Is Health Insurance Good for Your Financial Health?

By Nicole Dussault, Maxim Pinkovskiy, and Basit Zafar
Federal Reserve Bank of New York, June 6, 2016

What is the purpose of health care? What is the purpose of health insurance? When people fall ill, they seek health care in order to get better. But insurance has a slightly different function: Its main role is not to protect our health per se, but to protect our finances.

Protection against financial hardship was one of the drivers behind passage of the 2010 Patient Protection and Affordable Care Act, commonly known as the Affordable Care Act (ACA). As President Obama said in a 2015 weekly address, “… that’s the whole point of health insurance. Peace of mind.”

In this blog post, we discuss the results of a research project that examines the effect of the Affordable Care Act’s Medicaid expansion on personal financial indicators. We find suggestive evidence that after the implementation of the ACA in the first quarter of 2014, counties with a high uninsurance burden pre-reform in states that subsequently expanded Medicaid had a decrease in average debt sent to collections agencies compared with such counties in states that did not expand Medicaid.

From the Conclusion

While the full effects of the Affordable Care Act on financial health are yet to be seen, and while the effects of the ACA — positive or negative — are not restricted to financial health, we offer suggestive early evidence that the Medicaid expansion is fulfilling the goal of health insurance: providing “peace of mind” by protecting against financial hardship.

http://libertystreeteconomics.newyorkfed.org/2016/06/is-health-insurance-good-for-your-financial-health.html

***

Comment:

By Don McCanne, M.D.

One of the most important purposes of the Affordable Care Act (ACA) was to make health care affordable. After all, “Affordable” is in its name. This study reported by the Federal Reserve Bank of New York confirms that, indeed, health care has become more affordable for new enrollees in Medicaid, as confirmed by the decline in debt sent to collection agencies in states that did expand Medicaid. But that’s not the full story.

One of the problems faced by the architects of ACA was that health care costs have become so expensive that insurance premiums would not be affordable without modifying the private health plans that were to be sold on the exchanges. Thus they established the benchmark silver plan at an actuarial value of 70 percent (the patient pays an average of 30 percent of the costs if not qualified for subsidies). The easiest way to do this was to require high deductibles. Other studies have shown that these deductibles have made health care less affordable and have resulted in a perpetuation of medical debt that frequently ends up being assigned to collection agencies.

Why then would Medicaid patients have a lower incidence of accounts assigned to collection agencies than do those with private plans? It is simply because most Medicaid patients do not have deductibles or other forms of cost sharing. They do not incur much in the way of medical debt. As President Obama said, “That’s the whole point of health insurance – Peace of mind.”

We can do the same for everyone else. We can prevent financial hardship from medical debt by providing first dollar coverage for everyone. With a well designed single payer system we can control costs through much more patient-friendly means. For those who say that we can’t afford that, other nations have first dollar coverage while spending considerably less than we do with our highly dysfunctional financing system. Single payer. It’s that simple.

Is Health Insurance Good for Your Financial Health?

By Nicole Dussault, Maxim Pinkovskiy, and Basit Zafar
Federal Reserve Bank of New York, June 6, 2016

What is the purpose of health care? What is the purpose of health insurance? When people fall ill, they seek health care in order to get better. But insurance has a slightly different function: Its main role is not to protect our health per se, but to protect our finances.

Protection against financial hardship was one of the drivers behind passage of the 2010 Patient Protection and Affordable Care Act, commonly known as the Affordable Care Act (ACA). As President Obama said in a 2015 weekly address, “… that’s the whole point of health insurance. Peace of mind.”

In this blog post, we discuss the results of a research project that examines the effect of the Affordable Care Act’s Medicaid expansion on personal financial indicators. We find suggestive evidence that after the implementation of the ACA in the first quarter of 2014, counties with a high uninsurance burden pre-reform in states that subsequently expanded Medicaid had a decrease in average debt sent to collections agencies compared with such counties in states that did not expand Medicaid.

From the Conclusion

While the full effects of the Affordable Care Act on financial health are yet to be seen, and while the effects of the ACA — positive or negative — are not restricted to financial health, we offer suggestive early evidence that the Medicaid expansion is fulfilling the goal of health insurance: providing “peace of mind” by protecting against financial hardship.

http://libertystreeteconomics.newyorkfed.org/2016/06/is-health-insurance-good-for-your-financial-health.html

One of the most important purposes of the Affordable Care Act (ACA) was to make health care affordable. After all, “Affordable” is in its name. This study reported by the Federal Reserve Bank of New York confirms that, indeed, health care has become more affordable for new enrollees in Medicaid, as confirmed by the decline in debt sent to collection agencies in states that did expand Medicaid. But that’s not the full story.

One of the problems faced by the architects of ACA was that health care costs have become so expensive that insurance premiums would not be affordable without modifying the private health plans that were to be sold on the exchanges. Thus they established the benchmark silver plan at an actuarial value of 70 percent (the patient pays an average of 30 percent of the costs if not qualified for subsidies). The easiest way to do this was to require high deductibles. Other studies have shown that these deductibles have made health care less affordable and have resulted in a perpetuation of medical debt that frequently ends up being assigned to collection agencies.

Why then would Medicaid patients have a lower incidence of accounts assigned to collection agencies than do those with private plans? It is simply because most Medicaid patients do not have deductibles or other forms of cost sharing. They do not incur much in the way of medical debt. As President Obama said, “That’s the whole point of health insurance – Peace of mind.”

We can do the same for everyone else. We can prevent financial hardship from medical debt by providing first dollar coverage for everyone. With a well designed single payer system we can control costs through much more patient-friendly means. For those who say that we can’t afford that, other nations have first dollar coverage while spending considerably less than we do with our highly dysfunctional financing system. Single payer. It’s that simple.

Decline In Public Substance Use Disorder Treatment Centers Most Serious In Counties With High Shares Of Black Residents

By Janet R. Cummings, Hefei Wen and Michelle Ko
Health Affairs, June 2016

Abstract

Previous research has associated declines in health care resources such as hospitals and trauma centers with communities’ racial composition. However, little is known about changes in the substance use disorder treatment infrastructure in recent years and the implications for black communities. We used data for the period 2002–10 from the National Survey of Substance Abuse Treatment Services to describe changes in the supply of public and private outpatient facilities for substance use disorder treatment, and to determine whether these trends had implications for the geographical availability of these facilities in counties with high percentages of black residents. During the study period the number of publicly owned facilities declined 17.2 percent, whereas the number of private for-profit facilities grew 19.1 percent. At baseline, counties with very high percentages of black residents (that is, more than one standard deviation above the mean) were more likely than counties with less than the mean percentage of black residents to be served by public facilities and were thus disproportionately affected by the overall decline in public facilities. Future research should examine the effect of expanding eligibility for Medicaid on the supply of substance use disorder treatment facilities across diverse communities.

From the Discussion

Between 2002 and 2010 there was a decline in the number of public and private nonprofit outpatient substance use treatment facilities, but considerable growth in the number of private for-profit facilities. Among counties with at least one public facility at baseline, nearly half experienced a net loss in the number of public facilities by 2010. Counties with a large percentage of black residents were disproportionately burdened by the decline in public facilities, and these losses were not offset by an increased likelihood of gains in private for-profit or nonprofit facilities.

An overall decline in the supply of public and private nonprofit facilities has important implications for vulnerable populations across all communities. Compared to private for-profit facilities, public and nonprofit facilities are less likely to turn clients away based on their ability to pay.

Although public facilities constituted only 15 percent of the sample at the beginning of the study period, the decline in this sector is especially notable because these facilities were the most likely, at baseline and follow-up, to provide services to people who could not pay. In addition, previous research has reported that public facilities serve a significantly higher percentage of clients who are unable to pay for services than private (for-profit and nonprofit) facilities do. Furthermore, public facilities are more likely than private ones to offer important services such as HIV testing and more likely than private for-profit facilities to offer comprehensive care, including physical examinations and mental health treatment. Future research is needed to better understand the implications of these declines for the accessibility of outpatient care among low-income populations and for the availability of specific types of services.

The decline of public facilities has important implications for counties with a high percentage of black residents in particular. Nearly half of the counties with a public facility at baseline experienced a net loss in this resource, and counties with higher percentages of black residents were overrepresented among these communities. Regression results indicated that there was no significant association between county percentage of black residents and the likelihood of losing a public facility after other county-level characteristics were adjusted for. Nevertheless, counties with very high or extremely high percentages of black residents were disproportionately affected by the overall downward trend in the public sector because they were more likely to be served by public facilities at baseline than counties with less than the mean percentage of black residents.

The net loss of public facilities in counties with very high or extremely high percentages of black residents was not offset by an increased likelihood of gains in private facilities. Instead, the latter counties were less likely to gain a private (for-profit or nonprofit) facility than counties with less than the mean percentage of black residents, after other county-level social and demographic characteristics were adjusted for in the analyses. Considered together, these results suggest that public facilities may help fill infrastructure gaps left by the private sector, and that losses of public providers may not necessarily result in new investments from the private sector. As a consequence of the general decline in the public sector, coupled with the similar or lower likelihood that counties with very high or extremely high percentages of black residents experienced a net gain in private facilities, the counties with higher percentages of black residents had a lower likelihood of having any outpatient facility by the end of the study period, compared to counties with less than the mean percentage of black residents.

As of March 14, 2016, thirty-one states had opted to participate in the Medicaid expansion. However, it is worth noting that the decline of public facilities was even more pronounced among states that are not participating in the expansion. In addition, more than four-fifths of counties with more than the mean percentage of black residents are located in states that have not expanded Medicaid.

Conclusion

This study provides the first empirical information about trends in the ownership mix of facilities for substance use disorder treatment since the beginning of the twenty-first century and the implications of these trends for counties with a high percentage of black residents. The general decline in the number of public facilities, coupled with a similar or reduced likelihood of gaining private facilities in these counties, resulted in an overall disparity between them and other counties in the geographic availability of treatment facilities by 2010. As national policies for substance use control continue to shift toward prevention and treatment and away from more punitive approaches, it will be essential to ensure that enough treatment facilities are available across diverse communities.

http://content.healthaffairs.org/content/35/6/1036.abstract

***

Nearly all ACA benchmark plans violate rules on addiction treatment coverage

By Steven Ross Johnson
Modern Healthcare, June 7, 2016

More than two-thirds of state benchmark plans violate federal requirements to cover treatment for addiction disorders.

The National Center on Addiction and Substance Abuse surveyed addiction treatment benefits offered among 2017 Essential Health Benefits benchmark plans and found none offered a comprehensive array of addiction treatment benefits.

The report cites benchmark plans, which determine the minimum level of benefits available to those covered in state exchange plans, frequently “excluded or not explicitly covered benefits” related to residential treatment and the use of methadone as therapy.

Calls for more comprehensive coverage of addiction treatment services have grown louder over the past few years as the number of drug overdose deaths have reached record levels. More than 28,000 people died in 2014 from overdoses involving opioid drugs, including heroin.

Last year, the federal government suggested including coverage of the full range of approved medication-assisted treatments as part of the essential health benefits to ensure more access to such therapies. But the proposal faced opposition from insurers and pharmacy benefit managers and was struck down.

http://www.modernhealthcare.com/article/20160607/NEWS/160609927

***

Comment:

By Don McCanne, M.D.

Outrageous! While the public drug abuse treatment centers decline in numbers, and the private, for-profit centers are proliferating, “the counties with higher percentages of black residents had a lower likelihood of having any outpatient facility by the end of the study period, compared to counties with less than the mean percentage of black residents” (Health Affairs). Further, more than two-thirds of private benchmark plans offered in the ACA exchanges “violate federal requirements to cover treatment for addiction disorders” (Modern Healthcare).

According to the Modern Healthcare article excerpted above, “Last year, the federal government suggested including coverage of the full range of approved medication-assisted treatments as part of the essential health benefits to ensure more access to such therapies. But the proposal faced opposition from insurers and pharmacy benefit managers and was struck down.”

Who is responsible for this egregious disregard of addiction treatment needs, coverage of which is required by the Affordable Care Act – omissions especially neglectful of our black brothers and sisters? The private, for-profit addiction treatment centers; the private, for-profit insurers; the private, for-profit pharmacy benefit managers; and the anti-government legislators who have underfunded public treatment centers, and who have turned the funding of health care over to private, for-profit intermediaries.

A well designed, publicly-funded and publicly-administered single payer system would separately budget capital expenditures, including those for facilities offering addiction services, with distribution based on needs rather than on for-profit business ventures, and the services would be paid for on an equitable basis, ensuring access and affordability for everyone. It should be about patients, not business stratagems.

Decline In Public Substance Use Disorder Treatment Centers Most Serious In Counties With High Shares Of Black Residents

By Janet R. Cummings, Hefei Wen and Michelle Ko
Health Affairs, June 2016

Abstract

Previous research has associated declines in health care resources such as hospitals and trauma centers with communities’ racial composition. However, little is known about changes in the substance use disorder treatment infrastructure in recent years and the implications for black communities. We used data for the period 2002–10 from the National Survey of Substance Abuse Treatment Services to describe changes in the supply of public and private outpatient facilities for substance use disorder treatment, and to determine whether these trends had implications for the geographical availability of these facilities in counties with high percentages of black residents. During the study period the number of publicly owned facilities declined 17.2 percent, whereas the number of private for-profit facilities grew 19.1 percent. At baseline, counties with very high percentages of black residents (that is, more than one standard deviation above the mean) were more likely than counties with less than the mean percentage of black residents to be served by public facilities and were thus disproportionately affected by the overall decline in public facilities. Future research should examine the effect of expanding eligibility for Medicaid on the supply of substance use disorder treatment facilities across diverse communities.

From the Discussion

Between 2002 and 2010 there was a decline in the number of public and private nonprofit outpatient substance use treatment facilities, but considerable growth in the number of private for-profit facilities. Among counties with at least one public facility at baseline, nearly half experienced a net loss in the number of public facilities by 2010. Counties with a large percentage of black residents were disproportionately burdened by the decline in public facilities, and these losses were not offset by an increased likelihood of gains in private for-profit or nonprofit facilities.

An overall decline in the supply of public and private nonprofit facilities has important implications for vulnerable populations across all communities. Compared to private for-profit facilities, public and nonprofit facilities are less likely to turn clients away based on their ability to pay.

Although public facilities constituted only 15 percent of the sample at the beginning of the study period, the decline in this sector is especially notable because these facilities were the most likely, at baseline and follow-up, to provide services to people who could not pay. In addition, previous research has reported that public facilities serve a significantly higher percentage of clients who are unable to pay for services than private (for-profit and nonprofit) facilities do. Furthermore, public facilities are more likely than private ones to offer important services such as HIV testing and more likely than private for-profit facilities to offer comprehensive care, including physical examinations and mental health treatment. Future research is needed to better understand the implications of these declines for the accessibility of outpatient care among low-income populations and for the availability of specific types of services.

The decline of public facilities has important implications for counties with a high percentage of black residents in particular. Nearly half of the counties with a public facility at baseline experienced a net loss in this resource, and counties with higher percentages of black residents were overrepresented among these communities. Regression results indicated that there was no significant association between county percentage of black residents and the likelihood of losing a public facility after other county-level characteristics were adjusted for. Nevertheless, counties with very high or extremely high percentages of black residents were disproportionately affected by the overall downward trend in the public sector because they were more likely to be served by public facilities at baseline than counties with less than the mean percentage of black residents.

The net loss of public facilities in counties with very high or extremely high percentages of black residents was not offset by an increased likelihood of gains in private facilities. Instead, the latter counties were less likely to gain a private (for-profit or nonprofit) facility than counties with less than the mean percentage of black residents, after other county-level social and demographic characteristics were adjusted for in the analyses. Considered together, these results suggest that public facilities may help fill infrastructure gaps left by the private sector, and that losses of public providers may not necessarily result in new investments from the private sector. As a consequence of the general decline in the public sector, coupled with the similar or lower likelihood that counties with very high or extremely high percentages of black residents experienced a net gain in private facilities, the counties with higher percentages of black residents had a lower likelihood of having any outpatient facility by the end of the study period, compared to counties with less than the mean percentage of black residents.

As of March 14, 2016, thirty-one states had opted to participate in the Medicaid expansion. However, it is worth noting that the decline of public facilities was even more pronounced among states that are not participating in the expansion. In addition, more than four-fifths of counties with more than the mean percentage of black residents are located in states that have not expanded Medicaid.

Conclusion

This study provides the first empirical information about trends in the ownership mix of facilities for substance use disorder treatment since the beginning of the twenty-first century and the implications of these trends for counties with a high percentage of black residents. The general decline in the number of public facilities, coupled with a similar or reduced likelihood of gaining private facilities in these counties, resulted in an overall disparity between them and other counties in the geographic availability of treatment facilities by 2010. As national policies for substance use control continue to shift toward prevention and treatment and away from more punitive approaches, it will be essential to ensure that enough treatment facilities are available across diverse communities.

http://content.healthaffairs.org/content/35/6/1036.abstract

***

Nearly all ACA benchmark plans violate rules on addiction treatment coverage

By Steven Ross Johnson
Modern Healthcare, June 7, 2016

More than two-thirds of state benchmark plans violate federal requirements to cover treatment for addiction disorders.

The National Center on Addiction and Substance Abuse surveyed addiction treatment benefits offered among 2017 Essential Health Benefits benchmark plans and found none offered a comprehensive array of addiction treatment benefits.

The report cites benchmark plans, which determine the minimum level of benefits available to those covered in state exchange plans, frequently “excluded or not explicitly covered benefits” related to residential treatment and the use of methadone as therapy.

Calls for more comprehensive coverage of addiction treatment services have grown louder over the past few years as the number of drug overdose deaths have reached record levels. More than 28,000 people died in 2014 from overdoses involving opioid drugs, including heroin.

Last year, the federal government suggested including coverage of the full range of approved medication-assisted treatments as part of the essential health benefits to ensure more access to such therapies. But the proposal faced opposition from insurers and pharmacy benefit managers and was struck down.

http://www.modernhealthcare.com/article/20160607/NEWS/160609927

Outrageous! While the public drug abuse treatment centers decline in numbers, and the private, for-profit centers are proliferating, “the counties with higher percentages of black residents had a lower likelihood of having any outpatient facility by the end of the study period, compared to counties with less than the mean percentage of black residents” (Health Affairs). Further, more than two-thirds of private benchmark plans offered in the ACA exchanges “violate federal requirements to cover treatment for addiction disorders” (Modern Healthcare).

According to the Modern Healthcare article excerpted above, “Last year, the federal government suggested including coverage of the full range of approved medication-assisted treatments as part of the essential health benefits to ensure more access to such therapies. But the proposal faced opposition from insurers and pharmacy benefit managers and was struck down.”

Who is responsible for this egregious disregard of addiction treatment needs, coverage of which is required by the Affordable Care Act – omissions especially neglectful of our black brothers and sisters? The private, for-profit addiction treatment centers; the private, for-profit insurers; the private, for-profit pharmacy benefit managers; and the anti-government legislators who have underfunded public treatment centers, and who have turned the funding of health care over to private, for-profit intermediaries.

A well designed, publicly-funded and publicly-administered single payer system would separately budget capital expenditures, including those for facilities offering addiction services, with distribution based on needs rather than on for-profit business ventures, and the services would be paid for on an equitable basis, ensuring access and affordability for everyone. It should be about patients, not business stratagems.

Countervailing incentives in value-based payment

By Daniel R. Arnold
Healthcare, May 17, 2016

Abstract

Payment reform has been at the forefront of the movement toward higher-value care in the U.S. health care system. A common belief is that volume-based incentives embedded in fee-for-service need to be replaced with value-based payments. While this belief is well-intended, value-based payment also contains perverse incentives. In particular, behavioral economists have identified several features of individual decision making that reverse some of the typical recommendations for inducing desirable behavior through financial incentives. This paper discusses the countervailing incentives associated with four behavioral economic concepts: loss aversion, relative social ranking, inertia or status quo bias, and extrinsic vs. intrinsic motivation.

From the Introduction

The Department of Health and Human Services (HHS) intends to have 85% of Medicare fee-for-service (FFS) payments tied to quality or value by 2016 and 90% by 2018. In addition, HHS is moving away from FFS in favor of alternative payment models, such as accountable care organizations and bundled-payment arrangements. HHS’s goal is to have 30% of Medicare payments tied to quality or value through alternative payment models by the end of 2016 and 50% by the end of 2018. The U.S. health care system’s transition to value-based payment is underway.

Loss aversion

While upfront payment has the potential to leverage physician’s loss aversion and nudge them toward providing higher-value care, it is also important to recognize the implications loss aversion has for current design features of value-based payment. One example is wage variation. Wage variation under value-based payment is likely to be greater than wage variation under FFS, particularly if value-based payment is tied to patient outcomes that are highly variable. Loss aversion implies that employees respond poorly to variable wages – relatively low wage years are more painful than relatively high wage years are pleasurable. There is some evidence that physicians may respond to low wage years by boosting their incomes in subsequent years, either through increasing prices or shortening patient appointments. Thus, as long as there is some level of productivity-based compensation, certain value-based payment arrangements could increase the likelihood of unappealing income boosting activities that stem from perceived low wage years.

Relative social ranking

There are, however, drawbacks to comparing physicians to their peers. After New York and Pennsylvania began releasing coronary artery bypass graft (CABG) report cards, both states saw surgeons turn away sick patients in an effort to avoid poor outcomes and lower publicly reported ratings. In Pennsylvania, 63% of cardiac surgeons admitted to being reluctant to operate on high-risk patients. In New York, 67% of cardiac surgeons refused to treat at least one patient in the preceding year that was perceived to be high risk.

Another concern is the power of rankings: individuals often attribute more meaning to rankings than is warranted. For instance, Isaac and Schindler have identified a “top 10″ effect–people categorize performance by round numbers (i.e. you are either inside or outside the top ten). This makes moving from rank 11 to rank 10 more important than moving from rank 10 to rank 9, even if the absolute change in performance is the same. Furthermore, the importance of rankings can lead individuals to sabotage others in order to improve their relative ranks. Finally, rankings become particularly problematic when all participants perform well, there is random variation in outcomes, or performance is difficult to measure — all of which can be true for physicians. Outside of health care, team-based, rather than individual, incentives have been shown to reduce these undesirable behaviors.

Inertia or status quo bias

But what happens when the default choice is not clear? Is it still better to give physicians a default option, or instead rely on physicians to actively decide which treatment option is best. A recent study introduced the notion of a “default pull” effect: defaults shape what a decision maker prefers by making him consider whether he prefers the default. This pull can have a substantial effect on choice, even when the default itself is not chosen. It may be better to allow physicians to have their undistorted preferences in situations where there is no obvious best course of treatment.

Another downside of imposed defaults is that they reduce physician autonomy. Ariely and Lanier vividly describe that physicians without autonomy “may feel like Charlie Chaplin’s character in Modern Times, pulled through the gears and cogs of a machine in a factory, and as a consequence they often feel defeated when attempting to put their hearts and souls into their profession.” But in the opposite direction, some argue that nudges are too weak. For example, calorie labeling has done little to reduce people’s calorie intake, which has led some to argue that some public health policies need to be more aggressive – shoves rather than nudges.

The effect of explicit incentives on intrinsic motivation

Himmelstein et al. highlight two important assumptions of pay-for-performance that are rarely made explicit: (1) variation in performance is caused by variation in motivation, and (2) financial incentives will add to total motivation, not undermine it. Incentive pay is unlikely to improve variation in poor performance that is not due to motivation, such as mistakes from fatigue that come from overworked physicians. Assuming a lack of motivation as the problem, pay-for-performance then assumes financial incentives can increase motivation. Financial incentives clearly affect behavior. For instance, shifting physicians from fixed salaries to FFS has been shown to increase the amount of clinical work performed and improve billing practices.

But there is mounting evidence that extrinsic rewards can undermine intrinsic motivation. Of the numerous findings that relate to the crowd-out of intrinsic motivation, two seem particularly relevant to physicians: (1) negative effects of monetary rewards are strongest for complex cognitive tasks and (2) motivational crowd-out spreads to work that is not directly incentivized. With respect to complex cognitive tasks, even very large financial incentives undermine performance. For example, rural villagers in India offered half their annual money income experienced worsened performance on complex memory and puzzle-solving tasks. The spread of motivational crowd-out to work not directly incentivized has been observed in England. In 2004, the U.K. government introduced a pay-for-performance scheme with 136 indicators for family practices. By 2007, improvement for incentivized measures had plateaued, and quality deteriorated for two measures that were not incentivized.

Conclusion

Insights from behavioral economics can be used to create value-based payment policies that promote high-value care. Upfront bonuses, physician rankings, and better default options can all help promote high-value care. But it is important to follow the implications of these behavioral motivators through to all areas of physician decision-making and performance. In doing so, unintended consequences may be revealed along the way.

http://www.sciencedirect.com/science/article/pii/S2213076416300392

***

Comment:

By Don McCanne, M.D.

As the government moves away from payment based on volume and forward to payment based on value, it is important to have a thorough understanding of behavioral economics, and the application needs to be done right. The excerpts selected from the article above describe the problem of countervailing incentives in value-based payments.

There will always be a certain volume of care and payment must take that volume into consideration, but that care should be of value. Through approaches such as comparative effectiveness, cost effectiveness, and outcomes research we can determine to a great extent what care is beneficial and affordable, that is, what care is of value.

Through the application of behavioral economics we can motivate health care professionals to strive for higher value care, but we have to get it right. Dedicated, altruistic health professionals are much more likely to set the compass in the right direction than are business school academics and government bureaucrats. But the strategists do need a good foundation in behavioral economics.

Countervailing incentives in value-based payment

By Daniel R. Arnold
Healthcare, May 17, 2016

Abstract

Payment reform has been at the forefront of the movement toward higher-value care in the U.S. health care system. A common belief is that volume-based incentives embedded in fee-for-service need to be replaced with value-based payments. While this belief is well-intended, value-based payment also contains perverse incentives. In particular, behavioral economists have identified several features of individual decision making that reverse some of the typical recommendations for inducing desirable behavior through financial incentives. This paper discusses the countervailing incentives associated with four behavioral economic concepts: loss aversion, relative social ranking, inertia or status quo bias, and extrinsic vs. intrinsic motivation.

From the Introduction

The Department of Health and Human Services (HHS) intends to have 85% of Medicare fee-for-service (FFS) payments tied to quality or value by 2016 and 90% by 2018. In addition, HHS is moving away from FFS in favor of alternative payment models, such as accountable care organizations and bundled-payment arrangements. HHS’s goal is to have 30% of Medicare payments tied to quality or value through alternative payment models by the end of 2016 and 50% by the end of 2018. The U.S. health care system’s transition to value-based payment is underway.

Loss aversion

While upfront payment has the potential to leverage physician’s loss aversion and nudge them toward providing higher-value care, it is also important to recognize the implications loss aversion has for current design features of value-based payment. One example is wage variation. Wage variation under value-based payment is likely to be greater than wage variation under FFS, particularly if value-based payment is tied to patient outcomes that are highly variable. Loss aversion implies that employees respond poorly to variable wages – relatively low wage years are more painful than relatively high wage years are pleasurable. There is some evidence that physicians may respond to low wage years by boosting their incomes in subsequent years, either through increasing prices or shortening patient appointments. Thus, as long as there is some level of productivity-based compensation, certain value-based payment arrangements could increase the likelihood of unappealing income boosting activities that stem from perceived low wage years.

Relative social ranking

There are, however, drawbacks to comparing physicians to their peers. After New York and Pennsylvania began releasing coronary artery bypass graft (CABG) report cards, both states saw surgeons turn away sick patients in an effort to avoid poor outcomes and lower publicly reported ratings. In Pennsylvania, 63% of cardiac surgeons admitted to being reluctant to operate on high-risk patients. In New York, 67% of cardiac surgeons refused to treat at least one patient in the preceding year that was perceived to be high risk.

Another concern is the power of rankings: individuals often attribute more meaning to rankings than is warranted. For instance, Isaac and Schindler have identified a “top 10″ effect–people categorize performance by round numbers (i.e. you are either inside or outside the top ten). This makes moving from rank 11 to rank 10 more important than moving from rank 10 to rank 9, even if the absolute change in performance is the same. Furthermore, the importance of rankings can lead individuals to sabotage others in order to improve their relative ranks. Finally, rankings become particularly problematic when all participants perform well, there is random variation in outcomes, or performance is difficult to measure — all of which can be true for physicians. Outside of health care, team-based, rather than individual, incentives have been shown to reduce these undesirable behaviors.

Inertia or status quo bias

But what happens when the default choice is not clear? Is it still better to give physicians a default option, or instead rely on physicians to actively decide which treatment option is best. A recent study introduced the notion of a “default pull” effect: defaults shape what a decision maker prefers by making him consider whether he prefers the default. This pull can have a substantial effect on choice, even when the default itself is not chosen. It may be better to allow physicians to have their undistorted preferences in situations where there is no obvious best course of treatment.

Another downside of imposed defaults is that they reduce physician autonomy. Ariely and Lanier vividly describe that physicians without autonomy “may feel like Charlie Chaplin’s character in Modern Times, pulled through the gears and cogs of a machine in a factory, and as a consequence they often feel defeated when attempting to put their hearts and souls into their profession.” But in the opposite direction, some argue that nudges are too weak. For example, calorie labeling has done little to reduce people’s calorie intake, which has led some to argue that some public health policies need to be more aggressive – shoves rather than nudges.

The effect of explicit incentives on intrinsic motivation

Himmelstein et al. highlight two important assumptions of pay-for-performance that are rarely made explicit: (1) variation in performance is caused by variation in motivation, and (2) financial incentives will add to total motivation, not undermine it. Incentive pay is unlikely to improve variation in poor performance that is not due to motivation, such as mistakes from fatigue that come from overworked physicians. Assuming a lack of motivation as the problem, pay-for-performance then assumes financial incentives can increase motivation. Financial incentives clearly affect behavior. For instance, shifting physicians from fixed salaries to FFS has been shown to increase the amount of clinical work performed and improve billing practices.

But there is mounting evidence that extrinsic rewards can undermine intrinsic motivation. Of the numerous findings that relate to the crowd-out of intrinsic motivation, two seem particularly relevant to physicians: (1) negative effects of monetary rewards are strongest for complex cognitive tasks and (2) motivational crowd-out spreads to work that is not directly incentivized. With respect to complex cognitive tasks, even very large financial incentives undermine performance. For example, rural villagers in India offered half their annual money income experienced worsened performance on complex memory and puzzle-solving tasks. The spread of motivational crowd-out to work not directly incentivized has been observed in England. In 2004, the U.K. government introduced a pay-for-performance scheme with 136 indicators for family practices. By 2007, improvement for incentivized measures had plateaued, and quality deteriorated for two measures that were not incentivized.

Conclusion

Insights from behavioral economics can be used to create value-based payment policies that promote high-value care. Upfront bonuses, physician rankings, and better default options can all help promote high-value care. But it is important to follow the implications of these behavioral motivators through to all areas of physician decision-making and performance. In doing so, unintended consequences may be revealed along the way.

http://www.sciencedirect.com/science/article/pii/S2213076416300392

As the government moves away from payment based on volume and forward to payment based on value, it is important to have a thorough understanding of behavioral economics, and the application needs to be done right. The excerpts selected from the article above describe the problem of countervailing incentives in value-based payments.

There will always be a certain volume of care and payment must take that volume into consideration, but that care should be of value. Through approaches such as comparative effectiveness, cost effectiveness, and outcomes research we can determine to a great extent what care is beneficial and affordable, that is, what care is of value.

Through the application of behavioral economics we can motivate health care professionals to strive for higher value care, but we have to get it right. Dedicated, altruistic health professionals are much more likely to set the compass in the right direction than are business school academics and government bureaucrats. But the strategists do need a good foundation in behavioral economics.

By Uwe E. Reinhardt
Health Affairs Blog, June 1, 2016

Corporate executives, the management consultants who advise them, and the financial industry executives who help corporations finance their capital investments tend to believe that whenever their joint work enhances the wealth of a firm’s shareholders, they ipso facto enhance also the nation’s wealth. It is a soothing narrative, one routinely trotted out to college students in their textbooks of economics, which often slouch vaguely toward propaganda.

Very often this narrative is, of course, valid. It is especially so for venture capitalism, which acts as the midwife, so to speak, of newly-born companies creating valuable products hitherto unknown. It is valid also when established companies introduce new products or even when they merely expand existing product lines. Hereafter in this post, this version of capitalism will be labeled “value creation.”

But, as the pharmaceutical industry has been busily teaching us in recent times, alongside this value-creating facet, modern capitalism can also play a more dubious role by merely redistributing wealth from some members of society (for example, sick people) to the shareholders of particular enterprises, without making any net contribution to overall social value. Hereafter we refer to this process as “value shifting,” meaning that value is taken away from some members of society and channeled to the owners of capital.

It is widely thought that the proper fraction of total social value to be garnered by health care product manufacturers as sales revenue is one that just covers research and development (R&D) and production costs, with a profit margin designed to encourage further innovation — hence the demand that drug manufacturers make their costs transparent to the public. Health care product manufacturers, on the other hand, argue that the proper base for their pricing policies is not the cost of developing and producing their products, but the total social value they create for society. This pricing policy is called “value pricing.” At its extreme, it can extract enormous prices from seriously stricken patients or their insurers, because better health and longer life are so precious.

There is growing evidence that, save perhaps for some economists, American society is not comfortable with the idea of value pricing in health care, as can be inferred from the uproar over the pricing policy adopted by Turing Pharmaceuticals, which raised the price of one long-established product by 5,000 percent, and of Valeant Pharmaceuticals International. Valeant’s business model has been to acquire already existing pharmaceutical companies with long-established products, substantially increase the prices of these products and further enhance short-run cash flow to shareholders, reducing outlays on R&D by the acquired firms. These strategies are purely value shifting. In fact, it can be argued that by reducing R&D spending, Valeant destroyed social value.

Although Turing Pharmaceuticals’ and Valeant Pharmaceuticals’ business models are extreme versions of value shifting, the entire drug industry has for some time now leaned more and more toward that model by repeated price increases for long-existing products. Substantial price hikes have been observed even for off-patent generic products.

Spokespeople for the industry argue that the cash from these price increases flows directly to higher spending on R&D. Some of it probably does. But these firms spend considerably more on SG&A, which stands for “sales [marketing] and general and administrative expenses.” Spending on R&D by these companies tend to be well below 20 percent of revenue, while spending on SG&A is well above 20 percent. From the endless series of advertisements for prescription drugs on cable and network news and entertainment, patients (sick people) can infer that with the prices they pay for drugs, directly out of pocket or through health-insurance premiums, they now have become the main source of financing for the television industry — a truly bizarre circumstance.

Another part of the added cash flow generated by price hikes on existing pharmaceutical products often flows to shareholders through buy-backs of these firms’ stocks in the open market, to boost the earnings per share of the remaining stock outstanding. As Obi Ezekoye, Tim Koller, and Ankit Mittal of McKinsey and Co. argued in a recent article, these stock buy-backs usually do not create value even for the remaining shareholders, let alone add social value.

In short, it is far from clear to what end the industry’s repeated price increases under value shifting are used by the industry. There is no reason to believe that they will all, or even predominantly, flow into R&D.

Consolidation in both the R&D-based and the generics industry through mergers appear to have contributed to value shifting. When large pharmaceutical firms acquire smaller entrepreneurial companies, the objective usually is to expand the R&D pipeline of the large companies whose own R&D shops may have failed to produce enough new breakthroughs. But when large pharmaceutical companies or other health care companies merge, the objective is likely to be mainly to reduce price competition.

There is ample empirical research in health economics showing that consolidation on the supply side of the health care sector has served to drive up prices. It is another way of saying that it supports value shifting, rather than value creation.

My gratuitous advice to the drug industry, and to the health care industry in general, is to be very mindful of the distinction between value creation and value shifting in their pricing policies, lest they eventually invoke the wrath of the losers in that game, with dire consequences.

A healthy addition to corporate board meetings at these companies, for example, might be a presentation on the distribution of family income in the United States, whose median now is around $52,000 (meaning 50 percent of American families have a lower family income). Similarly, the boards should know more about the health insurance status of the American people, including the ever-increasing deductibles and coinsurance families are made to bear. These data might give boards some feel for how much money can reasonably and humanely be extracted from their fellow Americans, especially those in the bottom half of the income distribution, with whom the boards and business executives have lost touch.

http://healthaffairs.org/blog/2016/06/01/value-creation-and-value-shifting-in-health-care/

***

Comment:

By Don McCanne, M.D.

Uwe Reinhardt once again helps us to understand another aspect of the inequitable economics in our health care system by explaining the difference between value creation and value shifting.

Bringing us new beneficial health care services and products creates value, whereas extracting more revenues from the ill without providing any further health benefit shifts value, creating more wealth for the owners of capital (rent-seekers). Value shifting is pervasive throughout our health care system and has been detrimental to the health and finances of middle- and low-income individuals and families.

Reinhardt concludes, “My gratuitous advice to the drug industry, and to the health care industry in general, is to be very mindful of the distinction between value creation and value shifting in their pricing policies, lest they eventually invoke the wrath of the losers in that game, with dire consequences.”

Dire consequences for the health care rent-seekers, anyone? It’s about time.

By Uwe E. Reinhardt
Health Affairs Blog, June 1, 2016

Corporate executives, the management consultants who advise them, and the financial industry executives who help corporations finance their capital investments tend to believe that whenever their joint work enhances the wealth of a firm’s shareholders, they ipso facto enhance also the nation’s wealth. It is a soothing narrative, one routinely trotted out to college students in their textbooks of economics, which often slouch vaguely toward propaganda.

Very often this narrative is, of course, valid. It is especially so for venture capitalism, which acts as the midwife, so to speak, of newly-born companies creating valuable products hitherto unknown. It is valid also when established companies introduce new products or even when they merely expand existing product lines. Hereafter in this post, this version of capitalism will be labeled “value creation.”

But, as the pharmaceutical industry has been busily teaching us in recent times, alongside this value-creating facet, modern capitalism can also play a more dubious role by merely redistributing wealth from some members of society (for example, sick people) to the shareholders of particular enterprises, without making any net contribution to overall social value. Hereafter we refer to this process as “value shifting,” meaning that value is taken away from some members of society and channeled to the owners of capital.

It is widely thought that the proper fraction of total social value to be garnered by health care product manufacturers as sales revenue is one that just covers research and development (R&D) and production costs, with a profit margin designed to encourage further innovation — hence the demand that drug manufacturers make their costs transparent to the public. Health care product manufacturers, on the other hand, argue that the proper base for their pricing policies is not the cost of developing and producing their products, but the total social value they create for society. This pricing policy is called “value pricing.” At its extreme, it can extract enormous prices from seriously stricken patients or their insurers, because better health and longer life are so precious.

There is growing evidence that, save perhaps for some economists, American society is not comfortable with the idea of value pricing in health care, as can be inferred from the uproar over the pricing policy adopted by Turing Pharmaceuticals, which raised the price of one long-established product by 5,000 percent, and of Valeant Pharmaceuticals International. Valeant’s business model has been to acquire already existing pharmaceutical companies with long-established products, substantially increase the prices of these products and further enhance short-run cash flow to shareholders, reducing outlays on R&D by the acquired firms. These strategies are purely value shifting. In fact, it can be argued that by reducing R&D spending, Valeant destroyed social value.

Although Turing Pharmaceuticals’ and Valeant Pharmaceuticals’ business models are extreme versions of value shifting, the entire drug industry has for some time now leaned more and more toward that model by repeated price increases for long-existing products. Substantial price hikes have been observed even for off-patent generic products.

Spokespeople for the industry argue that the cash from these price increases flows directly to higher spending on R&D. Some of it probably does. But these firms spend considerably more on SG&A, which stands for “sales [marketing] and general and administrative expenses.” Spending on R&D by these companies tend to be well below 20 percent of revenue, while spending on SG&A is well above 20 percent. From the endless series of advertisements for prescription drugs on cable and network news and entertainment, patients (sick people) can infer that with the prices they pay for drugs, directly out of pocket or through health-insurance premiums, they now have become the main source of financing for the television industry — a truly bizarre circumstance.

Another part of the added cash flow generated by price hikes on existing pharmaceutical products often flows to shareholders through buy-backs of these firms’ stocks in the open market, to boost the earnings per share of the remaining stock outstanding. As Obi Ezekoye, Tim Koller, and Ankit Mittal of McKinsey and Co. argued in a recent article, these stock buy-backs usually do not create value even for the remaining shareholders, let alone add social value.

In short, it is far from clear to what end the industry’s repeated price increases under value shifting are used by the industry. There is no reason to believe that they will all, or even predominantly, flow into R&D.

Consolidation in both the R&D-based and the generics industry through mergers appear to have contributed to value shifting. When large pharmaceutical firms acquire smaller entrepreneurial companies, the objective usually is to expand the R&D pipeline of the large companies whose own R&D shops may have failed to produce enough new breakthroughs. But when large pharmaceutical companies or other health care companies merge, the objective is likely to be mainly to reduce price competition.

There is ample empirical research in health economics showing that consolidation on the supply side of the health care sector has served to drive up prices. It is another way of saying that it supports value shifting, rather than value creation.

My gratuitous advice to the drug industry, and to the health care industry in general, is to be very mindful of the distinction between value creation and value shifting in their pricing policies, lest they eventually invoke the wrath of the losers in that game, with dire consequences.

A healthy addition to corporate board meetings at these companies, for example, might be a presentation on the distribution of family income in the United States, whose median now is around $52,000 (meaning 50 percent of American families have a lower family income). Similarly, the boards should know more about the health insurance status of the American people, including the ever-increasing deductibles and coinsurance families are made to bear. These data might give boards some feel for how much money can reasonably and humanely be extracted from their fellow Americans, especially those in the bottom half of the income distribution, with whom the boards and business executives have lost touch.

http://healthaffairs.org/blog/2016/06/01/value-creation-and-value-shifting-in-health-care/

Uwe Reinhardt once again helps us to understand another aspect of the inequitable economics in our health care system by explaining the difference between value creation and value shifting.

Bringing us new beneficial health care services and products creates value, whereas extracting more revenues from the ill without providing any further health benefit shifts value, creating more wealth for the owners of capital (rent-seekers). Value shifting is pervasive throughout our health care system and has been detrimental to the health and finances of middle- and low-income individuals and families.

Reinhardt concludes, “My gratuitous advice to the drug industry, and to the health care industry in general, is to be very mindful of the distinction between value creation and value shifting in their pricing policies, lest they eventually invoke the wrath of the losers in that game, with dire consequences.”

Dire consequences for the health care rent-seekers, anyone? It’s about time.