Impractical Scheme of the Day

The health policy reform world has, in my view, a tragic if understandable tendency to get bogged down in the swamps of the politically viable so I'm always glad when someone puts something obviously unpassable on the table. Here's Robert Waldman:

One politically unfeasible approach to this would be to assign people randomly to HMO's and pay the HMO's based on their health but have the HMO's pay for their health care. Then the HMO decides incentives. You have to decide how much a life is worth (and eyesight and all that) but it doesn't depend on individual income and the decisions are made by an organization with tons of data.

No way this is going to fly in the real world. But unlike a lot of other state-market hybrids that are really just a way to try to buy off the interests of incumbent firms, this really would capture some important benefits of market competition. Firms would become more profitable insofar as they promoted better health outcomes and also become more profitable insofar as they avoid costly medical expenditures. Importantly, the HMO is rewarded not only for delivering effective medical care (though they are rewarded for that) but also for getting their patients to do things that aren't strictly "medical" (walk more, stop smoking) but do improve health.

It's a total non-starter for a whole bunch of reasons, including most notably that nobody is going to accept the total lack of consumer choice this involves, but thinking about infeasible plans serves a useful function in terms of structuring our thinking.

Comments

Firms would become more profitable insofar as they promoted better health outcomes and also become more profitable insofar as they avoid costly medical expenditures.

Health insurers today also become more profitable by doing those things, so I'm not sure what value you think there is to this thought experiment.

Posted by Mixner | July 27, 2008 5:33 PM

Mixner, you've changed the scope of the phrase "by doing those things." Currently insurance companies also become more profitable by denying as many claims as they can and cherry picking whom they cover.

Posted by Jeffrey Davis | July 27, 2008 5:39 PM

I still say the smarter approach isn't to buy off the current healthcare firms, but just to buy off the top execs of the current healthcare firms, which is way, way cheaper.

Recent history has shown that CEOs will gladly help wipe out their companies and shareholders for huge personal bonuses, so why should the healthcare CEOs be any different?

My guess is that a few billion in bribes...err, "patriotic bonuses" to healthcare CEOs would make them all extremely happy to endorse Single Payer or anything else, shareholder profits be damned.

Posted by RKU | July 27, 2008 5:58 PM

Jeffery Davis,

Mixner, you've changed the scope of the phrase "by doing those things."

No I haven't.

Currently insurance companies also become more profitable by denying as many claims as they can and cherry picking whom they cover.

Denying "as many claims as they can" would put an insurer at a competitive disadvantage and thus tend to reduce its profitability.

But your assertion is irrelevant to the point, anyway. Regardless of what other things current health insurers may do to increase their profitability, they can obviously do both of the things Matthew mentioned: promote better health outcomes among their subscribers and avoid costly expenditures. The benefits of those policies are already "captured" through market competition among insurers today.

Posted by Mixner | July 27, 2008 6:39 PM

Thank you for the link. I am actually flustered excited and delighted. I have been hoping for this for a long time (at least you are now more than half my age.

Uhm I got this evil twin who happens to be called Robert Waldmann too and he wrote some rude things about the standard deviation due to sampling of the change in the difference between support for 2 candidates in a comment to a post below. Uhm I don't talk to him much, but he wants to say that he's sorry.

Posted by Robert Waldmann | July 27, 2008 6:51 PM

Denying "as many claims as they can" would put an insurer at a competitive disadvantage and thus tend to reduce its profitability.

Thankfully, I have no employees and am covered through my wife, so I've never priced health insurance. Can even a large potential customer get information on percentage of claims denied? If not, it doesn't seem the market would have a strong enough signal to really hurt the over-denying insurer.

Posted by BrianM | July 27, 2008 6:53 PM

No thank you, I have enough people telling me to walk more and smoke less and eat better. Although, having my insurer tell me these things is at least better than the government telling me. That's the worst thing about universal healthcare: every private health-related decision you make suddenly becomes everyone else's business.

Posted by too many steves | July 27, 2008 7:07 PM

Can even a large potential customer get information on percentage of claims denied?

An insurer that denies a lot of valid claims is likely to generate a lot more complaints by subscribers to their employers (in cases where the subscriber is covered by a group policy purchased by his employer), to government regulatory agencies, and to consumer watchdogs than an insurer that does not. Bad service and poor products from health insurers are made known to the market by the same kind of mechanisms as bad service and poor products from any other kind of company.

Posted by Mixner | July 27, 2008 7:10 PM

Mixner,

as someone who has a REAL respect for the power and efficiency of markets, it is always amusing to see the vapid musings of conservatives like yourself, who somehow seem to think that Adam Smith anticipated, and praised, 21st century corporate/state "capitalism," when in fact he did no such thing.

The differences are sometimes subtle, but not in the area of health care, where the current system resembles a free market in no way whatsoever. It is certainly possible that, in the absence of current market distortions*, competitive mechanisms would work the way you suggest. But no one who understands a thing about markets pretends that this is currently the case.

One can certainly argue that reforms should be in the direction of less, rather than more, government intervention, and I'd personally be very sympathetic to that argument. But defending the status quo on market efficiency grounds is laughably stupid. It is, of course, of a piece with your other moronic comments; in fact, I may have misjudged you a bit. Your sub 80 IQ possibly mitigates some of your more monstrously evil impulses.

Though when it comes to domestic politics, like Elvis Costello, I'm more amused than disgusted. And god knows that the current domestic scene provides PLENTY of amusement, and certainly not just brain dead movement conservatism. "Progressives" and moderates are guilty of beliefs almost as absurd as yours.

*primarily tax deductibility for employer provided insurance, but not for employee provided insurance, which eliminates the normal link between the purchaser of the service (employer) and the user of the service (employees and their families), but also excessive anti-competitive licensing requirements, and the distorting effects of Medicare and Medicaid, just to name the most prominent factors.

Posted by voice of reason | July 27, 2008 7:13 PM

Hopefully Obama will do something like Taiwan. There was a great program on Frontline:

http://www.pbs.org/wgbh/pages/frontline/sickaroundtheworld/countries/

When I say "do something like Taiwan", I mean study how other countries have done it right and wrong, and take into account the differences we have in the US. Taiwan didn't copy any other country, they just used them as case studies.

State governments also have experimented with different models, and we have Medicare and other government run programs that can serve as raw data from the real world.

In fact, if we roll a review of Medicare and the VA, and other government health insurance programs, we could kill two birds with one stone, or maybe three of four. Medicare is a much larger issue than the Social Security system, and any federal involvement in this area would need to take into account all current government programs.

If Obama expands the discussion to cover current programs, he will likely get powerful allies on his side. This is probably why Republicans are instinctively against extending benefits to veterans: Obama can easily extend his reasoning to other groups, because we are all in this together...and we are.

Posted by tomj | July 27, 2008 7:32 PM

Is healthier necessarily cheaper? Seems if every member of the HMO "accidentally" died from cyanide poisoning, for example, the HMO would make huge profits from this scheme. Or, slightly more likely, the HMO could just not do anything, ever, for the consumer. Without any consumer choice, why would they bother?

Posted by Mark | July 27, 2008 7:53 PM

Denying "as many claims as they can" would put an insurer at a competitive disadvantage and thus tend to reduce its profitability.

How? If people were randomly assigned to individual plans, then denying care wouldn't affect enrollment in the least.

Seems like it would be the quickest route to fat profits to me.

Posted by flory | July 27, 2008 7:56 PM

I still favor David Cutler's plan to make everybody compete in a decathlon every open enrollment period and pay their past year's health plan by their change in performance...

Posted by Brad DeLong | July 27, 2008 7:59 PM

Why do we need to leave *any* private insurers in place? They don't provide any benefit to the public. They exist only to provide profit for their shareholders. That's it.

Are there hordes of people begging to be let off of Medicare so they can join an HMO? Why not, do you think?

Posted by Notorious P.A.T. | July 27, 2008 8:12 PM

Yeah, everyone's pretty much got this one right. If HMOs were going to control the problem of rising health-care costs and do so in a manner that we'd judge fair rather than arbitrary, it'd have done so long ago.

While no candidate has backed a single-payer system, the Democrat plans at least assume that a government alternative patterned after Medicare may have to pay a role and may indeed force out the private sector in the end entirely. By comparison, this version of managed care is so retro as to make it outrageous to place it in context of supposed alternatives beyond the pale.

Unlike Voice of Reason, I don't think Matt's inclinations are conservative. But I do fear that too often bloggers are seduced by youth and time pressure to embrace the latest shiny object. Seems to have happened again.

Posted by JohnH | July 27, 2008 8:31 PM

the idea Matt points to has a sort of Rawlsian feel to it, veil of ignorance and all that.

Posted by Ben Cronin | July 27, 2008 9:49 PM

Re: Seems if every member of the HMO "accidentally" died from cyanide poisoning, for example, the HMO would make huge profits from this scheme.

Well, except for the fact that then there would be no one paying premiums either.

Posted by JonF | July 27, 2008 10:22 PM

"flory",

How? If people were randomly assigned to individual plans, then denying care wouldn't affect enrollment in the least.

Obviously, people are not randomly assigned to individual plans. The disputed claim was that "denying as many claims as they can" would improve profitability of "current" health insurers, not hypothetical ones in which people are randomly assigned to plans.

Posted by Mixner | July 27, 2008 11:08 PM

Why do we need to leave *any* private insurers in place?

Because markets and private enterprise are a better way of matching supply with demand for private goods than government.

Are you seriously proposing to eliminate all private health insurance? No industrialized democracy in the world does that.

Posted by Mixner | July 27, 2008 11:15 PM

Mixner,

Eliminating ALL private health insurance is not necessary or seriously advocated that I know of (and I've been following this issue for 3 + decades, as an RN).

The markets and private enterprise have gotten us into this mess - with a lot of government help in handouts, etc.. IF you actually look at outcome based statistics, the best health care in America is available ONLY at ... the VA. Our one and only socialized medicine system (leaving out the millitary itself, which has to remain socialized).

From the perspective of those of us who daily deal with the fiasco that is private insurance in health care, the cost in lives (18,000 per year just from lack of insurance) and health is simply too astronomical to keep on trying to make it work. As of a 4/08 poll by Indiana State University, 59% of physicians now want universal health insurance (the single payor system). Medicare may have it's problems - we are dealing with humanity, there will always be problems.

Meanwhile, the multipayor system is an accounting nightmare like no other business has to cope with, let alone deal with the unnecessary cost. Accountants who go to health care from other backgrounds are usually dumbfounded and appalled by the incredible complexity.

Someone seemed to think that letting the government into our health care would automatically make it worse. The government is involved in regulating healthcare as it should be. Some of those regulations were instigated because the system failed to use well established new treatments in favor of those developed from superstition, tradition and denial. Pain management is one of the more obvious ones.

Once a single payor system is instituted, there will still be some guidelines for what must by covered as basic health care plus what treatments & tests are appropriate. Those are also already used by both the insurance company and government programs.

What will be different is actually having a choice of provider. Instead of the HMO telling you what doctors, etc you can go to, or your employer telling you what HMO you can go to (and sorry, but we changed the HMO this year so go find out what new doctors, etc you can now go to under the new plan), you can pick and choose yourself. Like we used to do. Even stayed with doctors we liked until one of us died or retired.

There is basically something wrong with something as necessary as health care (water, education, police and fire protection...)being provided under the profit system. I read everything Ayn Rand ever wrote on this, and several others. In theory, it sounds wonderful. I found out that real people pay an enormous price for this ivory tower conviction that simply does not work in the real world.

Medicare was actually an outstanding success. The health care technology and approach that we have came about because seniors had money to fund services. New funding went to developing better diagnostic measures, medications and treatments. It's time to admit the HMOs have not improved on Medicare. In fact the ones that tried to take over Medicare patients had to go back to Congress to get extra money because they couldn't do it as cheaply as Medicare (government doesn't need to pay the share holders). Then a lot of them just decided they would quit that experiment - leaving a whole lot of elderly with chronic illnesses scrambling to find new doctors. One of mine ended up in the hospital the day she was supposed to have her first visit with the new doctor. Despite my telling the doctor's office, and her cardiologist that her symptoms were getting worse and needed attention immiediately, she had to wait - TWO months- for an appointment.

Which brings me to Massachusetts and mandated health insurance. One article on the problems focused on the reality that there just aren't enough providers to put all the uninsured on health care overnight. One of the primary care physicians they interviewed a month or more ago, would not be able to take another new patient until 3/09....

Yeah, once you get into the health care 'system', there are over 90,000 drug errors per year with drastic consequences. Hundreds of thousands of serious problems caused by medications that were properly prescibed and used. Then you get to diagnostic errors, unnecessary testing, necessary testing not done, done wrong, inappropriate treatments, treatements done wrong, etc etc, before you get to the basic, some people just don't fit the prescribed scenario from those text books.

Seems to me it's pretty obvious by all measures and statistics, the great profit driven health insurance is a disaster. We made it, we can unmake it. If we could just get some of you to stop digging.

Posted by Ginny in CO | July 28, 2008 1:07 AM

Fun is having your doctor recommend a CT scan as soon as possible and your insurance company denying it. Sure hope it wasn't pancreatic cancer.

Posted by another satisfied customer | July 28, 2008 2:06 AM

Firms would become more profitable insofar as they promoted better health outcomes and also become more profitable insofar as they avoid costly medical expenditures.

Health insurers today also become more profitable by doing those things, so I'm not sure what value you think there is to this thought experiment.

Posted by Mixner | July 27, 2008 5:33 PM

The problem is that much of the reduction in medical expenditures due to preventive measures occurs after the patients turn 65 so the savings go to the medicare administration not to the insurer which decided whether to pay more than 100% of the costs of the preventive measures. This is a spillover. The current insurer pays all of the cost of incentives for prevention (I'm thinking of prizes above and beyond paying for the pills and doctors' time) but gets only a small part of the benefits. Empirical estimates due to Beulieu, Cutler, Ho, Horrigan and Isham (2003) (warning pdf http://tinyurl.com/55no3e) suggest that an aggressive program to control blood sugar was barely profitable for the HMOs that implemented it but would save tons of money for the medicare administration

Posted by Robert Waldmann | July 28, 2008 3:08 AM

"Denying "as many claims as they can" would put an insurer at a competitive disadvantage and thus tend to reduce its profitability."

This has been discussed a lot above (with no takes IIRC). I too find the argument very unconvincing. To me a key problem is that there is a double market. Employers buy health insurance and employees decide for whom to work. I just can't seem a potential employee grilling his potential future employer about the claims denial rate from the health care provider.

Once people have been working for an employer long enough to hate the associated insurance company it is very costly for them to quit (lost seniority means most people would lose money if they just quit (without a new offer) and people tend to say they would only switch employers for a raise on the order of 20% see Akerloff G., Rose A. and J. Yellen (1988), "Job switching and job satisfaction in the U.S. labor market," Brookings Papers on Economic Activity , 2, pp 495-582. )

Denying claims creates a hassle for all but less so for the relatively healthy so it provides beneficial selection for the insurance company.

The idea that the health care market on top of job market is like a fruit market is plausible only to fruitcakes.

Posted by robert waldmann | July 28, 2008 3:38 AM

But your assertion is irrelevant to the point, anyway. Regardless of what other things current health insurers may do to increase their profitability, they can obviously do both of the things Matthew mentioned: promote better health outcomes among their subscribers and avoid costly expenditures. The benefits of those policies are already "captured" through market competition among insurers today.

That's a fantasy. Few purchasers of insurance have access to the practices of the people they buy it from. Advertising and price cover a multitude of sins.

Posted by Jeffrey Davis | July 28, 2008 8:41 AM

Robert Waldmann,

This has been discussed a lot above (with no takes IIRC). I too find the argument very unconvincing. To me a key problem is that there is a double market. Employers buy health insurance and employees decide for whom to work. I just can't seem a potential employee grilling his potential future employer about the claims denial rate from the health care provider.

You seem to be under the strange impression that employees are unable or unwilling to complain to their employers when they receive poor service from their health insurer and that employers are unable or unwilling to act on that information in their health insurance purchasing decisions. Or on information about the quality of service provided by health insurers that is collected by government regulators, consumer watchdogs or other employers.

I'm not sure why you find this so hard to understand. A crappy car, or a crappy cell phone service provider, or a crappy homebuilder, or a crappy bank, or a crappy car insurer will develop a reputation in the marketplace for being crappy, as a result of bad word-of-mouth by people who buy the product or service, bad reviews, complaints to government regulators and consumer watchdogs, and so on. You seem to think that health insurers are somehow immune to these market forces. They're not.

Posted by Mixner | July 28, 2008 1:13 PM

I'm not sure why you find this so hard to understand. A crappy car, or a crappy cell phone service provider, or a crappy homebuilder, or a crappy bank, or a crappy car insurer will develop a reputation in the marketplace for being crappy, as a result of bad word-of-mouth by people who buy the product or service, bad reviews, complaints to government regulators and consumer watchdogs, and so on. You seem to think that health insurers are somehow immune to these market forces. They're not.

Who said "immune"? You did.

Have you ever had to to take care of an aged relative and dealt with horror of over-lapping claims? Once the aged have passed a certain level of incompetency, they're not in the market for discriminating among Angie's List type information, and their insurance is fixed. 'Till death do us part. The sick elderly are a huge drain on insurers and they do automatically deny lots of claims. Adults with the power of attorney over their aged kin quickly get the Resubmission Blues.

Posted by Jeffrey Davis | July 28, 2008 1:45 PM

Who said "immune"? You did.

I don't know if anyone else used that word, but Robert Waldmann said he thinks it's "very unconvincing" that a health insurer who provided crappy service in the form of "denying as many claims as they can" would be at a competitive disadvantage in the marketplace.

The sick elderly are a huge drain on insurers and they do automatically deny lots of claims.

They may deny lots of invalid claims, but that's not the same thing. If you think single-payer health care would mean that the government would pay for any and every kind of health care product or service that would benefit a sick elderly patient, you are seriously mistaken.

Posted by Mixner | July 28, 2008 10:22 PM