drugs, it could have the effect of lowering prices in rich countries while raising prices in poor countries.
To be sure, poor people in rich countries should be able to obtain drugs at subsidized rates, through insurance or socially available discounts. But attempting to force down prices in rich countries by either importing price controlled products from other rich countries or low-priced products from poor countries is a very indirect approach that could have significant negative impacts on incentives to develop new drugs and on the availability of drugs in poor countries.
Links:
Centrists.Org Testimony: Prepared Statement for the HHS Task Force on Drug Importation
(April 29, 2004)
Congressional Budget Office Would Prescription Drug Importation Reduce U.S. Drug Spending? (April 29, 2004)
OECD Purchasing Power Parity Statistics
The Economist The Big Mac Index
Chronic Care: The U.S. health care and health insurance systems are still mostly based on acute care: when a patient suffers a sudden illness or injury, the health care system is excellent at resolving the acute crisis. Then, the U.S. health insurance system -- public or private, fee-for-service or managed care -- generally does a very good job of paying the bills.
However, the systems are starting to crack at the edges, and the creaks and groans result from a system designed for acute care that can't adequately cope with the emerging health care challenge: chronic care, the treatment of and care for patients with on-going or long-term illnesses.
Chronic care takes place between hospitalizations, and even between doctor visits. Ideally, it helps patients and their families prevent sudden health crises altogether, using self-monitoring, remote consultation with doctors and nurses, and home- or community-based care.
The chronic vs. acute care debate is most relevant for Medicare. Medicare covers seniors and workers with long-term disabilities, precisely the people most likely to have chronic or ongoing health problems. Therefore, Medicare beneficiaries have the most to gain from early diagnosis and continuity of monitoring and treatment of chronic illnesses.
Some private health plans are learning how to arrange chronic care, and thereby keep their enrollees out of the hospital. Chronic care tools can range from simple educational programs to specialized programs tailored to help people manage a particular disease, such as diabetes, to comprehensive case management systems for patients with multiple chronic conditions.
Only comprehensive health plans have a sufficient incentive to invest in chronic care. Investments in one area of chronic health care, such as proper patient monitoring or medication, will pay off only if the plan would save money in other areas, such as reduced hospitalizations.
But Medicare has not adapted to chronic care. Its fragmented payment systems and regulations can actually work against coordinated, patient-focused care.
Under the drug benefit proposals that passed the House and Senate in June 2003, many seniors would have hospital coverage from Part A of Medicare, physician and outpatient coverage from Part B (a wholly different system with separate payment systems), a barebones drug benefit from the new Part D of Medicare (yet another separate plan), and supplemental and “wrap-around” coverage from a private Medigap or employer-based retiree plan.
Needless to say, these separate insurance companies and government agencies could never get together to create a coordinated care plan -- including specialty hospital services, physician care, diagnostic and monitoring tests, nursing assistance, medicines, and home-based services -- for a senior with multiple chronic conditions.
However, the Medicare bills do take some small steps toward improved chronic care. The House Medicare bill has a compelling chronic care program, based on regional administration and flexibility. The Senate bill contains a more targeted set of demonstrations, and has a significant $6 billion pot of funds available for improved benefits -- including chronic care programs -- after 2009.
Links:
The Progressive Policy Institute and the National Academy for Social Insurance have been leaders in pushing for new health coverage systems that are more amenable to chronic care. See, for example:
Progressive Policy Institute An "ABC" Proposal to Modernize Medicare by Jeff Lemieux, David B. Kendall, Kerry Tremain, and S. Robert Levine, MD (February 14, 2003).
Progressive Policy Institute Healthy Aging v. Chronic Illness: Preparing Medicare for the New Health Care Challenge by David B. Kendall, Kerry Tremain, Jeff Lemieux, and S. Robert Levine, MD (February 14, 2003).
National Academy of Social Insurance Medicare in the 21st Century: Building a Better Chronic Care System edited by June Eichner and David Blumenthal (January 2003).
