Nicholas Bagley at The Incidental Economist:
Why doesn’t competition drive out inefficient health care technology?: So here’s a burning question. There’s a consensus that the primary driver of escalating health-care costs is the rapid adoption of new and expensive medical technology. Much of that technology is untested and of questionable medical value. Yet private insurance plans typically cover most any intervention that physicians say is medically necessary. ...
Why? Why don’t private plans compete on price by refusing to cover costly, unproven therapies? ... One answer you sometimes hear is that the law gets in the way. ... We want to contain costs, but the courts won’t let us do it.
The law can’t be the real story, however. As it stands, a federal statute—ERISA—gives employer-sponsored plans almost complete freedom to tailor their coverage packages as they like. ... ERISA even shields a plan from liability if it negligently refuses to authorize coverage for care that it (wrongly) thinks is medically unnecessary. As safe legal harbors go, it doesn’t get any better than ERISA.
Why, then, are private plans so cautious? I’m speculating a little here... For starters, it’s really hard to make good coverage decisions. The data for making them are usually quite poor... And, absent convincing data, a plan that excludes a promising treatment risks alienating physicians and hospitals (not to mention patients). No individual plan has the right incentives to generate that kind of convincing data because, once it does, its competitors will ... take advantage of the leading plan’s research investments.
What’s more, most coverage decisions aren’t crisp (“No proton-beam therapy, period.”). They’re qualified: if a patient has a certain risk-profile, or an identifiable need, then the intervention is covered. But once a plan has said that some patients are eligible for a particular treatment, it’s hard to stop those outside that group from getting the treatment, too. ...
Against this backdrop, piggybacking on Medicare’s coverage determinations makes good sense. Not only does it allow plans to sidestep the collective-action problem that plagues efforts to develop good coverage data. It also helps plans avoid public backlash because they can be confident that their competitors will also follow Medicare’s lead. The government’s seal of approval lends legitimacy to a coverage exclusion that might otherwise appear hard-hearted.
Employer-sponsored plans aren’t the only private plans around, of course. And, as it happens, the law has more bite outside of the employer setting. ... But for employer-sponsored plans, the law isn’t the problem. Far from restraining these plans, the law enables them to tackle the rising costs of technology. There’s just not a business case for it—at least not yet.