Healthcare Policies

HCA_531 Unit 1 additional reading: http://www.nejm.org/doi/full/10.1056/NEJMp1204516 H I G G S

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, S H A N I C Q U A 1 1 0 5 T S Health Politics and Policy H I G G S , 4th edition S H A N I C Q U A J. Litman, and Leonard S. Robins James A. Morone, Theodor 1 1 0 5 T S Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States 9781133819202, Health Politics and Policy, Fourth Edition, Morone/Litman/Robins – © Cengage Learning. All rights reserved. No distribution allowed without express authorization. Health Politics and Policy Fourth Edition James A. Morone, Theodor J. Litman, and Leonard S. Robins Director of Learning Solutions: Matthew Kane © 2008 Delmar, a part of Cengage Learning ALL RIGHTS RESERVED. 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We can’t have all we want of both fairness and efficiency, so we have to Nthink about tradeoffs between them. In the process we learn a more fundamental lesson: how to think about values in health policy. I C Q Two powerful ideals—fairness and efficiency—tower U simple of the two, and more often taken for over health policy. These ideas unite us around lofty granted as an incontrovertible value in health goals, only to divide us the minute we get down to A policy. details. That’s not only because there is an inherent tension between fairness and efficiency, but also because each has multiple meanings. Different interpretations of fairness and efficiency define different kinds of community. They draw different boundaries, gather different memberships and offer different levels of inclusiveness. In the shadow of these grand ideals lurk many dilemmas for those who would use them as yardsticks for policy evaluation. 1 1 0 5 T S EFFICIENCY Let’s start with efficiency, for though it is less inspiring than fairness, it is the more deceptively Efficiency is another word for a bargain. It is getting the most for the least, or, in slightly more economic terms, producing the most output for a given input. All policy reformers promise to give the country a bargain. Every person with a program to peddle promises that this program will save more than it costs. Efficiency is one of those motherhood values that everybody is for, so long as no one spells out exactly what it means—but it papers over a lot of conflicts. The idea behind efficiency is engagingly simple: First, we measure the costs and benefits of any program, proposal, or procedure. Then, with measurements in hand, we can compare them and choose the course of action with the highest ratio of benefits to costs. 24 9781133819202, Health Politics and Policy, Fourth Edition, Morone/Litman/Robins – © Cengage Learning. All rights reserved. No distribution allowed without express authorization. CHAPTER 1 Values in Health Policy: Understanding Fairness and Efficiency There are lots of problems with this vision, but the most basic is the core assumption that efficiency is an empirically measurable fact. I want to suggest, instead, that efficiency is a concept that must have and come from a point of view. Efficiency can be judged only with reference to a vantage point, and vantage points are particular, not universal.HWith multiple vantage points come multiple efficiencies. I Efficiency is not the one best way to do things for G Effisociety as a whole (as Pareto would have it). ciencies, like politicians, are tied to constituencies. G Let me illustrate with five examples. The Waiting Room S , A doctor’s waiting room is set up to be efficient. S a With long training and very expensive expertise, doctor is a valuable resource. A doctor can’tHknow in advance how much time each patient will need, A so to use the resource most efficiently, the receptionist schedules patients so that there are always N several waiting in the waiting room. The doctor never has an unused minute. The patients kill aI lot of time. You know the drill—how much time have C you killed in doctors’ waiting rooms in your life? (I venQ ture to say it is more time than you have bought yourself by reducing your cholesterol.) U The waiting room game is efficient only if we reA gard it from the doctor’s point of view. The doctor, as a resource, is being used to the max. His or her time is never wasted. Now look at it from the pa1 tients’ point of view. Some of their time is always 1 syswasted. In order to say that the waiting room tem produces the most medical care for the 0 least amount of time, we have to ignore all the patients’ 5 time wasted time. Or we have to value patients’ much less than the doctor’s time. Or both. T The point is simple. One person’s efficiency is another person’s waste. Even if we think thatSorganizing medical care so that patients wait for doctors is the most efficient use of medical resources for society as a whole, we still buy societal efficiency at the cost of lots of wasted time for lots of people. Somebody is hurt. The doctor’s waiting room is a good metaphor for the core notion of 25 efficiency itself—every gain and every loss belongs to somebody. The Million-Dollar Catheter Lab Under the headline “Doctors Say They Can Save Lives and Still Save Money,” the New York Times ran an article touting the Geisinger Foundation in Minnesota as the wave of the future. The Geisinger Foundation had figured out how to increase efficiency in medical care. Among its tricks was a grand version of the waiting room game. The health plan avoided “duplication of costly equipment” by doing all cardiac catheterizations at one hospital. “This does mean,” the New York Times allowed, “that some patients have to travel up to 100 miles for major procedures that in a less efficient system might be available at a community hospital.”1 It might be more efficient to have only one cardiac catheterization lab for the entire community served by the Geisinger Foundation, but we shouldn’t leap to that conclusion before we tally up all the costs of centralization. First, there are the costs of patients’ time; then the time of their spouses, friends, or whomever accompanies the patients; then the travel and lodging costs for all the people who have to travel so far from home. There are the emotional costs of making this procedure into an even bigger deal than it already it is by embedding it in a trip away from home. There may be still more costs associated with leaving home—paying someone else to mind the kids, for example, or the burden to yet another relative who comes into the home to mind the kids. One can imagine an infinite chain of disturbance: John needs a cardiac catheterization, his wife Janice goes with him, her sister Janeen takes time off from work to mind their kids, Janeen’s husband Arthur eats out because Janeen’s not there to cook, Janeen’s colleagues work harder to fill in for her, and some of Janeen’s work doesn’t get done, with attendant costs to her employer. A full efficiency calculus has to take into account all these points of view—the points of view of all the people who are affected by the remote location of catheterization labs. Tracing out such chains of 9781133819202, Health Politics and Policy, Fourth Edition, Morone/Litman/Robins – © Cengage Learning. All rights reserved. No distribution allowed without express authorization. 26 PART ONE Ideas and Concepts consequences is rather like doing genealogy: We can decide to go only so far as our great-grandparents, but drawing those limits is an arbitrary decision. This represents what I call the boundary problem in efficiency measurement. How do we know where to draw the boundaries in including the ramifications and costs of any way of organizing medical care? There are no natural or correct or obvious boundaries, because people live embedded in social networks, just as they are born into unbounded genealogical trees. The Paycheck Every paycheck is an expenditure to a hospital and a livelihood to an employee, and therein lies a tale. Whether that paycheck goes on the output side or the input side of an efficiency ratio depends on who is doing the accounting. We could adopt the point of view of the hospital CEO, and say we are trying to measure efficiency from the point of view of the hospital. How much input does it take to produce our output? To the CEO, the paycheck is input, and she or he wants to write as few paychecks as possible and keep each one of them as low as possible. But the hospital is also a community institution and a major local employer. To the governor, the mayor, and even the neighbors, the hospital’s role is not only to make sick people well but also to provide economic stability to the neighborhood. From the point of view of the local community, each hospital payroll check is output many times over. It means a livelihood to a hospital employee and her family. Because employees will spend most of their paychecks, each check means revenue to local businesses and, in turn, paychecks to those businesses’ employees. Robert Reich, the former secretary of labor, has made a career on the idea that economies produce not only goods and services, but jobs. Reich has taught us that while labor counts as “inputs” to production in classic market models, employment is also an economic output. Societies whose economies produce more employment for their members are H I G G S , S H A N I C Q U A 1 1 0 5 T S usually better off than those whose economies produce less. Thus, President Bill Clinton was only half right when he said in his first inaugural address that we can’t fix our economy without doing something about health care costs. The half he didn’t mention is that our health care system is the strongest part of our economy in terms of jobs. Between 1988 and 1992, in the run-up to the Clinton presidency, jobs in health care grew 43%, while jobs elsewhere in the private sector inched up a paltry 1%.2 Thanks largely to a graying population, jobs in the health sector are projected to increase almost twice as fast as jobs in all industries—27% compared with 14%—over the next several years.3 There’s a nasty double bind here. Health care expenditures are eating up our GNP and raising the cost of American goods, but every health care expenditure is income to someone employed in the health sector, or to someone employed by someone who makes things for the health care sector. We can’t get a handle on health care costs unless we are willing to put a lot of people out of work. There’s another wrinkle to the paycheck story. Jobs, on balance, probably contribute to people’s health: Paychecks feed families. Jobs give people pride, satisfaction, something to do. For the lucky employees of large businesses, jobs provide health insurance and access to medical care. To be sure, not all jobs provide decent wages, stress-free work, or even safe and healthy work, much less health insurance. But to the extent that jobs do provide these things, reducing the input side of health production by reducing paychecks doesn’t necessarily increase the ratio of output (health) to input (dollars). Only from the vantage point of someone whose vision stops at the hospital walls does cutting staff increase efficiency. From a wider community vantage point, such as the mayor’s, the efficiency calculus is much different. To extend the analogy, insofar as health analysts look only at the efficiency of health providers, they neglect all the important ways health activities are outputs to the communities in which providers provide. 9781133819202, Health Politics and Policy, Fourth Edition, Morone/Litman/Robins – © Cengage Learning. All rights reserved. No distribution allowed without express authorization. CHAPTER 1 Values in Health Policy: Understanding Fairness and Efficiency The Leaky Bladder To talk about producing health care most efficiently requires us to think that health care production can be analyzed like widget production. The most important difference is that medicine works not by people doing something to inert objects, H but by people interacting in a relationship. Trust and I warmth in the relationship contribute to better diagnosis and more effective therapy. Without G getting sentimental about old fashioned doctoring, G it is probably fair to say that time and talk are the two great healers. When time and talk are treatedSas inputs in a production process, to be measured , and minimized, medical care will suffer. Economists traditionally measure productivity in manufacturing as output per labor hour. In the S service sector, this definition becomes something like Hsince “number of people processed per labor hour,” handling people is what service industries do.AThus, hospital productivity is measured in patient days. N Extra personnel, such as more nurses or ombudspersons, no doubt add to patients’ comfort andI sense of well-being, and maybe even to their health; C but they lower productivity statistics because now there Q of are more workers spread over the same number patients. U If we adopt the point of view of the consumers, A patients, and families instead of the CEOs, productivity looks very different. In choosing a hospital or a nursing home for a relative, you would look for a 1 that high staff-to-patient ratio. The very qualities make hospitals and other human services more 1 attractive to consumers—more useful and helpful to 0 them—make them less productive in efficiency 5 statistics. What happens when we use economic notions T of efficiency to re-shape health services and drive down S its costs? Consider New York’s effort to reduce spending for home care during the 1990s. New York has the most extensive and generous Medicaid home care program. In 1991, 63 cents of every Medicaid dollar spent nationally on home care were spent in New York.4 The state department of social services decided to apply Scientific Taylorism to 27 home care. The department devised a system of defining precise client needs—such as feeding, toileting, and bathing—and designated an amount of time necessary for each task. The goal was to pay home care workers only for the time necessary to do these instrumental tasks and to cut out the unproductive or “dead time.” The dead time is the time a home care worker spends chatting with the client— schmoozing, joking, just being together in a human relationship. Under the new system, an elderly woman whose chief problem is incontinence would no longer be eligible for a full-time live-in attendant. Her allotment of care would be ten-and-a-half hours per week.That was apparently the time it took to service someone without bladder control. The department thought of paying for her care in the same way an auto mechanic would figure out how much time it takes service a car with a leaky gas tank. The pursuit of instrumental efficiency reduced this woman to a leaky container that needed mopping up.5 In health care, it is hard to tell what efficiency is because we don’t know what “output” is in the first place. We use some crude population measures, such as infant mortality and life expectancy, but these are not good measures of a health system’s output since they are influenced by lots of factors besides medical care. Researchers in the field of outcomes research have come up with a host of indicators about specific treatments, such as survival rates for cardiac bypass operations or recurrence rates for urinary tract infections. Others have developed “report cards” to measure organizational performance on such indicators as consumer satisfaction, delivery of preventive care, and administrative efficiency. Most of what the health system produces is not so easily definable and measurable—things such as better functioning, lowered risk of future disease, reduced pain, education about caring for oneself, and, let us not forget, reassurance, hope, and a sense of well-being. Health researchers are going to be hard-put to provide consumers with this kind of outcome data. Pain control, peace of mind, dignity, hope, and other important features of medical care are 9781133819202, Health Politics and Policy, Fourth Edition, Morone/Litman/Robins – © Cengage Learning. All rights reserved. No distribution allowed without express authorization. 28 PART ONE Ideas and Concepts notoriously hard to measure. And when the only incentive is to score well on the measures, that which is measurable drives out the unmeasurable. Suppose, for example, that all the outcome studies found that waiting a month or two to investigate a mildly suspicious breast lump had no discernible impact on survival rates among women whose lumps turn out to be malignant. Health plans might save money—without sacrificing longevity—by reducing their capacity for ultrasounds and biopsies and making women (and their anxious families) wait a few months for diagnoses. The outcome data on those plans would look just fine to regulators and consumers. The price would look good, too.Yet the human costs and benefits—private terror versus peace of mind—would not be measured, much less factored into the efficiency calculus. These are some of the traps that await the health care efficiency experts. Without carefully specifying whose costs count, what kinds of costs we want to control, and what kinds of output we want from the medical system, we end up simply shifting the burden and producing all kinds of perverse results. The Cost-Ineffective TB Program6 Paul Farmer, doctor, anthropologist, and international medical activist, was troubled by the large number of cases of drug-resistant tuberculosis in Haiti and Peru. When he and his colleague Dr. Jim Yong Kim tried to interest the World Health Organization in funding public health campaigns against MDR-TB (multi-drug-resistant tuberculosis, as the disease is nicknamed), they learned that WHO had deemed treating the disease in developing countries as not cost-effective. Indeed, it did cost about $15,000 per person to treat a patient with MDR-TB. Treating the simpler forms of TB that do respond to standard antibiotics was much cheaper. And so, in the deadly jargon of policy analysis, WHO had declared in one of its manuals: “In settings of resource constraint [read: poor countries], it is necessary for rational resource allocation to prioritise TB treatment categories according to the H I G G S , S H A N I C Q U A 1 1 0 5 T S cost-effectiveness of treatment of each category.”7 In other words, doctors like Farmer and Kim were supposed to ignore patients with MDR-TB because they could cure more people by putting all their resources into treating those with ordinary TB. With WHO’s seal-of-disapproval for treating MDR-TB in developing countries, it was nearly impossible for Farmer and Kim to raise money to support their programs. They were so committed to treating the disease, though, that they went ahead treating a small number of patients, begging and borrowing the money and drugs to do it. (At one point, they were “found out” by Brigham and Women’s Hospital; they had taken $92,000 worth of drugs from its pharmacy to Haiti and Peru. But they never intended to steal; they had a philanthropist in their corner who wrote a check to the hospital, with a note saying he thought the hospital “ought to be more generous toward the poor.”) They were determined to prove that at least the disease was curable. And they were incensed by the way that cost-effectiveness analysis, as they saw it, “rationalized an irrational status quo: MDR treatment was cost-effective in a place like New York, but not in a place like Peru.” Farmer and Kim had been buying some drugs to treat MDR-TB in different places. They noticed that one of the drugs, manufactured by Eli Lilly, cost $29.90 per vial at the Brigham and Women’s Hospital in Boston, $21.00 a vial in Peru, and only $8.80 per vial in Paris. When their Paris supplier suddenly refused to sell them any more drugs, a light bulb went on: The price of drugs is set by the pharmaceutical manufacturers, and they set radically different prices for different markets. If that were true—and it still is—then the “cost” of treating MDR-TB wasn’t a given. The “cost” in cost-effectiveness analysis was an artifact of the drug manufacturer’s pricing policies. Dr. Kim, Dr. Farmer, and their allies browbeat, jawboned, and negotiated. They persuaded some manufacturers to lower their prices for the MDR-TB drugs, and persuaded one of them, Eli Lilly, which had a patent on one of the most effective drugs, to donate large amounts of its drug. Suddenly, the cost 9781133819202, Health Politics and Policy, Fourth Edition, Morone/Litman/Robins – © Cengage Learning. All rights reserved. No distribution allowed without express authorization. CHAPTER 1 Values in Health Policy: Understanding Fairness and Efficiency of curing a case of drug-resistant TB plummeted from $15,000 a year to $1,500 a year, and cure rates were very high. But it wasn’t enough to get one or two companies to lower prices for a small amount of drugs. Farmer and Kim set about trying to change the market for MDR-TB drugs, to change the entire H system of supply and demand. They knew they needed I to get someone to manufacture large quantities of Gwith these drugs for less money. They joined forces other non-profit organizations to stimulate smaller G drug manufacturers to make generic versions of S MDR-TB drugs. In order to convince generic manufacturers to develop and produce the drugs, , they had to show that there was a market for them, meaning that a lot of TB projects would use (and buy) them. They masterminded a plan to getS MDRTB drugs listed on WHO’s official list of “essential H drugs,” a list that in itself symbolically signaled a A market demand. If a drug were on WHO’s essential list, then firms should manufacture it regardless. N Farmer and Kim’s public health coup turns costI effectiveness analysis inside out. Cost-effectiveness and cost-benefit analyses depend on knowing C the cost of whatever outcome you are trying to produce. Q You’ve got to plug some price into your equation. But if cost is simply a matter of what a supplier U charges, then it, in turn, depends on the power relaA the tionships between buyers and sellers. When World Health Organization evaluated the costeffectiveness of treating MDR-TB in developing 1 countries, it took the price of drugs as a given— 1 Imsomething fixed, inherent, and unchangeable. plicitly, then,WHO also took as a given the political 0 economy of pharmaceuticals—the dominant market 5 position of large American pharmaceutical companies, the monopoly pricing permitted by American T patent protection, the power of manufacturers to dictate prices, and WHO’s power to dictateSwhat diseases public health programs would treat, and therefore which drugs they would purchase. If instead, we regard the cost of inputs as themselves outputs of a political-economic system, then they are not objective measures, and the cost-benefit analysis that derives from them is no more objective. 29 Prices and cost-effectiveness judgments are captives of the political status quo, and cost-effectiveness analysis is a recipe for preserving the current distribution of resources. FAIRNESS Elsewhere in the world, medical insurance is called “sickness insurance” and it covers sick people. In the United States, we have “health insurance,” and as befits its name, insurers strive to weed out sick people and cover only the healthy. This is about as perverse a system as one can imagine, and one that poses an extraordinary puzzle: Why and how does a country’s political system produce a health-policy sub-system whose result is absolutely antithetical to its public purpose? The result can only be explained as a long history of political conflict between worldviews about fairness and equity. This conflict is vividly illustrated—quite literally, illustrated with photographs—in the advertising campaigns of health insurance and other interest groups. In the late 1980s, the trade associations of the health and life insurance industry sponsored an advertising campaign to persuade the public that “paying for someone else’s risks” is a bad idea. In one of these ads, a photo of a worker in a hard hat and tool belt straddling the girders of a steel tower was captioned “If you don’t take risks, why should you pay for someone else’s?” Another ad showed a young man and woman playing basketball one-on-one, and asked “Why should men and women pay different rates for their health and life insurance?” The choral refrain at the bottom of each ad in the series went “The lower your risk, the lower your premium,” and the small print explained the relevant facts. For example, Women under 55 normally incur more health care expenses than men of the same age, so they pay more for individual health insurance than men. After age 55, women 9781133819202, Health Politics and Policy, Fourth Edition, Morone/Litman/Robins – © Cengage Learning. All rights reserved. No distribution allowed without express authorization. 30 PART ONE Ideas and Concepts generally have lower claims costs, so they normally pay less for individual health insurance than men of the same age. That’s why insurers have to group people with similar risks when they calculate premiums. If they didn’t, people with low risks would end up subsidizing people with high risks. And that wouldn’t be fair. In 1991, with Bill Clinton running on a platform of universal access to health care, The Prudential Insurance Company ran a very different sort of ad campaign. In the New York Times, Wall Street Journal, and many news weeklies, readers saw a photo of a chest X-ray with a large white mass in the lower right quadrant. Though most readers couldn’t interpret the X-ray, the caption explained its significance: “Because he works for a small company, the prognosis isn’t good for his fellow workers either.” The small-print text went on to explain how one employee’s serious illness might cause a small company to be charged “excessively high premiums” come renewal time, and how the company might even be forced to drop its health insurance coverage. Prudential, readers were assured, didn’t consider this situation fair, and so it was backing legislation to “regulate the guidelines and rating practices of insurers.” Offering a rather different interpretation of fairness from the one in the trade association series a few years back, Prudential opined: “After all, a small company shouldn’t be forced to drop its health plan because an employee was sick enough to need it.” These advertisements have many layers of meaning. On the surface, the issue is how commercial insurers ought to price their health insurance policies. Just below the surface lurks the struggle over health insurance reform proposals in the states and Congress. But the underlying question is whether medical care should be distributed as a right of citizenship or as a market commodity. If, as “the loweryour-risk-the-lower-your-premium” series commends, we charge people as closely as possible for the medical care they need and consume, then we are treating medical care like other consumer goods H I G G S , S H A N I C Q U A 1 1 0 5 T S distributed through the market. If, like Prudential, we are unwilling to throw sick people and their fellow employees out of the insurance lifeboat, if we think that perhaps the healthy should help pay for the care of others, then medical care becomes more like things we distribute as a basic right, such as education.These advertisements symbolize two very different logics of insurance: the actuarial fairness principle and the solidarity principle. At a still deeper level, these advertisements offer competing visions of community. They suggest how Americans should think about what ties them together, and to whom they have ties. In one view, no one else should feel an obligation to pay for the medical care of those who get injured while doing constructive work for society. Similarly, women of childbearing age are exhorted daily to assure the health of their babies, even those not yet conceived; yet no one else should finance their extra medical care, least of all the men with whom they are creating the next generation. Alternatively, says the Prudential ad, we should not abandon those who are sick or attached to people who are sick; sick and healthy, we are all one community. Many things go into the making of community. Communities share a common culture and a way of perpetuating it. They establish processes for governance, conflict resolution, and self-defense. But above all, the people in a community help each other. Mutual aid among a group of people who see themselves as sharing common interests is the essence of community. A willingness to help each other is the glue that holds people together as a society, whether a simple peasant community, an urban neighborhood, or a modern welfare state. What distinguishes the mutual aid in the modern welfare state from that in peasant societies is largely a matter of scale: the number of people encompassed in the mutual aid network, the complexity of the rules that govern how we aid one another, and the variety of goods and services that we provide. All mutual aid systems are based on a communal agreement—why, when, and to whom should people give up something of their own and offer help? This is not to say there is no conflict over redistribution in 9781133819202, Health Politics and Policy, Fourth Edition, Morone/Litman/Robins – © Cengage Learning. All rights reserved. No distribution allowed without express authorization. CHAPTER 1 Values in Health Policy: Understanding Fairness and Efficiency a community; on the contrary, the agreements are constantly under challenge, the communal boundaries are always being re-drawn. But there is also a core of stable expectations about when people can expect help from one another. In most societies, sickness is widely accepted as a condition that should trigger mutual aid; the H American polity, however, has had a weak and wavering I commitment to that principle.The politics of medical G over insurance can only be understood as a struggle the meaning of sickness and whether it is a condition G that should automatically generate mutual assisS tance. This is more than a cultural conflict, however—more than a fight over meanings. The ,private insurance industry, the first line of defense in the U.S. system of mutual aid for sickness, is organized S idea around a principle profoundly antithetical to the of mutual aid. Indeed, the growth and survivalHof the industry depends on its ability to finance health care A that by charging the sick and convincing the public “each person should pay for his own risk.” N Actuarial fairness—each person paying for his or I her own risk—is more than an idea about distributive justice. It is a method of organizing mutual C aid by fragmenting communities into ever smaller, Q that more homogeneous groups. It is a method leads ultimately to the destruction of mutual U aid. This fragmentation must be accomplished by fosterAthan ing in people a sense of their differences rather their commonalities; it emphasizes responsibility for self rather than interdependence within a com1 munity. Moreover, insurance necessarily operates 1 is on the logic of actuarial fairness when it, in turn, organized as a competitive market. 0 Both social and commercial health insurance are 5 mechanisms for pooling savings and redistributing funds from healthy premium-payers to sickTones. However, they operate by two fundamentally differS ent logics—the solidarity principle and actuarial fairness. The Solidarity Principle Social insurance operates by the logic of solidarity. Its purpose is to guarantee that certain agreed-upon 31 individual needs will be paid for by a community or group. This is the logic of mutual aid societies and fraternal associations, as well as government social insurance programs. Having decided in advance that some need is deserving of social aid, a society undertakes to guarantee that the need is met for all its members. The argument for financing medical care via social insurance rests on the prior assumption that medical care should be distributed according to medical need. If medical care were financed like most market goods, by charging people for exactly the goods and services they consume, medical care would only be partially distributed according to need. Those who are sick and need care would come forward to purchase it, but only those who could afford it would actually receive care. In addition, some who are not sick but who have plenty of resources might try to purchase care as well. People who could not afford to buy care would not receive any, regardless of their need for it. Social insurance unties the two essential connections of the market, the link between the amount one pays for care and the amount one consumes, and the link between the amount of care one buys and one’s ability to pay. Under a social insurance scheme, individuals are entitled to receive whatever care they need, and the amounts they pay to finance the scheme are totally unrelated to the amount or cost of care they actually use. (Of course, to the extent there are coinsurance and deductibles in a social insurance scheme, the amount a person pays is slightly related to the amount one consumes.) Of course, even social insurance doesn’t guarantee that medical care is distributed exactly according to medical need. Need, after all, is a rather elusive concept, all the more so in medicine. Unlike most consumer goods, the value of medical care depends on its being customized. Whether someone can benefit from a particular medical procedure doesn’t hinge on personal “tastes and preferences,” as classical economic theory would have it, but rather on a correct match between a medical procedure and the person’s pathology. The degree to which social insurance results in allocation of care 9781133819202, Health Politics and Policy, Fourth Edition, Morone/Litman/Robins – © Cengage Learning. All rights reserved. No distribution allowed without express authorization. 32 PART ONE Ideas and Concepts according to need is mediated by the professional skill of medical personnel in matching procedures to pathologies. Many other factors influence the distribution of care as well, such as local professional norms about the appropriate use of procedures, the supply of medical facilities and personnel and equipment, and ownership of diagnostic and therapeutic facilities, such as imaging centers and dialysis clinics.8 All of these factors mean that even under a system of pure social insurance, medical care will not be perfectly distributed according to medical need. But the ideal of the solidarity principle is that we should strive to distribute medical care according to medical need, and to limit the influence of one’s ability to pay. The solidarity principle doesn’t require that medical care be distributed equally in the sense that everyone gets the same amount. Social insurance is not a fixed-shares arrangement, where each contributing member gets an equal slice of the pie. When people “pool their risks” and their savings in social insurance, they are taking their chances that they may never become sick or need expensive care, and that most of their contributions will go to help the members who do incur a need for expensive care. As in any lottery, they pay into the pot, regardless of whether they ultimately get to draw out of it. In fact, only some members of a risk pool will get sick enough to need care. Since only those who get seriously sick will receive a payout, the others necessarily pay to help them. Thus, redistribution from the healthy to the sick is built into insurance. Payouts are made on the basis of need (or loss incurred), not on the basis of contributions to the scheme. Health policy analysts and corporate benefits managers frequently discover with great alarm that a small portion of insured people accounts for a huge proportion of claims expenditures, as though this skewing means that something is amiss. But subsidy from the vast majority of insured people to a small minority is precisely what is supposed to happen in insurance. Such skewing is what people agree to when they join a social insurance riskpool. They accept it because they don’t know, when they join, whether they will be on the giving end or the receiving end, and they want to protect themselves in case they are part of the unlucky minority. They accept it, too, because they believe that sickness is one of those contingencies when society should rally around the individual. H Actuarial Fairness I Commercial insurers—that is, private firms selling G insurance as a profit-making venture—operate on a G deep contradiction. They provide for pooling of and mutual aid among policyholders, much as S risks social insurance does; yet they select their policy, holders, group them, and price their policies acS H A N I C Q U A 1 1 0 5 T S cording to market logic. When they speak of equity, commercial insurers espouse the principle of actuarial fairness: Premium rates should be differentiated so that “each insured [person] will pay in accordance with the quality of his risk.”9 By quality of risk, insurers mean the likelihood a person will incur whatever loss he or she is insured against. In life insurance, they are principally interested in factors that might affect life expectancy; in health insurance, they are interested in factors that affect or predict a person’s use of medical care.These include one’s occupation, hobbies (since some are very dangerous), family medical history, personal medical history, and any medical information such as family history or a genetic marker that predicts disease, even if the disease hasn’t yet occurred. Insurers assert that actuarial fairness requires them to seek the most complete risk information on applicants. An insurer has the “responsibility to treat all its policy holders fairly by establishing premiums at a level consistent with risk represented by each individual policyholder.”10 To accomplish this task, insurers must have the “right . . . to create classifications to recognize the many differences which exist among individuals.” People who have diseases or serious risks to their health are in a sense getting a more valuable insurance policy than those with lesser risks, so they ought to pay more for the extra value. Or, to see the matter another way, if insurers did not identify people with higher risks, separate them from the general pool of policyholders, and charge them more, 9781133819202, Health Politics and Policy, Fourth Edition, Morone/Litman/Robins – © Cengage Learning. All rights reserved. No distribution allowed without express authorization. CHAPTER 1 Values in Health Policy: Understanding Fairness and Efficiency insurers would be causing a “forced subsidy from the healthy to the less healthy.”11 “An applicant presenting a low risk of loss to the insurer should not be required to subsidize another applicant who presents a higher degree of risk.”12 Here is the crux of the conflict: The very redistribution from the healthy to the sick that is theH essential purpose of medical insurance under I the solidarity principle is anathema to commercial insurers under the actuarial principle. Tellingly,G insurers virtually never use the word “subsidy” without G a pejorative modifier such as “coerced,” “forced,” or S “unfair.” Although all insurance entails a subsidy from the lucky to the unlucky (whether luck , concerns car accidents, diseases, or fires), commercial insurers eschew subsidy from one “class” of policyS holders to another. “Class,” in insurance jargon, means risk class, or a group of people with H similar probabilities of becoming sick (or perhaps more acA curately, with similar probabilities of generating costs to the insurer). To commercial insurers, N subsidy is not what they pursue, but the unwanted result of their failure to segregate peopleI into homogeneous risk classes. C If the actuarial fairness principle could be perQ infectly implemented, if we had perfect predictive formation and precise rating, each person would U pay for himself. This, of course, would be the antithesis A of insurance. In fact, in a world of perfect predictive information, there would be no need and no market demand for insurance, because no one would stand 1 to gain by “beating the odds.” Since each insurance 1 policy would be priced according to the medical care actually consumed by each policyholder, people 0 would do better to pay for their care directly and 5 and avoid paying for the administrative expenses profits of insurance companies. And since the Tprice of insurance would be the same as the price of S to needed medical care, those who couldn’t afford pay for their own care couldn’t afford to pay for insurance either. Insurers rarely acknowledge that actuarial fairness undermines the solidarity principle of insurance—the very reason to have insurance— but the ultimate conclusion of the logic of actuarial fairness is clear. In the words of Robert Goldstone, 33 vice president and medical director of Pacific Mutual Life Company, In theory, every individual should have a different rate, based on a multivariate analysis of every possible health condition and risk factor that can be evaluated.13 Actuarial Fairness and the Politics of Exclusion To put the matter simply, the U.S got a “health insurance” system instead of a “sickness insurance” system because our government fostered privatization of the social welfare function from the beginning. Because government allowed the private sector to provide the first line of defense against illness, and because the private sector operated on the logic of actuarial fairness, the door was open for a politics of exclusion. The first battles over insurance company underwriting practices concerned race, specifically the use of race as an underwriting criterion in life insurance. As early as the 1880s, several states tried to prohibit life insurance companies from charging higher rates to blacks than whites.14 Insurers found it quite easy to avoid public interference with their “scientific principles.” In 1900, Frederick Hoffman, then chief statistician of The Prudential Company, wrote that many states had passed laws “compelling Industrial [life insurance] companies to accept Negro risks at the same rates as those charged the white population. Fortunately,” he boasted, “the companies cannot be compelled to solicit this class of risks, and very little business of this class is now written by Industrial companies, practically none by the Prudential.”15 In the ensuing century, there have been more battles between the public and private sectors over race and other social groupings. In the late 1960s and 1970s, the property insurance field was plagued by the issue of “redlining”; the racial composition of a neighborhood became an explicit factor in determining the availability of mortgages and property insurance. Also in the 1970s, activists 9781133819202, Health Politics and Policy, Fourth Edition, Morone/Litman/Robins – © Cengage Learning. All rights reserved. No distribution allowed without express authorization. 34 PART ONE Ideas and Concepts challenged the use of gender as a factor the price of life and disability insurance, as well as automobile insurance. Disease-based interest groups (notably Tay-Sachs Disease, Sickle Cell Anemia, and DES mothers and daughters) challenged the use of “their disease” as a criterion in underwriting life and health insurance, and succeeded in winning protections in several states. In the late 1980s, the dominant underwriting issue was life and health insurers’ use of sexual orientation as a proxy for AIDS risk and then HIV tests. For the most part, insurers have been able to block restrictions on their underwriting criteria, either by defeating bills and regulations or by inserting narrow language to permit the use of criteria that are “actuarially sound.” What risk classification and segregation insurers cannot accomplish through direct medical underwriting, they can often accomplish through targeted marketing or pricing. Prudential’s early strategy of simply not soliciting Negro business was the prototype. Today we see HMOs and other managed care plans featuring their maternity and fitness club benefits when they market plans to employee groups; they market to the young and healthy. Some health plans quietly avoid contracting with physicians in minority neighborhoods, another way of making their insurance inaccessible to populations against whom they cannot discriminate outright. And finally, commercial insurers by-and-large have been able to capture public regulators. Most state insurance departments and commissions are controlled by men who come from commercial insurance and will return to lucrative jobs there. They share the insurers’ worldview in which equity is actuarial fairness. In the 1980s, when the battle over HIV testing by health and life insurers was largely perceived as a struggle about the inclusion of gays in the insurance lifeboat, a state commissioner told the Office of Technology Assessment (emphasis added): “We encourage insurers to test where appropriate because we don’t want insurance companies to issue policies to people who are sick, likely to be sick, or likely to die.”16 H I G G S , S H A N I C Q U A When public regulators see their job as protecting private health insurers from covering sick people, we get a system of “health insurance” instead of “sickness insurance.” It is not going to be easy to eradicate the actuarial fairness principle from the American insurance system. We have had nearly a century of industry promoting the “each person should pay for himself” principle as the ideal of fairness. The public servants who are responsible for regulating insurance generally believe in this principle as both a matter of fairness and a matter of financial necessity. Actuarial fairness makes sense as a business strategy in competitive insurance markets. With this combination of elements, it will be extraordinarily difficult to prevent insurers from engaging in implicit and explicit underwriting within any foreseeable system based on market competition among insurers. Efficiency and fairness are fine aspirations for public programs, but no one should be lulled into thinking they are neutral criteria for judging the virtues of health care systems or reform proposals. They are more like empty packages, craftily giftwrapped with glitter and bows, tempting us to imagine their contents. Political actors, stakeholders in the complex world of health insurance, conduct much of their politics by offering visions of what might be in these boxes under different political and economic scenarios. When the boxes are finally opened, some people will be showered with useful and lucrative gifts; others will go away empty-handed. 1 1 0 5 T STUDY QUESTIONS S 1. What are some examples that demonstrate that efficiency is a subjective concept? 2. What are some of the costs pertaining to centralization of (medical) procedures? 3. How does the ‘boundary problem’ arise in the measurement of efficiency? 9781133819202, Health Politics and Policy, Fourth Edition, Morone/Litman/Robins – © Cengage Learning. All rights reserved. No distribution allowed without express authorization. CHAPTER 1 Values in Health Policy: Understanding Fairness and Efficiency 4. How can rising health care costs be seen as a positive development? Whose perspective would this require one to adopt? 5. Why is it difficult to identify (much less measure) health ‘outputs’? 6. Why is it important to treat health input costs H as products of a particular politico-economic configuration, rather than absolute? I 7. What are the actuarial fairness and solidarity principles? What is their relevance to G the finance of health care? G 8. Develop an opinion: Which principle—actuarial S fairness or solidarity—orms a superior basis for insuring health care? Why? Note the strengths , and weaknesses of each principle. 9. Why are there limitations on the extent to S which health care can be matched to patient need, even under a system governed byHthe principles of mutual aid? A in 10. In what sense do commercial insurers act ways that, taken to their logical conclusion, N would render insurance superfluous? I 11. How has the issue of insuring populations become racially charged? C NOTES Q U A 1. Erik Eckholm, 1991, A1. 2. Robert Pear, 1993, A1. 3. US Department of Labor, Bureau of Labor Sta1 tistics, Bulletin 2601, “The 2006–07 Career 1 Guide To Industries,Table 3 (www.bls.gov/oco/ cg/print/cgs035.htm, visited Jan. 15, 2006). 0 4. Bennett, 1992, p A1. 5. This story is from the New York Times 5 article, ibid. T 6. I take the details of this story from Kidder, Sfrom 2003. All quotations in this section are this book unless otherwise noted. 7. World Health Organization, Treatment of Tuberculosis: Guidelines for National Programmes. 2nd ed. Geneva, 1997, quoted in Kidder, 2003, p 141. 35 8. Hillman, B.J., et al., 1990, 1604–8 9. Bailey, H.T.,T.M. Hutchinson, and G.R. Narber, 1976. 10. Clifford, K., and R. Iuculano, 1987. 11. Clifford, K., and R. Iuculano, ibid. 12. Hoffman, J.N., and E.Z. Kincaid. 1986–7. “AIDS: The Challenge to Life and Health Insurers’ Freedom of Contract.” Drake Law Review 35: 709–71. 13. Goldstone, R., 1992. 14. James, Marquis, 1947. 15. Hoffman, F.L., 1900. 16. Statement made at a meeting (February 17, 1987) of the Advisory Panel to the Office of Technology Assessment for its study, Medical Testing and Health Insurance (US Congress, 1988). I was a member of this panel. REFERENCES Bailey, H.T., T.M. Hutchinson, and G.R. Narber. 1976. The Regulatory Challenge to Life Insurance Classification. Drake Law Review 25: 779–827. Bennett, James. 1992. “Home Care in New York, A Model Plan, Awaits Cuts,” New York Times November 20. p A1. Clifford, K., and R. Iuculano. 1987. “AIDS and Insurance: The Rationale for AIDS-related Testing,” Harvard Law Review 100: 1806–24. Eckholm, Erik. 1991. “Doctors Say They Can Save Lives and Still Save Money.” New York Times March 18. p A1. Goldstone, R. 1992. “Substandard, Not Inferior.” Best’s Review 92 (March): 24–8, 90. Hillman, B. J., et al. 1990. “Frequency and Costs of Diagnostic Imaging in Office Practice—A comparison of Referring and Radiologist-Referring Physicians. New England Journal of Medicine 323: 1604–8. Hoffman, F.L. 1900. History of The Prudential Insurance Company of America (Industrial Insurance) 1875–1900. Prudential Press. Hoffman, J.N., and E.Z. Kincaid. 1986–7. “AIDS: The Challenge to Life and Health Insurers’ Freedom of Contract.” Drake Law Review 35: 709–71. 9781133819202, Health Politics and Policy, Fourth Edition, Morone/Litman/Robins – © Cengage Learning. All rights reserved. No distribution allowed without express authorization. 36 PART ONE Ideas and Concepts Kidder, Tracy. 2003. Mountains Beyond Mountains: The Quest of Dr. Paul Farmer, A Man Who Would Cure the World. New York: Random House. James, Marquis. 1947. The Metropolitan Life: A Study in Business Growth. New York: Viking Press. Pear, Robert. 1993. “Health-Care Cots Up Sharply Again, Posing New Threat,” New York Times January 5. p A1. H I G G S , US Department of Labor, Bureau of Labor Statistics. Bulletin 2601, “ The 2006–07 Career Guide To Industries, “Table 3 (www.bls.gov/oco/cg/print/ cgs035.htm, visited January 15, 2006). US Congress. 1988. Advisory Panel to the Office of Technology Assessment for its study, Medical Testing Health Insurance. S H A N I C Q U A 1 1 0 5 T S 9781133819202, Health Politics and Policy, Fourth Edition, Morone/Litman/Robins – © Cengage Learning. All rights reserved. No distribution allowed without express authorization. CHAPTER 2 Markets and Politics H Thomas I G G S , Rice S H economists think about the two most important concepts In this chapter, Thomas Rice explains how A in health care economics—markets and government. N I produced using the least costly set of inputs. FurtherC more, the profit motive encourages firms and wouldQ be firms to be innovative in developing new products and techniques to meet future consumer demands. U MARKETS Economists have shown that if certain assumpA of Since the publication by Adam Smith of Wealth tions are met, then a market economy will result in a Nations in 1776, economists have been enamored with markets.This is understandable. Smith and sub1 sequent analysts demonstrated that markets can, 1 through an “invisible hand,” make the self-interested actions of disparate individuals result in—at least by 0 some definitions—an “optimal” allocation of soci5 ety’s resources. The logic of markets is now well understood. T People “demand” the things that they want most, ensuring S serthat they purchase the market basket of goods and vices that maximizes their “utilities” given their limited budgets. Suppliers produce only those things that are demanded by consumers, and in doing so must use inputs as efficiently as possible so as to price their products low enough to attract buyers. Thus, people are able to buy the things they desire, and these things are state called “Pareto optimality,” named after Italian economist Vilfredo Pareto. Under Pareto optimality, it is impossible to make someone better off without making someone else worse off. This might seem to be an odd criterion for optimality, but upon reflection it is logical. If an economy were not in Pareto optimality, then it would be possible to make someone better off without harming another person. But if that were the case, then things hardly would be optimal. Rather, changes could be instituted to help those who might benefit without resulting in any harm to others. Only when no such changes are any longer possible would the economy be in a Pareto optimal state. Aside from its reliance on certain assumptions, it is critical to understand Pareto optimality does not address issues of equity or the desirability of the 37 9781133819202, Health Politics and Policy, Fourth Edition, Morone/Litman/Robins – © Cengage Learning. All rights reserved. No distribution allowed without express authorization. 38 PART ONE Ideas and Concepts distribution of income that results from the workings of a competitive economy. Thus, a market outcome in which one person has nearly all of the output, and another has almost none, could still be consistent with Pareto optimality. In fact, this can easily occur if the former person begins with the vast majority of initial wealth or input. Amartya Sen makes this point graphically: An economy can be [Pareto] optimal . . . even when some people are rolling in luxury and others are near starvation as long as the starvers cannot be made better off without cutting into the pleasures of the rich. If preventing the burning of Rome would have made Emperor Nero feel worse off, then letting him burn Rome would have been Pareto-optimal. In short, a society or an economy can be Pareto-optimal and still be perfectly disgusting.1 Although it might seem desirable to transfer wealth from the rich person to the poor person, doing so cannot be viewed as improving the economy from a Pareto optimality standpoint because the change will involve making the rich person worse off. In summary, under a market-based economic model, competition is designed to enhance efficiency; it does not necessarily improve equity. In thinking about the impact of markets on health care, we will need to consider both the applicability of the model’s assumptions as well as any concerns we have about the resulting distribution of wealth. implications for health policy would include the following key requirements:2 ■ H I G G S , S H A N I C Q U A 1 1 0 5 T ASSUMPTIONS UNDERLYING S THE SUCCESSFUL OPERATION OF MARKETS There is no single agreed-upon list of assumptions about which the competitive economic model is based. A simple, abbreviated list emphasizing the ■ ■ Individuals are rational; they know what goods and services are likely to make them best off; and they can effectively use available information to achieve this best-off position given their wealth. Individuals’ tastes for goods and services are predetermined and cannot be unduly influenced by physicians or other providers. The distribution of wealth is approved of by society, and furthermore, individuals care only about their own resources and not those of others. What happens if these conditions are not met (as, I will argue, is the case in health care)? One policy alternative to markets is government intervention in the marketplace. Government can try to correct imperfections through direct regulation or control, or alternatively, institute policies to counteract some of the potentially undesirable consequences of market competition. To make this more concrete, suppose that direct-to-consumer advertising results in patients demanding prescription medications from their physicians that are both medically inappropriate and cost-increasing—resulting is poorer health and higher costs. A way to address this problem might be to further regulate the content and extent of such advertising (as was the case in the past). A different strategy would be for government to engage in its own advertising campaign to counteract what it believes to be misleading messages from industry. Sometimes both strategies are employed. In the case of cigarette smoking, government has banned or severely limited various types of advertising, and concurrently, created its own advertisements aimed at convincing smokers to quit and at others not to start. The alternative to government action is for government to do nothing. Even if markets do a poor job in some areas, government might perform even worse. There are several possible reasons for this. Government officials may lack the expertise of those in the private sector. Moreover, they may be beholden to 9781133819202, Health Politics and Policy, Fourth Edition, Morone/Litman/Robins – © Cengage Learning. All rights reserved. No distribution allowed without express authorization. CHAPTER 2 Markets and Politics 39 special interests, particularly those that contribute materially to these officials’ power or wealth. And even in the absence of such undue influence, government is often inefficient because it does not face competition for the services it provides.3 Over the years many economists have weighted in over this issue. Henry Sidgwick (1887) onceH stated that, “It does not follow that whenever laissez-faire I falls short government interference is expedient; G in since the inevitable drawbacks of the latter may, any particular case, be worse than the shortcomings G of private enterprise.”4 More than 100 years later, S Mark Pauly expresses a similar view when noting that “a government staffed by angels could undoubt, edly do a better job than markets run by humans”5 he is less sure when humans run the government. S is Charles Wolf (1993) adds, “The actual choice among imperfect markets, imperfect governments, H and various combinations of the two. The cardinal Amareconomic choice concerns the degree to which kets or governments—each with their respective N flaws—should determine the allocation, use, and distribution of resources in the economy.”6 We Iwill return to the issue of how markets and government C can work together to improve the health care. Q U A MARKETS IN HEALTH CARE: ARE THE ASSUMPTIONS MET? 1 1 This section briefly reviews evidence drawn from 0 health care systems about the three assumptions underlying markets, discussed earlier. 5 T Assumption No. 1: Individuals are rational; they know what goods and services are likely S to ■ make them best off; and they can effectively use available information to achieve this best-off position (given their wealth). In most areas, health included, individuals tend to act fairly rationally and know what is best for themselves, at least as evaluated by conventional norms. There are obvious exceptions. People ride motorcycles without helmets. Some desperate people in developing countries sell their own organs, a practice that reduces rather increases their economic status.7 Others kill themselves when an objective observer might have viewed the person’s circumstances as remediable. In general, though, government does not interfere too much with markets to deal with these issues; rather, it lets people make good or bad decisions for themselves. A more troubling issue is people’s ability to successfully use information about health-related issues.This involves both care and coverage decisions. They face at least two types of problems. One relates to the concept of the “counterfactual.” Counterfactual questions are those that are hypothetical in that they concern what would have happened if history had been different. Questions such as these can never be answered with certainty. Some examples in health: “Would the problem have gone away if I had left it untreated?” “What would have happened if I had sought the care of a specialist instead of a primary care physician?” And “Would the result have been different if I had seen a different primary care physician than the one I sought?” In this regard, Burton Weisbrod has written that, For ordinary goods, the buyer has little difficulty in evaluating the counterfactual—that is, what the situation will be if the good is not obtained. Not so for the bulk of health care . . . Because the human physiological system is itself an adaptive system, it is likely to correct itself and deal effectively with an ailment, even without any medical care services. Thus, a consumer of such services who gets better after the purchase does not know whether the improvement was because of, or even in spite of, the “care” that was received. Or if no health care services are purchased and the individual’s problem becomes worse, he is generally not in a strong position to determine whether the results would have been different, 9781133819202, Health Politics and Policy, Fourth Edition, Morone/Litman/Robins – © Cengage Learning. All rights reserved. No distribution allowed without express authorization. 40 PART ONE Ideas and Concepts and better, if he had purchased certain health care. And the consumer, not being a medical expert, may learn little from experience or from friends’ experience . . . because of the difficulty of determining whether the counterfactual to a particular type of health care today is the same as it was the previous time the consumer, or a friend, had “similar” symptoms. The noteworthy point is not simply that it is difficult for the consumer to judge quality before the purchase . . . but that it is difficult even after the purchase.8 Decisions about whether to obtain care, what to obtain, and from whom to obtain it present extraordinary challenges to the consumer because markets are ill equipped to assist in answering counterfactual questions. But consumers also face a second set of challenges involving which health plan, hospital, or physician generalists and specialists to choose. We focus here on choosing a health plan. There are many types of health plans available in the United States, including health maintenance organizations (HMOs), point-of-service plans (POSs), preferred provider organizations (PPOs), traditional or indemnity plans, and new-fangled “consumerdriven” health plans. Usually HMOs, POSs, and sometimes PPOs are referred to as examples of “managed care” while indemnity and consumerdriven plans are not. If consumers are going to choose the plan type that is best for their own preferences and circumstances, it behooves them to understand managed care—not just general issues but very particular ones, such as whether they can seek care directly from specialists and even what financial incentives their doctors and hospital face. When surveyed, however, most consumers do not understand even rudimentary issues, such as the difference between fee-for-service medicine and managed care plans.9 Consumers are particularly bad at understanding certain key features of their own health plans. One US survey, for example, found that whereas 62% of plan members believed that plans H I G G S , S H A N I C Q U A 1 1 0 5 T S had to approve specialty referrals, in reality approval was needed just 28% of the time.10 An area in which consumers need to be particularly skilled at using information is “report cards” on their health plans. People often obtain these report cards from their employer, and then are supposed to choose a health plan by weighing such factors as quality, convenience, flexibility, and costs. Currently, there is no one standard report card format. Good report cards should be easy to understand. Some items, such as satisfaction ratings, are comprehensible to most people, but other elements are more problematic. It is not clear, for example, that consumers know how to make effective use of information on utilization rates for alternative services, or that they understand the relative importance of survival rates from high-incidence (i.e., heart disease) versus low-incidence (i.e., kidney failure) diseases. As a result, more recent iterations of report cards tend to be somewhat simpler than previous versions, presenting a limited number of items and often rating health plans by showing, say, between one and five stars for each measure of quality. Even then, consumers often do not know how to interpret the information being presented.11 Some of the early work on consumer response to health plan report cards was discouraging: not only did people not understand the report cards, but their availability did not seem to draw people to better-rated health plans.12 There is some evidence that things may be beginning to change, however. One recent study that examined employees of General Motors found that although there is no evidence that people gravitated to health plans that receive high report card scores, there is evidence that they avoid plans with low scores. One limitation with the study, however, is the difficulty of determining whether the report cards themselves, or alternatively, other attributes of the health plans that receive low scores, cause people to move away from such plans.13 Challenges remain if we are to rely on the market to develop and disseminate report cards. Marc Rodwin notes a number of problems with the 9781133819202, Health Politics and Policy, Fourth Edition, Morone/Litman/Robins – © Cengage Learning. All rights reserved. No distribution allowed without express authorization. CHAPTER 2 Markets and Politics report cards in use today. One problem is that they ignore key aspects concerning how health plans operate such as the stringency of utilization review and the financial incentives that providers face. Another is that many of the tasks previously performed by health plans have now devolved to capitated physician groups, whose performance is onlyHoccasionally available from report cards. A third Iis that report cards—in order to simplify—tend to be agG pargregated and not focused on performance for ticular medical conditions. It is the management G of chronic conditions, however, that are perhaps the S most important barometer of the success of a health plan since most serious illnesses are chronic , ones and because they are responsible for the large majority of health care costs.14 S Assumption No. 2: Individuals’ tastes H for goods and services are predetermined and cannot be unduly influenced by physicians orAother providers. N I genEconomists often have a peculiar view of the esis of human preferences or tastes. They are C believed to be endemic to the individual—that is, Q something that is not influenced by the environment in which a person exists. (This may seem U odd in light of the way in which advertising tends to work.) A inIn economic theory, according to Lester Thurow, ■ dividual tastes and preferences “simply exist—fully developed and immutable.”15 This is what Kenneth 1 Boulding has referred to as the “Immaculate Conception of the Indifference Curve,” because 1 “tastes are simply given, and . . . we cannot inquire into the 0 process by which they are formed.”16 5 How else could one account for the following statement by Nobel Prize winners George T Stigler and Gary Becker, who write that, “[T]astes neither S change capriciously nor differ importantly between people. . . . [O]ne does not argue over tastes for the same reason that one does not argue over the Rocky Mountains—both are there, will be there next year, too, and are the same for all men.”17 (Becker has also written that, “preferences are assumed not to change substantially over time, nor to be very different 41 between wealthy and poor persons, or even between persons in different societies and cultures.”18) One natural application of this theory of the sovereignty of consumer preferences is the firm belief that physicians cannot “induce” demand among their patients, convincing them to receive services they would not want had they the same medical expertise as the physician. Perhaps no topic in health policy has generated more disagreements among economists, as well as between economists and other disciplines. The existence of physician-induced demand would be at odds with a health care marketplace that is operating competitively. Two examples will help clarify why this is the case. Economists would normally expect that an increase in physician supply would lower prices, but that is not necessarily the case if physicians induce demand. Furthermore, we would also expect physicians to supply fewer services if they are paid less per service, but again, this would not necessarily be true if demand inducement were present. Unfortunately, whether demand inducement exists and is an important element of the health care marketplace is terribly difficult, if not impossible, to demonstrate—there are many reasons for this,19 but the most important is simple: to know for certain if physicians are inducing demand, we would have to know what patients would demand if they knew as much about medicine as the physician— but testing that appears to be nearly impossible.20 The types of policies a society might develop regarding physician supply and payment depend crucially on beliefs about the importance of demand inducement. If the amount of patient demand induced by physicians is negligible, then policy makers may wish to encourage the training of more physicians and payment on a fee-for-service basis. In contrast, if demand inducement is commonplace, then physician supply should perhaps be controlled, and physicians paid in a way whereby they do not have an incentive to provide more services (e.g., salary or capitation). A similar argument can be made about the appropriateness of public policies aimed at regulating the diffusion of medical technologies. 9781133819202, Health Politics and Policy, Fourth Edition, Morone/Litman/Robins – © Cengage Learning. All rights reserved. No distribution allowed without express authorization. 42 ■ PART ONE Ideas and Concepts Assumption No. 3: The distribution of wealth is approved of by society, and furthermore, individuals care only about their own resources and not those of others. Markets are not designed to solve problems of income distribution. Rather, the outcome of the competitive process will be a distribution of income that is highly correlated with how many resources an individual brought into the process in the first place. Clearly then, if there is dissatisfaction with income distribution, government needs to intervene. Where disagreements arise is how to intervene. If one believes Assumption No. 1 (“Individuals know their own interests”), then cash subsidies are the best method because individuals would know the best use of additional monies. If there is some doubt about the assumption, then it might make more sense to provide poorer people with additional wealth through services—e.g., health care, housing—than cash. An equally important reason to provide services is that wealthier people are much more likely to willingly pay taxes or voluntarily contribute to charities if they know that their contributions will be used in the way they intend. As David Collard notes, “any reader who believes himself to be entirely non-paternalistic in his concern is asked to perform the following mental experiment. I notice that my neighbour is badly fed and badly clothed so I give him some money which he then spends on beer and tobacco. Do I feel entirely happy about this or do I somehow feel that my intentions have been thwarted?”21 A final assumption is somewhat more abstract, but gets at some of the key differences between markets and regulations. It is the assumption that individuals care only about their absolute wealth rather than how it compares to others. This goes by the technical economic term of “externalities of consumption.” If there are positive externalities of consumption, then person B is happier if person A has more wealth. If there are negative externalities, person B would be less happy, probably due to envy. A casual observation of human nature is that H I G G S , S H A N I C Q U A 1 1 0 5 T S people often exhibit positive externalities toward those who have little, and negative externalities toward those with more than them—consistent with the quotation by H.L. Mencken, who reputedly defined “wealth” as “any income that is at least one hundred dollars more a year than the income of one’s wife’s sister’s husband.”22 This seemingly abstract issue becomes real when one considers a new scarce medical technology that is only available to the very rich. Is society made better off by allowing them to purchase it? The concept of Pareto optimality would give an unambiguous “yes”—allow someone to be made better off so long as no one is made worse off? But if people care about how they compare to others, then providing something to a wealthy person that a poor person cannot afford could indeed make the latter psychologically worse off. Thus, allowing the former to purchase it has ambiguous implications for overall social welfare.23 A similar and perhaps less abstract example of a positive externality of consumption is altruism— your consumption of a good, like medical care, might not only you better off, but me better off as well. Since markets underproduce positive externalities of consumption, one would expect that external channels would be necessary to produce the “right” amount. as discussed in the following section. REGULATION IN HEALTH CARE An alternative to allowing markets to operate unencumbered is to regulate them. There are various theories regarding the motivation for regulation. The traditional viewpoint is sometimes called the “public interest” model, which hypothesizes that regulations are instituted to help the public. An opposite viewpoint—sometimes called the “economic theory of regulation” (and not terribly dissimilar to “public 9781133819202, Health Politics and Policy, Fourth Edition, Morone/Litman/Robins – © Cengage Learning. All rights reserved. No distribution allowed without express authorization. CHAPTER 2 Markets and Politics choice” theory in political science) is that regulations are instituted to serve special interest groups.24 For example, it has been claimed that the American Medical Association and affiliated organizations used their political power to keep HMOs out of the medical marketplace during the middle of the 20th H but century—not as a way of preserving quality rather to further increase physicians’ incomes.I25 Undoubtedly, there is an element of truth in both theoG the ries of regulation: some do appear to serve public interest and some don’t. And some classic G political theories suggest a “life cycle” of regulatory S agencies—governments create regulatory agencies with good public-interest intentions (often ,after a tragedy or a crisis), but, over time, the regulators slowly fall under the political influence of the most interested groups or parties (who continue toSlobby the agency long after the general public has stopped H paying attention).26 A en“Regulation” is a rather vague term, however, compassing many different strategies, some N of which intervene in market activity far more than I the others. Stepping back for a moment, consider various ways that government can intervene C in a market. One can come up with any number of continuums of government involvement. One Q useful set, developed by Philip Musgrove, lists fiveU types, ordered from the least to most intrusive: (1) provide information; (2) regulate, e.g., set rules for A private providers; (3) mandate, e.g., stipulate that private entities act in a certain manner, such as requiring 1 employers to provide health insurance coverage; 1 gov(4) finance with public monies; and (5) have ernment provide services directly.27 0 It is perhaps noteworthy that “regulation” ap5 see pears on this list as the second-least intrusive.To why this is the case, consider the case of health T insurance. Private markets can indeed provide coverage, but they are imperfect because they willSstrive to avoid the most costly individuals who, if they had to pay their expected costs (plus a “loading fee”), would not be able to afford coverage. If, as is the case in most countries, policy makers find this unacceptable, there is a continuum of approaches. One would be to regulate the market—for example, 43 require that insurance be “community rated” so that everyone is charged the same premium, and that there be “open enrollment” so people are not excluded from coverage because of their health status. This essentially permits a hidden network of cross subsidies to develop—when everyone pays the same price the good risks (healthy, young, and affluent) subsidize the poor risks (ill, old, and poor). This is what Deborah Stone called the solidarity culture in Chapter 1. A more intensive way for government to become involved would be to directly finance the insurance, because in doing so, it will undoubtedly set very stringent rules (e.g., coverage requirements, fee controls, or global budgets). The most intrusive involvement, of course, would be to replace the private insurance market with governmentprovided coverage. Up till now the discussion has implied that regulation is solely carried out by government, but that is not necessarily the case. To give just two of many possible examples, health plans exercise regulation when they require physicians to obtain permission before hospitalizing a patient, or require a patient to obtain a referral from a “gatekeeper” primary care doctor before consulting a specialist. There is an important distinction between “microregulation” and “macroregulation.”28 Microregulation implies direct observation and, potentially, control over the organization and/or individuals being regulated, whereas macroregulation is more indirect: setting the ground rules and stepping back, letting the organization and/or individuals choose how to respond. Other developed countries rely on macroregulation much more than the United States, using such tools as regional global budgets, where private entities (hospitals, nursing homes) must act under strict financial limits (say an annual budget) but do not face much direct oversight. The United States relies much more on microregulation that is carried out privately. Examples include utilization management techniques such as pre-certification requirements for hospital stays, monitoring physicians’ utilization patterns, and the like. Many Americans are surprised to learn that while foreign physicians face more stringent fiscal constraints 9781133819202, Health Politics and Policy, Fourth Edition, Morone/Litman/Robins – © Cengage Learning. All rights reserved. No distribution allowed without express authorization. 44 PART ONE Ideas and Concepts (from macroregulations), they enjoy considerably more professional autonomy over medicine itself than their American counterparts (who face a wide array of intrusive microregulations). POLICY CHOICES Economists often distinguish between two broad sets of policy levels: those aimed at the demand side of the market, and those targeting the supply side.29 In general, those espousing market solutions tend to favor demand-side policies, while those who believe in greater government regulatory action tend to favor the side. Demand-side policies seek to improve the workings of the price mechanism. To illustrate, economists often cite inefficiencies in the health care system due to overinsurance, which, it is claimed, cause people to consume services that they don’t value very much. This theory, originally applied to health care markets by Mark Pauly, postulates that society incurs a “welfare loss,” estimated by some to be on the order of 10% to 30% of total health care costs in the United States.30 The idea behind welfare loss is as follows. Economic theory postulates that people will purchase goods so long as the utility they confer to a person exceeds the price. Insurance brings down the price of services—sometimes to zero—meaning that people will find it advantageous to use services even if they convey very little utility. In such instances, the social costs of producing the services may far exceed the utility a person derives from its consumption.31 If one compares the costs and benefits, it is argued that the former exceeds the latter, leading to a welfare loss on part of society. Patient cost-sharing is one way to reduce the welfare loss of overinsurance. If people have to pay more for services, then they will, it is theorized, demand only those services that convey higher utility. Indeed, cost-sharing requirements are rising rapidly in the United States as a way of trying to quell the increased demand for services—although this is H I G G S , S H A N I C Q U A 1 1 0 5 T S also a simple way to shift costs from larger payers (employers, governments) to the consumers themselves. For example, in the two-year period between 2001 and 2003, average annual deductibles for innetwork services in PPOs rose by 60%.32 A related strategy called “consumer-driven health care is spreading rapidly.”33 The basic idea is to have the consumer bear the economic consequences of the insurance and utilization choices they make. Consumer-driven health plans often provide a choice of coverage and relatively large deductibles. They are often touted as an alternative to managed care because, rather than having an HMO say “no” to patients, these plans provide financial incentives for people to say “no” to themselves. Their success will depend on many factors. Most crucial are challenging issues surrounding favorable selection (i.e., healthier people joining them, leaving sicker individuals in the risk pools of other plans, which could potentially cause their premiums to spin out of control) and consumers’ ability to make informed choices about whether to seek services in the face of large deductibles. A final issue about demand-side strategies concerns equity. Robert Evans and colleagues eloquently state the issue: [P]eople pay taxes in rough proportion to their incomes, and use health care in rough proportion to their health status or need for care. The relationships are not exact, but in general sicker people use more health care, and richer people pay more taxes. It follows that when health care is paid for from taxes, people with higher incomes pay a larger share of the total cost; when it is paid for by the users, sick people pay a larger share . . . Whether one is a gainer or loser, then, depends upon where one is located in the distribution of both income . . . and health . . . In general, a shift to more user fee financing redistributes net income . . . from lower to higher income people, and from sicker to healthier people. The wealthy and healthy gain, the poor and sick lose.34 9781133819202, Health Politics and Policy, Fourth Edition, Morone/Litman/Robins – © Cengage Learning. All rights reserved. No distribution allowed without express authorization. CHAPTER 2 Markets and Politics The alternative to demand-side policies are those focused on the supply side. As Joseph White explains in Chapter 19, most developed countries rely far more on supply-side policies. These include global budgets, control of the diffusion of medical technologies, limits on the number of hospital beds H inand physicians, hospital and physician payment centives, practice guidelines, and utilization review. I Supply-side methods have two main advantages G reover those aimed at the demand side. First, with spect to efficiency, informational problemsGoften make demand-side policies less effective. As noted S above, consumers often do not respond to information about health plan quality by choosing, more cost-effective plans. Second, unlike demand-side policies such as increased patient cost-sharing, those S In aimed at suppliers are not, by nature, regressive. short, proponents of these policies claim that H they are more effective at controlling costs and more eqA uitable across the population. Supply-side approaches do have their problems, N however. Several of the methods just noted, especially I limits on technologies and hospital beds and funding, may result in long waits for services. Conversely, C reliance on price—the key market mechanism—tends Q to result in shorter waits because services are rationed on ability to pay. It is difficult to generalizeUmuch more than this, however, because waiting times vary A own a great deal between countries, and each has its way of grappling with the problem. 1 1 0 MARKETS AND REGULATION 5 IN HEALTH CARE SYSTEMS T Beyond the broad statement that the United States S and tends to rely more on markets in health care other countries, more on regulation, few generalizations are possible.This isn’t surprising. Every nation mixes markets and regulation. As James Morone describes in the Introduction, more than half of all health care spending in the United States is by government; and private providers (if not private 45 financing) play a dominant role in most developed countries. It should be apparent by now that markets and governments are not all-or-nothing propositions. Rather, they need to be used in conjunction with each other. Private markets help assure that government is not too inefficient or too beholden to special interest groups; government helps ensure that insurers do not select only the healthiest people, that providers are available to the general public, and that people can afford access to care (to name just a few things). The real issue is the balance between the two. Can we say unambiguously what this balance should be? Unfortunately, the answer is no. There are at least four reasons why countries may want to approach these issues differently: ■ ■ ■ Different countries want different things from their health systems. Some may want to emphasize access, others cost control; some opt for efficiency over equity, and others the opposite. Moreover, historical and cultural factors are critical determinants of how different countries health services systems have developed, making it risky to suggest that any one country’s system be replicated by others. It is probably impossible to come up with an agreed-upon set of weights among the different outcomes. How does one weigh, for example, the short waits (a characteristic of the marketbased US system) against the equity of health system financing (a characteristic of the government-controlled British system)? Selecting between such clashing values is the heart and soul of politics. When it comes to these basic tradeoffs, the often heard plea—“can’t we get beyond politics?”—is a sure sign of political naïveté. It is also hard to characterize the countries according to the reliance of each on markets versus regulation. Germany offers a good example. Although there is little explicit government involvement in health care financing (which is largely left up to the insurers, which are called “sickness funds”), there is a great deal of government oversight and 9781133819202, Health Politics and Policy, Fourth Edition, Morone/Litman/Robins – © Cengage Learning. All rights reserved. No distribution allowed without express authorization. 46 PART ONE Ideas and Concepts direction, particularly on the supply side. Further complicating matters is that health systems change, sometimes fairly rapidly. Both Great Britain and the Netherlands, for example, went from fairly non-market-like systems to ones relying much more on competition; then both nations stepped back from the market somewhat. ■ Although cross-national measures of access and costs are reasonably good, little is known about the quality of care provided in different countries. Ultimately, we should see markets and regulation as tools that can be combined in very different ways. Each choice involves complicated trade offs between different values such as equality, efficiency, freedom, solidarity, fairness, and the acquisition of wealth. Economists perform a vital function by developing empirical comparisons of the performance of countries that rely on alternative mixes of markets and regulation. But, in the end, basic health system choices involve more than evidence and computation. They require nations to make judgments about their own ideals. STUDY QUESTIONS 1. What is Pareto optimality? How can the concept be applied to health care? 2. What are the three key assumptions underlying markets, according to Rice? Where does the health care ‘market’ fail to meet these criteria? 3. What are some ways government (and other actors) can affect the demand side in health care? How can it impact, or regulate, the supply side? 4. Can health plan report cards be improved, to allow for a more informed health care ‘consumer’? 5. What ways can the U.S. be seen to microregulate health care? What are some alternatives to microregulation? 6. What is the theory behind consumer-driven health plans? How can they keep health care costs down? 7. At the very end of the article, the author mentions six values that a health care system can chose to emphasize. What are they? 8. Develop your own view: Which values in the preceding answer do you think are most important? H I G G S NOTES , 1. Sen, A.K. 1970. Collective S H A N I C Q U A 1 1 0 5 T S 2. 3. 4. 5. 6. 7. 8. Choice and Social Welfare. San Francisco: Holden-Day, p 22. For a fuller discussion—including fifteen assumptions—see T. Rice, 2003. The Economics of Health Reconsidered. Chicago: Health Administration Press, p 6. For further discussion of “government failure,” see: Wolf, C., Jr. 1979. “A Theory of Nonmarket Failure: Framework for Implementation Analysis.” Journal of Law and Economics 22 (1): 107–39; and Wolf, C., Jr. 1993. Markets or Governments: Choosing Between Imperfect Alternatives. Cambridge, MA: MIT Press. Sidgwick, H. 1887. Principles of Political Economy. London: MacMillan, p 414. Pauly, M.V. 1997. “Who Was That Straw Man Anyway? A Comment on Evans and Rice.” Journal of Health Politics, Policy and Law 22 (2): 467–73 (quotation on p 470). Wolfe, 1993 (endnote 3), p 7. Goyal, M., R.L. Mehta, L.J. Schneiderman, and A.R. Sehgal. 2002. “Economics and Health Consequences of Selling a Kidney in India.” Journal of the American Medical Association 288 (13): 1589–93. Weisbrod, B.A. 1978. “Comment on Paper by Mark Pauly.” In: Competition in the Health Care Sector: Past, Present, and Future, edited by W. Greenberg, pp 49–56.Washington DC: Bureau of Economics, Federal Trade Commission, p 52. 9781133819202, Health Politics and Policy, Fourth Edition, Morone/Litman/Robins – © Cengage Learning. All rights reserved. No distribution allowed without express authorization. CHAPTER 2 Markets and Politics 9. Isaacs, S.L. 1996. “Consumers’ Information Needs: Results of a National Survey.” Health Affairs 15 (4): 31–41. 10. Cunningham, P.J., C. Denk, and M. Sinclair. 2001. “Do Consumers Know How Their Health Plan Works?” Health Affairs 20 (2): 159–66. 11. Hibbard, J.H., and J.J. Jewett. 1997. “WillHQuality Report Cards Help Consumers?” IHealth Affairs 16 (3): 218–28. 12. Hibbard, J.H., and J.J. Jewett. 1996. G “What Type of Quality Information Do Consumers G Want in a Health Care Report Card?” Medical S Care Research and Review 53 (1): 28–47; and Chernew, M., and D.P. Scanlon. 1998. “Health , Plan Report Cards and Insurance Choice.” Inquiry 35: 9–22. S 13. Scanlon, D.P., M. Chernew, C. McLaughlin, and G. Solon. 2002. “The Impact of Health H Plan Report Cards on Managed Care EnrollA 21: ment.” Journal of Health Economics 19–41. N 14. Rodwin, M.A. 2001. “Consumer Voice and RepI of resentation in Managed Healthcare.” Journal Health Law 34 (2): 233–76. C 15. Thurow, L.C. 1983. Dangerous Currents: The Q State of Economics. New York: Random House, p 219. U 16. Boulding, K.E. 1969. “Economics as a Moral A (1): Science.” American Economic Review 59 1–12. Quotation on p 2. 17. Stigler, G.J., and G.S. Becker. 1977. “De 1 Gustibus Non Est Disputandum.” American Eco1 nomic Review 67 (2): 76–90. 18. Becker, G.S. 1979. “Economic Analysis and 0 Human Behavior.’’ In Sociological Economics, 5 CA: ed. by L. Levy-Garboua. Beverly Hills, Sage Publications, p 9. T 19. For a more complete listing and discussion see S Rice (2003), Chapter 3. 20. Mooney, G. 1994. Key Issues in Health Economics. New York: Harvester Wheatsheaf. 21. Collard, D. 1978. Altruism and Economy: A Study in Non-Selfish Economics. Oxford: Martin Robertson & Co., p 122. 47 22. This quotation was obtained from: Frank, R.H. 1985. Choosing the Right Pond: Human Behavior and the Quest for Status. New York: Oxford University Press, p 5. 23. For further discussion of this and other examples, see: Reinhardt, U.E. 1992. “Reflections on the Meaning of Efficiency: Can Efficiency Be Separated from Equity?” Yale Law & Policy Review 10: 302–15. 24. For one of the earliest and most readable essays on the economic theory of regulation, see: Stigler, G.J. 1971. “The Theory of Economic Regulation.” Bell Journal of Economics and Management Science 2: 3–21. 25. Kessel, R.A. 1958. Price Discrimination in Medicine. Journal of Law and Economics 1(1): 20–53. 26. Downs, A. 1993. Inside Bureaucracy. Long Grove, IL: Waveland Press. 27. Musgrove, P. 1996. Public and Private Roles in Health: Theory and Financing Patterns. Discussion paper no. 339. Washington DC: The World Bank. 28. For a discussion of this distinction, see Rice, T., “Macro Versus Micro Regulation,” in Regulating Managed Care: Theory, Practice, and Future Options, ed. S.H. Altman, U.E. Reinhardt, and D Shactman (San Francisco: Jossey Bass, 1999). 29. A good discussion of one aspect of supply vs. demand-side policies, involving cost-sharing, is in: Ellis, R.P., and T.G. McGuire. 1993. “Supply-Side and Demand-Side Cost Sharing in Health Care.” Journal of Economic Perspectives 7 (4): 135–51. 30. Pauly, M.V. 1968. “The Economics of Moral Hazard: Comment.” American Economic Review 58 (4): 531–7. 31. Feldman, R., and B. Dowd. 1991. “A New Estim…
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