Today I attended the event "Explaining International Health IT Leadership" at The Information Technology and Innovation Foundation to release an ITIF report by the same name. In addition to the ITIF scholar who authored the report, the panel included experts from the small, relatively homogenous nation-states of Finland and Denmark.
The panel discussion focused on government initiatives to spur development of electronic medical records, telemedicine, and other innovations that Information Age consumers expect in many other sectors of the economy. One got the impression that the primary impediment to broad penetration of these technological advances is a lack of political leadership.
But if health care consumers want these things, why doesn't the market provide them? Well, to a certain extent, it does, but probably not as much as people want.
The vast majority of private sector health plans are purchased through an employer. This has at least two effects with respect to health IT.
First, employment decisions are generally made based on total compensation, which includes wages, benefits (medical and otherwise), and intangibles like opportunities for advancement, prestige, enjoyability of work, and so forth. This bundling prevents workers from exploring alternatives and selecting something that fits them best, as we do when we choose universities, automobiles, and homes. Instead, employee demands on health care providers are mediated by insurance companies AND employers, neither of whom can efficiently communicate the individual preferences of workers. As a result, neither the insurance market nor the providers face sufficient competition to drive the rapid innovation seen in other sectors.
Second, the linkage of employment to health insurance means that insurance coverage is very likely to change every time a worker changes employment. Electronic medical records may be a worthwhile investment when long-term relationships exist, and perhaps less so in a market with contractual instability.
Medical records also raise concerns about privacy. What is the appropriate level of privacy protection? No 'correct' answer exists--demand for privacy varies subjectively with individuals. Any one-size-fits-all standard will in fact not fit all, but will leave many people unhappy--both those who want more privacy and those who are willing to trade off some privacy for other benefits (like individually tailored advertisements).
Concerns are also raised about interoperability and standards. This is an important point, but one that markets have resolved time and time again--railroad track gauges and PC operating systems, just to name a few. Far better to encourage experimentation that gets us to the medical records equivalent of modern operating systems instead of locking us into something like Windows 3.1--once state-of-the-art, now completely obsolete.
Giving individuals more control over their health care dollars ought to force insurance companies and medical providers to innovate and offer these products and invent others simply to attract and retain customers. It's not at all clear that government leadership is the only way to get there.
Tuesday, September 22, 2009
Sunday, September 20, 2009
Where are the Real Health Care Reforms?
For all of the rhetoric about reforming health care in the United States, Senator Baucus' proposal—like the other Democrat bills—is striking in how little reform it incorporates, at least in the right direction.
The root cause of many problems facing American health care today is the reliance on third party payment for medical expenses. Currently the government pays for about half of U.S. medical expenses. Roughly forty percent is paid by employers and insurance companies. Only about ten percent comes directly from health care consumers.
At the time of care, patients on average bear only about a tenth of the cost directly—the rest of the episode's cost comes from others: the insurance company to which the patient pays premiums or the government. Spending other people's money on oneself does not diminish a patient's concerns about quality, but incentives to be cost-conscious are weak. The result is excessive consumption of marginally useful or even potentially harmful procedures.
While risk sharing is an appropriate strategy for unexpected and potentially catastrophic care episodes, such insulation from having to confront the costs and benefits of alternative options systematically biases patients towards accepting more expensive and risky procedures with little or no net benefit than they otherwise would.
Would the Democrats' proposals help to properly realign the incentives facing consumers? No, they would make the problem worse.
Compelling all Americans to purchase insurance either through an employer or individual mandate—especially when combined with guaranteed issue, community rating, and minimum benefit requirements—would further entrench this overconsumption cost death spiral, as would more explicit government takeovers such as single-payer, government insurance, and co-ops. And since medical services would no longer be rationed by price, they would ultimately have to be rationed by quality degradations like long waiting times and denial of care.
When politicians and bureaucrats direct the allocation of resources, they are spending other people's money on other people, which gives them insufficient reason to monitor quality or cost as carefully as private actors spending their own money.
Another approach would empower consumers to make their health care decisions with full knowledge of the relevant costs and benefits. They would be free to choose the kind of plan that best fits their preferences, whether that would take the form of fee-for-service, prepayment (the health maintenance organization model), or catastrophic insurance with out-of-pocket payment for routine and expected care. After all, ‘government funds’ come from taxes, and ‘employer contributions’ mostly come out of employee compensation, so why not just let individual consumers control the money that funds their medical needs?
Two major (and many minor) obstacles prevent this consumer-driven market from becoming a reality: the preferential tax treatment of employer-provided health insurance purchases and poorly designed government programs.
Since employers can deduct health benefits from their taxable income but individuals cannot, workers are pushed into accepting whatever plan their employer happens to offer. Giving individually purchased health coverage the same tax treatment as employers receive would allow workers who prefer a different type of plan to cash out the portion of their compensation that employers currently divert into the so-called employer contribution to their workers’ health care. Policymakers have several options: tax credits, tax deductions, or, even better, large HSAs.
Government programs fail to give their beneficiaries ownership of the funds that finance their care. Giving Medicare recipients the option to choose a health-status-adjusted voucher and allowing states more flexibility in serving needy populations would further develop an individual insurance market.
Removing barriers to interstate competition in health insurance could also spur lower costs, more innovation, and more regulatory competition between the states.
Unfortunately none of the Democrats' proposals would empower health care consumers in these ways or much otherwise. They would instead consolidate the status quo of third-party payment for routine expenses and further concentrate the power of the political class.
The root cause of many problems facing American health care today is the reliance on third party payment for medical expenses. Currently the government pays for about half of U.S. medical expenses. Roughly forty percent is paid by employers and insurance companies. Only about ten percent comes directly from health care consumers.
At the time of care, patients on average bear only about a tenth of the cost directly—the rest of the episode's cost comes from others: the insurance company to which the patient pays premiums or the government. Spending other people's money on oneself does not diminish a patient's concerns about quality, but incentives to be cost-conscious are weak. The result is excessive consumption of marginally useful or even potentially harmful procedures.
While risk sharing is an appropriate strategy for unexpected and potentially catastrophic care episodes, such insulation from having to confront the costs and benefits of alternative options systematically biases patients towards accepting more expensive and risky procedures with little or no net benefit than they otherwise would.
Would the Democrats' proposals help to properly realign the incentives facing consumers? No, they would make the problem worse.
Compelling all Americans to purchase insurance either through an employer or individual mandate—especially when combined with guaranteed issue, community rating, and minimum benefit requirements—would further entrench this overconsumption cost death spiral, as would more explicit government takeovers such as single-payer, government insurance, and co-ops. And since medical services would no longer be rationed by price, they would ultimately have to be rationed by quality degradations like long waiting times and denial of care.
When politicians and bureaucrats direct the allocation of resources, they are spending other people's money on other people, which gives them insufficient reason to monitor quality or cost as carefully as private actors spending their own money.
Another approach would empower consumers to make their health care decisions with full knowledge of the relevant costs and benefits. They would be free to choose the kind of plan that best fits their preferences, whether that would take the form of fee-for-service, prepayment (the health maintenance organization model), or catastrophic insurance with out-of-pocket payment for routine and expected care. After all, ‘government funds’ come from taxes, and ‘employer contributions’ mostly come out of employee compensation, so why not just let individual consumers control the money that funds their medical needs?
Two major (and many minor) obstacles prevent this consumer-driven market from becoming a reality: the preferential tax treatment of employer-provided health insurance purchases and poorly designed government programs.
Since employers can deduct health benefits from their taxable income but individuals cannot, workers are pushed into accepting whatever plan their employer happens to offer. Giving individually purchased health coverage the same tax treatment as employers receive would allow workers who prefer a different type of plan to cash out the portion of their compensation that employers currently divert into the so-called employer contribution to their workers’ health care. Policymakers have several options: tax credits, tax deductions, or, even better, large HSAs.
Government programs fail to give their beneficiaries ownership of the funds that finance their care. Giving Medicare recipients the option to choose a health-status-adjusted voucher and allowing states more flexibility in serving needy populations would further develop an individual insurance market.
Removing barriers to interstate competition in health insurance could also spur lower costs, more innovation, and more regulatory competition between the states.
Unfortunately none of the Democrats' proposals would empower health care consumers in these ways or much otherwise. They would instead consolidate the status quo of third-party payment for routine expenses and further concentrate the power of the political class.
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