FRESH Thinking on Health Plan Competition

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FRESH Thinking on Health Plan Competition

• Joseph P. Newhouse
• May 20, 2008

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Both Presenters

• Both describe the policy choice to be between
  market-like competition among health plans vs a
  single government plan
• Question is the degree of market failure
  (selection) vs government failure (lack of
  competition and inefficiency plus failure to
  satisfy heterogeneous preferences for plans)
• Good enough risk adjustment is a way out

3
Van de Ven - Schut (vdV-S)

• Excellent exposition/analysis of issues
• Description of the Dutch financing system, a
  leading example of managed competition
• The Dutch system is too new to evaluate, though
  vdV-Ss tone is optimistic
• Newhouse remark Important for managed
  competitions proponents to have successful
  examples such as NJ and DRGs, WI and welfare
  reform Netherlands may do this

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Garber, Goldman, Lakdawalla (GGS)

• Because best forms for organization and finance
  are unknown, competition is better
• Allows for learning, evolution
• Netherlands, Israel, Germany, Switzerland
  approximate the managed competition model with
  mixed results
• Selection in Germany and Switzerland
• Health investment accounts would smooth
  consumption

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Discussants Enthoven

• Enthoven Generally laudatory of vdV-S
• Need to transform delivery system small FFS is
  antithetical to quality, efficiency (JPN but
  isnt Dutch outpatient care mostly small FFS?)
• Bundling of supplementary insurance opens up
  selection, as do group discounts
• Feasible to do individual mandate with managed
  competition
• CED model for US would replace employment-based
  system

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Discussants Pauly

• What bothers most people and Pauly uninsured
  risk variation over time handled poorly in
  private insurance
• What bothers most people but not Pauly high
  cost selection quality should be better
• What bothers Pauly but not most people rising
  cost too high quality levels at top ideological
  drive for equity despite diverse preferences
  (JPN rising cost bother others in addition to
  Mark)

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Pauly, cont.

• Puzzling that plans differentiated by quality
  have not emerged
• Government has difficulty catering to
  heterogeneous tastes
• Underconsumption by uninsured overconsumption by
  subsidized majority
• Require (or subsidize) coverage in actuarial
  terms required value declines with wealth
• Remove or cap existing tax subsidy

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Newhouse

• Im sympathetic to general thrust of authors and
  discussants competing plans mandates with
  subsidies to ease enforcement
• Not sympathetic to abolishing employment-based
  insurance (Enthoven) GGL exempt large employers
  how large is large? I would say allow exemptions
  above 300

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Employment-Based Insurance

• Health insurance is a complex product thats why
  we have brokers in the small group and individual
  markets, but their incentives are problematic
  think subprime mortgage brokers

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Government as Broker

• Essence of several reform proposals is for
  government to set up an exchange, e.g.,
  Massachusetts Connector
• Potential problem Government has difficulty
  excluding poorly performing plans/providers from
  choice set, so choice sets are arguably too large
• Rules for entry into Medicare Parts C and D
  difficulties with Centers of Excellence in Part A

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Too Many Choices Can Lead to Bad Choices

• 401(k) plan participation rates As the number of
  mutual funds offered employees increases, their
  participation rate falls
• Participation rates 2 funds offered, 75 10
  funds offered 70 60 funds offered 60
• CMS issued NPRN to limit Part D plans to
  2/insurer, never issued rule
• Medigap market reforms (10 plans), but impossible
  to standardize HMO type plans
• Known status quo bias in health plan choice

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(Large) Employers as Agent

• Employers have better incentives than broker and
  I think also government
• Want to get value for
• Small employers are not very effective at this
  and tend to shop on price only
• Empirical question whether labor market
  inefficiencies (e.g. job lock) offset value of
  employment-based insurance, but small market
  reform reduces inefficiencies

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Minimizing Selection Tools for Both Sides of the
Market

• Both papers focus on selection
• Risk adjustment to minimize supplier incentives
  to shun bad risks (lemon drop)
• Subsidies and mandates to minimize demand
  incentives of good risks not to insure

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Risk Adjustment

• Is risk adjustment good enough? vdV-Ss recent
  Health Affairs paper says not (yet)
• GGL numbers on performance of various risk
  adjusters appear in error
• I dont know if good enough now
• I have not seen any evaluation yet of how well
  diagnosis-based risk adjusters are doing in
  Medicare to minimize selection

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Subsidies and Takeup - 1

• What level of subsidies are needed to make good
  risks opting out (or enforcement of a mandate)
  an unimportant issue?
• Medicare Part B subsidy is 75 for most
• The premium for the average employer plan in 2007
  was 12,100. What level of income does not
  require a subsidy for most all people to buy this
  costly a policy? Or will we mandate a less
  generous policy?

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Subsidies and Takeup - 2

• If you said income levels above 100,000 do not
  require a subsidy, that is only 19 of households
  (2006)
• Is the implied amount of redistribution
  politically feasible?
• This implies subsidies go to households at double
  the median income
• Fuchs and Shoven suggest not

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Subsidies and Takeup - 3

• Whatever level of subsidy is needed, can it be
  financed by ending the tax subsidy for
  employer-based insurance (which is itself, of
  course, a poorly targeted subsidy)?
• If not (or if the current subsidy cannot be
  ended), how many more dollars are needed, and
  what would be the deadweight loss?

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Subsidies and Takeup - 4

• Ending the tax subsidy raises around 200
  billion, but implies massive redistribution, not
  only between but also within income groups
  because of varying employer subsidies and costs
  by geography
• Capping the subsidy is more doable politically,
  but realistic cap levels (Mr. Bush proposed
  15,000) will not raise much new money, at least
  in the short run

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Two Specific Problems with the Managed
Competition Strategy

• Small markets
• Medicare and Medicaid

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Provider Concentration

• What about market power on the provider side in
  small markets? Can there be meaningful
  competition? If not, what is the recommendation
  for those markets?
• Note the tension between Enthovens view that
  small FFS performs poorly, which implies larger
  groups, and having enough groups to have
  effective competition in markets with small
  numbers of a given specialty type

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Medicare and Medicaid

• What happens to traditional Medicare (TM)? GGL
  let it compete on a level playing field
• What the left fears Risk adjustment is not good
  enough to prevent a death spiral in TM
• What the right fears TM exercises its existing
  monopsonist power in prices, so the playing field
  isnt level and we get single payer
• What about Medicaid? Non-trivial numbers of
  cognitively impaired on Medicaid

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Medicare and Medicaid, cont.

• If the fears of the left and right mean the
  political difficulties of folding Medicare and
  Medicaid into a new managed competition system
  are too large, at least for a first step
  (American politics tends to be incremental), can
  one have effective reform of the delivery system?

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Questions for Discussion - 1

• What are the lessons from the Dutch that the US
  can make use of? What is or would be evidence of
  efficiency gains there? Is such evidence likely
  to be forthcoming?
• Alain Enthoven wrote his book 30 years ago, and
  in my judgment (and I think his) most of his
  vision has not happened. Going forward, what
  will change that would bring about the system he
  and GGL describe?

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Questions for Discussion 2

• Should we seek to end employment-based insurance?
  Or emphasize fixing the individual and small
  group markets?