All the Summaries and Takeaways

© Joseph P. Newhouse,

with some selective editing

Class 1What You Should Know

Understand the difference between the marginal $ in the cross-section vs over time Over time the capabilities of medicine change

Benefits of more $ over time may have exceeded cost, but waste in cross-section Downsides of higher costs: more deadweight

loss from higher taxes to finance Medicare, Medicaid, and premium subsidies; more risk from more cost sharing; more labor market distortions (more in Class 2)

Class 1 Takeaways - 1

The good news is that the medical care industry has come up with a lot of “good stuff” and probably will continue to do so

But there is a lot of bad news: The good stuff has cost a lot and there is a lot of waste

Financing as much future costly good stuff through either taxes or employment-based insurance (next time) is problematic

Class 1 Takeaways - 2

So there are two related issuesIs there a way to get rid of the waste

without cutting out a lot of the good stuff? The managed care backlash doesn’t augur well

(Classes 14 and 15) And getting out the waste is a one-time saving

And is there a way to slow cost growth without giving up the valuable innovation?

Class 1:A Possibly Helpful Schematic

Patient, Consumer Providers

Insurer (public, private) Regulator, Sponsor (employer, gov’t), Accreditor

Demand forinsurance;risk aversion

Selection;diseasemanagement

Demand for services; malpractice claims

Agency (SID, stinting);organization of care;defensive medicine

Eligibility and coverage rules; managed competition; insurance regulation

Qualityregulation

Political and labor markets

Information onplans, quality

Administeredprices, capitation,utilization review

Coding

Class 2—ESIWhat You Should Know

Incidence of employer-paid premiums and labor market effects

Theory of demand for care as a function of coinsurance

Distinction between positive and normative economics

Assumptions needed to establish efficiency and how medical care violates them

Class 3—Modeling DemandWhat You Should Know

Theory of demand for insuranceStrengths and weaknesses of various

empirical research designs/strategies to estimate demand for medical care

Selection/endogeneity and bias from omitted variables (these are related)

Class 4—HIE What You Should Know

Statistical power, sample size justificationFindings in the literature on cost sharing

Class 5, QualityWhat You Should Know

Quality can be measured and the existing measurements of it should not make patients feel warm and fuzzy about the care they are getting Nonetheless, most patients think they get high

quality careThere is variation under every rockIssues in defining “appropriateness” and

creating guidelines

Class 5, QualityConclusions

I think improving quality is an urgent task, but there are no magic bullets The strategies of improving public information

and P4P raise “second-best” kinds of issues– Improving quality for one disease by P4P or

information does not necessarily improve welfare But keeping information poor and not

rewarding good performance can’t be the answer; over time more IT should help

Class 5, QualityWhat You Should Know

Underlying causes of quality problemProblems in measurement at MD and

hospital levelsPotential for improvement from more

reporting of information, greater use of pay for performance, and greater IT investment

Class 6, QualityConclusions

I think improving quality is an urgent task, but there are no magic bullets The strategies of improving public information

and P4P raise “second-best” kinds of issues– Improving quality for one disease by P4P or

information does not necessarily improve welfare But keeping information poor and not

rewarding good performance can’t be the answer; over time more IT should help

Class 6, Quality What You Should Know

Underlying causes of quality problemProblems in measurement at MD and

hospital levelsPotential for improvement from more

reporting of information, greater use of pay for performance, and greater IT investment

Class 7, CERWhat You Should Know

The possibilities and problems of inferring outcomes from observational data Selection in this context Why clinicians have the RCT as gold standard

IV as a technique to address selection How to recognize a good study that uses IV

Strengths and weaknesses of RCTs vs observational data

Class 8, Tort Reform 1What You Should Know

Assumptions needed to establish optimality of damages that make injured person whole Whether optimal damages include pain and

sufferingReason for assigning liability to MDTheory to establish deterrent effects of tort

and how assumptions might or might not hold in practice

Class 9, Tort Reform 2What You Should Know

Assumptions needed to establish that tort law leads to optimal prevention/deterrence Negligence standard and efficiency Why settlement is efficient

Pros and cons of various reforms

Class 10, R-S ModelsWhat You Should Know

How markets can fail if the information of buyer and seller is asymmetric Selection in health insurance and how it is

managed or mitigated– Managed competition– Business coalitions– Welfare loss from selection

Class 13, Reform & MarketsWhat You Should Know

US insurance marketsPotential problems going forwardDifficulties of modeling effects of reforms

Class 14, Takeaways on Administrative Cost - 1

Low Medical Benefit Ratios may mean lack of competition in the insurance market or rents in provider fees

Economically the MBR is an arbitrary number; e.g., joint cost allocation

Do the additional activities of commercial insurers that raise their administrative costs above a passive bill reimburser add value? Keep this question in mind for the next class

Class 14, Takeaways on Administrative Cost - 2

Even if single payer advocates overstate administrative savings, a single payer must set prices and can act like a monopsonist

Although there would be savings in dollar costs with a monopsonist, there could be health giveups and inefficiencies that result from having to set prices; we are coming to reimbursement issues (Classes 16-18)

Class 14, Administrative Costs What You Should Know

The difference between accounting costs and economic costs

Class 15, Managed CareTakeaways on Managed Care

Instrument partly designed to reduce rents Networks; steering patients to certain providers

Instruments that could improve quality Tiering networks on quality; P4P Disease management; case management;

wellness/health promotion (ROI will be low if there is high turnover among beneficiaries)

IT, personal health records

Class 15, Managed Care Takeaways

What are the instruments by which managed care might add value

Do they add value????

*For profits, see notes.

Class 16, Prospective PaymentWhat You Should Know - 1

Evidence of profit maximization by: Selection (specialty hospital data) Unbundling (growth of post acute after 1988) Entry where profitable (growth of post acute)

85% of hospitals are nonprofit, so the numbers you see are dominated by them These data imply nonprofits maximize, but for

profits are even more aggressive*

Class 16, Prospective PaymentWhat You Should Know - 2

General lesson, which will also be part of the next several classes: It is impossible in practice to get administered prices exactly right and in some cases even approximately right

85% of American hospitals are non-profit.

Class 17, Admin Pro Payment What You Should Know - 1

The difficulties of setting economically efficient prices E.g., problem of different prices at different

providers for the same service (various post acute care sites, OPD vs office vs ASC)

Non-profit agents respond to prices Examples: Post-PPS, hospitals shifted overhead

to cost-based sites such as the SNF, OPD; they reduced LoS; they raised OPD charges

Class 17, Admin Pro Payment What You Should Know - 2

Economics of and who pays for training; effects of subsidizing a correlated but not causal cost factor (residents/bed) in an administered price system

Problem of how to account for geographic variation in input prices with imperfect labor market information and measurement

Vulnerability to geographic redistribution with a geographic based legislature

Class 18, Medicare Physician Payment Takeaways - 1

MD payment in Medicare illustrates inherent issues of administered pricing Setting prices in relation to (marginal?) cost

when productivity changes (so in principle price should be changed) and new procedures are implemented (so cost data are needed)

Political system resists redistribution, in this context across specialties

Class 18 Takeaways - 2

Changing Medicare’s payment methods literally requires an act of Congress Typically the benefits of a change are diffuse,

but the costs are concentrated on a particular group (specialty) that resists the change

*SGR = Sustainable Growth Rate

Class 18What You Should Know

Evidence that MDs respond to supply pricesSubstantive and political difficulties to set

economically efficient administered prices: Problem of allocating joint cost to services Changing relative costs at procedure level Updates (new procedures; productivity, SGR*) Geographic areas for input prices Ignoring structure of local market

Class 19, Part CSummary on Plan Payment

Medicare health plan payment shows many problems of an administered price system Same payment for persons with different

expected cost in the past led to selection Geographic variation political pressure for

uniform reimbursement so payment ≠ cost Changes in payment plans to exit, enter

Successful price competition requires workable risk adjustment methods

Class 19, Part C What You Should Know About Health Plan Payment

How to judge risk adjustmentDifficulties that the geographic variation in

spending creates for plan reimbursement Note that geographic variation in the US is

much greater than in the Netherlands so the issue doesn’t much arise there (see Van de Ven - Schut)

A Wrap Up on Medicare (except Part D)

The following slides try to summarize a number of the difficulties of administered price systems that we have covered in this class and the prior three classes Part D doesn’t have administered prices so I am

summarizing before we get to Part D

A Comparison of Medicare’s Payment Systems - 1

The following description is selective; MedPAC’s “Payment Basics” (see the reading list) has more

My intent here is to show some of the inconsistencies in an administered price system that is intended to be rational and has behind it much analytic work over many years by many smart people

*See notes for acronyms.

A Comparison of Payment Systems – 2*

Basis of payment differs by provider Health plan: Capitation, per member per month Hospital Inpatient: Stay; Outpatient: “service” SNF: day; IRF, LTCH: stay; HH: 60 day

episode Physician: CPT/HCPCS code End Stage Renal Disease: All services except

drugs (drugs outside bundle) Part B Drugs: Average sales price + 6%

*RUGs = Resource Utilization Groups; RVS = Relative Value Scale.

A Comparison of Payment Systems - 3

Relative prices Health plan payment for enrollee – Based on

age, sex, Medicaid eligibility, geography, diagnosis of enrollees (using TM treatment patterns); beneficiaries pay incremental cost > benchmark, get 75% of savings passed through

Hospital – Relative cost by DRG SNF – Time-motion with RUGs* Physician – Based on judgments of work and

estimates of practice expense (RVS)*

DHHS = Department of Health and Human Services.

A Comparison of Payment Systems - 4

Initial conversion factors Usually budget neutral

Updates Most services: Congress, following DHHS and

MedPAC recommendations Exception: MD updates are supposed to be

formulaic based on GDP growth and past quantity changes (SGR), though we now have de facto annual updates similar to other services

*Will now change to a varying % of TM in county

A Comparison of Payment Systems - 5

Geographic adjustment Health plans:* max(100% TM, floor; 50-50

county/nat’l Medicare 5 year average; 2% over past year), last two less common

Hospital and other institutional providers: wage index for each metro area and entire non-metro area of state; reclassification allowed

– SNF, HH have different labor mix than hospitals, but use the same wage index

MD: ad hoc, geographic areas vary by state

*DSH = Disproportionate Share Hospital

A Comparison of Payment Systems - 6

Special adjusters High cost outlier systems for hospital, OPD,

HH; low cost for HH, short-stay for rehab Post-acute transfer adjusters for some inpatient

hospital (converts hospital to per diem) Teaching, DSH* for inpatient hospital New technology pass through in hospital

inpatient and outpatient

*LTC = Long Term Care. See notes on waste from Medigap and drug

payment abuses.

Medicare Through the Eyes of the Course - 1

The cost sharing is wrong headed No stop loss; resulting waste in Medigap* Differentially high for hospital OPD; “donut

hole” in Part D (next class)The benefit structure makes little sense

Until 2006 almost no drugs covered– And abuses in reimbursing Part B drugs that were*

LTC* is mostly need based through Medicaid but comes into Medicare through HH and SNF

*See notes.

Medicare Through the Eyes of the Course - 2

Parts A and B distinction makes little sense Should be common cost sharing Committee jurisdiction means hard to change*

Quality concerns Reluctance to intervene in traditional Medicare Co-ordination with Medicaid (Class 21)

– Note to single-payer advocates: Could we get a single payer in public programs? Bradley proposed this in 2000, but Gore successfully attacked him

Medicare Through the Eyes of the Course - 3

Selection in Medicare Advantage (MA) pre-2006, not clear how much remains

Note for those wanting to save money by reducing variation: Congress dealt with the variation by leveling up; i.e., floors

A host of administered price distortions; see next slides

A List of Some Administered Pricing Problems - 1

Ability to react to technical change - or even obtain data on how costs change!

Arbitrary allocation of fixed or joint costsSelection when patients are heterogeneous

and reimbursed similarlyBundling handles substitution and

incentives for efficient production, but sets up incentives for unbundling and selection

And Still More Administered Price Problems - 2

No integration across acute hospital and post-acute reimbursement systems

Geographic distortions in both product markets (e.g., unbalancing of local markets in MA pricing post-1997 and 2% updates) and labor markets (arbitrary boundaries; hospital reclassifications)

Annual updates for MDs erratic

And a Few More

Politics of preserving inefficient providers Hard to close a hospital, especially rural hospitals For an example see the next slide

Administered prices tend to preserve inefficient technologies, especially if there are no or minimal safety problems or outcome differences; old providers can keep using inefficient technologies

Unlike other markets, disruptive technologies don’t seem to disrupt to the same degree

Class 20, Part DWhat You Should Know

Special difficulties of price setting in drugs Tradeoff between static and dynamic efficiency

Choices in structuring a market to maintain advantages of competition, minimize selection, and reduce the burden on beneficiaries

Class 21: Medicaid Takeaways

The mixed federal/state funding of the marginal $ creates incentives for states to devote effort to maximize federal revenue Efforts to make states fully responsible for the

marginal $ have political and substantive problems

Having the poor elderly eligible for both Medicare and Medicaid poses quality problems

Class 21,Takeaways on LTC

Private insurance is uncommon Could spread if employers subsidized, but this

is unlikely; no willingness to sacrifice cash wages, perhaps because of estate insurance nature, perhaps because of Medicaid

LTC has a substantial housing/hotel component that differentiates it from medical care

Class 21, Medicaid & LTC What You Should Know

Problems of a jointly financed state-federal program with state administration Including coordination with an all federal

program MedicareWhy private long-term care insurance is

small compared with health insurance Why health insurance may not be the right

model

*GP = general pratitioner

Class 22, Physician Workforce Takeaways on Geography - 1

The actual MD location fits the predictions of standard economic location theory

Presumption of market failure arose from Decline of GP* and rise of specialist For a time in the 1970s GPs were retiring from

towns not yet large enough to attract specialists Once subsidies to deal with a presumed failure

are established, it is hard to eliminate them

Class 22, Physician WorkforceTakeaways on Geography - 2

Diffusion of MDs of a given specialty as their numbers rise implies that MD demand-creation powers are bounded; i.e., MDs cannot or do not fully offset any change in demand per MD

Power of economics in emphasizing equilibrium conditions and preferences at the margin

Studies of individual MD location decisions are not helpful in establishing equilibrium conditions

Class 22, Physician Workforce Takeaways on Geography - 2

Diffusion of MDs of a given specialty as their numbers rise implies that MD demand-creation powers are bounded; i.e., MDs cannot or do not fully offset any change in demand per MD

Power of economics in emphasizing equilibrium conditions and preferences at the margin

Studies of individual MD location decisions are not helpful in establishing equilibrium conditions

Class 22, Physician Workforce Takeaways on Workforce - 2

This class focused on MD issues, but there is also a large debate on similar issues for nurses and allied health professions What services can they deliver independently? Is there a nurse shortage? If so, what, if

anything, should be done about it? Should we be importing nurses from LDCs?

– This is also an issue with respect to MDs

Five Issues in Health Policy and What the Course Covered - 1

1. Efficiency/value for money in medicine Quality/medical error/safety problems

– We didn’t deal with drug safety issues, but they are real, as Vioxx, Avandia, etc. have shown

The level of cost within the US vs the world Administratively set supply and demand prices

means reimbursement often diverges from cost Public reporting

Five Issues in Health Policy and What the Course Covered - 2

2. Financing the cost of medical care Growth rates and future costs Premium growth and the future of employment

based insurance– Labor market effects of employment based

insurance Tax rates for financing public programs and

possible macroeconomic effects

Five Issues in Health Policy and What the Course Covered - 3

3. Equity The uninsured Variation

– Geographic (equity as well as efficiency)– Disparities (we did not focus on this)

4. Innovation and research (barely touched on but intellectual property policy is important)

5. Health promotion and wellness “Sin” taxes, public health (not discussed)

Some Final Comments - 1

A major theme of the course was that we live in a second-best world (see slide notes)

Greater reliance on allocating resources through the market leads to more problems with selection and possible equity issues Questions of how well risk adjustment,

guaranteed issue and renewal, lock-ins, and income-related subsidies can deal with these

Some Final Comments - 2

Greater reliance on allocating resources through regulation and government provision leads to problems of administered price systems with associated inefficiencies and the standard political economy issues of lobbying/vote buying, favors for certain geographies, and inefficiencies from lack of competition Question of magnitude of inefficiencies

Some Final Comments - 3

So the issue can be framed as market failure vs. government failure; how one comes out depends on how one assesses the magnitude of these failures and how one weights efficiency and equity

*TM = Traditional Medicare

My Own Views – 1 Suppose we had a single payer in the form of a

universal TM* scheme with no supplementation and no choice of plan

That would eliminate most marketing expense and, for the individual and small group market, underwriting expense

There would be some administrative saving but the magnitude is unclear; we would still have billing costs and compliance/audit issues with providers

Would not deal with heterogeneous plan preferences

My Own Views - 2 Everyone would be covered, though there are

other ways to do that Many labor market distortions (e.g. job lock)

would be eliminated, but distortions and inefficiency from higher taxes would increase

The labor market distortions are also avoidable with competing plans and Connector scheme, which is the route the 2010 reform went, though this raises the question of who is the best agent for the consumer and whether selection can be managed

My Own Views - 3

The major welfare gain from the above – potentially available in any universal insurance scheme – is getting rid of the medical underwriting and selection issues in the individual and small group market and extending coverage to the uninsured

Anyone who loses employer-based insurance under current US arrangements has a potentially large welfare loss, especially if uninsurable

TM = Traditional Medicare

My Own Views - 4

KEY ISSUE: Which is worse: Government or market failure?

I sympathize with an emphasis on efficiency, which is unlikely without competing plans Plans can negotiate prices with providers; this

probably better approximates a market price But one must risk adjust at the plan level,

which means an element of administered pricing

My Own Views - 5

Risk of death spiral in TM if TM is a competing (public) plan and market failure from selection; this could have severe consequences for the elderly Note traditionally the left did not want TM as a

competing plan (see reaction to 1998 Bipartisan Commission), but many on the left (e.g., Jacob Hacker) now favor it in the under 65 market as a route to single payer

My Own Views - 6

Competition can’t be very effective if there is concentration in provider markets, which there is in many small markets and some large ones

Without good risk adjustment, the only solution for selection is a single plan, which would have to set prices (inefficiency)

As a practical matter we have health plans now, and it is unlikely they will go away as long as they make money

My Own Views - 7

With the amount of money at stake in Medicare (and Medicaid) there will be a heavy political input; reimbursement systems with a heavy political input will always exhibit some inefficiency

See the next slide for three examples

My Own Views - 8

Examples include: Dealing with geographic inequalities in a

geographically based Congress makes it hard to reduce floors in Part C

Ending subsidies for a rural (or even a metropolitan) hospital with a low occupancy rate that is losing money and probably not providing high quality care is hard;

Cerrtain mandated benefits

My Own Views - 9

And if we are talking about “actual” instead of “theoretical” Medicare-for-all, we have potential selection in the choice between Medicare Advantage and traditional Medicare, in Part D, and in the supplementary insurance market

Supplementary insurance adds admin cost; abolishing it adds budget cost

My Own Views - 10

So if we are to move toward universal coverage, I would personally move in the direction of the Massachusetts plan, which is a variant of premium support, but reasonable people can, of course, differ

This is, however, how the US has come out for now