| Statement of Edmund F. Haislmaier, Senior Research Fellow, The Heritage Foundation Testimony Before the Subcommittee on Health of the House Committee on Ways and Means July 15, 2008
Mr.
Chairman and members of the committee, my name is Edmund F. Haislmaier. I am
Senior Research Fellow in health policy at The Heritage Foundation. The views I
express in this testimony are my own, and should not be construed as
representing any official position of The Heritage Foundation.
Thank
you for extending to me an invitation to testify before you today on state
health reform initiatives. During the past three years I have had the
opportunity to assist, in one way or another, health reform and coverage
expansion efforts in about eighteen different states.
In
the process I have been impressed by the interest of state lawmakers from both
parties, and from widely differing states, in developing health reform
solutions that are truly patient-focused and consumer-centered. I believe that
putting patients and consumers first in health care is the key to creating a
value-maximizing health system that includes all Americans.
Furthermore, my work with the
various states has given me a greater appreciation for their diversity,
including the diversity of their health care financing and delivery systems. I
have come to believe that the most likely path to national health reform in the
United States is through an evolutionary, not revolutionary, process resulting
from a mix of state and federal initiatives.
With that perspective, I present
in this written testimony what I view as the key principles for designing a
health system that is truly patient and consumer-centered.
Key PrinciplesThe fundamental objective of a
patient-centered health care system is to maximize value for individuals and
families so that they receive more benefit and better results for their health
care dollars, both as patients and as consumers buying health insurance. Only
when individuals choose and own their own health insurance will the other
actors in the system—health plans and providers—have the right incentives to
deliver better value in the form of improved results at lower prices.
If policymakers are serious about
real patient-centered, consumer-driven health care reform, they should ensure
that their legislative proposals embody six key principles:
- Individuals
are the key decision makers in the health care system. This would be a major
departure from conventional third-party payment arrangements that dominate
today’s health care financing in both the public and the private sectors.
In a normal market based on personal choice and free-market competition,
consumers drive the system.
- Individuals
buy and own their own health insurance coverage. In a normal market, when
individuals exchange money for a good or service, they acquire a property
right in that good or service, but in today’s system, individuals and
families rarely have property rights in their health insurance coverage.
The policy is owned and controlled by a third party, either their
employers or government officials. In a reformed system, individuals would
own their health insurance, just as they own virtually every other type of
insurance in virtually every other sector of the economy.
- Individuals
choose their own health insurance coverage. Individuals, not employers
or government officials, would choose the health care coverage and level
of coverage that they think best. In a normal market, the primacy of
consumer choice is the rule, not the exception.
- Individuals
have a wide range of coverage choices. Suppliers of medical goods and services,
including health plans, could freely enter and exit the health care
market.
- Prices
are transparent.
As in a normal market, individuals as consumers would actually know the
prices of the health insurance plan or the medical goods and services that
they are buying. This would help them to compare the value that they
receive for their money.
- Individuals
have the periodic opportunity to change health coverage. In a consumer-driven health
insurance market, individuals would have the ability to pick a new health
plan on predictable terms. They would not be locked into past decisions
and deprived of the opportunity to make future choices.
The Key Tests of Reform
Not all health care reform
legislation that is labeled consumer-oriented is equally effective or
significant. The key test is whether or not it puts in place structural changes
that maximize the ability of a large number of individuals to make basic choices
about their own health insurance coverage and medical care.
Individuals are both consumers
and patients. In a consumer-centered health system, individuals directly
control the flow of dollars, buy and own their own health plans, pick the kinds
of coverage that they want, and determine which plans offer them the best
value.
In such a system, consumers
expect transparent prices, and consumer choice stimulates competition among
plans and providers to offer better value for money. That competition, in turn,
drives innovation in both clinical practice and plan design. For individuals as
patients and consumers, value for money is judged in terms of results: better
medical outcomes, improvements in their health condition or status,
cost-effective treatments, and health plans that save them money by helping
them stay well and, when they do need care, by identifying the providers that
offer the best results at the best price for their particular condition.
Thus, true consumer-centered
health reform is system-focused reform, not product-focused reform. Its
objective is to improve performance and results by changing the basic structure
and incentives of health care markets so as to maximize value for money in
health insurance and medical care. It is not simply an exercise in legislating
new product designs or trying to plug gaps in coverage by crafting new programs
for targeted subpopulations. Instead, true consumer-centered health reform
focuses on making fundamental structural changes in the system, as opposed to merely
expanding the existing system or micromanaging insurance plan designs or
provider reimbursement methodologies.
Policymakers need to step out of
the conventional mindset that accepts the basic structure of the present system
as a given and attempts only to modify it around the edges. For example,
legislative proposals to promote certain product types—e.g., health maintenance
organizations (HMOs) and health savings accounts (HSAs)—may well have
beneficial effects, but they do not fundamentally change how the system
functions as long as someone else picks the health plan for the individual.
Similarly, no amount of regulatory tinkering with provider reimbursement rates
or payment methodologies can create more than marginal improvements in value as
long as the system vests control over key decisions with employer and
government “payers” who are not the ones receiving the medical care or using
the health insurance policy.
Rather, consumer-centered health
reform challenges policymakers to redesign the basic rules of the health care
market to create new incentives for all of the actors in the system to put the
interests of consumers and patients first.
Properly designed structural
reforms will also produce a better framework and new incentives for addressing
the current system’s failings in cost, access, and quality more effectively. If
responding to consumer needs and preferences is made the organizing principle
of the system, then insurers and providers will have the right incentives to
develop innovative ways to deliver better value to consumers and patients in
the form of lower costs and improved outcomes.
In a reformed market, competition
will produce new and better plan designs, clinical practices, and provider
payment arrangements without lawmakers needing to micromanage the process. At
the same time, it will generate new opportunities for lawmakers to focus public
assistance more effectively to ensure that all Americans have access to the
benefits of a system that offers better value.
The fundamental problem with the
current system is that it encourages all participants (payers, insurers,
providers, and patients) to engage in a giant game of cost-shifting, with each
party trying to stick one or more of the others with a bigger share of the
bill. Thus, while there may be plenty of competition in the present system,
much of it is a zero-sum competition in which there is a loser for every
winner. What America’s health care system desperately needs are structural
changes that create positive-sum competition in which all participants can
“win” by working, often collaboratively, to improve the health care value
proposition.[1]
The Consumer As Key Decision Maker
The place to start examining any
economic or social system is with its basic organizing principle, which is identified
by asking “Who is the key decision maker in the system?” In any economic or
social system, the key decision maker is the one who sets the parameters for
the other participants in the system. The other participants must act in
response to the needs or preferences of the key decision makers.
Political science clarifies this
process. For example, in a democratic system of representative government, the
organizing principle is popular sovereignty, identified by the fact that voters
are the key decision makers. Other participants (e.g., office holders, public
employees, lobbyists, and interest groups) operate within the framework of the
preferences periodically expressed by voters in elections. To advance his or
her interests successfully, another participant must ultimately persuade voters
either that they already want what the participant is proposing or that they
should want it.
This creates a cascading chain of
incentives throughout the system. For example, the most successful way for a
lobbyist to persuade a politician to vote for what the lobbyist wants is to
show the politician how such a vote would be popular with voters.
Other political systems (e.g.,
monarchies, aristocracies, and dictatorships) have different organizing
principles, each of which can be determined by identifying the key decision
makers in these systems.
The same holds true in economics.
Most market economic systems are “consumer-driven” because the individual
customer is the key decision maker. The other participants (e.g., producers,
shippers, wholesalers, and retailers) must operate within the framework of the
consumers’ preferences as expressed through their purchases. To advance their
own interests successfully, the other players must find ways to persuade
customers either that they are offering what the customers already want or that
the customers should want what they are offering.
Again, the result is a cascading
chain of incentives. Thus, the surest way for a shipper to get a producer’s
business is to demonstrate that it can deliver goods to retailers or consumers
more quickly and at less cost.
As in politics, alternative
economic system designs can be recognized by identifying the key decision
makers and, thus, the systems’ organizing principles.
For example, the organizing
principle of a monopoly is that the economic sector is “producer-driven.” A
monopoly exists (whether by accident or by design) when only one producer
provides a particular product, thus making that producer the key decision
maker. With no alternative producers available, other participants in the
sector (e.g., consumers and retailers) are constrained by what the sole
producer decides to produce and its quantity, timing, and price.
Likewise, when suppliers collude,
such as through a guild or cartel, the resulting market can be described as
“supplier-driven,” reflecting the fact that suppliers hold the key
decision-making power in that particular sector.
The Health Care Sector Anomaly
In health care, on the supply
side of the supply and demand equation are physicians, hospitals, and other
health care professionals and institutions. Collectively, they are commonly
referred to as health care providers. On the demand side are the patients who
are seeking or receiving medical treatment. The broader term “consumer”
encompasses not only patients, but also individuals who, while not actively
seeking or receiving medical care, purchase related products and services, most
notably health insurance.
In the U.S. and many other
countries, health care differs from most other economic sectors because
government policies have sponsored, promoted, and maintained an anomaly in the
sector—an additional set of participants known as third-party payers. While
individuals always ultimately pay the costs of any health system, governments
have instituted policies that effectively divert a portion of their incomes
into the hands of others (the payers), who then make the basic or key decisions
on how to spend the money on behalf of patients.
The simplest variant of this
arrangement is the single-payer system, in which the government taxes its
citizens and then pays medical providers for treating them. The U.S. and some
other countries have developed multipayer variants of the same basic model.
In multipayer health systems, the
government is almost always one of the payers, but its role is more limited
than in single-payer systems, typically operating tax-funded medical care
payment programs only for certain subgroups of the population. For example, in
the U.S., the federal government runs a tax-funded single-payer system for the
elderly called Medicare, while the state governments run a similar system for
the poor called Medicaid.
However, for the majority of
individuals in countries operating multipayer health systems, the relevant
third-party payers are private entities: most often their employers, although
in some instances unions or associations. These private payers divert a portion
of their workers’ or members’ income either to buy health insurance or to pay
medical bills directly on behalf of their employees or members. These
arrangements can be either mandatory, as in Germany, or voluntary, as in the
U.S.[2]
Yet, in a voluntary third-party payment system,
individuals are unlikely to hand over large chunks of their income and the
authority to spend it without something that makes the arrangement
significantly more advantageous to them than buying the services directly. That
is particularly true for something as personal and important as health
insurance and medical care.
In the U.S., these arrangements
exist largely because employee compensation that is diverted through employers
to buy the employees’ health insurance is exempt from federal income and
payroll taxes. In contrast, if workers wanted their employers to divert part of
their compensation for other purposes—such as buying groceries, paying for
their housing, or leasing cars for their personal use—they would find that tax
law treats such arrangements as income and taxes the workers accordingly. While
the law does not prevent employers and workers from entering into third-party
payment arrangements for food, housing, transportation, or anything else, such
arrangements are uncommon because they offer no clear advantage (tax or
otherwise) to workers over receiving their compensation in cash and then paying
directly for the goods or services of their choice.
The Evolution of the Health Care SystemCurrent health care systems are a
relatively recent phenomenon. They evolved in response to advances in biology,
chemistry, and physics since the end of the 19th century that transformed
medicine into a scientific discipline and an expanding economic sector. Even
though the purpose of medicine is to better the lives and health of patients,
the health care financing arrangements that evolved over the past century have
never been truly consumer-centered.
Through at least the first half
of the 20th century, health systems were essentially provider-centered.
Patients were expected to defer to the judgment of medical professionals and to
pay what was charged. It was considered highly unprofessional for physicians to
engage in explicit price competition. Hospitals granted admitting privileges to
physicians, and physicians referred patients to the hospitals where they had
such privileges. Thus, a hospital’s real customers were the doctors who
controlled the flow of paying patients, not the patients themselves.
This basic structure persisted
even as third-party payers, whether governments or employers, were introduced
into the equation. Third-party payers were expected to pay the usual and
customary charges billed by physicians and hospitals for their services, but
not to question the benefits, quality, or value of these services. This
provider-centered focus can be seen in early health insurance arrangements. For
example, in the 1930s, hospitals organized Blue Cross and doctors organized
Blue Shield to guarantee providers steady, predictable income streams by having
patients—and later, their employers—effectively prepay for medical care on a
subscription basis.
However, the resulting growth in
the cost of medical care eventually spurred payers to start questioning the
bills, beginning in the 1970s. At first, the focus was on the prices charged by
providers. Payers, both government programs and private insurers working for
the employers who were their customers, imposed payment limits on provider
charges. Over time, those initial limits evolved into complex and comprehensive
payer-imposed provider fee schedules.
However, as the payers soon
discovered, prices constituted only half of the cost equation. Costs were still
climbing thanks to steady increases in the volume and intensity of the medical
care being provided. In recent decades, payers have tried to tackle this other
half of the cost equation with a variety of restrictions on patient access to
specific treatments or technologies.
The result is that today’s health
care financing systems, whether at home or abroad, are functionally
payer-centered, with third-party payers having displaced providers as the key decision
makers in the system.
In this specific sense, there is
no qualitative difference between a single-payer system and a multipayer
system. Both systems are payer-centered. Consequently, both systems generate
the same incentives for other participants to respond to payers’ demands and
preferences rather than those of providers or patients. In a single-payer or a
multipayer system, the payers decide whether or not to contract out to private
insurers all or part of their role in managing the system, and they determine
the terms and extent of such contracts. Private insurers therefore first serve
the interests of the third-party payers who are their customers.
Thus, the relevant question is
“For whom do the private insurers work?” not “Are private insurers part of the
system?”
The Alternative: A Patient-Centered, Consumer-Based SystemThe obvious shortcoming of a
provider-centered system is that it distorts the system in the direction of
providing more, regardless of cost. The natural tendency of providers is to
assume that increasing the volume and intensity of medical services will
generate more benefit. Of course, this assumption is not consistently true.
Depending on the circumstances, a particular test or therapy can be unnecessary
or ineffective. Indeed, many medical interventions entail significant risks to
the patient and can cause more harm than good. At other times, the modest
benefits are not worth the costs.
In contrast, the shortcoming of a
payer-centered system is that it distorts the system in the opposite direction
by focusing on the cost side of the equation to the detriment of the benefit
side. The most obvious, most effective, and simplest way to limit costs is by
not spending money, but simply paying less or refusing to pay at all does not inherently
produce more benefit or better value for the patient.
Furthermore, both a
provider-centered system and a payer-centered system have an inherent bias to
favor short-term considerations over long-term considerations. In a
provider-centered system, the incentive is to do more now without adequately
considering the possibility that such a course of action could produce a worse
result later. In a payer-centered system, the incentive is to save money today
without adequately considering the possibility that this could increase future
costs.
Neither a provider-centered
system nor a payer-centered system has the requisite incentives to maximize
value systematically and consistently. Only consumers have a natural interest
in a system that reduces costs while simultaneously improving results over the
long term.
For any economic system to be
value-maximizing, it must consistently and broadly reward consumers with lower
cost and greater benefits if they seek the best value and must reward producers
and suppliers with more business and higher incomes if they offer a better
value than their competitors.
Thus, the foundational insight
behind consumer-centered health care reform is that the only way to achieve
better value in health care is to make the consumer the key decision maker in
the system. Only when users and payers are the same will the incentives in the
health care system properly align to seek and generate better value. Since
third-party payers are never the users of the system—doctors and hospitals, not
governments or companies, provide medical care to people—the only way to align
the incentives to produce better value is to give those who use the system
(patients and consumers) control over the funding and the associated spending
decision. No other alternative arrangement can systematically and consistently
produce more for less and secure value for the patient.
The Objectives of Patient-Centered,
Consumer-Based Reform
The overarching objective of
consumer-centered health care reform is to transform the health care market
into one that maximizes value, meaning that the system’s operational dynamic is
competition among participants to produce better results at lower cost for
patients and consumers. Once delivering better value to consumers becomes what
enables other participants (e.g., doctors, hospitals, insurers, drug makers,
and insurance agents) to “win” within the system, many of the current problems
start to solve themselves. A consumer-centered system begins to control costs
because it creates increased pressure to justify costs better in terms of
demonstrated benefit. At the same time, a consumer-centered system generates
pressure to improve results by demanding data showing that anticipated benefits
are commensurate with expected costs.
Consumer choice also creates
stronger incentives for measuring and reporting quality and performance because
consumers need that information to make better decisions, thus producing
improvements in those areas as well. Even a portion of the access problem
begins to solve itself. When health insurance attaches to the person instead of
to the job, fewer people encounter circumstances in which they lose their
health insurance coverage, and the size of the uninsured population is
commensurately reduced.
A secondary objective is to
provide lawmakers with a better foundation on which to build complementary
public policies that more effectively address those access issues that
competitive markets alone cannot solve. For example, the existence of a
consumer-centered market for food makes it easier for policymakers to assist
those who need help beyond what the market can provide through such means as
subsidies in the form of food stamps or targeted incentives for grocery stores
to operate in economically or geographically marginal, underserved areas. In a
similar fashion, the presence of a consumer-centered, value-maximizing health
system would allow lawmakers to focus tax dollars on helping those individuals
who are financially or geographically disadvantaged to “buy into” a well-functioning
system.
Another secondary objective is to
encourage greater innovation. In this regard, health system innovation
encompasses not only medical innovation to produce new and better treatments
and therapies, but also innovation in organization and financing such as
developing better clinical practices for treating patients, better provider
payment arrangements, and better insurance plan designs.
This last point is particularly
important. By putting the interests of patients and consumers first, a consumer-centered
system forces other participants, particularly insurers and providers, to
rethink their relationships and interactions. The current confrontational
dynamic, in which providers try to force payers to spend more and payers try to
force providers to charge less and do less, becomes an unproductive strategy
for both sides because it does not produce the better value that consumers
want. Instead, in a consumer-centered market, providers and insurers would find
that they can both win (gain market share and increase income) if they
collaborate to deliver better value (more benefits for less costs) to patients
and consumers. This forces them to think more creatively and urgently about how
providers can improve their quality, results, and efficiency and how insurers
can restructure provider payment and contracting arrangements to capture newly
created value and pass the savings and benefits on to their customers.[3]
The Key Principles of Real ReformLawmakers looking to design the right policy framework
for enabling a consumer-centered, value-maximizing health system need to start
with six key principles.
Principle
#1: Individual consumers are the key decision makers in the system.
In a consumer-centered health care system,
individuals are the key decision makers with respect to medical treatments and
health insurance. The current payers in the system (governments and employers)
will still play an important role, but in a different fashion. They will no
longer manage the details of the system, but will instead play supporting roles
in assisting consumers, who become the system’s primary decision makers. The
role of employer will center on providing their employees as consumers with
financial engineering and decision-support services.
The financial engineering aspect
encompasses various employer strategies to help workers participate in the
system more efficiently. For example, the workplace is a convenient location
for distributing information and handling administrative tasks, such as workers
choosing coverage from a menu of options during an annual open season.
Similarly, employer participation in an automatic payroll deduction system for
insurance premiums is an administrative efficiency that benefits workers at
very little cost to employers.
Most important, as long as
federal tax policy treats worker compensation for health care as tax-free to
the worker if it is passed through the employer’s hands, employers can leverage
the tax code to ensure that their employees’ spending on health insurance and
medical care takes advantage of that favorable tax treatment. Doing so
effectively lowers the cost of health insurance and medical care to workers by
15 percent to 50 percent because workers do not pay taxes on this compensation.[4]
Employers can also play a decision-support
role by assisting their employees with information and guidance in making
health care choices. Most often, this will take the form of the employer or an
insurance broker under contract with the employer helping individual workers
pick the insurance plans that best suit their personal circumstances and
preferences. Employers can also offer their employees a range of related
services, such as workplace clinics; health promotion programs; information on
the costs, risks, and benefits of common treatments; and comparative data on
the quality and results of health care providers. Employers inclined in this
direction will find that numerous vendors already exist who are willing and
able to bring these and similar programs into the workplace.
For governments, their role in a
consumer-centered system shifts to financial assistance. Ultimately, the goal
should be for the government to stop trying to design and operate public health
insurance plans and instead focus on providing disadvantaged individuals with
the necessary funds to buy into the same consumer-centered system that everyone
else uses.
This will primarily take the form
of steps to shift public assistance from a defined-benefit model to a
premium-support model. In the current defined-benefit model, the government
operates separate public health insurance plans for specified subsets of the
population—something that government is poorly equipped to do competently. In a
premium-support model, the government would operate programs to supplement the
incomes of those who do not have sufficient funds to buy adequate health
insurance and medical care in the market, just as the government now does with
food stamps to help the poor buy groceries.
In some places, such as rural areas or economically
distressed locations, governments might also provide assistance in the form of
targeted subsidies or incentives to ensure that essential health services are
available—for example, by funding clinics or offering inducements to health
professionals to practice in those areas.
Principle
#2: Individuals
buy and own their own health insurance coverage.
For a health system to be consumer-driven, health
insurance coverage must be purchased and owned by individual consumers. In
other words, the coverage contract must be an agreement between the insurer and
the individual consumer. If the contract is between the insurer and some other
party, such as an employer or a government, then the other party, not the
individual consumer, is the insurer’s real customer.
While at one level a coverage
contract is a legal arrangement, it is primarily an economic arrangement. The
legal aspects of the contract simply define the specifics of the underlying
economic arrangement between the insurer as the supplier and the counterparty
as the customer. As a supplier, the insurer is legally obligated and
economically motivated to work in the interest of its customers. However, when
the counterparty is an employer or government, that entity becomes the
insurer’s customer, and the counterparty’s interests may differ from or be
contrary to the individual’s interests, even if the coverage is ostensibly
purchased for the individual.
A simple analogy illustrates this
key point. When a parent purchases breakfast cereal for a child, the customer
is the parent, not the child. The parent and the child may have different
opinions as to the best cereal to purchase. Indeed, these different opinions
likely result from differences between the interests and preferences of the
parent and the child. For example, the child likely prefers flavor over
nutrition, while the parent will likely view nutrition as more important than
flavor. Of course, the child’s preferences likely influence, at least
partially, the parent’s decision, and cereal makers may even try to exploit this
by pitching advertising to the child in the hope that he will influence his
parents.
Ultimately, the buying decision
rests with the parent, who is therefore the cereal maker’s true customer. For
the child to be the customer, the child must make the purchasing decision,
using either his own money or money given him by a parent. Absent such a shift
in decision-making authority, to sell more cereal, the cereal maker must first
make its products attractive to the parents who will buy them, regardless of how
attractive it makes the cereals to the children who will eat them. This means
that the cereal maker must focus on the aspects that matter most to parents,
such as nutritional content or pricing that gives them good value for their
money.
While parents letting their
children choose which breakfast cereal to buy is probably not a good idea,
having individual consumers—not their employers or the government—choose their
own health insurance plans is a good idea.
Principle
#3: Individual
consumers choose their own health insurance coverage.
Individual ownership of coverage
is an essential criterion for a consumer-driven market, but it is not the only
criterion. A market characterized by individuals purchasing the product is
still not a consumer-driven market if only one product is available, if there
is only one supplier, or if the suppliers are organized in a cartel.
In such monopolistic
circumstances, the lack of meaningful choice for consumers means that the key
decision-making power still resides on the supply side of the economic
equation. For the market-shaping power of the key decision maker to shift from
the supply side to the demand side, consumers must have a choice of competing
products and suppliers. Only then must suppliers respond to consumers instead
of the other way around.
The linchpin of a
consumer-centered health care market is the opportunity for individuals to
choose the health insurance coverage that best suits their own preferences.
While choice of health care providers is certainly essential to a
well-functioning, consumer-centered market, the ability to choose among a
diverse array of competing health insurance plans is the most important
feature. This is true for two reasons.
First, health insurance is the
principal mechanism for financing medical care. Indeed, this is true even when
consumers opt for high-deductible plans and purchase much of their routine
medical care directly from providers. For a health system to be truly
consumer-centered, individual consumers must ultimately decide how the money in
the system is spent. Thus, the first and most basic decision that consumers
must be allowed to make is which health insurance plan to purchase.
Second, the choice of a health insurance
plan of necessity incorporates a whole set of other implicit choices, such as
what the plan will pay for versus what the consumer will purchase directly from
providers, how and from whom the consumer will receive care, and how the plan
will assist consumers in deciding among competing providers and treatment options.
This last consideration is particularly important. Even the most sophisticated
consumer may not have all of the relevant information available or have
sufficient time to gather and analyze it when deciding among providers and
treatments. However, health plans have—or should have—the information and
expertise to assist consumers in making these decisions.
What consumers want is good
value—meaning the best medical care at the best price. In a competitive market
in which consumers choose their own health insurance, insurers succeed and
prosper by offering consumers a better value proposition than their competitors
offer. In other words, they apply their data and expertise to finding their
customers the best medical care at the best price or, better yet, to finding
ways to help their customers minimize their medical spending by staying or
becoming healthy.
Thus, when individual consumers
decide which insurance plan to purchase, insurers become the consumers’ expert
agents, helping them to navigate the health care system and obtain the best
results at the lowest cost.
Principle
#4: Individuals
have a wide range of coverage choices.
In any truly consumer-centered
market, multiple suppliers compete to offer consumers better products at better
prices. Yet for market competition to produce better value consistently—that
is, by simultaneously increasing benefits while decreasing costs—consumers must
be free to choose from a range of different options, and suppliers must have
wide latitude to innovate in meeting consumer demands and preferences with new
and better products. Thus, a precondition to any well-functioning,
consumer-centered market is that lawmakers avoid unduly restricting either the
options available to consumers or the scope for supplier innovation.
Government does need to set some
basic rules for any well-functioning market. Much like establishing product
safety standards or a uniform system of weights and measures, government can
establish rules that facilitate well-functioning markets without unduly
restricting supplier innovation or consumer choice. However, for a competitive
market to function optimally, the basic rules need to permit wide scope for
suppliers to innovate in developing new and better products and features to
meet consumer needs and preferences.
Furthermore, lawmakers need to
recognize that not all consumers have the same needs, preferences, or
priorities. Suppliers must be free to innovate in offering different products
to different subsets of consumers, targeting their different needs and
preferences. This is particularly important in the health care sector where
constantly expanding scientific knowledge and the resulting innovations in
medical treatment force continual reassessment of what is “best” for individual
patients and specific medical conditions.
For example, in health care, it is appropriate
for government to limit the practice of medicine to those who demonstrate
adequate knowledge and skill, but lawmakers should avoid inappropriately
restricting provider competition with rules beyond those necessary to ensure
basic provider competence and patient safety. Likewise, lawmakers should also
take care to avoid imposing regulations that needlessly micromanage providers,
stifle innovation in clinical practices, or favor one set of providers over
another.[5]
In the same fashion, lawmakers
need to set basic standards and rules for health insurance products and the
companies that offer them. Yet they need to resist the temptation to substitute
their judgment for the consumers’ judgment.
In setting health insurance
market rules, lawmakers should focus on establishing the broad market
parameters and allow market competition to work out the details. For
example, in setting coverage standards, lawmakers should limit themselves to
specifying basic coverage categories, such as physician services, hospital
services, and prescription drugs. They should avoid micromanaging the market
by, among other things, imposing coverage mandates for specific conditions or
treatments or by stipulating how plans must contract with providers.
Similarly, lawmakers should not enact measures that
favor one particular plan design over others. Government policy should treat
all plan designs (e.g., HMO, preferred provider organization (PPO), indemnity
insurance, and HSA with high-deductible insurance) equally. Such an approach
not only permits beneficial competition and innovation, but just as importantly
respects and accommodates differing personal preferences among consumers.
Principle
#5: Prices
are transparent to consumers.
The same holds true in
establishing rules for the price side of the price/benefit equation. In all
cases, lawmakers should avoid direct “price setting” because such interventions
inevitably distort the market in ways that end up harming both suppliers and
consumers.
Yet government does play a
legitimate role in ensuring that a market functions fairly and smoothly by
establishing basic pricing rules, which enable consumers to comparison shop
effectively by clearly informing them up front about the price of each option.
For example, government requires grocers to include the unit price on the label
of products sold by weight or volume and requires lenders to disclose the
effective annual percentage rate (APR) of a loan when offering financing to prospective
borrowers.
In a similar fashion, lawmakers
will need to reach agreement with stakeholders on the appropriate standards for
calculating and communicating prices to consumers in the health system. While
enhanced price transparency at the provider level will certainly improve the
functioning of the health system, the bigger issue will be the rules for how
insurers price their health plan offerings.
Because insurance premiums can be
calculated in a number of different ways, lawmakers need to establish rules for
reporting those prices so that consumers can comparison shop among the
different offerings. In other words, which factors and parameters will be used
in reporting prices? Will prices (premiums) be reported on an age-adjusted
basis? If so, will the competing plans produce rate tables priced in one-year
age increments, or will five-year age increments be sufficient for insurers and
simpler for consumers? Lawmakers will need to address similar questions about
other possible rating factors, such as geography and family status.
Regardless of the specifics,
lawmakers need to establish some set of basic rules on reporting premiums.
Otherwise, if competing insurers priced their plans in different ways, or if
insurers customized the premium charged to each individual customer, it would
be difficult or even impossible for consumers to comparison shop among plans.
Without some agreed convention on reporting prices, the balance of power in the
market shifts back to the supplier because the answer to the consumer’s
question “What is the price?” becomes “It depends.” This makes it difficult for
consumers to weigh the relative costs and benefits of competing options
accurately and makes the market supplier-driven instead of consumer-driven.
The specifics of the pricing
convention are less important than making certain that some standard pricing
convention is used. For example, for many years the standard convention on the
New York Stock Exchange was to price stocks in eighths of a U.S. dollar, while
the London Stock Exchange used hundredths of a British pound. Although they
used different pricing conventions, both markets worked equally smoothly.
Indeed, when U.S. stock markets switched to using hundredths of a U.S. dollar,
some market participants fared marginally better or worse than they had fared
under the previous convention, but the markets continued to function smoothly.
In contrast, a stock market would become less transparent and less efficient if
each company was listed using its own choice of currency and fractional system.
In setting these and other market
parameters, lawmakers should focus on ensuring that the resulting rules are
transparent and equitable to consumers and that they provide insurers with a
level playing field while accommodating their legitimate business concerns.
Principle
#6: Consumers have regular opportunities to make coverage choices on
predictable terms.
For a market to be truly
consumer-centered, individuals must be able, at least periodically, to
reconsider past purchasing decisions and make different ones. A market that
restricts consumer choice by unreasonably locking consumers into past decisions
also has the effect of shifting the balance of power in the market back to
suppliers.For example, if a market rule
locked consumers into buying new cars only from the manufacturers of their
first cars, this would clearly shift market power from consumers back to
suppliers and reduce producer competition and its resulting benefits. With much
of its customer base locked into its product line, each producer would have
significantly less incentive to respond to consumer demands for better
products, more innovative features, and lower prices.
For the health insurance market
to be truly consumer-driven, a clear set of rules must establish when and under
what terms consumers can choose among competing options. Otherwise, adverse
selection or constant churning could undermine the stability and viability of
these markets. Nonetheless, these rules need to ensure that the market puts the
interests of consumers firmly ahead of the interests of suppliers (the
insurers) while still accommodating the legitimate business concerns of the
suppliers.
This feature of consumer-centered
health reform will likely be the most unsettling to many insurers because it
will require them to adjust their business practices to accommodate a new
market dynamic in which the customer picks the supplier. In the current
dynamic, the supplier picks its customers through various strategies that focus
on selling to some potential customers but not to others.
In setting this portion of the
market rules for a consumer-centered system, lawmakers need to start from a
clear understanding of both the product in question and the needs and behavior
of consumers.
A significant portion of any health
insurance plan is not insurance in the classic sense of financial protection
against unpredictable risks or costs. All health insurance plans still retain
some element of this protection, but it is no longer their primary feature.
Rather, a large share of health insurance today consists of prepayment for
medical care of varying cost and predictability. While the concept of using
health insurance to pay for a full range of possible medical care was
originally developed decades ago to serve the providers’ interest in having
more predictable income, that concept has since superseded its original intent.
Today, health insurance plans are
a way for consumers to manage their need to finance medical care of varying
predictability. In recent decades, advances in medical science have steadily
made more medical services more predictable for more patients. Furthermore, the
current trends in scientific discoveries and their practical applications in
the clinical setting will make even more medical care more predictable for more
patients in the future. This is an irreversible dynamic that is driven by
steadily expanding knowledge in the basic sciences of biology, chemistry, and
physics, closely followed by constant practical innovation in applying that
knowledge to the development of new tests and therapies.
This ongoing scientific evolution
has several practical implications for health insurance and health insurance
markets.First, it is no longer practical or
desirable for policymakers to attempt to fight the rising tide of scientific
knowledge by trying to restrict health insurance plans to paying only for the
limited and ever-shrinking share of medical care that is genuinely
unpredictable. Even the more consumer-directed plan designs that limit coverage
by requiring subscribers to pay directly for more of their routine care will
need to evolve to accommodate this new reality—for example, through mechanisms
to ensure that incentives are properly aligned between the care that
subscribers purchase directly and the care paid for by the plan—so that the
totality of treatment is integrated and produces optimal results. While such
plans will continue to attract a share of consumers, they will need to
demonstrate in a competitive market that the total proposition offered—the combination
of services paid directly by the consumer and services reimbursed by the
plan—is a good value compared to other plan designs and produces a combined
outcome for the consumer that is as good as or better than that offered by
alternative, competing arrangements.Second, plans will need to become more of
the consumer’s “expert agent” who works to identify for customers the best
providers and treatment options available at the best prices. Some current
business practices, such as negotiating provider contracts based mainly on
price and then steering patients to those providers, will not compete
adequately in a value-maximizing market.[6] Instead, plans will need
to develop new strategies. For example, they might cover all providers in a
given market but vary patient co-pays according to an analysis, which the plan
makes available to its subscribers, of which providers offer the best results
at the best prices. Pharmacy benefit managers have already pioneered such a
business strategy in the form of tiered co-pays for different competing drugs.Third, a consumer-centered system will
need to curtail some current insurer underwriting practices that exclude,
limit, or charge above-standard rates for coverage for certain individuals or
certain medical conditions. While these traditional practices will need to be
retained in a limited form as penalties against those who wait until they are
sick to buy coverage, they cannot be applied when individuals with coverage
choose a different plan if the new market is truly consumer-centered. One of
the important incentives for purchasing health insurance when an individual is
healthy must be the assurance that future changes in health status will not
disadvantage the individual when retaining existing coverage or choosing new
coverage.[7]Fourth, as science increasingly makes more
medical care more predictable, health plans must recognize that they are
increasingly less in the business of cross-subsidizing unpredictable risks and
more in the business of cross-subsidizing health status. In this regard,
cross-subsidizing health status is not only a horizontal exercise—commonly
understood as the healthy paying for the sick—but also a longitudinal one in
which a healthy person today will probably be in poorer health at some point in
the future or even vice versa.A competitive, consumer-centered
system will force insurers to rethink some of their business practices in this
area as well. For example, insurers might experiment with offering features
such as multi-year contracting, premium discounts for participation in wellness
or disease management programs, or cash rebates to subscribers who successfully
meet agreed-upon health improvement goals. These and other novel plan designs
can create powerful new incentives for consumers, providers, and insurers to
work together to achieve better value by keeping or making consumers healthier
at a lower cost.Fifth, lawmakers must ensure that the
market rules in this regard are fair to consumers, while also accommodating the
legitimate business concerns of insurers. For example, if consumers are to be
able to choose coverage at standard rates regardless of health status, it will
be necessary to limit when consumers can make these choices to avoid confusion
in the market. For instance, consumers could be limited to choosing or changing
coverage only during an annual open season, or for some other fixed period of
time, with exceptions for special circumstances such as loss of employment or
loss of coverage under a spouse’s plan.Similarly, lawmakers will need to
work closely and cooperatively with insurers to devise risk-adjustment
mechanisms to give insurers incentives not to avoid subscribers with health
problems, but rather to help them get better outcomes at better prices or even
to specialize in identifying and organizing cost-effective treatments for
patients with specific conditions, such as diabetes, cancer, and heart disease.
The market will need risk-adjustment mechanisms that allow each insurer to
accept all customers regardless of their individual health status and that
permit all insurers to aggregate a portion of their large claims and equitably
redistribute these costs across all consumers in the market.[8]ConclusionThe current debate over health
care reform is usually framed in terms of addressing cost and access problems,
accompanied by occasional discussions about the need to improve quality and
outcomes in the system. Yet those issues are all manifestations of a more
fundamental dissatisfaction with the status quo. Implicitly, both policymakers
and the public are motivated by a sense that health care today is not living up
to their expectations for value at either the individual level or the societal
level.
While America’s current health
system has clear strengths, it also has significant weaknesses. For all the
benefits that it provides in helping people to live longer and healthier lives,
America’s health care system seems too costly, confusing, inefficient, and
uneven in its results, and it leaves too many people without adequate access to
its benefits. Fundamentally, Americans as individuals and as a society
intuitively recognize that the present health system could do a much better job
of delivering value.
Put simply, Americans rightly
sense that either they are paying too much for their present health system or
the system should be delivering better results given what they are already
paying.
The solution and the challenge
for policymakers is to undertake the reforms needed to transform the present
system into one that does a much better job of rewarding the seeking and
creation of better value. As the experience of other economic sectors shows,
health care need not be a zero-sum game in which costs can be controlled only
by limiting benefits and benefits can be expanded only by increasing costs.
Rather, a value-maximizing system will simultaneously demand and reward
continuous improvements in benefits while continuously reducing costs.
Such a value-maximizing result
can be achieved in health care only if the system is restructured to make the
consumer the key decision maker. When individual consumers decide how the money
is spent, either directly for medical care or indirectly through their health
insurance choices, the incentives will be aligned throughout the system to
generate better value—in other words, to produce more for less.
All Americans
should be able to agree with the goal of creating a value-maximizing health care system.
Consumer-centered health care market reforms are the only effective means for
achieving that goal.
This concludes my prepared
remarks. Thank you Mr. Chairman and members of the committee for the
opportunity to testify today. I will be glad to answer any questions you may
have.
The
Heritage Foundation is a public policy, research, and educational organization
operating under Section 501(C)(3). It is privately supported, and receives no
funds from any government at any level, nor does it perform any government or
other contract work.
The Heritage Foundation is the most broadly supported
think tank in the United States. During 2006, it had more than 283,000
individual, foundation, and corporate supporters representing every state in
the U.S. Its 2006 income came from the following sources:
Individuals 64%
Foundations 19%
Corporations
3%
Investment Income 14%
Publication Sales and Other 0%
The top five corporate givers provided The Heritage
Foundation with 1.3% of its 2006 income. The Heritage Foundation’s books are
audited annually by the national accounting firm of Deloitte & Touche. A
list of major donors is available from The Heritage Foundation upon request.
Members
of The Heritage Foundation staff testify as individuals discussing their own
independent research. The views expressed are their own, and do not reflect an
institutional position for The Heritage Foundation or its board of trustees.
[1]For a concise
discussion of why structural change is needed and how to refocus competition on
value maximization, see Michael E. Porter and Elizabeth Olmsted Teisberg,
“Redefining Competition in Health Care,” Harvard Business Review, June
2004. For a longer discussion, see Michael E. Porter and Elizabeth Olmsted
Teisberg, Redefining Health Care: Creating Value-Based Competition on
Results (Boston, Mass.: Harvard Business School Press, 2006). See also Regina E. Herzlinger,
Who Killed Health
Care? America’s $2 Trillion Medical Problem—and the Consumer-Driven Cure
(New York, N.Y.: McGraw-Hill, 2007).
[2]For a concise
overview of the German health system, see David G. Green, Ben Irvine, and Ben
Cackett, “Health Care in Germany,” Civitas, 2005, at www.civitas.org.uk/nhs/germany.php
(April 15, 2008).
[3]See Porter and
Teisberg, “Redefining Competition in Health Care” and Redefining Health
Care: Creating Value-Based Competition on Results.
[4]The value to a
worker of the tax exclusion for employer-sponsored health insurance is equal to
the combined marginal income and payroll tax rates that would be imposed if the
compensation were instead paid to the worker as taxable cash income. For a
low-wage worker with no federal income tax liability, the tax exclusion is
worth 15.3 cents per dollar of health benefits, reflecting the combined
employee and employer payroll (FICA) tax rate. Thus, the value of the tax
exclusion for that worker is effectively a 15 percent discount on the cost of
buying health insurance. For a worker in the 28 percent income tax bracket, the
value of the tax exclusion is 43 percent (15 percent payroll tax plus 28
percent federal income tax) and, depending on the applicable state income tax
rate, can approach 50 percent when avoidance of state taxes is included.
[5]Examples of such
counterproductive regulations include certificate-of-need laws that restrict
the availability of medical facilities, technologies, or services; insurance
benefit laws that dictate how plans are to pay certain favored health care
providers; and laws that unreasonably restrict competition among providers,
such as ones that bar the creation of specialty hospitals. For further
discussions of these various regulations, see Michael J. New, “The Effect of
State Regulations on Health Insurance Premiums: A Revised Analysis,” Heritage
Foundation Center for Data Analysis Report No. CDA06–04, July 25, 2006,
at www.heritage.org/Research/HealthCare/cda06-04.cfm; Ashok Roy, “How
Congress Is Killing Competition: The Future of Specialty Hospitals,” Heritage
Foundation WebMemo No. 1740, December 13, 2007, at www.heritage.org/Research/HealthCare/wm1740.cfm;
U.S. Federal Trade Commission and U.S. Department of Justice, Improving
Health Care: A Dose of Competition, July 2004, at www.justice.gov/atr/public/health_care/204694.htm
(April 15, 2008); and Patrick A. Rivers, Myron D. Fottler, and Mustafa Zeedan
Younis, “Does Certificate of Need Really Contain Hospital Costs in the United
States?” Health Education Journal, Vol. 66, No. 3 (September 2007), pp.
229–244.
[6]See Porter and
Teisberg, “Redefining Competition in Health Care” and Redefining Health
Care: Creating Value-Based Competition on Results.
[7]As a practical
matter, in the employer group market, federal law already provides for limited
guaranteed issue of coverage and prohibits individual medical underwriting.
Consequently, consumer-centered insurance market reform within the existing
framework of employer-sponsored coverage will focus primarily on expanding the
coverage options available to workers and shifting ownership of the policy from
the employer to the individual. That way, coverage becomes truly portable and
the interests of insurers are aligned with those of consumers who are seeking
better results for their health care dollars. Such changes in the employer
context are analogous to the changes introduced by 401(k) plans, which created
the option of individual choice, ownership, portability, and control within the
framework of tax-favored employer-sponsored retirement savings. The more
contentious aspect will be expanding those same rules to include the non-group
market as well.
[8]For a further
discussion of risk-adjustment mechanisms, see Edmund F. Haislmaier, “State
Health Care Reform: The Benefits and Limits of “Reinsurance,” Heritage
Foundation WebMemo No. 1568, July 26, 2007, at www.heritage.org/Research/HealthCare/wm1568.cfm.
| |