Innovation, Part II
Did you know there is going to be a Center for Medicare and Medicaid Innovation? The authority comes from the new health reform law. And it appears to give the Health and Human Services Secretary enormous discretion to try almost any new idea she finds interesting.
If this doesn’t strike you as a bit strange, you need to recall that in the entire 45 year history of Medicare and Medicaid these two insurance programs have almost never been the first to do anything. In fact, most significant changes in Medicare and Medicaid have come years after the rest of the market has already tried them out.
Medicare was probably the last major insurer in the country to cover prescription drugs. And even today it doesn’t cover (for all practical purposes) telephone or e-mail consultations, text messaging and a raft of other services private insurers are implementing.
Still, give Congress credit for one thing. It is acknowledging there is a problem.
By some estimates as much as one in every three health care dollars is wasted. If so, why aren’t entrepreneurs developing systems and products to do away with all that waste — just as they do in other markets?
As I pointed out in previous posts at Kaiser Health News and at this blog, in a third-party payment system no one has an incentive to eliminate waste. There is a lot of innovation. But it’s the wrong kind of innovation.
With respect to the organization and financing of care, for example, there has been an enormous amount of innovative activity. Wherever there is third-party payment (almost 90% of the market) it has been of two forms: (1) helping the supply side of the market maximize against third-party reimbursement formulas or (2) helping the third-party payers minimize what they pay out. Of course, these developments have only a tangential relationship to the quality of care patients receive or its efficient delivery.
The tiny sliver of the market (less than 10%) where patients pay out of pocket has also been teeming with entrepreneurial activity. In this area, however, the entrepreneurs have been lowering costs and raising quality.
It is the failure to understand this distinction that is the root of the problem — both in Washington and in academic work.
Harvard health economist David Cutler, for example, has a paper on this very topic posted on the NBER Web site. But like the people who gave us the Affordable Care Act, Cutler doesn’t see third-party payment as the problem. He sees it as the solution. Cutler thinks that third-party payers are paying for care the wrong way and problems would be solved if we paid in a different way. He admits that the various payment methods of other developed countries are not much of an improvement over ours with respect to, say, diabetic care or overall lack of coordination of care.
He doesn’t venture into the field of education (see my analysis here), but after 25 years of trying, if there were a way for third-party payment to make schools efficient don’t you think we would have found it by now?
He recounts various Medicare demonstration and pilot programs that try managed care, coordinated care, bundled care, pay-for-performance, electronic medical records, etc. He neglects to mention that both the Congressional Budget Office (CBO) and the Centers for Medicare and Medicaid Services (CMS) have concluded there is no real savings to be had here. (But, hey, you can’t expect him to reference every study, can you?)
So what is Cutler’s answer? It’s the same answer that is incorporated in the health reform legislation recently enacted: More pilot programs and demonstration projects of the very type that have failed. That means more managed care, more coordinated care, more bundled care, more pay-for-performance, more electronic medical records, etc. Will it work? Cutler responds, “Only time will tell.”
As I explained in previous posts, a new payment system is like a new military weapons system. Once it is in place, the enemy (the providers) will start innovating to minimize against it, while the weapons managers (the payers) will start innovating to protect their assets. We will have a new wave of innovation, but it will be the wrong kind of innovation.
So what is the real answer? Instead of funding more pilot programs, Medicare should immediately start rewarding the entrepreneurs who have already lowered costs and raised quality. It should unleash new entrepreneurship everywhere by opening its doors to every hospital and every doctor group that wants to be paid in a different way — provided that Medicare’s costs go down and quality of care goes up. (Details here.)
For the longer term, we need to reduce, not enhance, the role of third-party payment by turning to the casualty model of health insurance. (Details here.) If patients control the spending at every margin, cost-reducing, quality-improving innovation will not be far behind.
Interesting. I don’t know why Cutler doesn’t get this. Isn’t he supposed to be an economist?
Nothing useful is going to emerge from any center for innovation run by CMS.
I agree with Tom. This is absurd.
In America, the government is permitted to exist only so that it can stay out of the way of the American people. Government “innovation”, inevitably leads to the destruction of wealth, while misguided, often corrupt politicians line their own pockets, and pass laws to protect them from us.
If we want to reign in costs, we must permit the market to become an open market and function properly. That’s what http://www.MediBid.com does. By allowing Americans to shop across state lines for medical care,and by allowing American, and overseas doctors to compete on an even playing field, the patient/doctor relationship will be restored, and costs will come down.
Cost cutting innovation will eliminate “waste”. Only problem is “waste” is someones top line. You should expect them to “resist” innovation. Resistence is usually achieved via interaction with the “best government money can buy”.
Amen, John. Third-Party Payment is the key problem. It is what makes health care an imperfect market. This cannot be said often enough. But every time I raise this with anyone on the Left — Alain Enthoven, Uwe Reinhardt, Henry Aaron, you name it — they ignore the point and change the subject. I have never, NEVER, heard an honest rebuttal.
Greg, that’s because Enthoven, Reinhardt, Aaron, etc. cannot conceive of a world in which health care is not paid by third party bureaucracies. And they have no interest in trying to conceive of one.
If someone said to you “Greg, there would be almost no injuries from falling if it weren’t for gravity,” you wouldn’t start trying to imagine a world without gravity would you. No, you would say “Interesting, but of no practical significance.”
That’s the way these guys approach health care.
John, thanks for pointing this out. Innovation in government is the complete oxymoron. Their innovation will be how to tax and control. Reform is another oxymoron.
I appreciate your watching government in action, because I can’t keep up with their innovation.
Every one should take the time to read Cutler’s article. It shows how health care lags in official productivity data and points out the lack of big name entrepreneurs in this industry. You know, the Ford’s, Edison’s, Gate’s and Walton’s who become wealthy by creating new and improved products and services at a lower cost and great benefit to society. Of course, they operated in a real market place. Why can’t the Professor Cutler’s of the world figure this out?
Sure Dr. Brody, “Innovation in government is the complete oxymoron” I’ll bet you the vast majority of Nobel Prize for Medicine research in the past 50 years was government funded. How about the internet, that was a government project. The world wide web you used to post your response, developed with government funding, European at that. Watson and Crick’s research on DNA, government funded. Magnetic Resonance Imaging, government funded, first medical application was in the UK. And how about that government funding that underwrote you residency training?
Thank you for this post, John. It shows me just how little I know about U.S. history and how wrong about the parts I thought I did know.
Thus, I had not known that the original work on the DRGs by Vetter and Thompson at Yale was funded by private insurers. Since I met them there at the computer center and they told me their research was a DHEW project, I was dumb enough to believe them. It probably was Wellpoint that funded the research.
I also thought that Medicare introduced the DRG system long before any private health insurer did. That payment system — really a first attempt at bundling payments — has since been copied by many countries. Now I learn that Aetna and Wellpoint probably developed it and were the first to use it.
Being a friend of Bill Hsiao, I got seduced into thinking that HCFA (Medicare) funded the research that eventually lead to the RBRVS and the Medicare fee schedule on which private health insurers now base their fee negotiations. Wrong again.
I won’t even mention my misconception about the work of AHRQ.
Now I know better.
Best,
Uwe Reinhardt
I think the examples that artk points to involve government providing funding, but allowing individuals to be createive and entrepreneurial on their own.
This contrasts with a government created entrenched bureaucracy, such as public schools, the Postal Service, the DMV, which resists change because change is threatening to its self interest.
Medicare and Medicaid are far more similar to the public schools, the Postal Service and the DMV than to Nobel Prize winning professors off in the lab doing their own thing.
In America, the government’s job is to stay out of the way of American companies so that THEY can innovate.
In re Greg Scanlen’s comment and John’s rejoinder on the alleged ultimate spoiler in health care, namely, third-party payment:
By way of a mea culpa, my friends, I would like to explain to you and your faithful disciples on this blog why people like Enhoven, Henry Aaron, Kenneth Arrow, Martin Feldstein, Joe Newhouse, Joe Antos, indeed most properly trained economists — not all of them the legendary “pablum-puking Liberals” — support third-party payment in health care, even if not first-dollar coverage.
It is not that economists are evil and seek to destroy the cherished health care market. It’s the economic theory of rational consumer choice that makes us do it, you see, just like it was the Devil that made TV star Flip Wilson do it.
For economics professors, myself included, the original sin in this regard starts when in our lectures we come to the topic on decision-making under uncertainty.
You can get a full idea of what we teach here by looking at the mathematical appendix to Nobel Laureate Kenneth Arrow’s seminal 1963 paper on health economics in the AER, which deals with health insurance or, for that matter, into any modern textbook on health economics or intermediate micro economics.
Loosely speaking here in English prose, the problem is that consumers whose own preferences (yes, “own,” not government-mandated preferences or any from indoctrination by watching MSNBC) are characterized by diminishing marginal utility of wealth — a property most economists assume characterizes most consumers — when faced with the choice of
1) ending up with a certain level of wealth equal
to W – P
or
2) ending up with wealth W with a probability x if
they stay healthy, but with a much smaller level
of wealth W – M with a probability (1-x) should
they fall ill
can be predicted to choose Option (1)for P below a certain level. [Here W is the level of wealth consumers expect to have with certainty if they do not fall ill, P is the premium for health insurance and M is the out-of-pocket spending on health care in the absence of insurance. Little x stands for probability.]
The marvel is that, depending on their level of of wealth, on P and on their own belief on their x, consumers would do this without a government mandate to do so or any other totalitarian dictum raining down from government. Self interest (maximimizing their own utility) would make them do it.
In our courses we call the choice of Option (1) — purchasing health insurance at premium P — a manifestation of being risk averse. We also mention, of course, that risk lovers — those with increasing marginal utility of wealth — would choose Option (2). [Question: Are the staff of the NCPA risk averse in this sense, or risk lovers? Do any of them have health insurance?]
The point of these lectures is that a private, completely laisser-fair market would naturally develop health insurance (the dreaded third party payment), and consumers — possibly even the staff of the NCPA — would buy it. And far from condemming the phenomenon, most economics professors call it “welfare enhancing.”
One misses this fine point if one’s education has been confined strictly to lectures on economics under conditions of certainty, but one quite naturally stumbles upon it the minute uncertainty is allowed into the analysis.
Yes, for many types of insurance this natural desire for insurance coverage does create problems known as “moral hazard,” which can be reduced but rarely eliminated through judicious cost sharing at point of service. But there would still be third party payment even under welfare enhancing optimization, as Arrow shows, even if it would make the market for health care deviate from the textbook model of the market for, say, water mellons or ice cream. One can rail against that natural phenomenon only so much.
Evidently, the Nobel Prize Committee did not hold Arrow’s conclusion that health insurance can be welfare enhancing as an obstacle to awarding him the prize. On the contrary, they probably considered it part of his academic achievement.
Do you, John and Greg, believe that outlawing health insurance (the allegedly mischievous third party payment) would be a welfare enhancing policy? You sure write like you do, at least in your comments above.
Before I close, let me mention that my fear is that both Greg’s and John’s utility the functions may exhibit diminishing marginal utlity of wealth after all and that, therefore, they secretly do have at least catastrophic health insurance covering entailing the dreaded third-party payment and the moral hazard it begets. Luckily for them, I am too delicate to ask if it is so. But I invite readers of this blog to hazard a guess.
In any event, be well, y’all, with probability p = 1,
Uwe
John, you write:
“I think the examples that artk points to involve government providing funding, but allowing individuals to be createive and entrepreneurial on their own.”
Do I infer from it that corporate boards and executives in the private sector are not creative and innovative because they merely fund the work of creative individuals further down the hierarchy? Knowning what to fund can be creative in its own right.
I think you are splitting hair here.
Indeed, I think the DoD, NASA and, yes, even Medicare have been quite innovative in their thinking and funding of research. Of course, their creativity often is severlely circumscribed by Congress. We have seen it in HCFA/CMS attem pt to experiment with various forms of competitive bidding.
It is not the much maligned “bureaucrats” who lack creativity. It is that Congress so often stifles their creativity.
Uwe is back. From where? Britain?
Let’s start with post 1 and 3.
Uwe, you need to distinguish between innovations that solve problems and innovations that create them. Within bureaucratic systems there are no shortage of ideas. The postal workers have a new idea for the price of a stamp every month or so. Teachers unions have been incredibly creative in thinking about benenfits they want (taxpayer funded Viagra?).
The DRG system and the physician payment system are not solutions to problems. They are the cause of our problems. They either prevent or penalize every doctor and every hospital in America from repricing and repacking their products in more rational, customer pleasing ways.
What do you think would happen if Wal-Mart’s prices had been determined by a formula devised by professors at Harvard and Princeton? Wal-Mart would have gone bankrupt years ago.
Sorry, I had to take break. Breathe a deep breath. Drink a cup of coffee. Just to get over the high level of anxiety created by such intellectually challenging comments.
Now to Uwe’s comment number 2.
I hope that student’s at Princeton are not being short-changed by such a narrow way of looking at the world.
There is a huge difference beteen insurance and third party payment of medical expenses. I have life insurance. But when I die, the insurer is not going to pay for my autopsy, my cremation, the urn that will hold my ashes, or the cost of the plane needed to sprinkle my ashes over the Princeton University football field (or some other suitable place). Instead, my wife will get a check.
Uwe, did you know that’s the way most health insurance worked before Blue Cross and the hospitals persuaded the state legislatures to drive rational payment from the market and substitute cost-plus payment of medical bills in its place?
Sometime you need to read the history of this sordid experience in my book Regulation of Medical Care. Then read “Designing Ideal Health Insurance” to see how rational insurance can reappear in health care:
http://www.ncpathinktank.org/pdfs/livesrisk_24.pdf
Uwe, though you do make the public and academic case for health insurance, acknowledging the unfortunate moral hazard side effects, do you think we would have wound up with such a cost-generating third party payment system if we had not provided tax exempt status in the employment setting? Granted we are never going to go uninsured, and will always want to assist the economically disadvantaged to obtain insurance, can we introduce more discipline on the consumer (as via HSAs + catastrophic protection)? And are gov’t price controls the only way to get push providers to focus seriously on controlling costs?
Thanks, John.
Uwe, that is the point. We use the term Third-Party Payment for a reason. TPP is not the same as health insurance. In fact, it was created by the hospitals (which literally owned Blue Cross) as a way of ensuring revenue. For many years the Blues insisted they were NOT health insurance but pre-paid hospital (or medical) service organizations. In a system of TPP providers are under contract, not to their patients but to the payers. It is this that has made health care financing irrational and unaccountable.
BTW, although Arrow is rightfully considered the “father of health economics” that is not what he got his Nobel for. I don’t think he dealt very much with health care at all outside of that one paper. We could use a big dose of original thinking like that again — someone coming to the subject with fresh eyes.
Phew! All that high “floutin” professorial talk can wear me out. Us actuaries don’t always get those danged forumlas. Seems like common sense says, we need to maximize insurance but minimize others (TPPs) messin’ with the decision makin’. My daddy always said, those who pays the bills controls the decisions. When it comes to my healin’ and breatin’, I think I want to pay the doctor for the visit and cough syrup myself so he will listen to me and Ma. I think that’s what the insurance man told how those new fangled HSAs work. But then again, I don’t have the learnin’ that Mr. Uwe does. (What kind of pa would name their son after a female sheep?)
Ron sez: “My daddy always said, those who pays the bills controls the decisions” You daddy was wrong, or maybe he didn’t care the last time he was admitted to the hospital. Take the typical hospital admission. There are dozens and dozens diagnosis and treatment decisions made. Even if you’re paying out of pocket, you’re not making the decision, your insurance company isn’t making the decision, you doctor is making the decision.
HSAs may be a good way to lower an employers insurance cost and advantage high income employees, but when it comes to the big ticket items that really drive health care costs, they are pretty much irrelevant.
“HSAs may be a good way to lower an employers insurance cost and advantage high income employees, but when it comes to the big ticket items that really drive health care costs, they are pretty much irrelevant.”
Big ticket items are exactly when they, HSA’s, become relevant. It is a known for the consumer of the financial exposure for big ticket medical items right up front during the purchase of the plan.
How is that irrelevant to the consumer?
Uwe wrote:
The point of these lectures is that a private, completely laisser-fair market would naturally develop health insurance consumers would buy.
I agree with you completely.
Of course, the typical “conservative” position is that too much government interference destroyed the private market to operate effectively.
I don’t believe a word of it.
It would seem like one health insurer could have designed a product distinctive from the rest, a product that could have lasted at least until Medicare at affordable rates.
I have read 5 codes of insurance in various states, including Texas, in which experimenal policies can be developed.
I can even cite the provision in Texas, if anyone is interersted.
Second point.
Uwe wrote Medicare has been quite innovative in their thinking and funding of research.
Well, that may be true, and I am not qualified to comment.
I will say that when Social Security began, it was supposed to be a self-sustaining system, with no use of general rebenues.
Seems to me that when the trust funds are borrowed from to finance current expenses, that at least is a partial violation of a self-sustaining system, even though it may be innovative.
And, when public debt has to repay for those Treasuries it is a blatant violation of not using general revenues.
Don Levit
Harry is close…Patients need coverage for catastrophes. They are lacking the navigator/guide thru the system. The only one that can do that are PCP’s .HSA’s/HDHP’s are a solution for some (along with a PCP paid by the patient and an accident policy). However, it’s different for each of us and in different market places.
The missing piece for the uninsured/Medicaid and others is the lack of a PCP. We are rethinking the way innovative concierge physicians can work with the states to provide such care. Consideration should be made for medical stamps that can be cashed in with physicians that have small practices and give all comers their cell phones, 24/7 access, email, same day access, preventive care and early access to acute problems to keep our patients out of the ER and the hospital.
The govt and insurers can’t provide these services. Physicians do and we will take any patient..from any race, creed, culture, etc b/c we serve and work for them.
Third parties can’t do it…Innovative physicians are in a great position to change healthcare one patient at a time…as long as we work for our patients.
M is your answer….Our patients get it more than you think..They want to know their out of pocket cost for the year just like some want to know how much they will pay for a week vacation in an all-inclusive….They determine the value and quality of the service. For unlimited access to primary care, 13 cigs per day is not much if your age 35-59..neither is 17 if your over 60…And this out-of-pocket expense applies to every patient, whether insured or not.
Greg, there is no such thing as health insurance…It’s accident or sickness insurance…
To artk: The last time my daddy was in the hospital, my call to the doctor exposed him at physicians Friday night beer party rather than attending to my dad’s heart attack. Had we been paying him rather than the insurer, my dad might have recovered. I might have had a choice of physicians. Instead, the lack of attentive medical care was I am sure never reviewed or corrected for future patients. Hence, he began one of the 98,000 deaths per year form hospital errors and malfeasence. Of course,there is a place for insurance and risk sharing between us. You failed to pick up on the statement of “Maximize insurance but minize third party payments.” Surely, those of you so educated as to tell the rest of us what we need, can read the short blog and recognize some back country common sense.
Ron, I your father died because of negligence, than you should have sued. A high six figures settlement wouldn’t bring him back, but it could help pay for your kids education and maybe make the doctor more attentive so others don’t have to die needlessly.
For all of you “the government can’t innovate” folks, you should read the attached New York Times article. The NIH (the N stands for National) spearheaded up an Alzheimer’s research program where all the participants shared all data as soon as it was discovered; no one claimed ownership to any of the data; and everyone agreed not to file patents. This is a level of cooperation that private industry is incapable of doing. The first results have already been announced, they have discovered a predictive test. I would recommend all you uber free markets government is always the problem and never the solution folks pledge to forgo any benefits from this research for you and your loved ones.
http://www.nytimes.com/2010/08/13/health/research/13alzheimer.html?_r=1&hp
artk, I believe if you reread that article you will find that this was a PRIVATE, voluntary, cooperative effort that libertarians should approve of. No one was forced to do anything at the point of a gun. And although NIH does disperse taxpayer dollars, most of the time it acts like a private foundation — making grants with little interference from Congress. I said most of the time, not always. Thats why NIH works so much better,say, than the stimulus program.
Wow. DRG’s and RBRVS are innovative? Actual, they are government price controls which are at the heart of our health care mess. I always use the example of a vascular surgeon I had in an MBA program in Cleveland. Medicare under RBRVS was going to pay him more to do a neck artery clean than to repair an upper aortic artery embolism. Guess what happened? There were lots of artery cleans going on and, by his own admission, most of them were unnecessary. Lotsa quality, cost effective medicine from that huh!
The stage is set. Innovation, comparative analysis and a health care Board. Sounds like the UK in budding stages. Want an excellent explanation read the book Help! Your Health care Hanging in the Balance.