Health Hazards

Via Tyler at Marginal Revolution, I found a summary version of Michael Porter and Elizabeth Olmsted Teisberg’s prescription for a better healthcare system. (I’m too cheap to pay $5 for the long version.) Porter and Teisberg, both trained in economics, provide a diagnosis and prescription far better than most. Still, there’s room for criticism – some substantive, some rhetorical.

First the rhetorical. Porter and Teisberg try to sound non-partisan and even-handed by saying things like, “There is no villain here. Poor public-policy choices have contributed to the problem, but so have the bad choices made by health plans, hospitals, and the employers who buy their services.” I understand what they’re trying to do, but in some cases it’s misleading. For instance, they draw attention to the lack of transparency in healthcare pricing and recommend simplified billing practices:

A fundamental function of pricing is to convey information to consumers and competitors. Current billing practices obscure that information. Unnecessarily complex billing contributes to cost shifting, drives up administrative costs, and makes price and value comparisons virtually impossible. Under positive-sum competition, providers would have to issue a single bill for each service bundle, or for each time period in treating chronic conditions, rather than a myriad of bills for each discrete service. Many other industries have solved the problem of how to issue a single bill for customized services; among them aerospace, construction, auto repair, and consulting. A competitive health care industry could figure it out, too.

Absolutely correct. But if Porter and Teinberg won’t point fingers, I will. Current billing practices result not from market forces, but from government interventions that have encouraged people to insure all healthcare services – including routine care and maintenance – and to avoid high-deductible policies. As a result, customers have almost no incentive to compare prices and demand simpler bills. Why should they, when the insurance company (or Medicare or Medicaid) takes care of the bill?

By way of comparison, most car owners will ask their mechanics about the price of auto repairs and question any mysterious items on the bill. Similarly, I suddenly became a lot more interested in the cost of dental procedures when I discovered that my dental insurance didn’t cover my preferred dentist. My dentist’s assistant was able to quote me exact prices for each thing I might want done; of course, government intervention in dentistry doesn’t even approach the level of intervention in regular healthcare.

Porter and Teisberg assuredly realize all of the above, which is why I characterize it as a rhetorical complaint. But now for a couple of substantive complaints:

[Under our plan,] Providers could and would set different prices from their competitors, but that pricing would not vary simply because one patient was insured by Aetna, another covered by Blue Cross, and another self-insured. Payers could negotiate, but price changes would have to benefit all patients, not just their own. The cost of treating a medical condition has nothing to do with who the patient's employer or insurance company is.

It’s simply false that the cost of treating a condition is independent of the patient’s affiliation. Some insurance companies and HMOs have bureaucratic procedures for handling claims, while others have streamlined the process. The former cost more to deal with than the latter. Moreover, a patient who pays out of pocket is substantially easier to process than any patient paying through insurance. If providers cannot discriminate based on the patient’s payment method, incentives for administrative efficiency will diminish greatly.

National List of Minimum Coverage. The current system of individual negotiation and litigation over coverage is expensive. A better system would mandate a minimum level of coverage with a national list (such as the one used in the Federal Employees Health Benefits Program).

Any mandated minimum coverage would need to specify the package of benefits to be included. And who would do the specifying? Either Congress or a bureaucracy. Either way, the contents of the package would assuredly fall prey to the depredations of special interests. Under the status quo, state legislatures have responded to the lobbying efforts of medical specialists and pharmaceutical companies by passing literally thousands of laws that require health insurance policies to cover particular benefits, from mental health to acupuncture to hair transplants. Premiums have risen in order to cover the cost of all these benefits, thereby pricing some customers out of the market. And that’s only at the state-level; with the higher stakes of a nationally mandated package, the special-interest problem could only get worse. Make no mistake: a mandated benefits package will drive costs up, not down.

When Porter and Teisberg talk about minimum coverage, I’m sure they have in mind a minimal, catastrophic-care, high-deductible plan. But in politics, what you want is rarely what you get. Porter and Teinberg know their industrial organization, but perhaps they should brush up on their public choice theory.

Be sure to read Tyler’s misgivings as well.