Code Red: Two Economists Examine the U.S. Healthcare System

April 14, 2011

What I Learned in the Stalls at the U of C

Filed under: Health Reform,Medicare — David Dranove and (from Oct. 11, 2013) Craig Garthwaite @ 8:22 am

So President Obama has responded to the Ryan/Enthoven voucher proposal with a plan of his own. The President will not dignify the voucher proposal with a serious critique. But he will save Medicare by making deeper cuts to provider payments. In going this route, Obama is proving to be as anti-intellectual as his predecessor in the Oval Office. This is rather alarming considering how much time Obama spent in Hyde Park. Perhaps he hung out at the University of Chicago not for the mental stimulation but because he thought it was a good career move.

Rather than engage in a meaningful debate about the voucher proposal, Obama and others claim that the Ryan/Enthoven plan will increase the financial burden on seniors. If this is the problem, the solution is easy. Make the vouchers bigger and means-test them. One of the beautiful things about the Ryan/Enthoven plan is that it gets the economics right and limits the debate to the simplest of questions: how much should we transfer wealth from taxpayers to seniors? I suppose the real problem is that seniors may not like the answer.

Obama would be hard-pressed to debate the voucher plan on its merits because the very arguments he might muster against it – the potential for adverse selection and the need to assure that everyone uses their vouchers – are the same arguments that have been leveled at his insurance exchange proposal. So the President offers an alternative that is far worse. Anyone who ever used a bathroom at the University of Chicago knows that you can’t get what you refuse to pay for. If the government keeps slashing Medicare payments, doctors and hospitals will either refuse to see Medicare patients, or cut back on the quality of care, or both. I can see seniors lining up at their local CVS for treatment, because no one else will take them.

When Ronald Reagan was elected President in 1980, there was bipartisan support for Alain Enthoven’s vouchers. Nearly half of Congress was prepared to vote for the proposal; all it needed was a push from the White House. But Reagan was opposed to any plan that would require new taxes (to pay for the means-tested vouchers) and did not support the plan. How ironic that a President from the other end of the political spectrum has once again refused to consider Enthoven’s brilliant plan.

April 11, 2011

To the Barricades!

Filed under: Health Reform,Medicaid,Medicare — David Dranove and (from Oct. 11, 2013) Craig Garthwaite @ 12:29 pm

Last week, Republican Congressman Paul Ryan unveiled his plan to save Medicare and Medicaid. Supporters hailed the plan as revolutionary; critics decried the plan as revolutionary. For something so revolutionary, it sure is based on some old ideas.

In 1978, Stanford Business School professor (and my soon to be advisor) Alain Enthoven published an article in the New England Journal of Medicine in which he described his “Consumer Choice Health Plan.” Enthoven proposed tax-funded vouchers that all Americans could use to purchase health insurance. The amount of the voucher would be tied to income and individuals could use their own money to purchase a plan that cost more than their voucher. Enthoven even included some rules limiting the ability of insurers to cream skim healthier enrollees; new and improved versions of these rules are written into the insurance exchanges as part of the Affordable Care Act.

In 1986 I published a paper that described how states were trying to control Medicaid expenses by regulating the prices they paid to hospitals. I pointed out that states had surprisingly little interest in reining in hospital costs because the federal government paid for half or more of the Medicaid bills. The solution was apparent to any economist – convert the “percent of Medicaid spending” formula to a block grant, so that the states are 100% responsible for the costs of Medicaid expansions.

Ryan’s “revolutionary” proposals for Medicare and Medicaid reflect an age-old principle of microeconomics: in the absence of consumption or production externalities (e.g., pollution), efficiency demands that decision makers are 100% financially responsible for the marginal expenses they incur. Ryan’s proposals make so much economic sense that some version of them might even have a chance to survive. If I had to choose, I would put my money on Medicaid block grants. I think that the states will embrace block grants provided that the federal government gives them flexibility in choosing plan design, enrollments, and coverage. Once states are 100% responsible for the marginal Medicaid dollar, we might see sensible reforms like a massive shift away from nursing homes to home care, and a movement of younger beneficiaries into low cost, narrow network HMOs. Some oxen will be gored, of course, but you can’t spend less money on health care without spending less money on health care. That ought to be plain enough.

Medicare vouchers may seem like a tougher sell, but the idea is not too far removed from the present situation, in which Medicare Managed Care plans have captured 20% of Medicare enrollments in many markets, despite rules that limit beneficiaries’ financial incentives to enroll. I could even imagine shifting Medicare enrollees into the insurance exchanges. And if we need to keep “traditional Medicare” as a “public option,” that compromise might be worth it if we can restore some sanity to this budget chewing nightmare of an entitlement.

I never thought that I would live long enough to see comprehensive health reform on the scale of the Affordable Care Act. President Obama proved me wrong. And I never thought I would live long enough to see economically sensible comprehensive health reform. Will Congressman Ryan prove me wrong again?

August 28, 2010

The Accidental Socialists

Filed under: Health insurance,Health Reform,Medicare — David Dranove and (from Oct. 11, 2013) Craig Garthwaite @ 4:59 pm

Over the next few years, the U.S. healthcare system will be in the hands of academics from Cambridge, Massachusetts. New CMS Czar Donald Berwick was a member of the Harvard Medical School faculty. Joe Newhouse, who has been the senior adviser to Medicare for as long as I can remember, holds appointments in three different schools at Harvard. David Cutler, Dean of Harvard’s Undergraduate College, seems a good bet to lead the Independent Medicare Advisory Board. Countless of their colleagues and former students have taken key policy making positions in Washington.

I know most of these scholars. They are brilliant as a rule and are acting in the truest sense of public service. None of them are socialists in the usual sense of the word; they do not believe that the government is an efficient provider of most goods and services. I don’t think they want the government to provide health care either. They have never called for government ownership of hospitals or suggested that physicians join the civil service. But whether they realize it or not, they are the vanguard of a movement bringing socialized medicine to America.

My Cambridge colleagues are mostly economists and know a lot about how markets do and do not work. They have learned from economic theory and practical observation that free market health insurance is imperfect. Fearing adverse selection, unregulated insurers take steps that leave some individuals uninsured, while other individuals choose not to buy insurance and free ride off of taxpayer subsidized charity. Most economists (myself included) agree with this diagnosis of the problem with insurance markets.

Academics have proposed many fixes to these market failures. Conservatives like Stanford’s Alain Enthoven and Wharton’s Mark Pauly favor some sort of voucher or direct subsidy with which individuals can buy their own private insurance. Unfortunately, Wharton is hundreds of miles from Cambridge and Stanford is on the wrong coast. The preferred Cambridge solution is a combination of greatly expanded government insurance and a tightly regulated private insurance market. This is the essence of Obamacare.

But this solution does not end with a government takeover of health insurance. There isn’t a public or private health insurer anywhere in the world that doesn’t directly intervene in the delivery of medical care. Socialized insurance necessarily leads to socialized medicine, and if the government controls well over half of the insurance sector through Medicare and Medicaid, and tightly regulates the rest, it is only inevitable that it will also seek to control how health care is bought and sold. And I don’t think it will make much difference whether it is Democrats or Republicans in control. The temptation to set the rules for 17 percent of the GDP is too great.

Let me give you one example. Nearly 20 years ago, academics (from Harvard, naturally) devised a new way to pay physicians under Medicare. They anticipated that improvements in productivity would allow physicians to bill ever increasing amounts that would threaten Medicare’s long term solvency, so they crafted some rather clever rules to calibrate fees, while keeping both physicians and Medicare on an even keel. Those rules are still in place, but they have never been implemented. Every year, doctors protest and Congress overrides the rules. So the best laid plans of academics are cast asunder, doctor enjoy ever higher revenues, and Medicare faces insolvency. (Fees per “unit” of service actually fall, but the number of billed units increases at a faster rate.) This same issue is going to plague Obamacare. To take another example, I helped redesign a physician payment scheme in Alberta with the goal of increasing competition. The provincial government adopted part of the scheme and omitted key details. Now I fear that competition is going to be stifled.

The Obama administration has hired an army of academics to implement the new reforms. They bring with them the finest Cambridge pedigrees and promising ideas. They will write the first draft of the rules and academics everywhere will nod in approval at the cleverness of our colleagues. (Some of us may even enjoy seeing our own pet ideas turn into policy.) But in the fullness of time, the rules and regulations that will govern our health care system will bear the imprint of politicians more than academics. It is the nature of the beast.

My Cambridge colleagues do not favor socialized medicine. But I fear that the regulatory behemoth they have been entrusted to manage is too big for them, despite their talents. Ten years from now, we will look back at these days as the beginning of the end of market-based medicine in America. And my colleagues will only be able to look back, shake their heads, and say “it wasn’t supposed to turn out this way.”

August 17, 2010

Avastin, Rationing, and Death Panels

Filed under: Efficiency,Health Reform,Health spending,Medicare,Rationing — David Dranove and (from Oct. 11, 2013) Craig Garthwaite @ 9:39 am

President Obama’s health reform legislation empowers a new Independent Medicare Advisory Board (IMAB) to curtail spending. Republicans fear that IMAB restrict access to costly technologies, going so far as to call IMAB a “death panel.” The appointment of Donald Berwick, an advocate of cost-effectiveness research, to run Medicare has fanned the fires of discontent. But most everyone thought that this would remain a theoretical issue for political talking heads, at least for a few more years. Until yesterday.

Yesterday, an FDA advisory panel recommended rescinding approval of Avastin for treating metastatic breast cancer. The recommendation followed new research showing that Avastin extended the time until cancer worsened by one month; previous research had showed benefits of five months on average. That is right, Avastin is efficacious, but the benefits are small. Citing the high monthly cost ($8000), the panel ruling was nearly unanimous.

If the FDA follows the panel recommendation, this would be the first time to my knowledge that cost effectiveness trumped efficacy and safety. The U.S. would join other nations in saying that there is a price that we are not willing to pay in order to improve health. Republican Louisiana Senator David Vitter wasted no time in saying that the FDA was rationing healthcare. “I shudder at the thought of a government panel assigning a value to a day of a person’s life,” he said.

Such hypocrisy. Republicans have wasted no time trying to trim Medicaid budgets, nutritional programs, housing subsidies, and other expenditures that improve the health and happiness of low income Americans. They do this on the grounds of affordability. If we can’t afford to keep low income Americans healthy, sheltered and well fed, how are we supposed to afford Avastin?

Despite what Mick Jagger says, we can’t always get what we need, let alone get what we want. We ration all the time, making implicit judgments about benefits and costs. The FDA advisory panel is making these judgments explicit. I haven’t seen all the data and I don’t know what benefit/cost threshold was used by the panel. And I wonder if the panel valued the hope that Avastin gives patients and loved ones. But these are accounting issues and should not deflect from the fact that resources are scarce and we are always rationing.

I would much prefer to see the market ration access to Avastin. Perhaps Senator Vitter does as well. (If he truly believes that all Americans should have unfettered access to all health care services, regardless of cost, then he must believe that the sky is the limit for health spending.) The FDA should stay the course with Avastin and let individuals decide whether they want to purchase it themselves (or sign up for a health plan with very generous drug benefits.) But those who can’t afford it, or who choose a health plan that does not cover it, will not be able to receive the drug. This is rationing, but it is through private choices rather than government coercion.

If we don’t privatize Medicare (and I am not holding my breath), then we will still have to face up to government rationing, because Medicare is publicly funded and will therefore require public decisions about how to spend scarce dollars. Why demonize those who understand the reality of rationing and want to openly debate how to do it?

Senator Vitter and all of your Republican colleagues, stop the demagoguery. You are big supporters of traditional Medicare, an indemnity insurance program in which tens of millions of Americans spend other people’s money with little direct financial accountability. So please answer this simple question: How do you propose to rein in Medicare spending? You oppose cutting payments to providers. Your only other choice is to cut the quantities of services they provide. Isn’t that rationing?

May 18, 2010

What if Medicare Cut Physician Fees?

Filed under: Budget,Health spending,Medicare — David Dranove and (from Oct. 11, 2013) Craig Garthwaite @ 9:57 am

Congress must decide before June 1st whether to override scheduled cutbacks in Medicare physician fees. The cutbacks are the result of a complex formula that automatically schedules fee reductions in response to increases in physician “productivity” (i.e., physicians are billing for more remunerative procedures) and the need to balance the Medicare budget. This is an annual affair and thus far Congress has never failed to undo the cutbacks and keep doctors and seniors happy.

This time is a little different. For one thing, the stakes are a lot higher – fees are slated to fall by 21 percent and blocking the cutbacks will cost $20 billion annually. This is also a test for Obamacare; future cutbacks in provider fees are the main source of the projected cost savings. If Congress won’t fulfill its cost cutting obligations now, why should we expect it to do so later? It is much easier to keep fees intact and grow the deficit just a little bit higher.

The main argument for keeping fees intact is simple: lower Medicare fees may compromise access. If we ignore the extremists who claim that lower fees will drive doctors out of business (there is little if any evidence to support this), it is still true that some doctors may choose to see fewer Medicare patients or provide them with fewer services.

Where’s the harm? At most, a small percentage of doctors may close their doors to Medicare while others make modest cuts in the number of services they provide. (Some theorists worry that doctors may increase Medicare services to offset the fee reductions, although the evidence suggests that any such “inducement” would still yield a net reduction in Medicare spending.) But haven’t we been told that we are over-doctored? That we have too many specialists doing too many procedures? Lower fees combined with fewer procedures sounds like a win/win proposition. Better still, why not restore cuts to primary care fees and leave the specialist fee reductions intact?

Physicians who curtail access to Medicare patients may try to see more privately insured patients. Had there not been a backlash to managed care, private insurance fees would not be much higher than Medicare fees and physicians would not be so eager to abandon Medicare. Thus the demonization of HMOs makes it difficult to save traditional Medicare.

But suppose managed care mounts a comeback as employers and individuals seek out lower cost insurance options. Insurers would assemble smaller networks and reduce physician fees. If this happens, then Medicare could lower its fees without sacrificing access. Ironically, the future of Medicare may be tied to the success of HMOs!

Physicians will be the big losers in this scenario. But if we are to spend less money on medical care without fundamentally changing how it is produced (see my previous blogs), then providers must necessarily receive less money. It’s a zero sum game. So we are left with an age old question in health economics: Do physicians make “too much money?” There is no good answer. But as much as I admire physicians, who sacrifice ten years of post-undergraduate earnings before finally earning their six figure salaries, I wonder if the Medicare budget must ultimately be balanced on their backs.

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