Massachusetts Health Reform, Version 2.0?

A commenter on Megan McArdle’s blog, CappedMD, made the following points about the 1990s experiments with capitation:

Been there, done that, have the scars to show. Short summary. Capitation did not work in the 90s. The basic problem was both insurance risk and a misalignment of incentives between agents and principals. If the MD group actually reduced costs the excess was quickly captured by the insurer/employer. No real incentive to keep down costs. Cost overruns were eaten by the medical group. ( heads I win, Tails you lose) The risk of not doing something was borne by the medical group, ie malpractice risks. Within the groups the professionals who kept costs low did not get the savings. This had to do with the various schemes for splitting the capitation. The physician fees had to be split between all the specialties based on a per member per month formula. Just figuring out who was on a panel at any specific time was an administrative nightmare. Also you had to calculate within the specialty groups to pay each MD. Depending on the group formula there could still be incentives for visits and procedures (define fairness, get everyone to agree, give three examples). There was also no incentive for preventive care or even good care since the group would not capture the lower costs in 5-10 years when the patient was healthier. Essentially no one could solve the difficulties in aligning the interests of the principals (payors), customers (patients) and the agents (health care providers). Payors wanted cheap, patients wanted the best/most, MDs knew you could pick 2 out of 3 and were caught in the middle. Capitation died because patients didn’t trust it and the agents went “John Gault” and refused to contract.

I don’t think Mr. Kling ever said markets are perfect or not wasteful. It’s just that markets are more efficient at correcting waste and finding new solutions.

Kling says, “With markets, trial and error takes place continuously. A lot more things get tried. Failure gets weeded out more ruthlessly.”

However, I believe Kling would agree that to his Darwinian (Spencerian) evolutionary analogy, one must add the effects and distortion of the ecosystem. In an economy, government laws and government programs are part of the ecosystem.

A market based health system must conform to the distortions created by the employer tax deduction for health benefits, Medicare hospital and doctor pricing and reimbursement rules, Medicaid, state health insurance laws, etc. This is the ecosystem.

Our attempts at a market based health reform exist within this system. If we are unhappy with our health delivery or our health insurance and reimbursement system (which are often confused with each other in the debate), it is essential to change the ecosystem, i.e. our laws and government programs, to allow a health system to develop based on undistorted consumer demand and profitability. Undistorted is not the same as unregulated, but that is a separate topic.

One of the key differences between government attempts and private market based attempts is that the evaluation is sequential as opposed to parallel. In government, one system is set up and allowed to exist until outside pressures, such as costs, electorate dissatisfaction, etc., force a reevaluation and a modification to the system. Different attempts do not compete against each other within the same period. This is what is happening in Massachusetts’ health reform legislation now.

In a market, different attempts are tried almost simultaneously (or within overlapping periods) so the user or consumer has choice. Continued existence requires the ability to attract users and the ability to be profitable. Maintaining costs levels to achieve profitability is essential for survival unless subsidies exist. Successful systems survive and unsuccessful ones wither away due to lack of demand (sometimes it is the product and other times it is the pricing), due to excessive costs or due to a competitor’s better and cheaper product.

Government, at times, tries to be more like a market system through limited use of pilot programs. However, pilots are more like drug trials than a market-based economy. The participants and time are limited. Consultants then usually evaluate the program’s success based on politically selected parameters instead of consumer demand and profitability.

Another difference between market-based and government-based programs is flexibility versus bureaucratic rigidities. If a business owner sees that a service or its pricing is not working, the owner has the control and power to attempt to make positive modifications as quickly as possible. In government, there are no owners. However, the programs must continue to meet rigid legal and regulatory requirements. Additionally, users usually do not have alternative options to a government program and can only voice, if at all, their dissatisfaction to the press and their politicians.

Consumer choice in an undistorted marketplace leads to consumer satisfaction. The result in not always the theoretical best or the cheapest, but it is the one that contributes the most to consumer satisfaction. If the consumer is not satisfied, the product and service will disappear and something else will replace it. If more consumer satisfaction is available at the same or lower price from a different product, it will replace what exists.

Undistorted consumer choice determines survivability in a free and competitive marketplace, and increases consumer satisfaction, even in a health care system.

Why isn’t the left outraged about them kicking legal, tax-paying immigrants out of the system? They are obviously going to ration treatment for politically weak groups. This will be awful for poor people. The rich will still be able to buy care, on the black market or abroad if need be.

“Providers would have to work within a predetermined budget, forcing them to better coordinate patients’ care, which could improve quality and reduce costs.”

I love how the bureaucrats and politicians predetermine the outcome: “forcing them to better coordinate care.” How about “forcing them to choose less expensive but less optimal diagnostic tests and less expensive but less effective therapies.” Or how about: “forcing them to offer patients with chronic illnesses fewer visits per year.” Or “forcing them to refer fewer patients to specialists who could shorten the time to correct diagnosis and the time to optimum therapy.”

Capitated health care plans work only under limited conditions. It is not a panacea for all health care financing problems. I don’t understand why Massachusetts’ politicians are expending energy to fix their health care mess, because citizens of Massachusetts soon can switch to ObamaCare.

“Instead, the group wants private insurers and the state and federal Medicaid program to pay providers a set payment for each patient that covers all that person’s care for an entire year and to make the radical shift within five years. Providers would have to work within a predetermined budget, forcing them to better coordinate patients’ care, which could improve quality and reduce costs.”

Isn’t this just a long-winded description of an HMO, designed to minimize costs of medical care by withholding it from patients to the fullest possible extent? In other words, socialized medicine?

@ Spencer

“Government interference is a very convenient excuse for libertarians.”

Tell that to the citizens on New Jersey, who saw their insurance rates jump at astronomical rates, after politicians decided insurance companies weren’t allowed to discriminate on pre-existing conditions. Guess what happened, people decided to cancel their insurance, and only sign up once they got sick!!! Duh.

How about laws that dictate minimum plans that include chiropractic and mental health coverage. Minimum plan prices go up because of political meddling.

People love to point to Europe; fortunately for them, their electoral system is much less dependent on campaign contributions, so lobbyists don’t have the ability to buy off some politicians, and make the rest of the market (for healthcare) pay. This little fact is often overlooked, then people think you can just pick a panel of smart people to make decisions on coverage.

Spencer:

Take a good look at the arguments that your politics lead you to make!

It’s false to claim the present state of affairs in health care is an example of free markets in action and dishonest to write off any objection to that categorization on the grounds that it is “convenient” for libertarians.

Convenient or not, the government really does get involved in the healthcare market. Convenient or not, this involvement really does affect what gets produced, how much it costs, and how the costs are distributed.

If my politics left me in a position where I had to make arguments like the one you made above, I’d change my politics.

And Thomas B.,

I find the left to be self dismissing – no straw man needed.