Smart Cost Sharing

Robert Waldmann is thinking about how to give insurance companies a long-term stake in the health of their clients. This is an example of the type of policy I had in mind when I said:

...preventative care ... ought to be encouraged, and one way to help with this is ... to forge an unbreakable lifetime relationship between the insurance company and the consumer so that expected lifetime costs are important to the insurance carrier.

Here's Robert Waldmann's plan:

Smart cost sharing, by Robert Waldmann: Ezra Klein writes about smart cost sharing. He wants a committee to decide reimbursement rates.

Oddly, I had another idea about smart cost sharing. Make the doctors pay for the care and pay the doctors based on outcomes. This is based on a Cutler et al result that very small financial incentives to doctors based on their patients' blood pressure, glucose and cholesterol can cause big changes in those outcomes.

One politically unfeasible approach to this would be to assign people randomly to HMO's and pay the HMO's based on their health but have the HMO's pay for their health care. ...

Now no way are Americans going to give up all choice... So there would be a huge huge cherry picking problem. ... Obviously it would never work.

I think the best we can do is to charge medical costs not just to the current insurance plan but also, in part, to the one that covered the patients in the past (to give the an incentive to keep their clients healthy). That has the effect of partially funding Medicare with a tax on health insurers which would be OK since it is insolvent.

Plus paying insurance plans based on documented improvement in, well, the 3 blood things say [blood pressure, glucose and cholesterol]. If insurance companies saw obese people with horrible eating habits who watch TV all day as a profit opportunity, the USA would be a healthier place.

Just think, sleazy insurance agent tells his boss (hey I just found someone with an LDL level of 300, we got to move fast before our competitors sign him).

To try to explain better

My plan is the Edwards plan plus insurance companies pay for care of former clients based on α(cost of the treatment)*(years with that company)/(age at time of care) where α is well below one and for the care of current clients minus the part paid by former insurers. They get paid a constant which depends only on the region where they are located times the same α-factors.

Thus they have an incentive to keep their clients healthy (which they can pass on to doctors).

Plus they get paid based on progress on preventive measures (patients who quit smoking, got blood pressure from x down to y, lost weight from obese to not obese etc.) funded with a tax on insurance companies per patient so on average they get zero.

This means they would be more willing to sign fat lazy smokers as there is lots of room for improvement compared to things as they are.

Comments

[More Expensive]

Taxing insurance is probably the wrong way to go. More expensive insurance means fewer people/employers will buy it. Finding a way to lower insurance costs is the way to go if we want more people covered. Of course, lowering insurance cost means lowering health care cost in general..

Cost all comes down to can we trust paying customers (patients) to make the right choice. If not, the free market approach won't work. Customer choice means no more competition stifling licenses or prescriptions. The customer must be in complete charge, free to choose an unlicensed Wal Mart trained doctor if she wants to, and buy her meds OTC from Amazon.

All other advanced nations have decided that the customer can't be trusted, so they use a paternalistic state run system. Our system is dysfunctional because we don't empower the customer with true choice (competition), but still expect market forces to work normally.

[save_the_rustbelt]

"Oddly, I had another idea about smart cost sharing. Make the doctors pay for the care and pay the doctors based on outcomes."

That sounds fine, until you meet a "non-compliant" patient.

The diabetic who loves cupcakes, patients allergic to exercise, those who cannot quit smoking, etc.

Next idea?

[ken melvin]

First, how best provide healthcare. I see no reason to believe insurance companies will ever provide the answer. If they were somehow the answer, responsibility would have to be continuous.

[Ninja Zombie]

"If insurance companies saw obese people with horrible eating habits who watch TV all day..."

Therein lies the problem with american health care. But what can insurance companies, socialized medicine or any other *medical care* payment scheme do about this? Send out "Dear Fatass, please exercise to save us money" letters?

The only thing that has any reasonable chance of success here is creating incentives for diet and exercise. One possibility: everyone buys their own insurance, and Chubby McLazy pays higher premiums...

Public ridicule might also work.

[GK]

I guess that I have to bring this discussion back to reality.

My insurance company loved me when I was healthy, after my battle with cancer they just keep raising my rates every year, even though I am considered "cured" from the type of cancer I had.

Insurance companies are "For Profit" corporations that hate sick people.

Fuck the insurance companies, let the Feds take over Health Care like Medicare.

The rest of this discussion is just ivory tower babble

[Holly W.]

How do you have competing insurance companies and an "unbreakable" lifetime relationship between the insurer and insured?

[save_the_rustbelt]

I jsut received an e-mail newsletter from my health care insurance company, with a nice column written by a doc about why eating healthy is good for me. I guess I head for the gym and give the M&Ms to my wife.

Gk: sorry about your experience, but Medicare IS an insurer, and doesn't cover everything

[ken melvin]

Guide dogs assist the blind. Dogma makes one blind.

[kthomas]

Right on, GK!

[hoya]

" "If insurance companies saw obese people with horrible eating habits who watch TV all day..."

Therein lies the problem with american health care."

Ninja Zombie,

Are there an alarming number of unhealthy/obese people in this country? Definetly. Is obesity/unhealthy behavior the problem with American healthcare? Definetly not.

I think its possible that I may have understood you. If so please clarify what you meant.

[Larry]

"incentives to doctors based on their patients' blood pressure, glucose and cholesterol can cause big changes in those outcomes"

Blood pressure, blood glucose, and lipid measurements are not outcomes! pain relief or chronic pain, healthy or disabled, living or dead - those are outcomes.

[Robert Waldmann]

I have stolen this thread over at my blog.

I was behaving myself responding here, but after writing hundreds of words I surfed away without saving. I need the "save draft" button.

Don't ever let an ivory tower babbler like me manage one of your popsicle stand franchises.

I reply to all the comments. I found them very stimulating and generally excellent. Thanks.

[Robert Waldmann]

Omigod I'm pathetic. I didn't surf away from this. I just lost it behind other windows on my desktop. Don't ever trust me to carry your briefcase.

Dear Mark

Thanks for the link. Sorry I didn't link back to your original suggestion. I forgot where I read it. I was definitely following your suggestion.

Dear More expensive. My proposal began "start with the Edwards plan" which mandates insurance coverage.

Dear save_the_rustbelt: An incentive scheme can improve welfare even if the agent doesn't have complete control over the outcome. First that is why I would propose incentives at the HMO level. The HMO would decide how much of the incentive to pass on to doctors. Here more risk to the doctor means MDs demand higher expected payments. At the HMO level the rate of non-compliant patients would average out (that is, you know, the point of insurance). The decision on how to balance giving doctors incentives and protecting them from risk is made by profit maximizing firms. Standard economic theory says it will therefore be efficient (and current CEO compensation policy is optimal for shareholders and when have I ever shown any sign of any interest in what standard economic theory says).

I know that patients can have bad outcomes even if doctors do the best they can. My little sister is an MD who treats homeless patients, my mom treats HIV positive people without health insurance. I know about the problem. I swear I don't know the names of any of their patients so they respect privacy. I know about "Eeyore" (very gloomy patient such that when my mom was talking about "a patient" I asked "you mean eeyore" and she said "how did you guess") and "Rage" (when first showed up he listed his primary complaint as "rage" he said it first not my sister).

I think your point is based on a sense that innocent people must not be punished. This is inconsistent with, well, the whole defense of markets based on the idea of incentives (which IIRC doesn't convince you). I'm not talking about throwing people in jail. I'm talking about a doctor getting $50 less than he would have if he found the way to reach the patient. Small incentives to docs have been tried and they worked (and the doctors didn't complain IIRC)

[Bruce Wilder]

I'm sure Waldmann is being somewhat facetious, while trying to make a point about the opportunities inherent in something closer to managed care. But, I don't think the primary economic problem centers on the incentives. Economists tend to think too much about incentives.

Economists should think more about information systems, feedback, modeling and control. The actual practice of medicine is evolving from an individual craft practiced in discrete encounters between patient and doctor, into an extensive series of mass processes, managed administratively. The take-away from Waldmann's example shouldn't be some clever little point about the incentives of fee-for-service medicine. The take-away is that medicine is no longer a service you buy from a craftsman; medicine is the management of health by massive administrative bureaucracies.

[Indulge me for a moment, while I snarkily dismiss the idiocy of economics from Adam Smith to Milton Friedman, which has stubbornly promoted and studied "markets" exclusively, while just as stubbornly ignoring the inexorable rise of bureaucratic enterprise.]

The key Waldmann insight ought to be that imagined ambition of the salesman, who has idenitified the 300 LDL patient as an "opportunity". This is health care by Proctor & Gamble or WalMart: a vast controlled system, guided by population statistics (aka market research) and executed, in part, by propaganda (aka advertising) and other forms of consumer manipulation.

I fear I may be repulsing some, by suggesting that medicine be reduced to the trivialities with which deodorant is marketed. But, I'm just trying to draw attention to the fact that most economic activity is organized this way -- not by "markets" as American/economics ideology demands, but by large administrative bureaucracies controlling mass production, mass distribution, mass marketing.

The problems of American health care are not primarily problems of designing market incentives. They are problems of designing administrative systems. Which is to say, problems of control: building information systems for feedback, modeling and effective intervention.

Our existing systems don't work well, and the fragmentation and for-profit nature of American medicine, (including the large numbers of uninsured or underinsured whose care is underfinanced and unmanageable,) tends to undermine the evolution of improved administrative systems. Even the best HMOs have too much information about cost, and too little information about performance and outcomes.

[jamzo]

profit-making insurance companies are of less value to the customer and to society than non-profit making insurance companies

trying to find ways to make profit-making insurance companies more noble, more altruistic, more interested in the welfare of others is silly

there are profit-making insurance companies in many european countries

these countries also have good government social insurance programs

the problem of american style health insurance is the laissez-faire model upon which it is built

[jamzo]

two good reads on the future of health care

one references the other

http://www.cjr.org/campaign_desk/battle_for_the_grassroots.php

http://www.slate.com/id/2195773/

"Battle For the Grassroots
Campaign for an American Solution vs. Health Care for America Now
By Trudy Lieberman
Fri 25 Jul 2008 01:23 PM
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Timothy Noah over at Slate succinctly summed up the impending war over health reform. The lines of battle will be drawn between the insurance industry’s proposals and those advanced by Health Care for America Now, a newly-formed conglomerate of progressive non-profits and labor unions—which for the record, have never been enthusiastic about any change that hurts their leverage at the bargaining table. Health Care for America Now’s mixed approach to reform gives people the option of having commercial insurance, perhaps as a way to gather financial support from the SEIU and AFSCME unions, which still see health insurance as a bargaining chip at contract time. (University of Pennsylvania professor Marie Gottschalk explains all this in her book, The Shadow Welfare State, which I recommend to any reporter digging into labor’s role in the coming battles.)

A few weeks ago, Health Care for America Now launched a $60 million ad campaign hoping to enlist the grassroots in fighting for change. For them, this involves letting people keep their private insurance, buy new policies from commercial insurers, or buy into a public plan that is run by the government. The government plan, which will compete with private insurance companies, is a Medicare for All approach that is likely to be cheaper than commercial insurance and available to everyone, whether they are sick or well. And that scares the bejesus out of private insurers. ....."

[baileyman]

"Make the doctors pay for the care and pay the doctors based on outcomes."

But,

because SOME people will have negative outcomes despite excellent care, the docs will bear the cost of their misfortunes. Therefore, this scheme shifts the burden of insurance to the docs. Surely we don't want the docs in the insurance biz. The only capital pool large enough for the risk is US.

[layla]

Why not enroll all children and elderly on a universal plan. At age 25, an individual should be required to obtained coverage either through an employer, on their own* or through a State-sponsored insurance plan.

In the event an individual's group or individual coverage is terminated for any reason, rather than enroll the individual on a State-sponsored insurance plan, the State should have a 5-year look back period where they can require a prior private insurer re-enroll the individual. In other words, the State would pay the premium and tax the individual based on what they can afford. (It may be cost effective for the State to keep individuals enrolled on a private plan at a group rate rather than have them enroll in State-sponsored plan or have them lapse into an uninsured status.)

*Pricing for individual coverage should be regulated. A group HSA individual policy, $1500 deductible, costs $420/mo, an individual purchasing the same coverage will pay $780/mo. Statistically, are the self-employed, temporarily unemployed or those who work for an employer that does not provide employer benefits that much sicker than those enrolled under group coverage? Or, is it cost-shifting? Speaking of cost-shifting, State-sponsored insurance plans should reimburse health care providers for the actual cost of providing services.

It's too bad insurers for those seeking individual HSA accounts are not allowed to price in bands, a base rate with discounts (+5%/+10%) and a base rate with penalties (-5%/-10%)...say 5 tiers. Insurers should be allowed to advantage or disadvantage in any manner they want: age, gender, weight, even genetic testing however they should not be able to deny coverage.

Personally, I have hard time understanding why individuals readily sign up for auto loans costing between $400/800 a month but balk at paying going rates for health insurance premiums.

[Robert Waldmann]

I apologize for writing "Make the doctors pay for the care and pay the doctors based on outcomes." which was just dumb. My actually proposal is to "Make the insurance companies pay part of the cost of the care of their former clients and pay the insurance companies part of the premiums of their former clients." The making doctors provide insurance silliness was just me working out my thoughts while typing (originally a comment at Ezra Klein's blog). To be clear, I think that insurance companies should provide insurance and, within limits as in the Edwards plan pass on incentives to doctors and patients (means mostly they get to give rewards if they want but not impose penalties).

Bruce thanks for your comment (especially the bit about my "insight" which is not due to me at all but mostly following David Cutler and Mark Thoma). I agree that setting up systems is key (the US based proof of what can be achieved is called the veterans' administration). My thought is that if the government provides them with an incentive to keep patients healthy, insurance companies can set up information systems. Again the dumb "Make the doctors pay..." line obscured the point I eventually reached.

Jamzo. I am working by the wonkosphere rule that you have to give for profit insurers some of the action or they will block reform (it's a rule for alleged political feasiblity which is imposed in the wonkosphere and very strictly imposed by Ezra Klein who is half my age but also the host of the original site of my typings).

Layla: Your proposal is very close to mine except I have an impenetrable formula not a simple for 5 years rule. I don't know for sure why current proposals by Edwards, Clinton and Obama don't allow insurance companies to charge based on age (they allow only region). My guess is that it is because young people don't turn out to vote as much as older people, so making them subsidize older people is a way to win primaries and elections.

[Linda]

because young people don't turn out to vote as much as older people, so making them subsidize older people is a way to win primaries and elections.

One could say the same about Social Security retirement benefits, right? Only it's not what we say.

It would appear that by including both young and old in the pool, and charging a level premium, the burden is shared over population and time.

The reason for varying premiums by region, as I understand the proposed system, is the varying cost of care by region, regardless of age. It would seem that those regional differences are more key than age as a determinant of cost.

[Linda]

Speaking of cost shifting...

As someone who has purchased individual health insurance in the past, I loudly second Layla's point about the cost of individual versus group coverage. There is a major disconnect between risk and the pricing of individual coverage. IMO, pricing individual coverage differently ignores the realities of health care in this country.

As someone who is now uninsured (and uninsurable except by a state-sponsored high risk pool that would cost more than my mortgage), I am sick of hearing how the uninsured "cost us all" so much money. No one pays for my health care but me!

And here is my cost-shifting point: When I see the doctor, I pay more than is paid by both insured and insurer for the same service. When I have lab work done, I pay 50% more, on average, that the total paid by both insured and insurer. The same principle in different percentages applies across the board.

[Robert Waldmann]

Dear Linda

I'm willing to say that about social security.

I certainly think that social security politically strong enough to survive the 2005 assault by the party that controlled everything because older people love it and vote. I think if we were to look at the polls we would see that (not that I have recently enough for my memory to be reliable).

Shifting money from young to old pleases or displeases me depending on how young and poor the young are and on how old and low income the old are. I'm not proposing any change to medicare, so I'm not proposing any change for people over 65. The old in question are 50 to 65 with typically high incomes but significant risk of heart attacks. The young I had in mind are people 18 to 25. Income follows a hump with a huge increase from around 20 to around 50. I would guess that many young people are liquidity constrained which means that forcing them to save is socially costly. I do not, in fact, really approve of the current social security system. I think that the regressive payroll tax should be replaced with a progressive tax where income up to some level is exempt.

That is I think the system as it is is better than nothing (and better than a Bush or McCain reformed system) but not ideal. Similarly, I enthusiastically support the Edwards or Clinton health care plans, but I would like them better if they were financed in a less regressive way (makes the payroll tax look leftist by comparison).

Many uninsured people don't pay their huge bills. It is simply a fact that hospitals have funds to pay for the care of the uninsured. They know that the insured are cross subsidizing the uninsured on average. You are cross subsidizing more than anyone else as you are uninsured yet not (yet) bankrupt. Clearly the practice of charging the uninsured more than insurance companies is unacceptable (recall my proposal says "start with the Edwards plan").

[Linda]

Robert,

First, on Social Security, it's true that older people are more likely to vote than the young. It will be interesting to see if more of the young vote this year. It's also true that many of the young have become convinced that Social Security won't be there for them. I remember thinking something not quite so absolute when I was younger. My reaction was to want it "fixed" (in terms of there being enough money v. projected payments). My impression is that the rhetoric of the past 10-15 years has convinced many of today's young that it can't be "fixed" without fundamental change in the program or that it should be scrapped because they feel "used."

As the so-called Greatest Generation is overtaken on the rolls by the Baby Boomers, sentiment could turn more negative on Social Security as it stands. An awful lot of GenX and Y don't seem to feel as warm and fuzzy about Baby Boomers as the Boomers have felt about the GG. On the other hand, things tend to change with time, don't they? ;-)

I do always hesitate to change something that basically works because nowadays it seems like the results are unpredictable and often worse than any current problems, due to the mutual back-scratching that goes into legislation. One need look no further than Medicare Part D and the government subsidy to encourage "reluctant" health care plans to participate. As some have said, FDR was constrained by not wanting the program to appear to be welfare and not wanting the highest earners to dismiss it as an egregious transfer of wealth. Hence the regressive structure and universal payouts to covered recipients, regardless of need. The same constraint seems to exist today.

As for your comments on what would be ideal, I don't think we're far apart on Social Security. Do you favor raising or eliminating the income cap? Personally, I'd rather see your idea of a regressive payroll tax with a low income exemption and a much higher cap on contributions.

[Linda]

As for health care coverage plans, I have no use for insurance companies, and I dread a future where I am required by law to buy "health insurance" at an "affordable" price.

I am uninsured because about 9 years ago the premiums for my Individual coverage went up 75% over two and a half years. (Part of the increase was an Age increase, but no more than half of it.) In addition to premiums I could no longer afford, the perverse effect was that I could no longer afford the copays to see a doctor ($40), much less the 30% copays for everything else. I was faced with a choice between having coverage and no care or having no coverage and being able to see a doctor! I decided the latter would be better for my health. I think I'm probably taking better care of myself now because I'm aware of the risk I've taken on. (And see another post for discussion of the bankruptcy issue)

At first, I was gung ho for a government solution. I read a lot. I wrote to a lot of politicians. Then I began to see that the solutions being proposed weren't solutions at all. I can dismiss the "free market" proposals with a snort. Without price controls, and with perverse incentives, one doesn't have to look far to see who benefits and who suffers. Had Gov. Schwarzenegger's plan gained traction, I probably would have left the state (hmmm, and I would have the equity that has vaporized in the past year! Maybe it would have been ok.) He "promised" it would be "affordable." My experience says that people in suits that cost more than my monthly income have no idea what I can afford.

I became and will remain convinced of the following: Cost containment on providers and pharma is not optional and any plan that doesn't deal with that should be off the table. The most cost effective and fair solution is universal, single payer, cradle to grave. It should be as automatic as having a Social Security number/card. Under such a plan, it shouldn't matter which provider you choose so choice should be part of it. Competition should enter the picture when it comes to those choices. No doctor, hospital, or lab should have guaranteed clientele in perpetuity. One incentive to offer in order to "grow" more doctors should be subsidized education and training, and there are choices on how to do that.

As for private insurance, it's nonsense. The insurance product is not compatible with health care. Some drivers never make a claim. Further, if you can't afford auto insurance, you can choose not to drive. Most homeowners never make a claim on their homeowners insurance (whether that's due to having no covered incidents or fearing termination of their policy is another topic). When it comes to healthcare, most lives start in a healthcare setting. I doubt there are many people in this country who go their whole lives and never see a doctor, never get sick, never have an accident and die at home without any medical care. The product has morphed into something that Insurance can't deal with efficiently. Or, to put it another way, insurers spend far too much advertising, cherry-picking, and figuring out how not to pay. Eliminating the cherry-picking won't solve the problem. We all need healthcare. It's not a matter of IF, but WHEN and HOW OFTEN.

The only reason Insurers are now "on the bandwagon," promulgating their own plans, is that they want to remain in control of what happens next. Back in '93-'94, they suddenly curtailed price increases and gave us "Harry and Louise" - until the Clinton plan was dead. As long as they are in the picture, the picture won't work. That was my problem with the Edwards plan, which I agree was the best offered by the three top Dem contenders.

Some of the details of your plan seem innovative and sensible if one accepts the private insurance premise, and I do realize that what I want isn't in the room much less on the table. (More's the pity.) I certainly would feel better about it if I knew that those designing what we eventually get will think as you do: "Shifting money from young to old pleases or displeases me depending on how young and poor the young are and on how old and low income the old are." However, I'd point out that, as you know, statistics don't portray individuals, and not all 55 year olds enjoy income greater than that of their children. Further, there's a chance that we may soon have a spate of low income earners at both ends of the age distribution.

As for Medicare - my eventual salvation if my luck holds - THAT is where I worry about viability. Getting something done about the health care mess in this country will help Medicare, too.