Professor James C. RobinsonUniversity of California, Berkeley

Market-Oriented Initiatives in Health Care:Market-Oriented Initiatives in Health Care:What Have We Learned?What Have We Learned?

Academy HealthAcademy HealthJune 3, 2007June 3, 2007

Goals: equity, efficiency, innovation Tradeoffs among goals Performance: biotechnology Performance: insurance Conclusions

OVERVIEWOVERVIEW

Apples to apples Compare real market initiatives to real

governmental initiatives– Not real markets and idealized governmental initiatives

A favorite tactic on the political left– Not real governmental and idealized market initiatives

A favorite tactic on the political right

Market failure and government failure

Principles of Evaluating MarketPrinciples of Evaluating Market(and non-market) Initiatives(and non-market) Initiatives

Be clear on the goals or standards against which performance is being evaluated– Markets tend to be good at some tasks, governmental

initiatives tend to be good at others Cherry-picking goals can pre-determine the comparison

Pick the most important set of goals Consider synergies and tradeoff among goals

– Success on one goal may facilitate or undermine success against others

More PrinciplesMore Principles

Equity: Access to services/products is based on health status, values, and preferences, not income or wealth or employment or race or religion

Efficiency: Services are produced at lowest possible cost, highest possible quality, lowest administrative burden, most appropriate mix

Innovation: Continual development of better drugs, devices, procedures, forms of organization

Three Goals of Health Care InitiativesThree Goals of Health Care Initiatives

Equitable access promotes efficiency– Lowers administrative costs of enrollment churning,

uncompensated care, unfunded mandate Efficiency promotes innovation

– Effective purchasing of today’s services gives signals to entrepreneurs and investors on where to focus

Innovation promotes equity– New technologies become cheaper with experience,

diffuse to even most disadvantaged populations

Synergies among GoalsSynergies among Goals

Equity can stifle efficiency– One-size-fits-all forms of payment and regulation distort

incentives, foster moral hazard, fraud, bureaucracy Efficiency can stifle innovation

– Low prices, ease of entry (e.g., bio-similars) undermine incentives for risk-taking, investment in fixed assets

Dynamic (Schumpetrian) competition v. static competition Innovation can impede equity

– New clinical opportunities can increase disparities

Tradeoffs among GoalsTradeoffs among Goals

Dynamic technology, with promise of significant benefits to sickest patients, potential for radical transformation of care for all patients– Genomics, personalized medicine, stem cell therapy

High scientific and commercial uncertainty (long lead time till revenue), major capital needs– Sector as a whole is yet to be profitable

Attractive economic spinoffs: jobs, training, etc.

Sectors for Evaluation:Sectors for Evaluation:BiotechnologyBiotechnology

Insurance as income re-distribution– Pooling of (known) unequal risks– Motivate the chronically well to support the chronically ill

Insurance as purchasing– Methods of payment give incentives to providers– Other incentives for providers: quality improvement,

review of appropriate use patterns – Design of cost-sharing give incentives to patients

Sectors for Evaluation:Sectors for Evaluation:InsuranceInsurance

Biotech products are directed at severe needs– Not population health but focus on the neediest

High prices and cost-sharing are financial barrier– But charitable donations help most patients in need

The US purchasers (CMS, private insurers, employers, individuals) are financing R&D for the entire world, including other rich nations

Biotechnology:Biotechnology:EquityEquity

Very high “value-based” pricing– Most biotech firms still not profitable; external access to

capital (VC and pharma licensing) remains crucial Most clinical gains to date have been incremental Debate over physician “buy and bill” incentives Overall, however, biotech has best scientific basis

in medicine; expensive but worth it

Biotechnology:Biotechnology:EfficiencyEfficiency

The US biotech industry is the envy of the world– New products, firms, capital investment, jobs

Major new products target major unmet needs– Cancer, auto-immune diseases, rare genetic conditions

Mutual benefits for basic and applied science– Technology transfer: US universities are the world’s envy

Genomics, diagnostics, stem cell are revolutionary

Biotechnology:Biotechnology:InnovationInnovation

Biotech is classic Schumpetrian industry– High initial investments, high risk, with major potential

rewards (more clinical than financial, it appears)– To date, no lack of investment and entrepreneurship

Bio-generics and pressure for lower prices may reduce risk-taking. Short-term concern over early-stage investments?

– Rapid vertical integration between pharma and biotech– Extensive global competition for biotech investments

Biotechnology:Biotechnology:PositivesPositives

Biotechnology is not “disruptive technology”– It is high cost, not low cost and low functionality– It clearly raises the cost of care

Often by converting fatal diseases into chronic illness– Cost-effectiveness ratio is not very favorable

Longevity gains often measured in weeks or months

Continued access to private capital is not certain– Especially for early stage firms, frontier technologies

Biotechnology:Biotechnology:ChallengesChallenges

Equity: 8/10. Targets the sickest patients with greatest unmet needs; charitable programs blunt cost-sharing requirements

Efficiency: 6/10. High prices, weak cost-effectiveness, modest breakthroughs in short run

Innovation: 10/10. Envy of the world; no centralized system can come close (e.g.,Germany)

Biotechnology:Biotechnology:Summing UpSumming Up

Two functions of insurance must be evaluated– Redistribution: motivating the healthy to pay for the sick

and the rich to pay for the poor– Purchasing: creating appropriate incentives for providers

and consumers through network (provider payment) and benefit (cost sharing) designs

Insurance: Income Redistribution and Insurance: Income Redistribution and Purchasing of Health Care ServicesPurchasing of Health Care Services

The US insurance sector fails 46 million at any one time, many more at some time (churning)

Under-insurance (excessive cost sharing) for low income and chronically ill patients

Tax exclusion of health benefits favors high income taxpayers and those with gilt benefit designs

Medicare taxes fall on all workers, including uninsured, and favor all elderly, including wealthy

Minneapolis and Portland subsidize Miami and Manhattan

Insurance as Redistribution:Insurance as Redistribution:EquityEquity

The mix of public/private insurance imposes high administrative costs

– Enrollment, disenrollment, marketing– Confusion and chaos (e.g., Part D)

Tradeoff betw. admin costs and fraud in Medicare Private insurance reduces incentive distortions of

income taxes (on job creation, labor force participation), compared to Europe

Insurance as Redistribution:Insurance as Redistribution:EfficiencyEfficiency

Health Savings Accounts– Incentives for saving are important, but skewed

distribution of need attenuates social benefits– “Consumer” benefit designs “protect the healthy from ill”

The erosion of entitlement thinking– Health care is not free. It is a scarce social resource that

should be cherished and used when most needed. Personal responsibility should play a part.

Insurance as Income Redistribution:Insurance as Income Redistribution:InnovationInnovation

The US seems really and truly not to want NHI– Blue Cross was created as alternative to NHI– Employment-based coverage as alternative to tax-based– Consumer-driven coverage as alternative to

employment-based and tax-based coverage The mixed system performs not too poorly, given

this (controversial) philosophical stance

Insurance as Income Redistribution:Insurance as Income Redistribution:PositivesPositives

The US insurance system challenges most people’s concept of fairness

It undermines whatever social solidarity we have The administrative costs are horrific It gives the whole US market-oriented economic

philosophy a black eye in global discussions

Insurance as Income Redistribution:Insurance as Income Redistribution:ChallengesChallenges

Efforts by insurers to get lowest prices undermine provider ability to offer charity care

But insurer as purchaser is agent of enrollee in obtaining wholesale pricing

– Retail prices would be even more unfair for those most in need and least able to bargain

The uninsured pay the highest prices, if they pay

Insurance as Purchasing of Health Services:Insurance as Purchasing of Health Services:EquityEquity

US pays highest prices for health services– MD and RN earnings; drugs and devices

Continual conflict between insurers and providers– Providers hate HMOs, Medicare FFS, Medicaid

Multi-payer system reduces risk to providers– This reduces imperative for lobbying

Cost sharing facilitates generic substitution etc.

Insurance as Purchasing of Health Services:Insurance as Purchasing of Health Services:EfficiencyEfficiency

The multi-payer system facilitates experimentation– Methods of provider payment (DRG, capitation, EOC)– Disease management for chronic conditions– Methods of provider organization

Medical groups, vertical integration, specialty facilities– Transparency and performance monitoring

Report cards, pay-for-performance

Insurance as Purchasing of Health Services:Insurance as Purchasing of Health Services:InnovationInnovation

Multi-payer systems foster experimentation and diversity in organization and delivery of care

The US system fosters more transparency, performance measurement than many

It is less subject to capture by providers It offers less pork to politicians

Insurance as Purchasing of Health Services:Insurance as Purchasing of Health Services:PositivesPositives

Multi-payer systems lack cost control power– This may be a good thing (for innovative sectors)

Dynamic versus static efficiency

Conflict and confusion at the plan/provider interface Exhaustion and low expectations

– Case rates? Specialty organization? DM and QI? Consolidation among insurers and providers

Insurance as Purchasing of Health Services:Insurance as Purchasing of Health Services:ChallengesChallenges

Tradeoffs between the two functions of insurance?– Single-payer governmental systems are more effective at

pooling risk, forcing healthy to pay for sick– Multi-payer (mixed public/private) systems allow more

experimentation in care delivery/organization Universal coverage within a multi-payer system?

Insurance as Redistribution and Insurance as Redistribution and Purchasing: Summing UpPurchasing: Summing Up

Equity– Biotechnology: 8/10– Insurance (distribution): 4/10

Efficiency– Biotechnology: 6/10– Insurance (purchasing): 6/10

Innovation:– Biotechnology: 10/10– Insurance (purchasing): 6/10

Biotechnology and Insurance: Biotechnology and Insurance: Summing UpSumming Up