Kidney Sales, a Free-Market Approach

Recent events in New Jersey have served to highlight deficiencies in the Kidney Market.

The impoverished of the world, at present, freely considering their options in a market economy, have taken to selling their kidneys, valued at roughly $160,000 on the less than open market, to kidney brokers for the approximate sum of, give or take, $10,000.

At present one may sell a body part legally only in Iran. Thus, as anyone steeped in the strict virtues of Chicago School economics would tell you, the Market in Kidneys suffers at present from “distortions.” The problem, of course, is two fold: the almost universal illegality has added risk to the cost; and limited access to the market has allowed the brokers, through government interference and lack of open competition, to exclude others from their fair share of the profit.

The Kidney Exchange

Patterned after the stock exchange (or perhaps the commodity exchange is a more apt analog), I propose we create, as part of a market driven health reform initiative, a Kidney Exchange. Value maximization will ensure the free flow of kidneys into the most appropriate markets and the most appropriate recipients.

In the interest of fairness and transparency, full reports on each putative “donor” will be submitted to the exchange by medical clinicians who (as is the current practice among medical device researchers) will be paid in stock options in the subjects of their examinations. This stake in the endeavor will ensure commitment to the process. These reports will function as the basis for prospectus and, in the case of those not yet ready for immediate harvest, ongoing quarterly reports.

We would not, of course, limit the purchase of kidneys to those who “need” the actual kidneys, as that too would tend to skew the market. “Need” must be determined through the time-tested criteria of the market: availability of, and a willingness to use, investment capital.

Because, however, even with the most thorough information that money can buy, things can on occasion go awry, we will need a market instrument to ensure protection in the event of failure. Kidney Default Swaps (KDS), an insurance of sorts keyed to whether or not the putative “donor” ultimately tenders a viable kidney. Further, KDS could be patterned after the Credit Default Swap–in that we can allow investors with no connection or insurable interest in the transaction to wager freely on the ultimate outcome–thus creating another lucrative market.

Of course, to combat inefficiencies, a wholesale market will ultimately develop, procurement and development syndicates will be set up, and branded groups of similar subjects will be packaged together for large investors like collateralized mortgage securities.

This investor/market driven approach will further ensure the development of a “Pipeline” to enhance quality and dismiss with the vagaries of procurement.

And lest we forget the benefit to the “donor,” the market too will provide for it. Obviously, anyone who has invested a handsome sum in 4 year old boys from Pakistan (”Pak-Neph B4, b. type O+, trading at…”) will have great interest in safeguarding his investment–nourishing well those kidneys until they are ready for harvest upon demand.

Considering the environmental risks involved for the “free range” donor in many prime but impoverished areas, “harvest banks” to house homegrown investments will, of course, be built. Within the sterile confines of such banks, subjects will grow, watered and fed and exercised to ensure sufficient blood flow and proper kidney function. Subjects kept thus would of course demand a premium on the open market.

Furthermore, upon harvest and release into world, such harvest bank subjects can also readily be expected to breed. Uneducated and untrained in any vocation (market contraindicated) one can reasonably expect them to turn over for modest profit the products of their breeding to the market for eventual harvesting–thus ensuring a steady supply of prime kidneys for generations to come. Naturally, the best genetic lines of kidneys will be identified–arrangements can be made (”Pak-Neph B14/Braz-NephG16, b. type AB+, trading at…), profits in accord.

The addition to one’s portfolio of such financial instruments as “Kidney Futures” or “Kidney Options,” will, I believe, prove a handsome reward to savvy holders. And a thriving business in Kidneys could well be just the market innovation that this economy needs to pull it out of its current doldrums. A Kidney Exchange will provide a swift feast of employment and real wealth.  And of course, we need not be limited to kidneys, there are many other organs that the poor do not, and cannot, use to best advantage.

Conclusion

280 years have passed since Jonathan Swift offered his “Modest Proposal” for solving the pangs of poverty in Catholic Ireland through the sale and eating of Irish babies.[1] Consider this an update of sorts.

There is, however, one distinction between the Swift model that is worth noting: considering the high market value of Irish babies, Swift proposes a preference in procurement for ravenous English Landlords:

I grant this food will be somewhat dear, and therefore very proper for landlords, who as they have already devoured most of the parents, seem to have best title to the children.

A Kidney Exchange, less sentimental but more modern, would, of course, put the preference where the invisible hand of the market deems it best (though under Swift’s criteria the  IMF, and World Bank would seem to be the  sentimental favorites). In this way it would allow, as we do now with private health insurance, that most efficient of instruments, the market, to decide who lives or dies.

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[1] Swift notes that before the age of 12, Irish children were  not particularly saleable or employable, and that “They can very seldom pick up a livelihood by stealing till they arrive at six years old.” His solution stems from the following:  “I have been assured by a very knowing American of my aquaintance in London that a young healthy child well nursed is at a year old a most delicious, nourishing, and wholesome food, whether stewed, roasted, baked, or boiled; and I make no doubt that it will equally serve in a fricassee or a ragout.” His modest proposal: “I do therefore humbly offer it to public consideration that of the hundred and twenty thousand children, already computed, twenty thousand may be reserved for breed…. That the remaining hundred thousand may at a year old be offered in sale to persons of quality and fortune through the kingdom, always advising the mother to let them suck plentifully in the last month, so as to render them plump and fat for a good table.”

The full title of the piece is “A Modest Proposal For Preventing The Children of Poor People In Ireland From Being A Burden To Their Parents Or Country, And For Making Them Beneficial To The Public.” Though most noted for his relatively benign Gulliver’s Travels, Swift’s Modest Proposal helped make him a hero among the Irish.

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.

Employees, Fearing Increased Cost-Sharing and Loss of Benefits, Utilize Current Employer-Based Health Plans More

The Kaiser Family Foundation reports that a recent survey reveals that employees are utilizing employer-based health plans more in fear that their plans will increase cost-sharing or dissolve altogether.

KFF reports:

U.S. workers are making more use of their employer-sponsored health insurance benefits because of concerns that employers could cut benefits or increase costs during the economic recession, according to a survey released Friday by the International Foundation of Employee Benefit Plans, the Milwaukee Journal Sentinel’s “Dollars & Sense” blog reports. IFEBP surveyed its members between March 30 and April 6 and found that one-third reported an increase in their workers filling prescription medications or undergoing costly medical procedures before their insurance runs out, the study found. Sally Natchek, senior director of research for IFEBP, said, “Plan participants are feeling anxious about the possibility of increased cost-sharing and a reduction in benefits due to the financial crisis.”

The International Foundation reports that:

[W]hile few plan sponsors (3.6%) are cutting or considering cutting health care benefits altogether, many are ramping up their cost-sharing approaches.  Thirty-five percent of plan sponsors are increasing employee deductibles, coinsurance or copays due to the financial crisis.  Nearly the same proportion are also increasing employee premiums.  Other cost-sharing actions that plan sponsors are taking include adding consumer-driven health plans as an option (12.8%), replacing a current plan with a consumer-driven plan (9.6%) and instituting spousal charges (10.8%).

The Foundation report confirms that more employers are using consumer-directed health plans in an attempt to rein in the cost of health benefits.

Perhaps the silver lining of this survey, though, is that there was also found to be “a heightened focus on wellness programs.  Eighteen percent of the respondents have introduced or are considering introducing wellness initiatives due to the economy (Foundation).” In a recent post, we noted that Kaiser had reported that

Eighty percent of large U.S. companies this year are offering chronic disease management programs for workers in an effort to reduce health care costs, up from 51% last year, according to a new survey by Hewitt Associates, the Houston Chronicle reports.

At the confluence of unfavorable economic conditions, rising health care and insurance costs and an administration which has vowed reform, these burgeoning trends may be only the forward guard in changes to employer-based plans. Driven by economic concerns, there seems to have been generated among employers an understanding that one way of avoiding the high costs associated with acute and/or catastrophic health care, is simply to help employees to avoid becoming sick (it may be only a matter of time before employers begin handing out “an apple a day.”) Unfortunately, with increasing frequency employers also seem to be learning that another means of avoiding the costs of  health care is to simply discontinue,  decrease, or “shift” the costs of health benefits. The numbers seem to suggest that employees have read the writing on the wall, and are visiting their doctors while they still can.

More Employers Are Adopting Consumer-Directed Health Plans

As the cost of health care increases and employers continue to struggle in the bleak economy, many employers are said to be faced with a decision: whether to opt-out of their existing health plans, either by eliminating health benefits for their employees or finding a more cost-friendly alternative. CNN reports that more employers are offering consumer-directed health plans as what is considered a cost-friendly alternative.

CNN states:

More than 51% of U.S. employers now offer a consumer-directed health plan (CDHP), up from 47% last year, according to the latest survey of 489 large U.S. employers from Watson Wyatt, a consulting firm that specializes in employee benefits.

A CDHP is a way of lowering health plan costs of employers by shifting the costs of medical care to individual employees.  The article reports:

Consumer-directed health plans (CDHPs) are typically lower premium but higher deductible health plans. They feature a kind of savings or spending account that helps employees pay their out-of-pocket expenses for covered services, or services that are not covered by a traditional plan.

One form of popular CDHP is Catastrophic Health Insurance– in these plans, often taken out in conjunction  with a tax exempt Health Savings Account (HSA). Under IRS rules, according to Insurance.com “the total out-of-pocket maximum (which includes the deductible and co-payments) for these HSA-linked catastrophic health plans is $5,600 for singles, and $11,200 for families.” In addition, Insurance.com states

Certain pre-existing conditions, such as diabetes and mental health disorders, might mean you can’t qualify for an individual catastrophic health plan without prior qualifying group coverage, or at least that you can’t get coverage for those pre-existing conditions.

Finally, many CDHPs have “lifetime caps” of somewhere between 1 and 5 million dollars. When medical bills surpass these amounts the insurance company is no longer liable.

As the cost of health benefits and health care continues to increase, alternatives to the traditional cost-sharing relationship between the employer and employee are being examined– and understandably so. As for the relative merit of CDHPs and their “catastrophic” brethren, perhaps it depends upon which lens one looks through.

Proponents of CDHPs often cite the increased value in cost conscious “out of pocket” consumer health care choices and the positive affect this “true market” driven approach may have on the cost and quality of care; but the reality of the basis for consumer choice, as Frank Pasquale noted on this blog, is that “brand power has a lot more to do with choices here than objective assessment of outcomes.” In addition, as Professor Pasquale points out, Partners Health in Massachusetts was able to use its power, (market, brand, and sundry), in order to demand “reimbursements up to 30% over what other hospitals receive for identical procedures. Their market share has steadily increased as well, allowing them to stockpile the resources necessary to enter into new markets and threaten the viability of cheaper community hospitals.”

If CDHPs are viewed through the “better than nothing” lens, they obviously have some appeal (But See immediately above); if viewed through the “universal coverage” lens they obviously leave something to be desired. Having said all that, CDHPs may not be a best alternative, but they are becoming– in a woefully ironic twist of the word– a more “popular” alternative.