Unregulated free market fanatics have been advocating a market based approach to health care reform. Part of their proposals involve more cost sharing by patients, and more competition between health insurers.
If by ‘more competition’, the conservatives mean more competition between very heavily regulated insurers to see which company can process the paper more efficiently, while patients can retain their connections with healthcare providers over the long term, then more competition might be good. This would require changes in the pricing policies of clinics and hospitals, so that one could get a binding price quote from providers before the service was delivered. It would also require a Swiss level of regulation, which would mean state and federal approval for rate increases, and in case of disputes, completely open books to federal regulators (not just the financials, but all the company’s records, data, and statistical analysis as well). It would be an public process, much more so than in the US. That is the way the commie Swiss pull it off.
But if this competition means a mere fiddling with the history of US practice over the last 25 to 30 years, then it won’t work. We will just have more of the same.
First, it is a mistake to say that more market based competition is a new strategy. It is simply recommending more of the same experiment the US has tried since the late 1970s. In fact, there was a buzz word for it that I do not hear much anymore: ‘managed competition’. Managed competition was supposed to provide the benefits of insurance through various kinds of managed care health plans and insurers, with companies competing to provide better and more efficient care, tailored to different groups of enrollees. But standards of care would be mostly self-regulated through guidelines and public reporting, and patients would have the option of shopping for better and cheaper care on a periodic basis. Sound familiar?
The problem is that insurance itself and healthcare providers have been offered as a package for a long time. It has been considered an efficient way to control utilization. So, if you change an insurer, you often have to change your doctor. This occurs with both managed care and insurance policies that have various kinds of preferred or closed provider lists that determine who you can and cannot see in order to get the insurance benefits.
One of the drawbacks to managed competition is that it has resulted in tenuous connections between individual patients and their healthcare providers, and tenuous relationships between providers and the insurer. The proportion of patients who leave a an insurance company over a year is called the turnover rate, as is the proportion of providers who leave an insurance provider. And evidence is starting to come in that says this high turnover rate increases the cost of care.
Let us look at enrollee turnover.
Survey results show that people in the US switch providers more often than in other high income countries. In survey in 2004 showed that a much smaller percentage of patients in the US have stayed with the same doctor for five years or more (37%) than in Australia (50%), Canada (53%), New Zealand (56%), or England (63%).
It is difficult to get recent estimates of the average annual patient turnover rates for large health care providers anymore. Five to ten years ago, published statistics showed and average of 20% to 25%. Recent cost and financial analyses usually assume a typical rate of 20%. While I cannot find estimates for the last several years, I do hear and read frequent complaints that turnover rates remain unacceptably high, so I assume they remain about the same today as at the turn of the century.
Turnover rates far higher, as high as 40% per year, occur in public plans for the poor. These higher rates occur because people drop in and out of eligibility, and because they are often allowed to change on almost a monthly basis, due to their more transient condition and fear that locking them into a provider for any length of time will lead to exploitation.
There are several reasons for these high turnover rates. Employers may add or drop insurers and managed care organizations as part of their health insurance benefits package. Insured employees may choose or be forced to change their provider at annual open enrollment. Even if your insurer is not the same as your provider (as in staff model managed care), your insurance company my change its allowable providers for any of a number of reasons (often due to corporate financial shenanigans rather than healthcare issues). Your may have to switch insurers or change from one of its plans to another (and therefore to a different list of providers) due to an increase in premiums.
It might be said that high annual turnover rates are part of the dynamic US society and cannot be avoided. But employee turnover averages between 10% and 15%, so enrollee turnover probably does not have to be as high as it is.
How does this high turnover rate affect care? Let us look at a simple example. First look at a simple problem from society’s perspective. You are the insurer. Consider an enrollee in their mid-forties and you want to reduce their medical cost for the next 22 years, until their expected retirement and entry into Medicare, and you know the enrollee will stay with your company. Suppose you are considering a smoking cessation, or diabetes, or blood pressure, or cholesterol management program. Say the average patient has a 0.002 chance of dying each year, and a social discount rate of 2% per year is used, and the program on average will save you $50 per year. What is the cash value today of providing that program? The cash value today is $874. If you can provide this program for less than $874, it is good business to provide it. Otherwise you don’t unless you are forced to by the government, or, say, an employer as a condition of being on their list.
What is the cash value worth if you estimate that there is a 20% chance that person will change health plans each year? The cash value is about $245. If you expect a higher turnover, say 40% per year in a public program for the indigent, now the cash value is $141. Now, even if you can provide the care for $874, you cannot recover your investment. Providing the care becomes an unattractive business investment.
This example does not even consider the fact that a profit making company in the corporate world will discount future savings at a much higher rate than 2% per year, which would reduce the cash value of treatment even more.
For this is the sausage making that goes into the design of benefits. Statements like “We cannot pay for some one to lose weight just in time for another company to reap the benefits”, or “We cannot afford to pay to produce former smokers for our competitors.” are heard. It sounds callous, but everything needs to be boiled down to how many pennies or dollars a set of programs adds to the per enrollee cost per month (the Per Member Per Month, or PMPM cost). If an insurer increases the PMPM too much, then it risks being dropped by employers, who usually have to pick up some of the tab. Or, if the employer accepts the additional cost, then the insurer may lose enrollees at the next open enrollment period. If too many of the added benefits are disease management programs for the chronically ill, and this is advertised during open enrollment month, then the insurer fears adverse selection: their benefits package may attract too many sick people.
Aggressive and effective disease management and preventive care programs that pay for themselves in the long typically cost at least 50 cents PMPM at the beginning, and often close to a dollar PMPM. If you add up all the programs you should be doing that are profitable from social perspective, then you may have an increase in several dollars PMPM, and the execs start getting very nervous. Especially if the programs will not break even over the next two to five years. And I think five years would be for only a very forward looking company.
A common problem of benefit design is trying to stuff all the disease management and prevention programs and benefits that are cost-effective from society’s point of view into a cost structure that has to be bare bones due to lightly regulated competition. After all, much of the PMPM goes to care that must be delivered for emergent conditions that demand attention and that cannot be avoided (at least at the benefit design stage, I have no direct knowledge of what goes on in executive suites in rescission and denial of claims decisions –those were very far above my pay grade. My pay grad was zero anyway, since I was a lowly statistician working with govt and private public health groups. )
These disease management and preventive care programs operate at a very thin margin. A few years ago PMPMs rangeed from $110 on up for employer plans, depending on the health of the employees and the generosity of the coverage. So, even for the very lowest PMPMs, you get nervous with marginal increases of just two or three percent.
And note what happens as the person approaches entry into Medicare? Sometime in their mid-sixties, their turnover rate becomes 100%. Entry into Medicare is important for determining the profitability of providing preventive and long term care, because the private insurer gets no benefits at all after that date. “We just can’t provide that care, we can’t get the investment back in time, and pretty soon, they are Medicare’s problem.” is something else that I have heard.
Some people will swear up and down in public that this is just not true. But some people will also say in private that if you go broke, you can’t provide any care at all, and it is surely better for our good company to stay in business than our sleazy (or bumbling) competitors down the road.
Many managed care health plans and some insurers understand this is a problem, and are willing to try cooperative approaches. People will say “If the other companies do everything they are supposed to do, we will too.” I believe that they are sincere, but the problem is in how to do it. One solution is public reporting of plan quality and performance. The HEDIS and CAHPs programs of the National Committee for Quality Assurance (NCQA) (http://www.ncqa.org/tabid/59/Default.aspx) provides public information on plan quality, but their surveys cover only a third of the population insured in the US. These programs are based on surveys, and while the surveys are conscientiously audited, some believe (including me) that they use crude quality measures (probably unavoidably, due to the limitations of surveys)
Large business customers of insurers and health plans have dealt with this problem by banding together into business purchasing groups that seek to improve the quality of care offered by the plans above what lightly regulated competition provides. There are several national umbrella organizations for these business healthcare purchasing groups which are organized by state. I think the largest is the National Business Coalition on Health (http://www.nbch.org/index.cfm), which has member organizations in over 30 states. But his effort mainly affects benefit packages for large corporations.
So this means that the smoking cessation therapy, the weight control, exercise, diabetes, blood pressure, cholesterol, etc. control program may just not get offered. Or, they may be very vaguely described in promotional literature, or boxes may be ticked of for surveys, but no money is spent for a real program.
And this leads to the problem that, even if that currently enrollee is not covered over the long run by a particular health plan or insurer, chances are that he or she will around long enough for society to pay the bills.
Is there any evidence that this turnover increases costs? Well, some new evidence may point in that direction.
A paper by Scanlon et al finds that competition does not increase quality, but it does decrease price. I do not think that does not tell us much about quality, since it uses rather crude survey data, but it does suggest that price pressure due to competition is real.
Research by Fang and Gavazza show that people in industries with higher turnover rates have increased health care costs during retirement, pointing to underprovision of medical care that would reduce long run costs. This study looks at employee turnover rates, but I think it gives evidence relevant for enrollee turnover in a healthcare plan as well. Quoting from the paper’s abstract:
When employers offer health insurance, the contracts have higher deductibles and employers’ contribution to the insurance premium is lower in high turnover industries. Moreover, workers in high turnover industries have lower medical expenditure and undertake less preventive care.
And the authors make the link themselves in the conclusion:
A very rough back of the envelope calculation suggests that on average every additional dollar of health expenditure during working years may lead to about 2.5 dollars of savings in retirement. While such calculations are necessarily rough, it does suggest potential channels to help solve the crisis of ever-rising health care costs in the U.S.
Finally, the results in this paper provide a strong link between the institutional features of the U.S. health care market, the incentives to invest in health it generates, and health outcomes. We believe that the interaction between private and public provision of medical care in the U.S. might be particularly subject to the dynamic externality we consider.
Finally to wrap things up, I will mention the recent paper discussed in the blogs by Sood et al, that give evidence that higher health care costs hurt economic performance in the US.
So, with the current system we are caught in trap. When one insurance company dominates a state or region, there is little competitive pressure for them to do a good job. Where there is competition that lowers price, the regulatory and institutional environment may reduce the current quality, and increase the long run costs of care, through the very process of competition itself.
Fang H and Gavazza A, Dynamic Inefficiencies in Employment-Based Health Insurance: Theory and Evidence. NBER working paper 2007.
Free copy at
Scanlon D, Swaminathan S, Lee W, and Chernew M. Quality and Efficiency
Does Competition Improve Health Care Quality? HSR: Health Services Research 43:6 (December 2008).
Found through the health-care economist blog:
Sood N, Ghosh A and Escarce J. Employer-Sponsored Insurance, Health Care Cost Growth, and the Economic Performance of U.S. Industries. HSR: Health Services Research 2009, in press.
I forgot the blog where I first saw this paper, so can’t give credit.