Convergence on Health Reform (Death of the Public Option)

Thomas (Tim) Greaney

Saint Louis University School of Law

So maybe the two parties are coming together on health reform after all.   Last night we learned that after days of “secret talks” among the “gang of ten” the Democrats have reached agreement to restructure their health care proposal.  The changes are significant:

• ditch the already-watered-down public option plan;
• create a new insurance exchange “option” for individuals and small groups consisting of a nonprofit plan as negotiated by the Office of Personnel Management;
• expand Medicare eligibility to cover uninsured individuals aged 55-64.

What does the Democrats’ “public option ultralight” compromise have  in common with Republicans’ alternative universe?  Well, consider the latter’s proposal to open interstate competition for all health insurers–a move they promise will immediately lower health care costs.   Besides being shameless attempts to offer simple solutions to complex problems, the two proposals are guilty of the same fundamental misunderstanding of health insurance. Simply put, they both ignore a critical economic truth of health insurance today: insurers require a provider network of hospitals and doctors or must have market leverage in order to negotiate for lower provider prices and for controls on excessive volume.

How, then, would a nonprofit insurer not presently competing in one of the concentrated markets succeed in putting competitive pressure on the incumbents?  As one insurance industry observer put it ,

So, Kaiser Permanente, which operates with highly organized and capital intensive networks in its markets, would now come into a state where it has no networks and offer a plan? Blue Cross of Nebraska might offer an individual and small group plan in Rhode Island? Tufts Health Plan out of Boston might offer a plan in Oregon?

Based upon what network of providers in those places where they do not now do business?

Likewise, in expanding Medicare, the Dems are taking a page out of the Republican playbook. For the last several weeks,  Senate Republicans have been loudly touting the benefits of Medicare.  By their lights, not only does the program produce unmatched (and untouchable) health care services in terms of quality of care and beneficiary satisfaction, but any cost-cutting constitutes a betrayal of our commitment to seniors.  As far as one can tell, the expansion proposal will do just that: offer the now-sacrosanct program to a few million almost-seniors.  As to the other 20 million citizens, forced to shop for insurance through an exchange flawed by inadequate competition and inadequate subsidies? Well, maybe the Democrats will borrow the rhetoric of Republican National Chairman Michael Steele: this is no time for a “government-run health-care experiment.”

Repealing Insurers’ Antitrust Exemption Under McCarran-Ferguson: Less There Than Meets the Eye?

Tim Greaney, Saint Louis University School of Law

The House Judiciary Committee’s vote (20-9) to send H.R. 3596 , to the floor has been heralded by proponents as providing a significant spur to competition in health insurance. Sorry to rain on this parade, but there is less here than meets the eye.

The bill  would repeal, but only in part,  the McCarran-Ferguson Act’s limited exemption from antitrust law for health and malpractice insurers. The bill narrows McCarran’s reach, providing that “nothing in that act shall be construed to permit  insurers “to engage in any form of price fixing, bid rigging, or market allocations in connection with the conduct of the business of providing health insurance coverage or coverage for medical malpractice claims or actions.” A Senate bill with broader effect was the subject of hearings by the Senate Judiciary Committee last week.

Although, as I’ve argued elsewhere, competition in health insurance markets has been less than robust, the case law reveals only a handful of instances in which the exemption protected anti-competitive conduct in the health care sector. The most prominent example, Ocean State Physicians Health Plan, Inc. v. Blue Cross & Blue Shield of Rhode Island, 883 F.2d 1101 (1st Cir. 1989), involved an HMO’s challenge to the exclusionary effect of the dominant insurer’s pricing policy and its offering a rival HMO product. Ironically, this conduct would not appear to be covered by H.R. 3596 and hence would remain immune from antitrust scrutiny.  In addition, the Supreme Court has narrowly interpreted McCarran-Ferguson requirement that only the “business of insurance” is exempt; hence insurers’ actions vis a vis providers is not exempt.  Moreover, it appears that health insurers do not engage in the kind of activities that are most clearly protected by McCarran-Ferguson, viz. joint forecasts of future medical costs and cooperative ratemaking.

Despite these reservations, repeal is not altogether a bad idea.  Most antitrust authorities agree McCarran-Ferguson is not needed to protect pro-competitive conduct, which already is well-insulated under modern antitrust doctrine.  For example, the Antitrust Modernization Commission (a blue ribbon –and very mainstream– panel that examined antitrust policy a few years ago) concluded that McCarran-Ferguson immunity was unnecessary to accomplish the Act’s goal of allowing insurers to collect, aggregate, and review data on losses so that they can better set their rates to cover their likely costs. Insurance companies, it found, “would bear no greater risk than companies in other industries engaged in data sharing and other collaborative undertakings.” When insurers engage in anti-competitive collusion “they appropriately [should] be subject to antitrust liability.” Moreover in insurance lines other than health, such as property/casualty, the exemption may protect collective price fixing with few offsetting benefits for consumers.

It is also noteworthy that the Department of Justice stopped short of endorsing repeal.

Assistant Attorney General Varney testified as follows:

In sum, the Department of Justice generally supports the idea of repealing antitrust exemptions. However, we take no position as to how and when Congress should address this issue. In conjunction with the Administration’s efforts to strengthen insurance regulation and states’ role in setting and enforcing policies, the Department supports efforts to bring more competition to the health insurance marketplace that lower costs, expand choice, and improve quality for families, businesses, and government.

This carefully-worded statement (”in conjunction with …efforts to strengthen insurance regulation and states role in setting and enforcing policies“) seems to signal that the Justice Department is worried about hamstringing state regulatory efforts by allowing parallel antitrust scrutiny of insurance industry practices.  But I would have expected the Antitrust Division to take precisely the opposite position.  Perhaps the strongest argument for repeal of McCarran-Ferguson (and also redefining the state action doctrine) is that a system that relies on extensive state-based insurance regulation (and perhaps state-run exchanges) risks undermining the consumer benefits of competition should regulators become beholden to insurer or provider interests. If history is a guide, this is a legitimate concern.

Medicare and Health Reform: Part II

In his closing remarks to the Senate Finance Committee last week, Senator Baucus pointed with special pride to the effect the Committee’s reform bill will have on shaping the health care system in the longer run:

One point I want to make… is about delivery system reform.  We are starting here in this bill to finally reform our delivery system so it’s based much more on quality and patient focus, moving ever so slowly, but inexorably, from fee for service….which causes a lot of the waste in our system. We’re not going to see savings, the benefits, to the system for a while… but after four, five, six years from now, we’re going to see the real benefits of reform.

There is no doubt that the Committee’s America’s Healthy Future Act devotes considerable attention to fixing what’s wrong with the existing delivery “nonsystem” and improving government oversight. Title II (Disease Prevention and Wellness), Title III (Improving the Quality and Efficiency of Health Care), Title IV (Transparency and Program Integrity) and Title V (Fraud Waste and Abuse) of the Act consume 143 pages of the 259-page Chairman’s Mark.

And well it should.  As Professor Bill Sage’s aphorism, “It’s the delivery system stupid,” suggests, changing the structure and interactions of health care providers has long been seen as critical to efforts to control cost and improve quality.  Given serious questions about the strength and effectiveness of competition among private health insurers, especially without a public plan option to spur them, Medicare reform stands as the only viable means to bring about delivery system change.  Policy analysts have made the point that “Medicare is the place to start delivery system reform,” recommending payment reforms that reward accountable health organizations and move toward bundled payments  as a means to spur needed integration in health care delivery.

But how quickly can all this be accomplished? Read more

Health Reform and Medicare: Part I

Here’s a pop quiz on health reform:  Which prominent Republican said the following:

And if you don’t [oppose this health care legislation] and if I don’t do it, one of these days you and I are going to spend our sunset years telling our children, and our children’s children, what it once was like in America when men were free.

OK, it’s a trick question: the answer is Ronald Reagan, paid spokesman for the American Medical Association’s Women’s Auxiliary, speaking in 1961 against the bill that ultimately emerged as Medicare.  (A recording of his “coffee klatch” talk, “Ronald Reagan Speaks Out Against Socialized Medicine,” is here.

Although what political scientist Jonathan Oberlander has termed “a politics of consensus” lasted for some thirty years after Medicare’s enactment, bipartisanship broke down in 1995 when Newt Gingrich targeted Medicare for cuts of 30% and urged privatization using managed care.  By the lights of conservative Republicans, severe cuts in traditional Medicare would encourage flight to managed care alternatives, so that, in the famous phrase of Newt Gingrich, Medicare would “wither on the vine.” (1 St. Louis U.J. Health L. & Pol’y 5-43 (2007), Abstract). Although President Clinton used the Republicans’ Medicare reform to his own benefit (polls showed that his defense of Medicare helped him secure re-election), ultimately much of the Republicans’ agenda for reform was adopted in 2003. Since then Republicans have not relented in their criticism of the program– with some in leadership positions even questioning the government’s role in health care for seniors. (See Rachel Maddow’s cable television show featuring a parade of video clips of Republicans bashing Medicare, including former Speaker DeLay –echoed by Representative Roy Blunt–asserting that “Medicare shouldn’t be a government program”).

Last week Republicans on the Senate Finance Committee opposing health reform switched gears and adopted a much more enthusiastic view of Medicare.  After long decrying the program’s faults and fiscal problems, they were now soberly warning that any cuts in the program will hurt Medicare beneficiaries.  A related tack has been to characterize the plan as a straightforward transfer from seniors to the uninsured. As Senator Kyle recently put it, “Seniors should not foot the bill for the uninsured. Medicare should not be the piggy bank for new non-Medicare spending, a new entitlement.”

To be sure, there is no small irony in the Republicans’ new-found enthusiasm for Medicare.  However politically astute exposing this hypocrisy may be, Democrats still find themselves on the horns of a serious policy dilemma.  Their problem is the result of the ingenious design of the Medicare Advantage program. Adopted with virtually no Democratic support in 2003, the Medicare Modernization Act of 2003 (MMA) took a variety of steps designed to encourage migration to private HMOs and PPOs (Medicare Advantage plans).  Although deploying a heavy dose of government subsidies and creating a deeply flawed competitive bidding system, the MMA succeeded in encouraging large numbers of seniors to join Medicare Advantage plans.

Elsewhere, I’ve analogized the design of  the MMA to “nation building”: an ambitious attempt to create markets and competition where little existed before, but funded by enormous public subsidies. Viewed less charitably, the new laws seem more like an insurgency. Incentives contained in the Medicare Modernization Act are geared to undermine traditional Medicare: large subsidies are given to private payers that in turn produce extra service benefits, a structure designed to lure seniors into private plans, while doing little to improve traditional Medicare.

For today’s reformers, there is both opportunity and risk.  Medicare pays far more to private plans than it would pay if they stayed in traditional Medicare.  (The Commonwealth fund estimates that these extra payments will amount to $11.9 billion, or $1,100 per enrollee, in 2009).   Some private plans do little to contain costs: so-called “private fee for service” plans offer no provider networks and simply funnel higher payments to intermediaries.  But other plans, primarily HMOs, do provide care at lower costs than traditional fee for service plans. Such plans introduce market pressures on providers that are sorely lacking under fee for service payment. Importantly, under the MMA one must return a large part of that differential to beneficiaries in the form of additional services (such as vision or hearing) or reduced cost sharing or reduced premiums.

So what is the net of cost control incentives, subsidies to private plans, and enhanced benefits?  Economist Austin Frakt’s study of extra payments to Medicare Advantage plans suggests that on balance they have not produced net benefits:

[F]or each additional dollar spent by the federal government (taxpayers) on the program since 2003, just $0.14 of it can be attributed to additional value (consumer surplus) to beneficiaries …What do we make of the other $0.86? That goes to the insurance companies but doesn’t come out “the other end” in the form of value to beneficiaries. In part it is accounted for by the costs of the additional benefits and in part it is captured as additional insurer profit.

But undermining all Medicare Advantage programs is bad policy and bad politics.

Health reformers hoping to capture some $400-500 billion in savings by eliminating subsidies to Medicare Advantage plans face a difficult political dilemma. Over 22% of Medicare beneficiaries are enrolled in a Medicare Advantage plan and are happily receiving “extra” benefits from them. While cutting subsidies will eliminate large amounts of wasteful spending that can be used to finance expanding insurance to all, some reductions in benefits will occur and in the future private plans may offer fewer additional benefits.  Adding another horn to the dilemma is the fact that many Medicare HMOs are delivering cost-effective alternatives in their markets and helping to encourage changes in medical practice.  Senator Nelson of Florida has sought to “grandfather” (i.e. protect) HMOs that deliver care below the cost of fee for service providers in their markets.  Yet even here, this sensible exception has run into political headwinds.  Pitting equity against efficiency, members of the Senate Finance Committee were eager to point out that the grandfather clause would be applied primarily in regions with the highest costs.

Reformers will need a fine scalpel and steady hand in order to perform surgery on Medicare Advantage.

In my next post I will discuss some other–and arguably more important in the long run– reforms to Medicare: those seeking to move away from fee for service payment and to nudge providers to adopt new forms of delivering care.

Market Entry by Health Care Cooperatives: Neither Quick Nor Easy

[Ed. Note: Considering recent speculation that the Public Option may be "dropped" in favor of adoption of Health Care Cooperatives, this post, which originally appeared in Health Reform Watch back on June 15th seems particularly worthy of reiteration. For those of you unfamiliar with Professor Greaney's work, he is the Chester A. Myers Professor of Law and the Director, Center for Health Law Studies, St. Louis University School of Law. A frequent contributor to HRW, he is a nationally recognized expert on health care law; Thomas Greaney has spent the last two decades examining the evolution of the health care industry. His bio may be accessed here; his recent testimony to the Senate on "Competition in the Health Care Marketplace" may be found here.]

The idea of establishing regional cooperatives, advanced as an alternative to President Obama’s public plan option, has attracted attention as a means of assuring that health reform legislation contains some means to improve competition among health plans around the nation. But the proposal, which may have superficial appeal as a “middle ground” between a public plan option and an unchecked private market, is ill-equipped to fix the key problems a public plan would address. In addition, recent experience teaches that timely and effective entry by such plans is unlikely.

The first issue is whether a cooperative, organized by consumers or other groups, can effectively deal with the shortcomings of the existing delivery system and insurance market. Thus far, the proposal advanced by Senator Conrad is pretty sketchy, but are grounds for skepticism. A central reason for having government sponsored plans is to allow the efficiencies of Medicare’s well-established administrative structure and innovative payment experiments to carry over to the private sector. Coops provide no such advantage. A second advantage of public plans is that they would likely achieve some bargaining leverage by virtue of their probable role as insurer for people representing higher risks whom private insurers find some methods to avoid. Hospitals and physicians will be hard pressed to bypass such a significant presence in the market and the public plan can thereby exert market-wide pressure to keep provider and pharmaceutical costs down. Whether co-ops will be willing to undertake the role of covering such individuals or able to sponsor innovative delivery systems to treat them is far from certain.

In any event, it is hard to envision numerous regional coops gathering the necessary data, experience and reputation to serve as a benchmark or counterweight to dominant hospitals and provider groups across the country. Further, there is a serious question regarding the independence and mission of coops. It is a mistake to assume that nonprofit entities will necessarily work to the advantage of the public. Unfortunately, our experience with nonprofit hospitals and HMOs suggest that they can easily be persuaded to play along with other providers and may not always vigorously pursue their charitable mission. Keeping cooperatives’ eye on the ball would require close attention to the control and governance of such entities.

The second objection is based on timing and practical considerations. There is ample evidence from our experience with health insurance markets that developing effective coop-sponsored plans will not come easily or quickly. It is clear that new entrants into health insurance markets face a host of obstacles. The prevalence and magnitude of entry barriers is evidenced by the dominance and profitability of existing insurance plans. One or a handful of companies dominate most health insurance markets around the country and these firms have enjoyed consistent and robust profits. Economic theory would suggest that such profit opportunities should have invited entry by rivals eager to capture some of the profits available in those markets.

Additional proof of the obstacles to entry are found in the investigations by insurance commissioners into proposed mergers in their states. In Pennsylvania for example, the proposed merger of Highmark and Independence Blue Cross would have combined the dominant insurers in two large distinct geographic regions of the state. Evidence provided to the State indicated that numerous attempts by regional and national firms such as Aetna and Coventry to enter both markets had proved unsuccessful over the years. Expert studies suggested that a variety of factors including brand loyalty, difficulties in securing physician and hospital network contracts, regulatory and information gathering costs, and obstacles created by the contracting practices of incumbent providers, thwarted entry. Newly formed coops needing to acquire expertise and develop networks will surely face enormous difficulties penetrating markets.

Dead Center

A lot of attention has focused on attempts by health reform proponents to woo what the press insists on calling “moderate” or “centrist” members of Congress.

But what constitutes a centrist position on health reform issues?

Apparently, opposing fair taxation, consumer protection laws, and regulation to make the health care market more competitive gets you branded a moderate these days. And despite their yelping about fiscal responsibility, neither the Blue Dogs (who seem to have ignored the real benefits of the Obama plan to working folks in their rural districts) or the “gang of six” on the Senate Finance Committee (who collectively represent 2.75 percent of the nation’s population) appear ready to vest real power in the government to reign in Medicare spending but at the same time are demanding more subsidies for providers in their communities.

So to get beyond misleading labels and see where they really stand on core issues, here’s a quick quiz that the press might pose to the putative centrists.

• Do you believe that the health reform initiatives should be funded by a progressive tax? If yes, do you regard a tax placed exclusively on families earning more than $350,000 as progressive? Does taxing health insurance premiums advance the goal of fairness?

• Do you believe that competition among insurers in the private market will control cost and reduce waste? If yes, why have insurers not succeeded over the last thirty years. If no, how would you improve their performance?

• Arguing against a public plan on the Senate floor, Senator Kyle recently offered the following pronouncement “The health insurance industry is one of the most regulated industries in America. They don’t need to be ‘kept honest’ by the government.”
Do you feel that the current regime of regulation of insurance companies provides Americans with adequate competition and consumer protection? Does the ERISA law help or hinder effective regulation?

• Will health insurance cooperatives–your alternative to the public plan–spring up in every market in the country? If not, what will insure competition works well in those markets without cooperatives?

• Is the current system of fee for service payments for doctors under Medicare efficient? Do you agree that payment systems that encourage continuity of care, rewards quality and elimination of waste would save money and produce better outcomes? Are regulations that move Medicare in that direction a move toward “socialized medicine”?

• What is the cost of “affordable health insurance” for a family of four earning $50,000 per year? Will the reduced subsidies under your plan enable them to buy insurance without sacrificing education, housing and other necessities?

Paying Attention to Competition: Payors, Providers and the Public Plan

Paying Attention to Competition: Payors, Providers and the Public Plan

Thomas (Tim) Greaney
Professor of Law and Director Center for Health Law Studies
Saint Louis University School of Law

Count me as a member of the Bill Sage School of Health Care Reform. Writing in Health Affairs, Professor Sage, a physician, law professor and Vice Provost for Health Affairs at the University of Texas, offered a slogan that should be on every Congressman’s wall: “It’s the delivery system, stupid.”

Somewhat overlooked in the debate over inclusion of a public plan option as part of the health reform legislation is the proposal’s potential to help deal with delivery system problems. There are a number of sound policy arguments favoring the public plan option. For example, it offers the promise of stability, choice, and innovation that may not be readily forthcoming in an unrestricted private market. Frank Pasquale and Ezra Klein have pointed to the “benchmark” function of such a plan, especially in exposing the various “gotcha” or “capricious” practices common in today’s less-than-transparent insurance business. But without cost control there is no reform at all. As the outline of legislation comes into focus it seems clear that in order to persuade law makers that costs will not continue to escalate, there needs to be some assurance that vigorous, efficient and competitive markets will emerge. Critical to achieving that goal are two things: putting in place a regulatory infrastructure to correct market failures and developing structurally competitive provider and insurance markets. As to the first issue, much depends on the scope of regulatory authority vested in insurance exchanges, for example, whether they will have the authority to set rules standards for health plans inside and outside the exchange. As to the structure of the market, there are reasons for serious concern. My view is that the public plan option can offer significant help in dealing with structural defects that have been a long time in the making.

If there is one thing that that finds almost universal agreement among health economists, it is that in America, health care “delivery” (we should abandon the misnomer ‘system’) is a fragmented hodgepodge of autonomous doctors, hospitals, facility owners, and vendors of technology, pharmaceuticals and equipment. Their lack of interconnectedness and coordination is at the core of most of the quality and cost problems Congress is now confronting. Add to that the fact that “consumer” decisions are filtered through a triple layer of agency (i.e. their employers, doctors, health plans). Moreover, as a result of lax antitrust enforcement and providers’ relentless efforts to gain “leverage”, many hospital and physician markets are now tight oligopolies or de facto monopolies. And one more: information on quality, outcomes and cost is scarce, and in some cases, unobtainable.

So its more than a little bit remarkable that conservative blogs and political operatives ignore the fundamental economic problems that reform must address: overcoming market failure and improving the competitive marketplace. Perhaps it is understandable. Their preferred solution, “consumer directed health care” which heroically assumes that individuals can and will effectively shop for low cost high quality care given the appropriate incentives (high deductible plans with health savings accounts), has been excoriated in the academic and policy literature. Looking at the uninsured market–the one place today where individuals shop on their own for insurance and services–Mark Hall and Carl Schneider put it well: “the market for uninsured medical services is a calamity.” Left to compare price, quality and outcomes under consumer directed model, Americans face overwhelming informational and practical hurdles. Uwe Reinhart’s colorful depiction of the defects inherent in consumers shopping for health services is apt :

Suppose, purchases of shirts by individuals were partly prepaid from collective funds assembled for large groups of shirt purchasers, although the individual buyer might also have to pay a part of the price. Suppose next that prospective buyers of shirts were led into a store stocked with boxes marked “Shirt.” The consumer would have free choice of boxes, although only the most vague idea of what actually was in each of the myriad of boxes. …Once a box with a shirt in it had been accepted by the consumer, he could not return it for a refund. A month or so after having received the box, the buyer would be sent a nearly indecipherable statement whose only comprehensible line is: Pay $56.95. It is only then that the buyer knows what the shirt has cost him or her. The shirt, by the way, may or may not fit.

But perhaps equally disconcerting is the apparent reluctance of Congressional reformers to tackle delivery reform head on. For better or worse, it appears likely that under reform legislation a reconstituted health insurance industry will do the heavy lifting of controlling cost and monitoring quality, tasks it has been disinclined to tackle in the past. The apparent logic is that by removing insurers’ perverse incentives to chase only good risks (healthy insureds) and create bureaucratic traps for providers and consumers, plans will have little choice but to do the right thing. This of course vests enormous faith in the regulatory mechanisms the new system will deploy: risk adjustment, community rating, the insurance exchange, standardized benefit packages, and so on.

Which brings us to the public plan option. Does it correct the myriad market failures and assure an efficient health delivery system emerges? Not by itself. However, if we are going to rely on the market interplay between insurers and providers in many hundreds of markets around the country (like politics, most health services and health insurance are local), then we need some assurance that each market will have vigorous intermediaries negotiating for consumers. Unfortunately, our experience with private health insurance over the last twenty years does not fill one with confidence that this kind of vigorous negotiation will emerge. First there is the behavior of insurers. As noted it has been more profitable to obtain good risks and in some case engage in questionable behavior (slow pay to providers; hassling their insureds, etc). The landscape of extraordinary health insurance profits, premiums increasing at rates far exceeding other sectors of the economy, and an inability or unwillingness to control health expenditures does not describe an industry which is benefiting consumers through vigorous competition.

But maybe that will change. The real question here is one of incentives. We’ve learned that most local insurance and provider markets are concentrated: dominant hospital systems of specialty services have formed single specialty groups. Economic studies reveal that increasing hospital concentration resulted in higher prices which in turn cause higher insurance premiums (and in fact increased disparities in access to care). Although research regarding insurance markets is less well developed, there is some evidence that insurance market concentration has resulted in higher premiums. Where dominant insurers face dominant providers–what economists call bilateral monopoly–the outcome depends on the strategic interactions of the parties. In the case of the now notorious “market covenant” involving Partners Health Care and Blue Cross of Massachusetts, the parties reached a mutually beneficial understanding to maintain hight premiums and high hospital charges.

In oligopolistic markets (only a few sellers) the dynamic in the health insurance industry suggest behavior consistent with self interested coordination rather than aggressive competition and price rivalry. Urban Institute economists John Holohan and Linda Blumberg summarized these propensities :

Dominant insurers do not seem to use their market power to drive hard bargains with
providers, [while]small insurers do not aggressively compete over price. Rather, rising
premiums and increased profitability of nondominant firms13 provide indirect evidence
of shadow pricing by smaller insurers; that is, smaller insurers do not seem to compete on
premiums to gain market share but rather seem to follow the pricing of the dominant insurer.

What might a public plan add to the mix? First, it will likely enjoy cost advantages associated with the infrastructure and experience of federal payment under the Medicare program. This can spur its rivals to emulate its methods and, well, just try harder (an old adage is that a benefit of monopoly is leading the “quiet life”). However, the principle competitive significance of the public plan may well lie in its independence. Although such plans will almost certainly be required to “float on their own bottom” (i.e. not receive federal subsidies), they should also be allowed to chart a course that does not necessarily maximize revenue as rivals do that engage in anticompetitive practices or collusive coordination. In this respect, the public plan should act as what economic theory calls the “maverick” competitor: one that breaks away from the closely-knit band of rivals. A second benefit might accrue from the public plan’s willingness to sponsor innovations in payment and delivery (such as those being developed by CMS for Medicare). In health insurance some cost control innovations are not routinely developed where reluctant to adopt because they cannot capture the long term benefits of efficient innovations. In short, the expectation is that the public plan will have the incentive and the market leverage to insist that providers change their ways.

There is no quick and easy way to change health care delivery arrangements that are deeply embedded in institutions and habits. The radical course, I would think, would be to subsidize a vast expansion of health insurance without putting in place institutions capable of improving a badly broken system.

Market Entry by Health Care Cooperatives: Neither Quick Nor Easy

The idea of establishing regional cooperatives, advanced as an alternative to President Obama’s public plan option, has attracted attention as a means of assuring that health reform legislation contains some means to improve competition among health plans around the nation. But the proposal, which may have superficial appeal as a “middle ground” between a public plan option and an unchecked private market, is ill-equipped to fix the key problems a public plan would address. In addition, recent experience teaches that timely and effective entry by such plans is unlikely.

The first issue is whether a cooperative, organized by consumers or other groups, can effectively deal with the shortcomings of the existing delivery system and insurance market. Thus far, the proposal advanced by Senator Conrad is pretty sketchy, but are grounds for skepticism. A central reason for having government sponsored plans is to allow the efficiencies of Medicare’s well-established administrative structure and innovative payment experiments to carry over to the private sector. Coops provide no such advantage. A second advantage of public plans is that they would likely achieve some bargaining leverage by virtue of their probable role as insurer for people representing higher risks whom private insurers find some methods to avoid. Hospitals and physicians will be hard pressed to bypass such a significant presence in the market and the public plan can thereby exert market-wide pressure to keep provider and pharmaceutical costs down. Whether co-ops will be willing to undertake the role of covering such individuals or able to sponsor innovative delivery systems to treat them is far from certain.

In any event, it is hard to envision numerous regional coops gathering the necessary data, experience and reputation to serve as a benchmark or counterweight to dominant hospitals and provider groups across the country. Further, there is a serious question regarding the independence and mission of coops. It is a mistake to assume that nonprofit entities will necessarily work to the advantage of the public. Unfortunately, our experience with nonprofit hospitals and HMOs suggest that they can easily be persuaded to play along with other providers and may not always vigorously pursue their charitable mission. Keeping cooperatives’ eye on the ball would require close attention to the control and governance of such entities.

The second objection is based on timing and practical considerations. There is ample evidence from our experience with health insurance markets that developing effective coop-sponsored plans will not come easily or quickly. It is clear that new entrants into health insurance markets face a host of obstacles. The prevalence and magnitude of entry barriers is evidenced by the dominance and profitability of existing insurance plans. One or a handful of companies dominate most health insurance markets around the country and these firms have enjoyed consistent and robust profits. Economic theory would suggest that such profit opportunities should have invited entry by rivals eager to capture some of the profits available in those markets.

Additional proof of the obstacles to entry are found in the investigations by insurance commissioners into proposed mergers in their states. In Pennsylvania for example, the proposed merger of Highmark and Independence Blue Cross would have combined the dominant insurers in two large distinct geographic regions of the state. Evidence provided to the State indicated that numerous attempts by regional and national firms such as Aetna and Coventry to enter both markets had proved unsuccessful over the years. Expert studies suggested that a variety of factors including brand loyalty, difficulties in securing physician and hospital network contracts, regulatory and information gathering costs, and obstacles created by the contracting practices of incumbent providers, thwarted entry. Newly formed coops needing to acquire expertise and develop networks will surely face enormous difficulties penetrating markets.

Senator Baucus on Delivery System Reform

Tim Greaney,

Director, Center for Health Law Studies

Chester A. Myers Professor of Law

Saint Louis University School of Law

Senator Baucus’ March 3 press conference sponsored by the Kaiser Family Foundation Health Care Reform Newsmaker Series: Sen. Max Baucus (D-MT) offered a few insights into the early state of the debate on health reform legislation.

Two points stood out.  First, he observed that “delivery reform” was for him a central element in designing reform legislation. Pressed to define what he meant, Baucus mentioned value based purchasing and the medical home concept.  Second, he stated that the tax exclusion for employer health insurance payments was on the table, noting two characteristics that make it an appealing target:  regressivity and potential source of considerable “revenue.”  On these and other issues, Baucus stressed the critical role OMB scoring will play in shaping the ultimate design of the legislation.

The known unknown here, however, is how some of the relatively novel delivery reforms like medical homes will be defined and implemented — and hence ultimately scored by OMB for their impact on system costs. One problem is that the “medical home” may encompass a wide range of delivery/financing arrangements. In general the medical home has been broadly defined as a physician-directed practice that provides care that is “accessible, continuous, comprehensive and coordinated and delivered in the context of family and community.” But as Bob Berenson and colleagues pointed out in Health Affairs last September,[1] few primary care medical practices are close to having the size, management capabilities and infrastructure (electronic and otherwise) to function as medical homes.  Transitioning to such practices (even on a virtual office basis) will surely take time, money, and a sea change in culture and practice style.  Estimating the pace and effectiveness of such change may prove as daunting as projecting next months Dow Jones average.

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[1] Robert Berenson et al., A House is Not a Home: Keeping Patients at the Center of Practice Design, 27 Health Affairs 1219 (Sept/Oct 2008)