Free market answers

Marketplace health care discourages providing services in poor communities
Blumenthal, July 22, 2020 David Blumenthal, M.D., M.P.P., Elizabeth J. Fowler, Ph.D., J.D., Melinda Abrams, M.S., and Sara R. Collins, Ph.D., July 22, 2020, New England Journal of Medicine, Covid-19 — Implications for the Health Care System, https://www.nejm.org/doi/full/10.1056/nejmsb2021088
Providers’ vulnerability to these demand fluctuations raises a fundamental question about the way we currently pay for health care in the United States. Providers operate as businesses that charge for services in a predominantly fee-for-service marketplace. When the market for well-paid services collapses, so do health care providers. This system has a number of adverse effects in normal times. It creates incentives to raise prices and push up volumes, shortages of poorly compensated services such as primary care and behavioral health, and an undersupply of services in less financially attractive poor and rural communities.

For profit health care fails

Friedman, 2019, Gerald Carl Friedman is an economics professor at the University of Massachusetts at Amherst. He became nationally prominent during the 2016 U.S. presidential election, The Case for Medicare for Al
The American system of for-profit insurance and medicine is unique among affluent countries, and it clearly does not work well. Elsewhere, governments fund a much larger share of health expenditures than in the United States and regulate private insurance very closely. Everywhere else, most healthcare is paid for out of tax revenue and is provided either by government agencies (such as the British National Health Service) or by highly regulated private bodies.13 From this perspective, the United States has been conducting a social experiment in health policy, testing whether it is possible to provide quality healthcare efficiently and equitably when directed by private individuals and entities dedicated to profit making. If that was the intention, we can now drop the experiment because the answer is clearly “no”: for-profit medicine is not only inequitable but also inefficient. By virtually every metric, health-care in the United States is much more expensive than elsewhere and distributed with much greater disparities. In Bloomberg’s healthy country index, the United States ranked 35 in 2018, behind much poorer countries like Cuba, Slovenia, and Chile and one place below its rank of 34 in 2017.14 The World Health Organization similarly ranks the United States at 37 out of 191 countries, above Slovenia but behind Dominica and Costa Rica, not to mention France or Italy (rated 1 and 2 respectively).15 Furthermore, the US is sinking in the rankings, as its privatized healthcare system has been getting relatively worse. Note: This figure shows the relationship between female life expectancy and the logarithm of per capita healthcare expenditures for member states within the Organisation for Economic Co-operation and Development (OECD). The line shown is the average relationship between these two for member states other than the United States. The position of the United States well below and to the right of the line indicates that it is spending much more than other countries but has significantly shorter female life expectancy than would be expected given this level of spending. The point of healthcare spending is improved health and to extend life. On that basis, healthcare in the United States, while much better than it was in the past, has fallen behind other countries. We would expect affluence to bring greater longevity because of better nutrition and more comfortable lifestyles. For the same reason, we would expect life expectancy to increase over time as countries grow richer and are better able to provide quality nutrition, clean water, and improved healthcare. Growing affluence has been associated with longer average national life expectancy, but much less so for the United States (see Figure 2). Among the world’s wealthiest nations, we are less healthy than many poorer countries. Despite our affluence, our health outcomes were already below average in 1971; and, while we are living longer and healthier lives now, improvement has been much slower than elsewhere, slower than would be expected given our increasing wealth. While women in the US live 6.2 years longer now than in 1971, Canadian women live 7.5 years longer, British women 7.8 years longer, and French women 9.6 years longer.16 Since 1971, the United States has dropped from 19th to 34th place among members of the Organisation for Economic Co-operation and Development (OECD) in potential years of female life lost (see Table 1). One reason for our poor health performance is that we have a higher infant mortality rate than 30 of 35 OECD members. Indeed, having children in the United States is particularly risky. At 14 deaths per 100,000 live births, the US maternal mortality rate is the worst in the affluent world, not only twice the rate in Canada and triple that in Japan, but twice the rate in the relatively poor countries of Croatia, Slovakia, and Slovenia.17 Note: This figure shows the relationship between female life expectancy and the logarithm of per capita income for member states within the OECD. The line shown is the average relationship between these two for member states other than the United States. The position of the United States well below and to the right of the line indicates that life expectancy in the US is about four years less than would be expected given its income level. Indeed, the US has shorter female life expectancy than most affluent countries. Table 1: US healthcare in comparative perspective Note: This table shows the standing of the United States compared to other member states of the OECD in 1971 and 2016 for various measures of healthcare performance. In every measure, the United States now performs worse relative to other affluent countries than it did in 1971. Since the United States has many of the world’s best doctors and the most advanced medical technology, it is surprising that Americans die at such high rates. The problem is that our healthcare finance system blocks many from access to even basic healthcare, and forces doctors and nurses to waste excessive time and energy dealing with a recalcitrant financing system designed to maximize profit rather than health. Much of the discussion over the last decades has been about those like Alec Smith without any health insurance.18 A study of cancer treatments explains this in cold clinical terms: “In the absence of health insurance coverage, many forgo cancer screening and/or delay diagnosis and thus are likely to experience poor clinical outcomes.”19 Health insurance, however, does not guarantee access to healthcare. Restrictions on access have become increasingly burdensome for many with insurance, like Shane Boyle. A recent survey found that while almost all diabetics had health insurance, 40% had rationed test strips and 26% had rationed insulin over the past year.20 Private health insurers have made rationing worse with a range of tools designed to inflate profits by limiting access to healthcare services. Benefits are conditional on the use of doctors and services selected by insurance companies, with financial penalties for those who use services outside of narrow networks or without prior authorization. Almost 90% of Americans with private health insurance now face deductibles, the minimum spending required before benefits begin. Since 2008, the average deductible has more than doubled, reaching almost $2000 in policies covering individuals and $3400 in policies covering families. Virtually all insurance plans now cover expenses only after a co-pay, or payment by the patient before the insurance company pays anything. Co-payments for office visits average around $25, and for hospital admissions over $300 per day.21 Since many Americans do not have significant available cash to cover emergencies, with almost half not having even $400 to hand, mounting cost-sharing forces them to choose between medical care and other essential bills.22 Doctors complain of patients who risk their health by not following recommended medication regimens or seeking follow-up care, but such “noncompliance” is a result of tragic financial constraints rather than an irresponsible act of defiance. The Federal Reserve finds that over 25% of Americans have skipped medical care because of cost. These noncompliant patients risk “adverse clinical outcomes” because they cannot afford the care they need.23 Their financial situation is more toxic than their disease. Together, foregone treatment and medication nonadherence kill thousands, even hundreds of thousands, of Americans. This is demonstrated in a comparison of the share of a county’s population who report that they could not afford to see a doctor when sick with that county’s age-adjusted mortality rate (see Figure 3). No one should be surprised that the larger the share unable to afford a doctor, the higher the mortality rate; indeed, this alone accounts for nearly a third of the variation in county mortality rates in the United States. Much of the excess mortality in the United States c
ompared with other affluent countries can be associated with financial barriers to access, and most of these excess deaths are of people with health insurance.24 Measured in crass economic terms, if we value human lives at $9 million apiece, as is done by the Environmental Protection Agency, the annual economic cost of this excess mortality could be in the hundreds of billions of dollars.

Market based solutions ignore the elderly and raise costs

Friedman, 2019, Gerald Carl Friedman is an economics professor at the University of Massachusetts at Amherst. He became nationally prominent during the 2016 U.S. presidential election, The Case for Medicare for Al
By treating healthcare as a commodity and promoting choice, the market turn in healthcare policy rewards the young and healthy at the expense of the sick and the old. At the same time, introducing market mechanisms and profit immediately raises costs. Before the 1970s, health insurance was highly regulated, often with a single Blue Cross/Blue Shield plan offering simple coverage to everyone at a uniform price without regard for pre-existing conditions. Economists joined with insurance companies to campaign for deregulation to allow for-profit companies to compete with Blue Cross/Blue Shield companies on the assumption that competition and the profit motive would lead to greater efficiency. The economists were wrong. The new for-profit private insurance companies were no more efficient than the old Blue Cross/Blue Shield plans. But by restricting sales to the young and healthy, the new entrants made quick work of the established companies, who were quickly forced to abandon open enrollment policies and community rating. The mistake here was that policymakers misunderstood the real advantage that the new entrants enjoyed. Far from increasing efficiency, administrative waste soared in for-profit companies, with increased spending on marketing, plan design, utilization review, managerial salaries, and, of course, profit. Rather than winning through efficiency, they profited by screening their subscribers. By offering plans attractive only to the healthiest, and cheapest, subscribers, they were able to make more money while driving the old Blues into bankruptcy with a pool of the sickest people. Thus, the market turn drove up healthcare costs even while reducing Americans’ access to care. As a result, we have a for-profit healthcare system that is more expensive than that of any other country while providing less care. But it generates profits and makes some people very rich. Medicare covers only 50% of healthcare spending by the elderly and Medicaid covers another 10%. The remaining 40% must be covered by private health insurance or out-of-pocket spending.

Consumers cannot make meaningful choices

Friedman, 2019, Gerald Carl Friedman is an economics professor at the University of Massachusetts at Amherst. He became nationally prominent during the 2016 U.S. presidential election, The Case for Medicare for Al
The Problem of Healthcare Market Power Healthcare will often be provided by institutions with market power. Providers operate in large facilities, like hospitals. Hospitals, specialist practices with dedicated machinery, pharmaceutical companies with large research facilities: all operate at a large scale that limits the number of competitors, giving each the power to influence prices.3 Even more important than scale, however, is the role of information. Few consumers can evaluate providers or treatment plans; even trained professionals do little better than amateurs in choosing providers.4 Every doctor is different, patients with identical diagnoses are different, each doctor-patient relationship is different. Feeling unwell, patients go to a doctor, not knowing what problems they may face, or even if they have a problem. They enter physician offices largely unaware of the proper treatment they require. Instead of comparing essentially equivalent bars of soap, where buyers can evaluate price and quality, healthcare “consumers” compare providers of unknown and unknowable quality. Facing such uncertainty, people rely on quality signals, brand names, reputation, the experience of others, advertising, even prices. Buying services that literally can be the difference between life and death, higher prices can increase demand because they are signals of quality. Signals steer patients to a small subset of providers who thus have real market power because people believe they provide better care and save lives. Massachusetts General Hospital, New York Presbyterian, Johns Hopkins, Yale New Haven, the Mayo Clinic, the Cleveland Clinic: these institutions do not compete on a level playing field with other hospitals and providers, and they advertise to further enhance their brands.5 Their reputation gives them the leverage to raise prices.6 The importance of reputation encourages providers to merge with marquee providers—hospitals with a reputation for extraordinary quality.
Free market fails
Singer 17 – Lawrence Singer, Associate Dean, Online Learning; Director, Beazley Institute for Health Law and Policy; Associate Professor of Law., Spring 2017, “Health Care Is Not a Typical Consumer Good and We Should Not Rely on Incentivized Consumers to Allocate It,” 48 Loy. U. Chi. L.J. 703, Lexis
Introduction Many believe that health care is, or should be treated as, a “typical” economic good. 1 As such, its delivery and distribution should be governed by “standard economic theory,” 2 in the context of a “free” 3 or [*704] “competitive” 4 market. While each of these terms means something different, all of the terms share one characteristic: the primacy of consumers having “complete” or “perfect” knowledge of the good being sold. 5 This knowledge is related to the “value” of the good – its price and quality – so that consumers can make informed choices. 6 Even a cursory review of the attributes of the health care market, however, raises serious questions as to whether consumers have, or can ever have, the knowledge necessary for a competitive market to work in health care. 7 Medical care is complicated, and insurance policies are dense documents. And because we habitually minimize risks that we cannot, or would rather not, contemplate, 8 in a moment of need and [*705] vulnerability, the last thing one wants to do is negotiate prices pursuant to those dense and complicated documents. Of course, this is not to imply that the current health care market is working – at best, the market is characterized as a strange mixture of competition and “command and control” that is lacking in transparency. 9 Prices continue to rise; 10 consumers still find the individual insurance market challenging to navigate; 11 many individuals still lack high-quality, accessible health care services; 12 and many common measures of public health in the United States rival those of third world countries. 13 Still, there is a worry that the current movement toward more fully embracing competition as the means to allocate health care services is fraught with peril. Wrong choices made by patients acting as consumers [*706] lead to delays in accessing services. Even further, some companies may capitalize on the fact that these patients-consumers make wrong choices and might not thoroughly consider all options by incentivizing avenues of care that may be suboptimal with enormous consequences. This Essay advocates that health care should not be treated like any other good and that the vagaries of a competitive free market should not be the approach to achieve health care’s so-called “Triple Aim”: high-quality, low-cost, accessible health care. 14 This Essay’s concerns about the role of competition are further heightened given the current movement toward “consumer directed” 15 or “defined contribution” 16 health care – the idea being that consumers should be empowered to make cost/benefit choices on their desired (if any) type of insurance coverage and then fully bear the implications of those choices. This is very much a competitive market approach, as it assumes that the industry must empower consumers to make self-interested choices to improve quality and reduce the cost of health care. In this defined contribution world, employers will no longer provide health care insurance to workers, 17 but rather will provide a fixed amount [*707] of money that an employee can deposit into a health savings account – along with the employee’s own money – to pay health care expenses. 18 Coupled with a high-deductible health plan, whereby the employee is required to pay a minimum deductible of $ 1,300 (individual) and $ 2,600 (family) for catastrophic health care coverage, 19 this “skin in the game” is designed to interject a degree of value consciousness into health care purchasing to parallel any other consumer good. 20 In considering the impact of this expansion of consumer-directed health care and its increased cost-sharing obligations, one must realize that insurance is not just a payment mechanism, but rather the key to entering the health care marketplace. Health care services are expensive, and few can afford a long course of treatment without insurance coverage. 21 While private hospitals have a legal obligation to provide care, this only arises in the context of an emergency or a possible urgent [*708] condition. 22 Private physicians, pharmaceutical companies, and many other health care providers have no legal obligation to provide services or products for free or reduced costs. Therefore, one must present an insurance card within five minutes of visiting a physician. By design, pulling back the scope and level of coverage will cause patients-consumers to consider their need for care. While to some extent, benefit levels and cost sharing have always impacted health care access, the higher level of cost sharing brings affordability of health care to a point where patients-consumers cannot access essential services because patients-consumers are considering the costs of their health care before the service is rendered. Not only has defined contribution thinking taken sway amongst private employers, 23 but it appears to be gaining headway in possible Medicare and Medicaid program reforms. While the views of President Trump’s administration continue to be unclear, 24 House Speaker Paul Ryan calls for the implementation of Medicare vouchers, which would enable beneficiaries to shop the private insurance market for the type of coverage they would prefer. 25 And some state Medicaid programs, such as [*709] Arkansas, 26 implemented a version of Medicaid vouchers in addition to the Centers for Medicare and Medicaid Services (“CMS”) approving similar programs in Iowa, Indiana, Michigan, and Pennsylvania. 27 Given the significant cost savings associated with a defined contribution approach, the idea is likely to gain even further sway. 28 This Essay argues that overall reliance on competition and free market thinking (particularly value-incentivized consumers) to achieve an appropriate, fair allocation of health care services will cause significant harm to many people. In arguing this proposition, this Essay focuses specifically on the lack of transparency in health care; this lack of transparency means that the sine qua non of a free marketeducated, self-interested consumersis lacking. This Essay also contends that the free market approach will not work because it ignores the reality that invariably society will intercede to “rescue” individuals who made poor choices regarding their scope of insurance coverage, ultimately increasing the cost of every other patient-consumer’s health care services. 29 Finally, reliance on this approach [*710] serves to further erode the social compact where everyone should be entitled to the basic building blocks of life to make their way in the world. 30 I. Health Care Lacks Transparency The health care industry is not transparent with respect to price or quality, 31 and its primary beneficiary – the patient – often lacks the capability and capacity to make informed choices. 32 Because an informed consumer able to make value judgments is lacking, the very foundation necessary for a competitive market to work is absent,
causing the market to fail
. The lack of transparency regarding the quality and price of health care [*711] services has been long known and lamented. 33 And there is a legitimate concern that this lack of transparency will create severely detrimental consequences in the new world of limited health insurance. 34 The nature of health insurance is changing: health plans are minimizing coverage and consumers can expect to bear more of the cost of care and to comparison shop cost and quality to a degree never expected. Invariably, these burdens will result in choices to delay care or seek less competitive, lower-quality options, causing harm. 35 The lack of transparency in large part results from health insurance historically shielding beneficiaries from the full cost of care. 36 Thus, unlike other types of common insurance where coverage is purchased for catastrophic events and rarely used, health insurance has traditionally been designed for the patient-consumer to pay for low-risk, often-encountered occurrences. While society may not agree that everyone has a right to health care, 37 insured individuals seem to agree that this right [*712] exists, because once coverage is secured, they often immediately seek health care services. 38 Indeed, while an important part of the difficulty in pricing insurance products on the exchanges is the lack of younger, healthier individuals opting into the market, 39 another significant factor is the higher-than-expected utilization of services as newly covered individuals seek (presumably delayed) medical care. 40 Government and private insurers have largely focused their efforts on cost containment, giving much shorter shrift to quality. 41 The Institute [*713] of Medicine’s 2000 report, To Err Is Human, 42 sounded a clarion call on the poor quality of health care services – likening the number of deaths caused by provider error to a daily crashing of a Boeing 747. 43 Sixteen years later, however, it is fair to say that quality initiatives are still at a fairly basic level of development and implementation. 44 Consumers are traditionally shielded from cost and have focused little on quality. Because of this shielding, there is little consumer demand for tools to assist consumers’ assessment of quality providers. 45 [*714] Widespread disparities relating to price and quality, seemingly unhinged from outcomes, are rampant. 46 For many years, the Dartmouth Atlas highlighted significant treatment differences in a wide variety of health care procedures, including tonsillectomies, coronary, stents, and hip fractures – all with no discernable link to quality. 47 Researchers long ago concluded that physician training and practice patterns were responsible for care variation, and that if the nation adopted best practices, then savings associated with standardized approaches would be [*715] immense. 48 Serious efforts at the federal, state, and private levels are underway to provide consumers with quality and price information to enable intelligent choices. For example, on a federal level, CMS’ Quality Initiative provides consumers with quality-of-care information and provides the Hospital Compare 49 online platform for consumers to research hospital quality, patient satisfaction, and pricing. 50 In addition, the Patient Protection and Affordable Care Act (“ACA”) allotted $ 250 million in state funds for the improvement of price transparency and requires CMS to make standardized extracts of Medicare claims available for provider evaluation. 51 States (e.g., Massachusetts and New Hampshire) 52 have also led the charge to provide information to consumers. 53 Massachusetts pioneered with its October 2013 legislation, which required insurers, physicians, and hospitals to provide health care consumers with the costs of health care procedures ranging from office visits at a primary care provider’s office to surgical procedures. 54 In [*716] 2005, New Hampshire passed legislation that created the New Hampshire Comprehensive Health Care Information System, and mandated the creation of an all-payor claims data base (“APCD”) and a consumer-friendly public website. 55 This information system collects provider data from a broad array of providers and services, and the New Hampshire APCD lists total and out-of-pocket costs for consumers. 56 Private insurers have also moved to empower consumers. For example, Blue Cross Blue Shield of Illinois provides detailed information on comparisons of in-network versus out-of-network provider services, ranging from CT scans to preferred brand drugs for certain medical conditions. 57 All of these initiatives are supported by incentivizing consumers to focus more deeply on the quality and cost of their care through increases in their out-of-pocket health care expenditures. Even if a consumer wishes to secure price and quality information, however, their ability to appropriately interpret this data may be rudimentary at best. 58 And, in many cases involving elderly, vulnerable, or frail individuals, the expectation of seeking and interpreting data may be completely unreasonable. [*717] To date, for example, leading quality indicators used by the federal government to determine value-based Medicare payments include percutaneous coronary intervention (“PCI”) received within 120 minutes of hospital arrival, thrombolytic agent received within thirty minutes of hospital arrival, and ACE Inhibitor or Angiotensin Receptor Blocker for Left Ventricular Systolic Dysfunction and Beta Blocker prescribed at discharge for a heart attack. 59 These particular measurements, however, have very little resonance with consumers desiring to learn the quality reputation of potential providers whose care they may solicit. 60 “Star” ratings, on a one-to-five scale, are more meaningful as they distill a multiplicity of factors in a consumer-friendly manner. 61 But even these ratings may capture areas of little or no concern to a particular consumer, or oversimplify issues causing the rating to be misleading. And, ratings may fail to equalize across patient characteristics, thus incorrectly identifying providers as substandard, for example, because [*718] their patient population is sicker and consequently more prone to poorer outcomes. In sum, meaningful measures of value are lacking in the health care arena. Serious questions also arise regarding consumers’ abilities to correctly interpret the available data so as to make reasonable choices impacting their access to quality care. II. There is no Available Proxy having an Interest Unified with Consumers to Evaluate Quality and Cost Data If we grant the notion that consumers may not be able to possess the knowledge necessary for a free market in health care to function, we might next look to see if there is an available agent, or proxy, able to fill this role on consumers’ behalves. Logical agents include the government (in the case of Medicare and Medicaid beneficiaries), private insurers, or employers. And yet, the same tangle of relationships responsible for the regulatory burden and confusing incentives rife within health care come to the fore here. 62 The government certainly has mixed incentives that may not give patient interest its deserved primacy. While there are many regulations focused on care quality, at their root, Medicare and Medicaid are insurance programs that have a goal of cost containment. 63 While higher [*719] expenses, of course, do not necessarily equate with higher quality, neither are the two concepts divorced. Thus, the potential competing motivators of cost control
and quality enhancement may cause these programs to not always align with patient interests. 64 Private insurers have the exact same issue. The tension between cost and quality in insurer goals is readily apparent in numerous lawsuits over many years. These lawsuits challenged the propriety of payment incentives on physician behavior, where insurers were accused of corrupting physician judgment by compensation formulas incentivizing less, and lower-quality, medical care. 65 The ACA further highlighted this tension by limiting the “medical loss ratio” – the portion of the insurance premium spent on insurer administrative expenses – to 20 percent. 66 In addition, given the high degree of turnover within an insured population, [*720] insurance companies take a decidedly short-term perspective on patient outcomes, often in conflict with a patient’s long-term perspective on their health. 67 And, of course, insurance companies function by carefully defining, and thereby limiting, the financial risk they assume, so transferring risk to consumers by definition benefits the insurer. Finally, for many of the reasons articulated above regarding the government and insurers, employers too seem conflicted in their allegiance to access and health care quality. 68 Thus, the industry lacks a proxy with a unified interest with consumers. There is no unbiased, credible party able to make value judgments on behalf of patients-consumers. III. Relying on the Market to Allocate Health Care Is Wrong As the industry continues to move toward a defined contribution era where each patient-consumer is expected to conduct one’s own research, balance cost and quality, and shop around, one must remember that not all consumers are equipped to manage these new responsibilities. The ability to access this type of information, process, and make an intelligent decision requires a level of sophistication that many people simply do not possess. 69 Further, unique aspects of an individual’s medical condition may render it difficult for patients to properly evaluate competing criteria in a manner that facilitates free market choice. 70 [*721] Because of the highly personalized nature of health care services, the influence of procompetitive forces may actually cause harm to a patient. A patient may gravitate toward an option based on inappropriately weighing the cost of the service, without sufficiently considering the likely outcomes from a quality of life perspective. 71 Finally, even if one wants to assume that an educated consumer can make informed choices in a competitive market, the attendant costs associated with this assumption may be hard to swallow. Externalities abound in health care, as one’s health status can have a significant impact on others. Individuals unable to pay for their care may be able to hold off on certain types of medical care for some time, but this often leads to very serious, more expensive consequences. 72 From both an ethical and legal perspective, the industry is not going to deny care to individuals presenting in an emergent situation, even if there is no payor and the cost is high. 73 In the end, however, the nation does not want individuals inflicting the social cost of their carepublic health issues, accidents, and the likeon society merely because they were unable to make informed health care choices. 74 Even if we adopt a view of “buyer beware” – leading to high incidences of medical debt – this, too, has significant costs on society. In the end, delayed care is likely to be provided, but at a cost to society higher than might have been borne if it had been provided when first [*722] needed. It is simply unimaginable that there will be an ethos amongst our caregivers, health care institutions, and the public that will accept otherwise. There certainly is a place in health care for a consumer focus on cost and quality. An educated consumer is a good thing. We need to be mindful, however, that we do not attribute to the market a sophistication that it lacks when it comes to allocating as essential a service as health care.

Free-market fails in healthcare

Frankford and Rosenbaum 17 [David M. Frankford is a specialist in bioethics and health care law, a professor at the Rutgers Institute for Health, Health Care Policy and Aging Research, faculty director at Camden of the Center for State Health Policy and the editor of Behind the Jargon at the Journal of Health Politics, Policy and Law, having previously served as book review and associate editor. Sara Rosenbaum J.D. is the Harold and Jane Hirsh Professor of Health Law and Policy and Founding Chair of the Department of Health Policy at the Milken Institute School of Public Health, George Washington University. She also holds professorships in the Trachtenberg School of Public Policy and Public Administration and the Schools of Law and Medicine and Health Sciences.] “Taming Healthcare Spending: Could State Rate Setting Work?” Rutgers Law School and George Washington University, Milken Institute School of Public Health Issue Briefs, March 2017 (http://www.cshp.rutgers.edu/publications/taming-healthcare-spending-could-state-rate-setting-work) – MZhu
This effort to use markets to control spending faces numerous obstacles because it is widely recognized that health care markets deviate substantially from more ordinary markets, even relatively complex ones that produce custom products. If health care markets fail, then their use cannot control expenditures. Six features of health care markets, discussed below—and many of which overlap—contribute to this failure.

  1. Heterogeneity everywhere. Compare the purchase of eyeglasses to health care.3 There are many distinctive features to different eyeglasses: size, shape, color, material, texture, weight and brand names (like fancy designers). Ordinary people, looking for eyeglasses, can easily discern these features and have much or all of the necessary knowledge to make educated choices among them; and shoppers can try eyeglasses prior to purchase simply by putting them on. Eyeglasses are relatively “homogeneous” and quintessentially “shoppable.”

By contrast, health care goods and services are most often extremely “heterogeneous.” A multitude of possible treatments exist for any given “condition”—e.g., for back pain, one might buy different furniture, use aspirin, use an NSAID like ibuprofen, try physical therapy, or be given multiple surgical options. Moreover, a “condition” can be treated in a multitude of ways in different persons—e.g., compare stroke treatment in an otherwise healthy and active 45-year-old man (with a family history) to treatment for a 75-year-old woman who is institutionalized quite often but otherwise lives alone on the third floor of a building without an elevator, and who also has hypertension and diabetes and moderate congestive heart failure. Finally, there is often vast variation in the price and quality offered by different providers. Purchasing in the face of such a huge number of contingencies and options is extremely difficult at best, especially for laypersons who know only that they need care.4

  1. Dependence and agency. To make even relatively rudimentary choices in treating complex, high-cost conditions, patients need expertise, but they are not experts. They might know something is wrong—being tired, feeling a lump, experiencing pain and so on—but they don’t know what the problem is (if they even know that a problem exists). Furthermore, one’s condition—purposely put in quotes above—cannot be known without diagnosis. To even know which of the multitude of different goods and services are needed, one needs to know the diagnosis before sorting through the options. To diagnose and treat most illness, therefore, patients need experts, aka “agents,” but they are dependent on those agents because they don’t know what the experts know. This problem is referred to as “information asymmetry.”

Necessarily, the problem arises, “How am I to choose an agent if I am not an expert?” Below we discuss the possibility of using insurers or employers, sophisticated buyers, as agents, but here we focus on consumers’ directly making choices among providers.
One way for consumers to overcome their ignorance is to try a product before choosing, as in our eyeglass example above. Most often, however, consumers don’t know what they need and therefore what they should try. Moreover, one cannot try a service in advance of the production of a service. One can’t try a surgeon without having surgery. The simultaneous production and consumption of health care makes such a strategy quite perilous.
Some health economists argue that providing consumers with information directly will lead to less reliance on agents. However, the dependence on agents stems from much more than lack of expertise. Patients are vulnerable not just because of their lack of knowledge but because they are necessarily emotionally involved. For this reason, some type of agent becomes essential, given the impossible task of choosing when one is sick and vulnerable. The necessary decisions do not resemble the discretionary purchase of a high-end television; it is selecting among costly approaches with unknown effects, for conditions whose true nature might not even be understood and the consequences of which can be disability or death.
The extreme heterogeneity coupled with the lack of consumer wherewithal to navigate among options (with perhaps limited exceptions for relatively discretionary health purchases that entail information that can be used by lay people) means that very few services are “shoppable.” A recent definition of “shoppable” is the following: “For a health care service to be ‘shoppable,’ it must be a common health care service that can be researched (‘shopped’) in advance; multiple providers of that service must be available in a market (i.e., competition); and sufficient data about the prices and quality of services must be available” (Frost and Newman 2016). One recent study has estimated that at most roughly onethird of total expenditures on health care are for shoppable services (White and Eguchi 2014).
Even for those services, consumers will shop only if the amount of their “skin in the game” makes the effort worthwhile. Insurance with first-dollar coverage obviously makes nothing worth shopping, while complete lack of insurance makes much, much more shoppable. A recent study from the Health Care Cost Institute examined employer-provided insurance from 2011 and reached the following conclusions again as maximums: (1) of the $524.2 billion in expenditures, 43 percent, $225.4 billion, was spent on shoppable services; (2) 15 percent of total expenditures were out of pocket; and (3) only $37.7 billion, 7 percent of total out-of-pocket expenditures, was spent on shoppable services (Frost and Newman 2016). The take-away is that unless out-of-pocket costs are very significantly increased—with the limit being complete de-insurance— relatively little is to be gained from consumer shopping.
Moreover, recent evidence shows that even when consumers are given the incentive to shop by the use of high deductible plans, their choices are perverse and their choices don’t improve with experience. Consistent with the findings from the RAND Health Insurance Experiment of many years ago, relatively high-income, sophisticated consumers did not respond to the incentives of high deductibles by shopping but instead simply reduced the quantity of their care across the board, failing to differentiate among services that have value from those that did not (Brot-Goldberg et al. 2015). Consequently, consumers chose to forego even high-value care.

  1. Shortage of sophisticated purchasers/agents. The situation might be totally different, however, if consumers could rely on sophisticated purchasers as their agents in choosing among providers and in choosing among services. A leading choice for this position is, of course, insurers. However, that just pushes the agency problem back by a degree, because now consumers need agents to pick their insurers as the agents that in turn pick their covered providers and treatments. In other words, consumers lack the knowledge or information to pick their insurer agents (who pick their providers as agents) because consumers l ack the needed knowledge—much less the information— to choose this agent.

The evidence that this problem exists—regardless of how consumer-friendly mechanisms like the ACA Marketplaces are made—is more than substantial. Numerous studies show that even relatively sophisticated persons choosing among insurance products get overloaded by too many choices and too much information, and they lack even rudimentary understanding of basic features of insurance products such as coinsurance, deductibles and networks (e.g., Bhargava, Loewenstein, and Sydnor 2015; Loewenstein et al. 2013).
For the most part in the United States employers have been the dominant agents shopping for insurance for their employees. However, this solution has proved inadequate for a number of reasons. First, the employer system leaves out millions, who in turn depend on public programs such as Medicare and Medicaid to act as their agents. Furthermore, employer-provided insurance and the segment of the population it covers has been declining. At its zenith in the late 1970s and early 1980s, employer-sponsored insurance covered approximately 70 percent of the non-elderly population (e.g., Gabel 1999, 65). Since then there has been a relatively steady march downward, with coverage of the non-elderly population falling as low as 58.4 percent in 2011 during the Great Recession but rebounding to, and possibly stabilizing at, 60 percent in 2013-2014 (Fronstin 2015b, 7).
Moreover, even when employers sponsor insurance, huge variation exists in terms of their incentives or capacity to serve as adequate agents for their employees. To function as agents, employers must be willing to invest in their employees, which means that in order to benefit from that investment they must have expectations of a fairly stable workforce (e.g., Fronstin and Helman 2003). These incentives vary across sectors of the economy and employers within one sector may have different incentives depending on such factors as firm size, the size, mixture and age of a firm’s workforce, and local labor market conditions (e.g., Buchmueller, Carey, and Levy 2013; Christianson and Trude 2003; Fronstin 2007; Moran, Chernew, and Hirth 2001). Thus, even among many employers offering insurance, incentives are relatively short term (e.g., Adams and Salisbury 2014); what may be good for the employer may not be good for employees over the long run.
Large employers and employer coalitions engage in serious efforts to understand their employees’ preferences and incorporate those preferences into plan designs (Peele et al. 2000). By focusing on dimensions of care like quality and satisfaction, instead of just on their own bottom line, these plan sponsors have acted as “responsible purchasers” (Lo Sasso et al. 1999) when they arrange for insurance or buy care directly from providers (e.g., Eggbeer, Morris, and Sukenik 2016). However, most employers lack this incentive or capability, particularly as scale decreases (e.g., Cebul et al. 2011; Rosenthal et al. 2007), and most workers are not employed by the large firms that have the capacity— technical skill and market power—to control expenditures. As a result, most employers have little choice but to turn to tools developed by the insurance industry itself to hold down premiums—high deductible plans and narrow networks— simply to cut their expenditures.

  1. Fragmentation among payers. This then brings us to the most important point, the extreme fragmentation of the financing system. With more than one million health plans sponsored by private employers, thousands of plans sponsored by public employers, thousands of Marketplace plans, 51 state Medicaid programs, nearly as many CHIP programs, and Medicare, payment is fractured and lacks more than minimal cooperation despite efforts by some states and CMS to begin to develop multi-payer initiatives.

Even if these initiatives are successful to some degree in controlling expenditures—and the evidence so far is not very promising (e.g., Dale et al. 2016)—they remain few in number and, moreover, they are voluntary, relying on governments’ enticement of private parties rather than a direct exercise of state power by such means as rate setting.
Thus, almost universally every payer fends for itself and has incentives with regard only to the insurance pools for which its plans are responsible. As discussed above, even a payer as large as Medicare attends only to its budget, obligated from its inception to pay only its “fair share” of costs. No payer has the incentive or capability to control expenditures overall. Instead, payers—and risk-bearing providers too— most often take a path of least resistance, which is to reduce expenditures by pushing risk and cost to someone else, rather face down powerful interests, overcome problems of collective action or challenge an organization’s fundamental way of doing things (e.g., Evans 1990; Marmor 2010). Externalities abound.
This (non)system of payment stands in stark contrast with those of other wealthy democracies, which accomplish risk pooling using government sponsorship or governmentregulated social organizations (or both), thereby creating systems grounded in social solidarity and social security. In Western Europe, with its strong tradition of solidarity and mutual aid, the risk of illness is pooled in the sickness funds, which cooperate voluntarily and with varying degrees of state coercion in collecting revenues, spreading risk, and paying providers. In national health system countries, like the United Kingdom and the Scandinavian countries, national governments unite all citizens into a single risk pool. In Canada, Canadian Medicare brings the population together into the risk-pooling systems of the provinces and territories, with some degree of federal subsidization. All advanced, industrialized countries socialize the risk-pooling function, and they pay with one voice, either as a single payer or as coordinated payers (e.g., White 2013).