Better Care for All: A conservative alternative to Medicare for All | Pt. 3

This is Part Three in a series that lays out the principles, framing, and tangible policy solutions that comprise “Better Care for All,” a conservative alternative to Medicare for All. You can find Part One on the principles of this reform here and Part Two on framing the problem and a rebuttal to Medicare for All here.

DISCLAIMER: My background is in both law and business. I am not a doctor or a medical professional, nor do I have a degree in either public health or public policy. My analysis and conclusions stem from years of independent study on the subject of healthcare reform and about six months of research on specific issues & thinking deeply about the problem from a citizen’s point of view. Take it for what it is worth.

Better Care for All is centered on the premise that lowering the price of care is a key first step towards fixing all of the things wrong with our healthcare system. As the price of care comes down, access expands because the average American is better able to afford the care they need. Moreover, by keeping healthcare exposed to market forces, providers of care will be continually forced to compete and innovate.

Better Care for All focuses on lowering the price of care through a bundle of reforms targeted at three core inputs to the price function:

(1) Reduce the demand for care

(2) Increase the supply of care

(3) Eliminate producer surplus by increasing competition & price pressures

We’ll start with reforms under the first heading.

First Bundle of Reforms: Reducing the demand for care

The Causes of Inflated Demand: Demand for healthcare is inflated by both doctors and patients for a host of reasons. On the provider side, Medicare’s fee-for-service arrangement encourages doctors to crank out volume on approved procedures irrespective of their value (i.e., health outcomes). This doesn’t necessarily mean doctors are delivering bad care, but it definitely means that doctors are delivering too much of it. “Got a headache? Let’s do a CAT scan just to make sure it’s not a tumor — and better throw in an X-ray just to be safe!”

Recent research confirms this phenomenon. A peer-reviewed study from 2017 surveyed over 2,000 physicians from the American Medical Association community regarding the incidence and causes of over-treatment. The study found that roughly 20% of overall prescribed medical care was unnecessary, including 22% of prescription medications, 25% of tests, and 11% of procedures. The most commonly cited reasons for over-treatment were fear of malpractice, pressure or request from the patient, and poor access to outside health records. Notably, most respondents (~70%) agreed that, despite the high ethical standards of their profession, physicians were more likely to perform unnecessary procedures when they stood to profit off of them. As a result, most of the physicians also felt that de-emphasizing fee-for-service payment schemes would reduce healthcare utilization and costs.

On the patient side, demand is inflated due to the moral hazard that accompanies the nature of insurance itself. Once a person is insured against all future health expenses, the cost of seeking care at any particular moment is significantly discounted and the incentives to stay healthy are blunted. (Arrow 1963; Pauly 1968; Zeckhauser 1970; Cutler and Zeckhauser 2000) This leads to over-utilization. In short, health insurance encourages patients to ask for more care than they otherwise would and the payment mechanism causes providers to over-prescribe that same care when asked for it. That’s a pretty dangerous cycle — so how do we combat it?

1. Pay for health outcomes rather than medical procedures

The CMS fee-for-service price schedule needs to be phased out as quickly as possible. By shifting from a fee-for-service model to capitated, value-based reimbursement, we can finally begin to purchase health outcomes instead of medical procedures — which will ensure that we only buy the care we need. The good news is that this is already happening. The Affordable Care Act instituted a number of value-based reimbursement programs that are beginning to wean Medicare and Medicaid off of the government-set fee schedules.

But these programs could be more ambitious. Currently, they function primarily as incentive programs on top of the typical reimbursement schedule. The End-Stage Renal Disease Quality Incentive Program (ESRD QIP), for example, functions as an extremely light penalty: ESRD facilities with health outcomes below established industry standards have their Medicare & Medicaid payments reduced by no more than 2%. Other programs, like the Skilled Nursing Facility Value-based Purchasing Program (SNF BNP), withhold 2% of the reimbursement upfront and then rebate the balance over time based on performance metrics.

This idea isn’t new. It has been popular since the 2000s. But, after nearly twenty years of bipartisan consensus that value-based repayment makes economic sense, Washington has only managed to implement these incentive structures in seven different health settings. Why? Because the hospital & physician lobbies are fighting hard against any plan that would condition even a slice of their revenue streams on the health outcomes of their patients. Conservatives in Washington should lead the fight against these interest groups to ensure that patients (taxpayers) are actually getting healthier for the money they spend.

2. Focus on care coordination and patient engagement

Managing down healthcare spend is tricky. Since the 1990s, HMOs have been dedicated to this task and have done a fairly good job of things. If you aren’t familiar with the arrangement, HMOs (or Health Management Organizations) essentially tell employers or the government or private health insurers: “Hey, we know you are on the hook to pay for a group of people’s health care. We are experts at managing the spend of a population. We have tons of data, tools, and support staff to identify your highest-risk people and get them the help they need more quickly to reduce costs. We will manage their care and take liability for the expense if you pay us a certain amount up front — because we think we can do it more cheaply.”

For the most part, HMOs have been an innovative byproduct of private sector forces. There was a need to reduce healthcare costs and enterprising Americans, trying to make a buck and do some good, created businesses that would do it at a discount. In this way, they were essentially mini for-profit health-reform laboratories. Theoretically, this approach makes great sense and the model should be preserved — but there are some pitfalls to correct.

One is that an HMO may make its margin by being really stingy with the treatments it approves. Through clinical protocols and pre-authorizations, HMOs engage in something they euphemistically call “utilization management” — which is essentially a fancy label for denying health claims. By their telling, this is part of the way they add value: by doing a better job of clamping down on unnecessary care. They create a network of approved physicians who care for patients more cheaply — and they develop rules for when patients can be approved for certain types of care.

As you can imagine, if there aren’t strict rules around when procedures are medically necessary, HMOs may fall prey to the perverse incentive to skimp on care. This can’t happen and is the centerpiece of fairness in the insurance marketplace. Conservatives should be tough on this part of the market and ensure that HMOs are doing right by their beneficiaries.

In general, though, HMOs still hold a lot of promise as a source of innovation in the management of healthcare expenses. They are experimenting with cutting edge patient engagement and care coordination models that will identify high-risk patients, connect them with easy-to-use and targeted care, and help reduce long-term utilization of higher-cost care. As long as they are creating this kind of value, HMOs are an important piece of the puzzle. To ensure HMOs create the right kind of value, consumers need to be better informed — which nicely raises the next reform.

3. Empower patients to be scrutinizing consumers of health care

a. Let employees rather than employers purchase health insurance: In 2016, about half of Americans received some form of health coverage through their employer — making employer-provided health insurance the most common form in the country. Because of this and the structural problems attending this segment of the market since the passage of the ACA in 2008, it’s worth spending a bit more time here. Reforming this segment of the insurance market holds the key to applying downward price pressure on the market for health care itself. Overall demand for care can be reduced by turning patients into smarter, value-driven consumers that make better utilization decisions.

At its inception, employer-provided health insurance was a boon for the American worker. It attracted top talent into the workforce during and after World War II and also led to a dramatic increase in the percentage of Americans with health coverage. The coverage originally took the form of bare-bones policies that served as stopgaps for catastrophic events. Then, over the 1960s and 70s, employer-provided health insurance evolved into the comprehensive coverage it is today.

In recent decades, workers have routinely given their employer-based coverage high marks and are reticent to give these policies up. But this has been due, in large part, to the fact that employees only saw the bill for their co-pays and deductibles, which were small when premiums covered the bulk of expenses. The premiums are paid directly by employers and taken out of workers’ pre-tax salary. Over the last few years, as healthcare costs have risen — workers have shouldered more of the cost through higher deductibles and stagnant wages as their employers experiment with new payment schemes to reduce utilization.

This has caused headaches for even those who nominally possess health insurance. Since the passage of the ACA, the number of underinsured has been steadily on the rise even as the number of uninsured has come down. Data from the Commonwealth Funds’ biennial survey shows that the percent of US workers who are underinsured (face out-of-pocket health care expenses greater than 10% of their incomes excluding premiums) increased from 10 percent in 2003 to 24 percent in 2016. That’s an incremental 20 million Americans whose private insurance became inadequate as a result of cost shifting in the private market that the ACA set in motion.

Over roughly the same time frame, these employees’ premiums and deductibles grew faster than their median income as private health insurers priced in the cost of the ACA’s coverage mandates and offset price hikes from providers who were compensating for the margin-dilutive reimbursement they receive for serving Medicare and Medicaid patients. This underinsurance problem is a serious one. Studies consistently show that when workers face high upfront payments, they frequently skip services, some of which are critical to their long-term health and productivity.

This is why expanding public options and moving everyone onto a government plan isn’t the rosy salve its proponents make it out to be. The only reason the price of government-provided care has remained low in recent years is because it has been subsidized by the private market, where a majority of Americans receive their insurance. In order to make this work economically, providers have been charging the privately-insured more to make up the balance. According to one analysis from the RAND Corporation, hospitals charged private employer-sponsored insurers at 241 percent of Medicare rates in 2017, leading those insurers to pass on the costs to employers and employees.

Thankfully, there’s a better solution. The entire healthcare marketplace needs greater price transparency, competition, and choice. While eliminating the government fee schedules overnight isn’t feasible, we can at least take steps in the right direction by empowering those who currently consume healthcare under private insurance arrangements. Today, both the employer and the insurance company stand between the patient and their doctor, limiting the patient’s freedom of choice. First, the patient must accept the plan that the employer negotiates on their behalf and then see only those doctors approved by the insurance company. Competition only occurs at the bulk-buying level between the employer and the few competing insurance companies as they negotiate over per capita premiums. To the extent that hospitals compete to be included in insurance plan networks, they do so only on price — which, as we’ve seen, isn’t exactly a healthy or transparent metric at the moment. Putting the patient in the driver’s seat will change this game.

If patients purchase health coverage with their own dollars, several things will happen. First, insurance companies will build insurance plans that cater to patients’ needs as opposed to employers’ needs. Second, patients will become savvier purchasers of care once they start seeing and touching every dollar they ultimately spend on healthcare. With tax-advantaged HSAs, a dollar saved will be a dollar earned — creating downside demand pressure that solves some of the moral hazard issues that inflate demand today. Finally, this solution will also have the ancillary benefit of increasing fluidity in the labor market. No longer will workers be afraid to quit or switch jobs for fear of losing their health insurance.

Another nice thing about this fix is that it’s fairly simple to implement. Instead of employers purchasing health plans for their employees with pre-tax dollars, they will remit those funds directly to personalized tax-advantaged savings accounts for each employee.

b. Build on ACA exchanges to better inform consumers of care: The market for health care is one of the only markets in which those who actually consume the good rarely know how much it costs before they consume it. Part of this, as discussed above, is because they aren’t directly paying for it. But another reason is that it’s nearly impossible to know in advance what a given medical procedure or visit will end up costing a patient or how likely it is to improve their health.

Of course, consumers of care don’t have the luxury of being selective buyers in emergency care situations. But, for a large majority of health procedures that involve a longer lead time, consumers have time needed to kick the tires on their doctor, their hospital, the price of care, and compare the value of what they plan to purchase.

Making it easier for consumers to make this value judgment before they purchase care is a critical component of making prices for health care work better. If consumers aren’t inform, they will likely dramatically overvalue and over-demand care — particularly when they aren’t even on the hook to directly pay its full cost. This equation needs to change.

The ACA exchanges were a good start towards price transparency in the market for health insurance — but there needs to be a similar exchange and consumer-friendly database that covers the markets for hospitals, doctors, medical procedures, and medical devices. Imagine a cars.com-style website for all of these things. A consumer visits the site — enters in some details about themselves and their location — and a report is generated that summarizes all of the health facilities and doctors in the area that can be filtered by a certain type of care that a customer may be considering.

4. Encourage Americans to lead healthier lives that require less care

Of the proposals that could help reduce demand for healthcare in the United States, this is perhaps the lowest-hanging fruit (pun intended). Part of the reason that utilization for healthcare is so high in the United States is because Americans are notoriously unhealthy in comparison to our global peers. We are fatter, we are more addicted, we exercise less, and the food we consume has more sugar, more carbs, and fewer vegetables.

“That’s what freedom looks like!” the libertarian cries. And it’s true to an extent — freedom does allow Americans to make bad choices as well as good ones, but not even the libertarian can claim that we currently make these choices in a vacuum. The reality is that government regulations and mandates throughout our economy already influence our behavior in countless ways. So why shouldn’t policymakers re-examine these influences to at least ensure that they aren’t nudging us in the wrong direction?

Moreover, the value of one’s freedom to choose is diminished when those choices aren’t informed. When a consumer selects a Big Mac without knowing the calories it includes or buys a cigarette without knowing that smoking causes lung cancer, the consumer may not be pricing in the negative health effects and long-term costs of consumption that aren’t readily apparent in the product itself.

Let’s look at some examples.

a. Improve Americans’ eating habits

• i. End sugar subsidies: The poor health effects of added sugar in diets is well-documented. Too much added sugar can lead to obesity and worse heart health, each of which ends up costing the healthcare system. In the United States, the adult male consumes an average of 24 teaspoons of added sugar per day (or 384 calories), more than twice the daily recommended intake. And, while it’s certainly true that Americans should be allowed to have a sweet tooth — it’s also true that bad government policies push Americans in this unhealthy direction. In the United States, fewer than 4,500 farm businesses (out of a total of 2 million) produce sugar. Yet, taxpayers dole out up to $4 billion per year in sugar subsidies (an average of ~$900,000 per farm per year), which incentivizes production of these unhealthy items. As a result, there’s no shortage of high fructose corn syrup on the market. At the very least, Congress should move to strip these subsidies from the annual Farm Bill and stop putting taxpayer dollars into unhealthy foods that ultimately drive up healthcare costs in the United States.
• ii. Limit food stamp purchases on unhealthy food items: The federal food stamp program, or SNAP, allows recipients to use their public dollars to buy sugary drinks, chips, cookies, and other unhealthy food items. According to a 2016 report, SNAP households spend about 10% of their food dollars on sugary drinks, which is about three times more than the amount they spend on milk. According to Harvard adjunct public policy professor Robert Halberg, “Low-income American adults consume nearly two [sugar-sweetened beverage] servings a day, and for every one or two daily servings consumed, the lifetime risk of diabetes increases by 30 percent.” None of this makes sense in a society that is an existential fight to pay for a sky-high healthcare tab.
• iii. Retain calorie count transparency: In 2010, the Affordable Care Act included a provision that required certain qualifying restaurants and vending machines to display the calorie counts of foods they offer on their menu. These measures ensure that consumers are properly informed about the health impact of foods they choose. If consumers are given more control over their healthcare budget through HSAs and other mechanisms as proposed above, it’s likely that information like this will affect consumer choices even more, leading them to make more informed cost-benefit trade-offs against the long-term health risks that some foods pose. Regulations like these could nudge consumers to make healthier eating choices without banning items or risk a nanny state.
• iv. Ensure kids’ school lunches are nutritious: Science tells us that our eating preferences — like many of our preferences — are actually substantially shaped by our experiences during the formative years of our life. That’s why children’s nutrition is a central battlefield in the fight to lower healthcare costs over the long-run. If children develop better eating habits early, they are more likely to sustain those habits into adulthood and lead healthier lives that require less care. There are more than 100,000 school cafeterias in the United States — seven times the number of McDonald’s restaurants. The food we serve our kids each day in school accounts for as much as half of the total caloric intake for many children. This is an enormous opportunity to nudge children in the right direction that will drive down the demand for healthcare in the long run. But, the administration recently pushed things in the opposite direction — loosening nutritional standards in school lunches to allow more sodium, refined grains, and sugary, flavored milk. To the individual, this might seem like small beans. But, with more than 10 million students on track to develop diet-related diseases, the aggregate story starts to add up for the American healthcare system. The bottom line here is that we shouldn’t be skimping on school lunches. If we’re going to set standards on school lunches, we should listen to the recommendations of pediatricians, nutritionists, and school food experts in setting school menus. It may cost a bit more to put together healthy food options for children, but a generation of unhealthy eaters will cost society even more over the long run.

5. Make good health pay with premium rebates for healthy choices

As touched on above, the major problem with the incentives created by health insurance is that there isn’t a particularly good mechanism to help patients internalize the economic costs of unhealthy living choices. In the market for car insurance, the safer you drive, the lower your rate. We should strive to apply the same incentive to health insurance. Insurers shouldn’t be allowed to discriminate against patients with pre-existing conditions — but they should be allowed to provide credits or premium reductions if the insured can show that they are actively taking steps to reduce the costs of covering them.

Congress has already applied this concept in a different way through the ACA. Wellness and prevention was a major pillar of that law and, as part of the reform, employers were given more leeway in structuring rewards and penalties for employee health behaviors. As a result, employee wellness programs have sprung up in the private sector to try to curb the cost employer’s health insurance pools. These programs have made it easier for over 50 million American workers to make healthier choices.

But, making exercise easier and cheaper for employees isn’t the same thing as making it pay. Private insurers and the federal government should consider implementing some form of “health credit” that allows people to enjoy the economic gains of good health. For example, insurance premiums could be structured in a way that allows the insured to show proof of working out two times per week, or enrollment in a smoking prevention plan, or completion of preventative health screenings in exchange for a rebate. Such a program would need to take care not to penalize people for their innate health risk and reward the conscious healthy choices people make instead. It’s also admittedly difficult to put a precise economic value on exercise. But, if we don’t allow people to internalize the gains of health beyond how it makes them feel, we will continue to lead the world in spending per capita on health care.

Part Four will explore the second bundle of Better Care for All reforms that will increase the supply of health care and help further reduce prices.