Earlier this month, health experts from the Obama Administration wrote up some advice on the next steps for health reform in the New England Journal of Medicine. I recommend reading it: Not too technical, about 2500 words, it gives you a glance into your likely future.
The paper’s big push is for cost controls: And that means both lower prices per service and fewer services. P and Q both get attention.
I’m interested in a narrow set of questions: Which of the reforms they recommend were attempted by private insurance? And if they failed when private insurers tried to bend the cost curve, what unique skills or legal powers will permit the federal government to do a better job?
Three options come initially to mind, each belonging to a conventional field of economics. Keep in mind I’m intentionally focusing on rosy scenarios:
1. Government will do a better job cutting costs than private insurers because it will use oligopoly and monopoly power to reap the rewards of increasing returns to scale. (Industrial Organization)
2. Government will do a better job cutting costs than private insurers because it will have superior knowledge-sharing across providers. (Information Economics)
3. Government will do a better job cutting costs because it’s the government: It can subsidize behaviors its prefers, and tax or ban behaviors it dislikes. (Public Finance)
Surely private firms have a strong incentive to cut costs–after all, profit is revenues minus costs. Every dollar of cut costs is a dollar for shareholders. It’s difficult to imagine any collection of government agencies facing incentives that strong. Perhaps private insurers tried to do all of 1-3 and faced legal barriers that outweighed the strong incentives they faced to cut costs. Or maybe customers just didn’t like it when they cut costs, and insurers responded to customers, so costs weren’t cut that much.
I recommend reading the whole article, asking yourself after each paragraph, “What friction kept the private sector from doing this?”
I can summarize perhaps a third of it as saying “Do things that HMOs do.” Fee for service gives bad incentives especially amid third-party-payers, so set “global targets” and “reduce payments to hospitals with high rates of readmissions” and buy inputs efficiently and the like. HMOs have not been popular in most parts of the country. I had a great experience with mine a few years back in California but when I moved I switched back to regular insurance. Perhaps we’ll like HMO-like service if almost everyone has it–I guess we’ll see.
The authors also recommend reducing regulatory barriers: They note that 34 states don’t “allow advanced-practice nurses to practice without physician supervision.” Insurance companies surely would have liked to reduce those barriers. I wonder why they lost those battles.
They also want the Federal Employees Health Benefits Program (FEHBP) to become more like Medicare and to engage in exemplary cost-cutting practices. Federal employees may soon be part of an important experiment.
Non-Pejorative Coda: The authors’ claim that “insurance industry overhead” is a big source of waste is quite similar to the claims made for the superiority of communism. People often forget–or have never heard–that efficiency was one of the big selling points of central planning.
Communism, after all, would end the “wasteful duplication
” of industries and advertising. Why build two car company headquarters? Why advertise for two similar carbonated beverages? Irony aside, ending the waste looks great on the chalkboard. Perhaps there’s something special about the insurance industry that makes it true there, but not for automakers.