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Who to Blame for Health Costs: The Poisoned Chalice of “Moral Hazard”

By JEFF GOLDSMITH

How the Search for Perfect Markets has Damaged Health Policy

Sometimes ideas in healthcare are so powerful that they haunt us for generations even though their link to the real world we all live in is tenuous. The idea of “moral hazard” is one of these ideas. In 1963, future Nobel Laureate economist Kenneth Arrow wrote an influential essay about the applicability of market principles to medicine entitled “Uncertainty and the Welfare Economics of Medical Care”.    

One problem Arrow mentioned in this essay was “moral hazard”- the enhancement of demand for something people use to buy for themselves that is financed through third party insurance. Arrow described two varieties of moral hazard: the patient version, where insurance lowers the final cost and inhibitions, raising the demand for a product, and the physician version–what happens when insurance pays for something the physician controls by virtue of a steep asymmetry of knowledge between them and the patient and more care is provided than actually needed. The physician-patient relationship is “ground zero” in the health system.

Moral hazard was only one of several factors Arrow felt would made it difficult to apply rational economic principles to medicine. The highly variable and uniquely threatening character of illness was a more important factor, as was the limited scope of market forces, because government provision of care for large numbers of poor folk was required.  

One key to the durability of Arrow’s thesis was timing: it was published just two years before the enactment of Medicare and Medicaid in 1965, which dramatically expanded the government’s role in financing healthcare for the elderly and the categorically needy. In 1960, US health spending was just 5% of GDP, and a remarkable 48% of health spending was out of pocket by individual patients. 

After 1966, when the laws were enacted, health spending took off like the proverbial scalded dog. For the next seven years, Medicare spending rose nearly 29% per year and explosive growth in health spending rose to the top of the federal policy stack. By 2003, health spending had reached 15% of GDP! Arrow’s  moral hazard thesis quickly morphed into a “blame the patient” narrative that became a central tenet of an emerging field of health economics, as well as in the conservative critique of the US health cost problem.  

Fuel was added to the fire by Joseph Newhouse’s RAND Health Insurance Experiment in the 1980s,  which found that patients that bore a significant portion of the cost of care used less care and were apparently no sicker at the end of the eight-year study period. An important and widely ignored coda to the RAND study was that patients with higher cost shares were incapable of distinguishing between useful and useless medical care, and thus stinted on life-saving medications that diminished their longer term health prospects. A substantial body of consumer research has since demonstrated that patients are in fact terrible at making “rational” economic choices regarding their health benefits. 

The RAND study provided justification for ending so-called first dollar health  coverage and, later, high-deductible health plans. Today more than half of all Americans have high deductible health coverage. Not surprisingly, half of all Americans also report foregoing care because they do not have the money to pay their share of the cost!   

However, a different moral hazard narrative took hold in liberal/progressive circles, which blamed the physician, rather than the patient, for the health cost crisis.  

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Medicare Advantage Poses Challenges to Health Care Cost-Effectiveness and Equity

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BY NIRBAN SINGH AND AMY HELBURN

Introduction

Medicare Advantage (Advantage), originally conceived in 1997 during the Clinton Administration as ‘Medicare + Choice’, has progressively grown and become an established health insurance option for those 65 and older. According to data collected and aggregated by the Kaiser Family Foundation, Advantage has more than doubled in total enrollment between 2010 and 2021. In 2021 alone, 26 million people were enrolled in Medicare Advantage, which is over 40% of the total Medicare beneficiary population. In 2021, 85% of Medicare Advantage growth was concentrated among for-profit health plans, with UnitedHealthCare, Centene, and Humana leading the way.

Overall, the Medicare Advantage market is dominated by UnitedHealthCare, Humana, and CVS Health/Aetna, with this trio responsible for over half of all Advantage beneficiaries.As of October 2020, about 80% of Advantage enrollees directly purchased individual policies, while employer-sponsored Advantage enrollment has been steadily growing, comprising 18.1% of the Advantage market overall in 2020. Analysis from The Chartis Group indicates that half of all Medicare beneficiaries will be enrolled in Advantage plans by 2025, so the trio of existing leaders in providing Advantage plans may continue to innovate and profit immensely while new market entrants may grow their footprint rapidly, in response to growing demand.

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Matthew’s health care tidbits: #What is insurance again?

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Each week I’ve been adding a brief tidbits section to the THCB Reader, our weekly newsletter that summarizes the best of THCB that week (Sign up here!). Then I had the brainwave to add them to the blog. They’re short and usually not too sweet! –Matthew Holt

For my health care tidbits this week, I was reminded on Twitter that many Americans really don’t understand health insurance. A spine surgeon no less in this thread (no jokes about arrogance please) was telling me that he was paying ~$8,000 a year ($4,000 in insurance and $4,000 in deductible) before he got to “use” his insurance–which, as his medical costs were low, he never did. Others were complaining that the cost of employee premiums were over $20K. They all said they should keep the money and (presumably) pay cash when they do use the system. It’s true that most people don’t use their insurance. That’s the whole point. When you buy house insurance, you don’t expect your house to burn down. You are paying into a pool for the people whose house does burn down.

In the US we are on average spending $12k per person on health care each year. But spending on most people is way under that and for a few it’s way, way over. If you take the rough rule that 50% of the spending is on 10% of the people then 35 million people account for $2 trillion in spending–that’s ballpark $60,000 each. They are the ones with cancer, heart disease, complex trauma, etc, etc. The rest of us are “paying” our $4,000, $8,000 whatever, into the pool to cover that $60,000.

There are only two ways to lower that cost for the healthy who aren’t “using” their insurance. One is to exclude unhealthy people from that insurance pool, which makes the costs for everyone else much less. We did that for years with medical underwriting and it was nuts because it screws over the unhealthy. Fixing the pre-existing condition exclusions was the only bit of Obamacare everyone agrees on–even Trump. But now we are ten plus years into this new reality, some people have forgotten how bad it was before.

The other way is to reduce the costs in the system and lower that $4 trillion overall. How to do that is a much longer question. But it isn’t much connected to the concept of insurance.

Americans Are Worried About the Cost of Their Healthcare (and they have good reason)

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By CASEY QUINLAN, HELEN HASKELL, BILL ADAMS, JOHN JAMES, ROBERT R. SCULLY, and POPPY ARFORD

Last year, the Patient Council of the Right Care Alliance conducted a survey in which over 1,000 Americans answered questions about what worried them most about their healthcare. We asked questions about access to care, concerns about misdiagnosis, and risks of treatment, which we reported on in our last THCB piece about the What Worries You Most survey.

We also asked people to rank their concerns about the costs of their care, in five questions that covered cost of care, cost of prescription drugs, cost and availability of insurance, and surprise billing. In the time since we ran the survey, everything has changed in American healthcare. The COVID19 pandemic is filling emergency rooms wherever the epidemic arrives. Bills are likely to be high, for both patients and insurers, and it is still far from clear how they will be paid. Americans are likely to continue to worry deeply about healthcare costs, with good reason, since it’s only in America that someone can go bankrupt due to seeking medical care.

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Out of Network? Cigna, RICO and where’s the line?

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By MATTHEW HOLT

Sometimes you wonder where the line is in health care. And perhaps more importantly, whether anyone in the system cares.

The last few months have been dominated by the issue of costs in health care, particularly the costs paid by consumers who thought they had coverage. It turns out that “surprise billing” isn’t that much of a surprise. Over the past few years several large medical groups, notably Team Health owned by Blackstone, have been aggressively opting out of insurers networks. They’ve figured out, probably by reading Elizabeth Rosenthal’s great story about the 2013 $117,000 assistant surgery bill that Aetna actually paid, that if they stay out of network and bill away, the chances are they’ll make more money.

On the surface this doesn’t make a lot of sense. Wouldn’t it be in the interests of the insurers to clamp down on this stuff and never pay up? Well not really. Veteran health insurance observer Robert Laszewski recently wrote that profits in health insurance and hospitals have never been better. Instead, the insurer, which is usually just handling the claims on behalf of the actual buyer, makes more money over time as the cost goes up.

The data is clear. Health care costs overall are going up because the speed at which providers, pharma et al. are increasing prices exceeds the reduction in volume that’s being seen in the use of most health services. Lots more on that is available from HCCI or any random tweet you read about the price of insulin. But the overall message is that as 90% of American health care is still a fee-for-service game, as the CEO of BCBS Arizona said at last year’s HLTH conference, the point of the game is generating as much revenue as possible. My old boss Ian Morrison used to joke about every hospital being in the race for the $1m hysterectomy, but in a world of falling volumes, it isn’t such a joke any more.

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Providers Don’t Take Enough Risk to Bend the Cost Curve

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By KEN TERRY

Back in 2015, 20 major health systems and payers pledged to convert 75% of their business to value-based arrangements by 2020. Today, more than two-thirds of payments from U.S. commercial health insurers are tied to some kind of value-based model. By 2021, the health plans expect three-quarters of their payments will be value-based.

However, a recent analysis of Change Healthcare data by Modern Healthcare found that the percentage of value-based revenue tied up in upside/downside risk contracts was in the single digits. Among the types of two-sided risk contracts that provider organizations had were capitation or global payment (7.3%), pay for performance (6.5%), prospective bundled payment (5%), population-based payment (5.8%), and retrospective bundled payment (4.1%).

An AMGA survey picked up signs of a recession in risk contracting in 2016. A year earlier, survey respondents—mostly large groups–had predicted their organizations would get 9 percent of revenue from capitated products. In 2016, the actual figure was 5 percent, according to a Health Affairs post by the AMGA’s Chet Speed and the late Donald Fisher.

The authors cited a number of obstacles to the spread of risk contracting, including “limited commercial value-based or risk-based products in their local markets; the inability to access administrative claims data from all payers; the massive administrative burden of submitting data in different formats to different payers; lack of access to investment capital; and inadequate infrastructure.”

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Half the Cost. Half the Jobs?

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By JOE FLOWER

flying cadeuciiHealthcare costs far too much. We can do it better for half the cost. But if we did cut the cost in half, we would cut the jobs in half, wipe out 9% of the economy and plunge the country into a depression.

Really? It’s that simple? Half the cost equals half the jobs? So we’re doomed either way?

Actually, no. It’s not that simple. We cannot of course forecast with any precision the economic consequences of doing healthcare for less. But a close examination of exactly how we get to a leaner, more effective healthcare system reveals a far more intricate and interrelated economic landscape.

In a leaner healthcare, some types of tasks will disappear, diminish, or become less profitable. That’s what “leaner” means. But other tasks will have to expand. Those most likely to wane or go “poof” are different from those that will grow. At the same time, a sizable percentage of the money that we waste in healthcare is not money that funds healthcare jobs, it is simply profit being sucked into the Schwab accounts and ski boats of high income individuals and the shareholders of profitable corporations.

Let’s take a moment to walk through this: how we get to half, what disappears, what grows and what that might mean for jobs in healthcare.

Getting to half

How would this leaner Next Healthcare be different from today’s?

Waste disappears: Studies agree that some one third of all healthcare is simple waste. We do these unnecessary procedures and tests largely because in a fee-for-service system we can get paid to do them. If we pay for healthcare differently, this waste will tend to disappear.

Prices rationalize: As healthcare becomes something more like an actual market with real buyers and real prices, prices will rationalize close to today’s 25th percentile. The lowest prices in any given market are likely to rise somewhat, while the high-side outliers will drop like iron kites.

Internal costs drop: Under these pressures, healthcare providers will engage in serious, continual cost accounting and “lean manufacturing” protocols to get their internal costs down.

The gold mine in chronic: There is a gold mine at the center of healthcare in the prevention and control of chronic disease, getting acute costs down through close, trusted relationships between patients, caregivers, and clinicians.

Tech: Using “big data” internally to drive performance and cost control; externally to segment the market and target “super users;” as well as using widgets, dongles, and apps to maintain that key trusted relationship between the clinician and the patient/consumer/caregiver.

Consolidation: Real competition on price and quality, plus the difficulty of managing hybrid risk/fee-for-service systems, means that we will see wide variations in the market success of providers. Many will stumble or fail. This will drive continued consolidation in the industry, creating large regional and national networks of healthcare providers capable of driving cost efficiency and risk efficiency through the whole organization.

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Are Doctors Paid Too Much? Behind Medicine’s Nasty Little PR Problem

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By PAUL KECKLEY 

Screen Shot 2014-06-20 at 11.28.40 AMOn the front page of last Tuesday’s Wall Street Journal was this headline:  “Taxpayers Foot Big Bills from Handful of Doctors.” It is a two-page story about a clinician whose practice drew attention from the WSJ research team that combed through the recently released Medicare Utilization and Payment database released in April. They wrote:

“Ronald S. Weaver isn’t a cardiologist. Yet 98% of the $2.3 million that the Los Angeles doctor’s practice received from Medicare in 2012 was for a cardiac procedure, according to recently released government data…The government data show that out of the thousands of cardiology providers who treated Medicare patients in 2012, just 239 billed for the procedure, and they used it on fewer than 5% of their patients. The 141 cardiologists at the Cleveland Clinic, renowned for its heart care, performed it on only 6 patients last year. Dr. Weaver’s clinic administered it to 99.5% of his Medicare patients…”

Lets face it: curiosity about what other people earn is a national pastime. Pro golfers qualify for their tournaments based on their publicly accessible official winnings. NFL agents bargain for their clients based on position-specific compensation comparables. We are frequently reminded that members of Congress “officially” earn $174,000 plus attractive perks, and of late, executive compensation for most of America’s public companies has become a major focus for Board Compensation Committee’s who are being pushed by shareholders to reign in their generous comp packages. So it’s understandable that physicians bristle at stories like this one. We would as well if in their shoes.

Here’s why the story is particularly challenging for the medical profession:

1-Physician income is high relative to what most American’s earn. Though wide-ranging across the various specialties in medical practice, the ratio of physician income to the median income in the U.S. ($51,324) is from a low of 3.6:1 for family practice to 13.9:1 for the highest earning clinicians in radiology, orthopedics and others (and that does not include their income from ownership in surgery centers, testing facilities and other services). Physicians think they deserve to be paid more than any other profession, reasoning theirs is a higher calling, their debt higher (averaging $170,000 for the 86% that borrow for medical school) and their training and expertise more valuable to society than others. Stories like this draw attention to how much physicians “might” earn and lend to suspicions that belly-aching by some in their ranks claiming they earn too little is more about greed than the greater good. Income potential is important to everyone: physicians want to earn as much as they can, and keep score against their peers and other high-earning professions. Many feel underpaid; some indeed are. But relative to what’s made in the vast majority of households, they are well paid.

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Health Care’s Rube Goldberg Machine. Who Is Responsible?

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By RICHARD GUNDERMAN, MD and Brian Callender, MD 

flying cadeuciiRube Goldberg was an American cartoonist and inventor, perhaps best known for the extremely complicated contraptions he devised for performing the simplest tasks.  Each year, a national Rube Goldberg Machine Contest is held, challenging competitors to devise bizarre contrivances that can shine a shoe or zip a zipper.  One day while watching a group of children marvel at such a machine in a museum, a thought occurred to one of us: As healthcare becomes more complex, the interactions between patients, physicians, hospitals, payers, and communities increasingly resemble a Rube Goldberg machine.

Consider a recent case.  Ms. Jones was a 50-something year old African American woman with type I diabetes, high blood pressure and end-stage kidney disease requiring peritoneal dialysis, a form of dialysis performed nightly at home.  She was recently admitted to the hospital because of an apartment fire that destroyed everything she owned, including her home dialysis equipment and medications.  Once she was hospitalized, the medical team restarted her dialysis, restored her blood chemistries to normal, corrected her blood sugar, and began to make plans for her discharge.  There was just one problem.  They had no place to send her.

Ms. Jones could not return to her apartment, which had essentially burnt to the ground.  She did not qualify for admission to a nursing home.  And she couldn’t afford to rent a new apartment, at a cost of about $1,500 per month.  She had paid for insurance on the apartment for years, but had recently let the insurance lapse to help finance the purchase of an $8,000 living room suite.  The medical team had heard that social service agencies would provide one month’s rent, but it turned out that she could get only one-time distributions of $100 from the Red Cross and $200 from the Salvation Army – not nearly enough.

As the days rolled by, the medical team caring for Ms. Jones began feeling escalating pressure from hospital administration to discharge her.  Her medical problems had been taken care of, and there was no medical need for her to remain in a hospital bed at a cost of $1,500 per day.  The team arranged to get her dialysis supplies delivered to her sister’s house, hoping that she could stay there until she found a place of her own.  But it turned out that too many people were already living there.  Attempts to find temporary housing through friends and her church dead-ended.  Hotels she contacted were all too expensive.  Going to a homeless shelter was not a viable option; it would give her a place to sleep, but she couldn’t perform her dialysis there.  She volunteered that she could live out of her car, for which she reportedly used some of the $300 to buy gas, but it later turned out that she did not have one.

As pressure to discharge Ms. Jones mounted, team members became increasingly frustrated.  Each new hope was thwarted by an opposing reality.  The team had provided their patient with the best available medical care, marshaling the impressive resources of a major academic medical center to solve her acute medical problems as effectively and efficiently as possible.  But now they had run up against a barrier for which they lacked the necessary training and resources – not a medical problem so much as a social one.  Treating acute illness was doable, but looking out for their patient as a whole person with a real life outside the hospital was proving quite another matter.

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How Business Can Save America From Health Care

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Brian-KlepperBy BRIAN KLEPPER
One of America’s most enduring mysteries is why the organizations that pay for most health care don’t work together to force better value from the health careindustry.We pay double for health care what our competitors in other developed nations do, but studies show that more than half of our annual health care spend – equal to 9% of GDP or our 2012 budget deficit – provides zero value. Every health care sector has devised mechanisms that allow it to extract much more money than it is legitimately entitled to. Health plans contract for and pass through the costs of products and services at high multiples of what any volume-based purchaser can buy them for in the market. Medical societies campaign for excessive medical service values that Medicare and commercial payers base their payments on. Hospitals routinely over-treat and have egregious unit pricing. There are scores of examples.Decades of these behaviors have made health care cost growth the most serious threat to America’s national economic security. Medicare and Medicaid cost growth remains the primary driver of federal budget deficits. Over the past decade, 79% of the growth in household income has been absorbed by health care. Health care’s relentless demand for an ever-increasing percentage of total resources compromises other critical economic needs, like education and infrastructure replenishment.Health care costs have been particularly corrosive to business competitiveness. Three-fourths of CFOs now report that health care cost is their most serious business concern. Commercial health plan premiums have grown almost five times overall inflation over the past 14 years. Businesses in international markets must overcome a 9+ percent health care cost disadvantage, just to be on a level playing field with their competitors in Australia, Korea or Germany.The health care industry’s efforts to maximize revenues have been strengthened by its lobby, which spins health policy to favor its interests. In 2009, as the Affordable Care Act was formulated, health care organizations fielded eight lobbyists for every Congressional representative, providing an unprecedented $1.2 billion in campaign contributions to Congress in exchange for influence over the shape of the law. These activities go on continuously behind the scenes and ensure that nearly every health care law and rule is structured to the industry’s advantage and at the expense of the common interest.Health care is now America’s largest and most influential industry, consuming almost one dollar in five. Only one group is more powerful, and that’s everyone else. Only if America’s non-health care business community mobilizes on this problem, becoming a counterweight to the health care industry’s influence over markets and policy, can we bring health care back to rights.

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