Paul Dickson, in The Official Rules, Delacorte Press, 1978 ...



HEALTHCARE REFORM – ROUND TWO

Here’s another holy trinity for you: affordability, access, and quality. Those are the widely recognized objectives of our healthcare system. And that system has been indicted on all three counts: quality, because our outcomes are often claimed to be deficient, and people too often do not receive the treatments that best practices would dictate; access, in that many Americans lack insurance coverage and must rely on unreimbursed walk-up episodes in hospital emergency rooms to receive care; and cost, because our nation spends more of its collective income than any other developed country, for which we surely would expect better quality and access than we get per the above.

Like any generalization, the foregoing paints over a lot of nuance with a broad brush. For example, the frequently referenced international comparisons of healthcare indicators on infant mortality are dependent upon each nation’s definition of a “live birth,” and there is reason to believe that the U.S. definition includes tenuous deliveries that other countries’ versions would not. In trying circumstances, most people around the world would want to be treated here. But is our quality good enough, especially considering the price we pay? Surely not, and surely we should try to do better. Likewise on access and cost.

The Patient Protection and Affordable Care Act (PPACA for short, ACA for shorter, and “Obamacare” for politics) was intended to fix all that. Unfortunately, by most indicators, it is coming up short.

In terms of access, signups under the new law are running behind schedule – which surely owes something to the purely technical website issues, but may rest also on some deeper fissures in the foundations. The figures cannot yet show how many signups are merely shifting coverage, as opposed to obtaining coverage after being uninsured for a time. And apparently, there are fewer-than-hoped-for signups by the young and healthy persons who are needed to yield a sound risk pool. So on what for some was the ACA’s primary objective – broadening the share of the population covered – the jury is still out, but the news so far is less than encouraging.

On cost control – which of course is necessary to maintain any increase in coverage – the picture is at least superficially a bit more optimistic. The nation’s aggregate healthcare spending has been growing more slowly for several years. Perhaps the most optimistic interpretation would be to attribute the improvement to the ACA. However, the slowdown began before the ACA’s enactment. Furthermore, it is hard to point to any ACA cost-reducing provision as having yielded important savings by this date. Even the most enthusiastic boosters of what some consider the ACA’s crown jewel, the Independent Payment Advisory Board (IPAB), must acknowledge that its first members have not even been appointed yet. Other key provisions likewise have not taken effect. Some might argue that providers have worked to come into compliance with the law’s requirements ahead of time; but surely that is a stretch.

Alternatively, one might surmise that with costs rising unsustainably, the various industry players would try to rein them in. But given that most players in so doing would be reducing their own incomes, it is hard to argue why they would be willing to go first, rather than waiting for someone else to take the hit.

In fact, this cost slowdown began during the financial crisis. The last noticeable – but temporary – healthcare cost slowdown began in the 1990-91 recession. One ex post explanation of that episode is that people stayed away from their doctors because they did not want to see the bills that would result. The same could be true today, and if so, the slowdown will not last. (Another ex-post explanation from the early 1990s is that people were forced by their employers into health maintenance organizations (HMOs), before an employee rebellion quashed that move.)

Meanwhile, even after building in the recent slower growth of health costs, budget projections still explode with a shower of debt – although admittedly they do so a little bit later. In sum, no one can identify the cause of this favorable cost trend, and without a cause that is at least potentially enduring, it is imprudent to assume that the cost problem has been solved.

Prediction is always difficult, especially when it is about the future; but so far, there seems to be little evidence that the ACA has solved any of the problems that it was intended to solve.

So is there any chance of a round two of healthcare reform? If the cost numbers are anything like what is now projected, there will have to be – or else the budget will indeed explode. The term “healthcare fatigue” has been heard often in Washington, and it will be easier for defenders of the ACA to prevent action than it will be for anyone else to make something happen. Still, given the issues with the ACA, the sooner our policymakers can get down to the job, the better.

And that is why CED’s Healthcare Reform Subcommittee is preparing for any such opportunity. As you may know, we presented our own vision of healthcare reform before the ACA became law. We still believe that our approach was far superior to the ACA. But we cannot turn back the clock. The ACA is unlikely to prove a complete success, but it is law. There have been five million insurance contracts written under its terms, and under our Constitution those contracts are as sacred as any. The ACA includes provisions that have received almost universal approval – such as eliminating pre-existing conditions as disqualifications for coverage; outlawing lifetime limits, higher premiums for women, and rescissions for immaterial inaccuracies in applications; and continuing coverage to age 26 under parents’ policies. Of course, those attractive provisions could not be retained in isolation if the rest of the ACA were repealed; there must be protections from what would be the resulting moral hazard problems. But that merely reemphasizes the obvious point: Policymakers need to build on the ACA, not pretend that it simply could be wished away.

And on the other side of the hoped-for political transaction, CED cannot assume that our original recommendations necessarily would stand a better chance on a second try. The ACA happened, and CED’s package did not. We need to consider whether or how we would change our original proposal, either to tie in to the parts of the ACA that are likely to endure, or because our sense of the best approach has evolved with the passage of time, or because of any change in our sense of the political environment. Still, in keeping with CED’s mission, we want to pursue sound public policy, even if that means that we are somewhat adventurous politically. Our goal is to make good policy possible, not to settle for the merely passable.

So all of that as given, what would round two of CED’s vision of healthcare reform be? The Subcommittee is just beginning its work, but we can infer some clear paths from the principles embodied in our October 2007 policy statement.

The U.S. healthcare system would serve the American people far better – with respect to quality, affordability and access – if it were as innovative and nimble as is every other sector of the U.S. economy. In other words, U.S. health care must be market-driven – providers must be able to succeed if they deliver better health care at lower cost, and consumers must be able to save money if they demand health care on those terms. Our goal of competitive, market-driven health care is far different from the current system, in which all too often employers choose least-common-denominator care to try to keep all of their diverse employees somewhere on this side of quitting, and providers – however well intended – are at least confronted with every incentive to run up the highest bill that they can get past the insurer.

In the most basic respect, a truly market-driven system requires the following:

Insurance plans and providers must be free to enter the market and to compete with new and different offerings. This is not a question of reducing quality standards, or allowing the inexperienced and the unqualified to deliver medical care. Rather, it is an issue of regulation, geography, and market power. For example, a provider that has a monopoly on hospital beds in a particular geographic area can prevent other providers from entering the area or creating new plans, even if consumers would prefer innovative alternatives. Any such entity with market power can charge higher prices and ignore opportunities to innovate and serve consumers better. Likewise, an established and cash-rich provider or plan could influence government to regulate to keep superior new entrants out on all sorts of grounds. Markets cannot drive innovation, and therefore price reduction and quality improvement, if those markets are not open to all potential qualified competitors.

To be sure, there must be regulatory standards for quality and consumer protection in health care. We cannot have reams of contract language concealing from the innocent exclusions of important care under opportunistic insurance plans. But we also must allow innovation so that plans can provide the coverage and care that people want and need; and that almost certainly will not be the same tomorrow as it was yesterday. Marrying essential standards with the equally essential flexibility to innovate and meet changing consumer needs will be an art, and decisions will be controversial. But we cannot withdraw from that challenge because of anyone’s dogma or ideology.

In addition, competition requires a free flow of reliable information to all parties, from multiple sources with multiple perspectives. Consumers cannot reward the most-efficient, highest-quality plans and providers if they do not know who they are. And if the best plans and providers are not rewarded, there will be no reason for the others to raise their games; and we will not enjoy the same benefits of competition that we see in every other market, from cars to computers to haircuts.

Those are the essential prerequisites of true market-based health care. If those enabling conditions are met, then we will enjoy the benefits of a high rate of product and business-model innovation, to offer a wide variety of choices at different price points, to meet consumers’ diverse needs and preferences. In short, we will have higher quality at a lower cost than otherwise would be available. The benefits of competition are not quantitatively and temporally predictable; but over time, we can expect those fruits to multiply and grow. Without competition, even with the most well intended central command and control, we can expect stagnation, and reward by politics rather than merit.

CED does not see the ACA as fulfilling those preconditions of market-based health care, at least nearly as well at it could or should. Many aspects of the ACA were, we believe, wide of the mark that we set.

On the positive side, the ACA did establish the principle of selling insurance to individuals through “exchanges” or “marketplaces.” An exchange could provide a means for an individual to make an unhurried, fully informed, apples-to-apples comparison of alternative plans, and to save money by buying the most efficient coverage for his or her needs. This idea was at the heart of CED’s vision, and we were pleased that it was included in the ACA, at least in some form. But it was far from the best form.

The most important – but not all – of the key differences between the ACA and the CED vision relate to what an economist might imperialistically call “economic” efficiency – in other words, how does the ACA fail to deploy competitive forces to motivate improvement in the healthcare system? One key shortfall is in the structuring of the ACA’s exchanges. The exchange system was a potentially invaluable device in which the ACA’s strongest advocates apparently did not believe. To them, the exchange system was an expedient rather than a key opportunity. Therefore, the exchanges followed from the current system of state regulation and hewed strictly to state boundaries. They could instead have been drawn according to natural market areas (as we recommended), which would in some instances cross state boundaries, and in other instances could have been parts of individual states. The ACA also created one separate exchange for individuals without employer coverage, and another for relatively small employers seeking to obtain coverage for their employees as conventional groups. A larger exchange population with the broadest-possible risk pool and only individual choice would capture greater economies of scale and potentially would be more stable, and would reward plans that deliver the care that people – not their employers – want.

On the same theme of economic efficiency, the ACA pursues a well-intentioned construct called the “Accountable Care Organization,” or ACO. The theory behind the ACO is that teams of providers should share the responsibility, and the potential reward, for dealing with each enrollee and his or her health challenges. But the ACO is an artificial structure created across otherwise independent providers. If market forces truly were allowed to have their effect, providers who chose to create their own more-robust affiliations – at the extreme, into what are called “integrated delivery systems” – would succeed in attracting enrollees precisely because they could deliver higher-quality, more-seamlessly-continuous care than could the artificially created ACOs. Similarly, the ACA created the IPAB to try to motivate – or command – providers to follow efficient practices. There is nothing fatally wrong with another set of eyes looking for weaknesses in the current practices of care, and for ideas for delivering care better. But integrated systems under market-based health care would have every incentive to seek out any and all weaknesses in their own practices – not just the issues that might happen to be noticed by the small number of authorities recruited by the IPAB. Furthermore, to earn whatever artificial carrot-or-stick incentives were offered, providers would be motivated only to check the regulatory practice boxes specified by the IPAB, which might or might not actually constitute improvement in the quality and cost-efficiency of the delivery of care. In a truly market-based system, the test is bottom-line quality and cost-efficiency; under the ACA’s command-and-control system, the test is compliance with the written regulation, which might or might not be the same thing. So why not let the invisible hand do the work, precisely?

The ACA, because of its design, appears likely to fall down on the range of options to be made available to consumers. With more emphasis placed on preserving employer choice of coverage, and less placed on consumer choice, there will be less incentive for providers and plans to seek new plan designs that provide what individual consumers want and need. There will be much less chance that innovative plan options will satisfy consumers who now struggle to resolve changes of networks offered by their current plans, and that are likely to interrupt the continuity of their care, for example. Also, the ACA’s command-and-control requirements for minimum standards, fully acknowledging the good will of the designers and the difficulty in drawing them, can choke off innovation in plan designs that could give consumers what they want at lower cost. More choice of plans above minimum standards would be more likely to satisfy consumer needs at affordable cost.

There are other issues in the ACA’s design, relative to the CED’s vision, that bear as much on administrative efficiency as they do on end-of-the-pipe economic efficiency. They also raise fairness issues.

CED proposed that all Americans should receive credits – which could be delivered probably most simply through the tax system – to make health insurance affordable. The ACA instead targets subsidy payments to some persons – which requires a complex eligibility test (which was largely responsible for the difficulty in the website’s rollout) – with enrollment of those with still-lower incomes in Medicaid at zero cost. There are inequities as different individuals’ incomes fluctuate above and below the subsidy formula’s boundaries. And people with modest incomes who receive employer coverage – which surely ultimately reduces their cash wages – receive no subsidy at all.

And finally, to deal with the moral hazard issues that arise from the ACA’s very desirable coverage provisions – such as guaranteed issue without reference to pre-existing conditions – the ACA requires coverage mandates on both employers and individuals. The CED system would be much simpler, with coverage instead irresistibly incented by tax credits, without any intervention by the employer.

We remain confident that an approach along our broad outlines would provide higher quality at lower cost, and would be easier to administer and more equitable as well. The Healthcare Reform Subcommittee will develop recommendations to get from here – which is to say, the ACA – to there – which is a revised CED vision. The Subcommittee will reconsider the CED plan, both in light of the new ACA starting point, and for simple revisions of our own judgment. This process is in its early stages, so there are no definitive results to report. However, I can suggest some preliminary ideas on how this task could be accomplished, without intending in any way to pre-judge the Subcommittee’s decisions.

The ACA’s graduated premium subsidies should be converted to refundable tax credits, and should be made available to everyone. With universal tax credits in place, there would be no need for the ACA’s individual and employer mandates. Without the employer mandate, we can expect greater plan entry into the insurance market for individuals. The ACA’s protections against underwriting for pre-existing conditions (and other such practices) will ensure that individuals can obtain coverage. Plans will design their coverages to meet the needs of consumers, rather than employers – which is as it should be.

The fixed-dollar tax credits should allow individuals to save money by purchasing a low-cost, efficient plan. The original CED proposal was that the credit should cover the price of the low-cost plan in each market area, and that individual consumers would be responsible for the incremental cost should they choose a more-expensive plan. There are other possible designs to the same effect, but the end result certainly should be to reward those who choose efficient coverage, while allowing choice and competition from more-traditional, wide-network, pick-your-own-provider plans. Consumers, not the system, should pick the winners.

Consumers should have the widest possible range of choices, which should mean that entry into the marketplace would be encouraged. Accomplishing this goal will require numerous innovative steps. Antitrust policies must prevent providers from monopolizing control of and preventing access to hospital beds, for example. “Disruptive” business models (such as retail clinics, specialty hospitals, chronic-care clinics and integrated delivery systems) must be allowed to enter the market and to succeed or fail based on the value they provide to the consumer. This imperative will intrude on the primacy of state insurance regulation, but that is inevitable and necessary. Innovation and competition cannot be stopped at the state line.

Similarly, CED will consider how highly-efficient self-insurance plans of large employers could be allowed to continue to operate under our proposal. Some form of risk adjustment would be appropriate, so that such plans could not succeed solely because they might have young and healthy populations. But to the extent that they deliver quality care efficiently, self-insured employer plans should be allowed to continue to contribute to innovation in care delivery. Those employers who today are less efficient at providing coverage and care should have a strong incentive to either improve or get out of the healthcare business.

It is possible that alternative and multiple access mechanisms – public exchanges, private exchanges, and the individual market, along with employer self-insurance plans – will contribute to increased consumer choice, competition, and innovation. If so, such mechanisms should be encouraged.

Finally, the current-law command-and-control IPAB should be replaced with a clearinghouse for studies, evidence-based medicine, recommended treatments, and quality information for consumers. This will help consumers to choose plans on the basis of quality as well as cost. It also will provide the basis for safe-harbor guidelines through which providers who follow best practices can be protected against speculative malpractice litigation, while wronged consumers still can obtain redress. This will provide relief from the pressure to practice costly defensive medicine.

The end result, as we described in our October 2007 report, will be a market-driven system of health care. Individuals will choose the kinds of plans they want, rather than having plans and providers chosen for them by their employers. Plans and providers that give value to consumers will grow; others will have to raise their games. This competitive pressure will encourage innovation and process improvement, as it has in every other industry. Over time, quality will improve, and cost will be more restrained.

The CED Healthcare Reform Subcommittee is still in the early stages of its work, and you are welcome to join in the effort. There is no guarantee that policymakers will return to this complex and difficult issue at an early hour. But there is the nearest thing to a guarantee that they will need to do so at some point – because without further restraint on costs, the federal budget will eventually fly out of control. Constructive thought is needed, and some outside observers have maintained that CED’s work on this issue has been the best available. We must be well prepared when the window of opportunity opens, and that is this Subcommittee’s goal.

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