It’s a bad time to be a supporter of the Affordable Care Act. Public support for the law remains low, and seems to be getting lower. Moderate and conservative Democrats who backed the law when it first passed in 2010 are increasingly opposed to it. Nevertheless, there are those who think this trend will pass as the Obamacare roll out goes more smoothly than people currently anticipate (Matthew Yglesias prominently among them) and many still hope that the virtues of Obamacare will become clearer as the public is better educated on the what the law is.Firmly in this camp is Stephen Davidson, a professor of Health Policy and Management at Boston University, whose latest work, A New Era in US Health Care, is a brief for the ACA. Davidson also wrote Still Broken: Understanding the US Health Care System (2010), and in his new book he reassesses the problems facing our system and offers a defense of the ACA’s attempt to address them. A New Era, which is, as far as I know, the first full-length book dedicated to defending the ACA, has four chapters. The first lays out the structural problems with American health care prior to the ACA. The second describes the ACA’s legal framework and the reforms it tries to institute. The third—oddly perhaps the least important chapter—makes a case for the ACA, and the fourth discusses the challenges and ambiguities involved in implementing the law. In the prologue, Davidson succinctly diagnoses our health care crisis: “The origin of the problems lay primarily in dysfunctional incentives faced by all parties to the system—employers, insurers, individuals and families, providers of services, and even federal and state governments. All were making choices they thought were rational for themselves, at least in the short run, but when added together, these choices created problems for the system and the nation.” The first chapter rehearses some familiar statistics about the problems these perverse incentives cause. We spend more on health care than most every other developed nation without getting any noticeable increase in quality from it. In fact, by many measures, our system is worse than those found abroad. Prices vary from hospital to hospital and from state to state, as does quality, and many Americans are uninsured or under-insured (pre-ACA). In detailing the perverse incentives that lead to such poor outcomes, Davidson focuses primarily on those faced by insurers and doctors, and this framing turns out to be crucial for the rest of the book. He argues that in the pre-ACA status quo doctors made more money if they increased the volume of treatments for their patients, even past what the patients might want or need. In other words, they benefit from inefficiency. Insurers faced another kind of incentive. Their profits are what’s left after they cover administrative costs and reimburse providers for all the care consumed by their customers. In order to maximize profits, insurers use various tools to reduce the unpredictability of that second expense, from denying coverage to people with pre-existing conditions to refusing to pay bills for services already provided. Much of the rest of the book discusses how the ACA addresses these two incentive problems. It deals with insurers by forbidding discrimination based on pre-existing conditions and imposes “annual or lifetime limits on the dollar value of benefits,” among other reforms. Insurance companies accepted these measures because the ACA also expands their number of customers by mandating that all citizens have health insurance. The ACA changes doctors’ incentives in two main ways. First, it sets up Accountable Care Organizations. An ACO is a health system in which providers work with Medicare to reduce health care costs and improve quality. They’re structured in such a way as to encourage better performance on the part of the providers, as well as to standardize care among providers, so that different doctors follow the same diagnostic and treatment practices. The incentive works this way: the providers receive a fixed payment for their services. If they control costs, beating the prices that the fixed payment is pegged to, they get to keep the difference. As Davidson puts it, “if they succeed in meeting targeted quality and cost measures for their population of patients, care will cost less, and by sharing in the financial savings with payers, they can earn more.” Davidson considers this the biggest experiment of the ACA: there is as of yet no reliable data that ACOs will consistently produce cost savings. Indeed, if anything, recent data on the first year performance of Obamacare’s ACOs suggests the opposite (though supporters remain hopeful). Second, the ACA creates the Independent Payment Advisory Board, which will “propose plans to help Medicare meet its financial targets.” Like ACOs, the IPAB will try to standardize care by cutting back on the unproven or unnecessary treatments doctors pursue. However, there’s a conspicuous omission in Davidson’s framing of how the ACA supposedly fixes our system’s broken incentives, and this points to the main problems with the law. Health care scholars have been arguing for a long time that the system is dysfunctional because is not a functioning market. To understand why that is, you have to look at the system through the consumer’s eyes. It all comes down to the insurance mechanism we use to pay for care. Unlike auto or home insurance—examples of how insurance ought to function—health insurance covers most all one’s routine needs. Imagine if auto insurance covered gas, tire repair, and oil changes. Or as Ben Domench has put it, imagine if you acquired lightbulbs through home insurance. That is essentially what we do with health care. We use insurance not only for major, unforeseen expenses like a heart attack or cancer (the medical equivalent of a car accident for auto insurance), but also minor ones like a checkup or treatment for chronic but not life-threatening conditions. Paying for all our care this way, first of all, adds a tremendous amount of administrative expense to the health care system. Doctors who have stopped insurance in favor of out-of-pocket payments or a subscription service have been able to cut their prices significantly because they’ve saved on the administrative overhead the insurance model carries with it. From the consumer perspective, insurance does more than add administrative costs. It also hides costs from the consumer and takes away price-signals, removing any incentives he or she would naturally have to consume responsibly. Because in an insurance-based system, a third party bears much of any given patient’s health care costs, a consumer has no reason to be frugal or even to find out the prices of care. And even if he or she wanted to know the prices of care in advance of an procedure—in order, say, to compare costs across different providers—in many cases it would be very difficult, if not impossible, to get that information. This free ride exacts all sorts of macro costs. Hospitals aren’t accountable to patients, because the patients don’t pay. This prevents consumers from exerting any meaningful pressure on the system to improve it and lower costs, leading to extreme price fluctuation, scandalous price gouging, and over-prescription of services. When looked at this way, any reform that doesn’t work to make consumers more price-sensitive is doomed to fail. The ACA or other similar plans might find some discrete savings or expand access in the short term, but they won’t do much to counteract the forces driving our health care crisis. One solution, proposed in different forms by David Goldhill and Megan McArdle, is to encourage higher deductible plans or catastrophic care combined with tax-advantaged Health Savings Accounts, so that insurance would be understood as providing a safety net for emergencies. This would make it more like home or auto insurance. This is a very different approach from Obamacare, which reinforces the comprehensive insurance system and even makes it harder to purchase catastrophic and high-deductible plans. For example, the ACA sets maximum annual limits on the high-deductible plans so that many catastrophic plans that existed prior to Obamacare do not the new, legal standards. There are three common critiques of this proposal, known as the “consumer-based approach.” One is that health care can never be a true market, simply by virtue of the unique service it provides. Unlike other consumer products, we all need health care in some form. In an emergency situation you don’t have time to dispassionately evaluate your options—which, depending on the medical treatment involved, can be quite complicated—and chose the one that is the best value. Therefore, this argument runs, trying to improve the health care system through consumer-oriented reforms is misguided. We can’t all be rational, well-informed health care consumers, so the system must instead incentivize rational health provision. Hence the ACA focuses on changing the motivations of doctors rather than those of consumers. The second critique is that attempting to reduce the role insurance plays in health care misses the fact that roughly 80 percent of health care is consumed by the sick, and only 20 percent by the healthy. This 80-20 rule means that most health care spending is on catastrophic conditions, like cancer, that consumers need to use insurance to pay for. Treatments for these conditions are necessarily expensive, and paring down insurance coverage of cheaper, routine services won’t bring significant cost savings. The third points out that Americans under-consume care when they have less generous insurance or no coverage whatsoever. If you have to pay more out of pocket, you’ll be less likely to seek out the care you need, preferring to skimp wherever possible. There are responses to all of these. We now know that higher deductible plans can actually help people become more cautious consumers, contra the first and second point: two studies in May linked slowdowns in national health care spending to increased out-of-pocket costs. No less a supporter of the ACA than Ezra Klein has even said that higher-deductible plans are a good idea. Some form of subsidy or assistance can be provided to lower-income Americans to help them consume an appropriate level of care instead of skimping too much. And in light of the recent Oregon Medicaid study, which showed that Medicaid can improve people’s financial security but not necessarily their physical health, under-consumption of care might not be the biggest thing we should be worrying about. In the end, some of this debate might come down to a perennial tension in American politics: whether to trust the people or the technocrats. Those who trust the technocrats more, like Davidson, want us to tinker with incentives on the provider side, helping doctors provide more care more efficiently. For them, the ACA represents a good attempt to reform insurer and provider incentives. The populists trust the people to exert consumer pressure on providers, if only the system allowed them to. Since the ACA further entrenches the existing insurance regime, they oppose it. These are not mutually exclusive options. It’s possible, for example, to favor standardization of basic care on the provider side while still giving consumers more control over their health expenditures. In practice, however, the two sides have tended to butt heads. Indeed, on the technocrat side, some people think consumer price-consciousness is not only ineffective but also a bad thing. For them, it’s not patients’ job to “haggle over price or second-guess their doctor.” But if we want to transform health care, some consumer control and haggling might be just what the doctor ordered. For example, a surgery center in Oklahoma recently started a bidding war in its area by posting its lower-than-average prices for all its procedures online. Consumers with access to public information about prices were able to approach other surgery centers and force them to match the prices offered by the original, lowering costs throughout the region. The fact that Davidson doesn’t even address fixing consumer incentives in this way is the biggest weakness in what is an otherwise lucid exposition of what Obamacare is and how it works. But, of course, his subject limited him: the ACA doesn’t have much to say about the consumer-directed approach, so we shouldn’t expect a book about it to. Readers who want to understood Obamacare could do worse than to start here, but those interested in better solutions should look elsewhere.
This is your free article this month. A quality publication is not cheap to produce.
Subscribe today and support The American Interest—only $2.99/month! Already a subscriber? Log in to make this banner go away.
Subscribe today and support The American Interest—only $2.99/month! Already a subscriber? Log in to make this banner go away.
Published on: July 25, 2013Obamacare’s Defensive Playbook