United States Health Care Reform: Progress to Date and Next Steps

By Barack Obama, JD
JAMA, July 11, 2016 (Online)

Abstract

Importance: The Affordable Care Act is the most important health care legislation enacted in the United States since the creation of Medicare and Medicaid in 1965. The law implemented comprehensive reforms designed to improve the accessibility, affordability, and quality of health care.

Objectives: To review the factors influencing the decision to pursue health reform, summarize evidence on the effects of the law to date, recommend actions that could improve the health care system, and identify general lessons for public policy from the Affordable Care Act.

Evidence: Analysis of publicly available data, data obtained from government agencies, and published research findings. The period examined extends from 1963 to early 2016.

Findings: The Affordable Care Act has made significant progress toward solving long-standing challenges facing the US health care system related to access, affordability, and quality of care. Since the Affordable Care Act became law, the uninsured rate has declined by 43%, from 16.0% in 2010 to 9.1% in 2015, primarily because of the law’s reforms. Research has documented accompanying improvements in access to care (for example, an estimated reduction in the share of nonelderly adults unable to afford care of 5.5 percentage points), financial security (for example, an estimated reduction in debts sent to collection of $600-$1000 per person gaining Medicaid coverage), and health (for example, an estimated reduction in the share of nonelderly adults reporting fair or poor health of 3.4 percentage points). The law has also begun the process of transforming health care payment systems, with an estimated 30% of traditional Medicare payments now flowing through alternative payment models like bundled payments or accountable care organizations. These and related reforms have contributed to a sustained period of slow growth in per-enrollee health care spending and improvements in health care quality. Despite this progress, major opportunities to improve the health care system remain.

Conclusions and Relevance: Policy makers should build on progress made by the Affordable Care Act by continuing to implement the Health Insurance Marketplaces and delivery system reform, increasing federal financial assistance for Marketplace enrollees, introducing a public plan option in areas lacking individual market competition, and taking actions to reduce prescription drug costs. Although partisanship and special interest opposition remain, experience with the Affordable Care Act demonstrates that positive change is achievable on some of the nation’s most complex challenges.

Building on Progress to Date (excerpt)

Third, more can and should be done to enhance competition in the Marketplaces. For most Americans in most places, the Marketplaces are working. The ACA supports competition and has encouraged the entry of hospital-based plans, Medicaid managed care plans, and other plans into new areas. As a result, the majority of the country has benefited from competition in the Marketplaces, with 88% of enrollees living in counties with at least 3 issuers in 2016, which helps keep costs in these areas low. However, the remaining 12% of enrollees live in areas with only 1 or 2 issuers. Some parts of the country have struggled with limited insurance market competition for many years, which is one reason that, in the original debate over health reform, Congress considered and I supported including a Medicare-like public plan. Public programs like Medicare often deliver care more cost-effectively by curtailing administrative overhead and securing better prices from providers. The public plan did not make it into the final legislation. Now, based on experience with the ACA, I think Congress should revisit a public plan to compete alongside private insurers in areas of the country where competition is limited. Adding a public plan in such areas would strengthen the Marketplace approach, giving consumers more affordable options while also creating savings for the federal government.

Lessons for Future Policy Makers (excerpt)

The third lesson is the importance of pragmatism in both legislation and implementation. Simpler approaches to addressing our health care problems exist at both ends of the political spectrum: the single-payer model vs government vouchers for all. Yet the nation typically reaches its greatest heights when we find common ground between the public and private good and adjust along the way. That was my approach with the ACA. We engaged with Congress to identify the combination of proven health reform ideas that could pass and have continued to adapt them since.

As this progress with health care reform in the United States demonstrates, faith in responsibility, belief in opportunity, and ability to unite around common values are what makes this nation great.

The full article can be downloaded for free at the JAMA website:

http://jama.jamanetwork.com/article.aspx?articleid=2533698

In this JAMA article, President Obama understandably touts the benefits of his Affordable Care Act (ACA) and describes some of the problems that remain that need to be addressed. Two serious deficiencies of his article are that he fails to acknowledge the fact that some of the changes taking place are actually detrimental, and his proposals for the way forward are grossly inadequate when considering the need.

A few examples of where changes have been detrimental include the expansion of intolerably high deductibles creating financial barriers to care, increased use of narrow provider networks impairing access to care, and expansion of administrative excesses including the Marketplaces (ACA insurance exchanges) and the new models of paying for care (APMs, ACOs, and MACRA models).

The President touts enhanced competition in the Marketplaces as a way forward when the prevailing evidence indicates that competition in private insurance markets is ineffective in improving quality and reducing costs. It is predicted that insurance premium increases for 2017 will confirm that the ACA exchanges have not been effective in controlling costs. Not only are insurance premiums going up, but more costs are being shifted to patients in the form of higher out-of-pocket spending.

The media are reporting the President’s recommendation for a “Medicare-like public plan,” yet the hope that a public option will open the door for single payer cannot be realized when it is offered only as another option in our fragmented system of financing health care. The failure of the co-ops should signal to us the deficiencies of a public or quasi-public option which is designed to protect the markets of the private insurers. The private Medicare Advantage plans are continuing to displace the traditional Medicare program because the politicians have provided the private plans with extra funds and regulatory freedom that allow them to “compete” unfairly with Medicare.

Finally, the President presents single payer and government vouchers for private plans as being the two extremes of health care financing reform, whereas ACA represents the “common ground between the public and private good.” Placing ideologically-driven health care reform policies along a linear political spectrum and then choosing the middle is an extremely simplistic and highly flawed approach to health policy. Health policies should be placed along a spectrum of effectiveness of those policies in achieving health reform goals of universality, efficiency, equity, comprehensiveness, accessibility, and affordability. Then the extreme that achieves those goals should be accepted as the ideal model for reform while rejecting those policies at the other end. To no surprise, using a spectrum based on optimal health policy leads us logically to single payer.

The President ends with the statement, “As this progress with health care reform in the United States demonstrates, faith in responsibility, belief in opportunity, and ability to unite around common values are what makes this nation great.” With the majority of the nation now supporting a federally funded health care system, isn’t that a call for uniting around health care reform that really works: a single payer national health program?

Secret Shoppers Find Access To Providers And Network Accuracy Lacking For Those In Marketplace And Commercial Plans

By Simon F. Haeder, David L. Weimer and Dana B. Mukamel
Health Affairs, July 2016

Abstract

The adequacy of provider networks for plans sold through insurance Marketplaces established under the Affordable Care Act has received much scrutiny recently. Various studies have established that networks are generally narrow. To learn more about network adequacy and access to care, we investigated two questions. First, no matter the nominal size of a network, can patients gain access to primary care services from providers of their choice in a timely manner? Second, how does access compare to plans sold outside insurance Marketplaces? We conducted a “secret shopper” survey of 743 primary care providers from five of California’s nineteen insurance Marketplace pricing regions in the summer of 2015. Our findings indicate that obtaining access to primary care providers was generally equally challenging both inside and outside insurance Marketplaces. In less than 30 percent of cases were consumers able to schedule an appointment with an initially selected physician provider. Information about provider networks was often inaccurate. Problems accessing services for patients with acute conditions were particularly troubling. Effectively addressing issues of network adequacy requires more accurate provider information.

From the Discussion

Two patterns emerged from our survey. First, and most striking, new patients in either Covered California or the comparable commercial plan had very low prospects—less than 30 percent—of securing an appointment with any randomly chosen provider. The odds got only slightly better in terms of getting an appointment with any provider in the practice. The results were particularly disheartening in the case of patients presenting with acute conditions. Although the average wait time was reduced by about half when compared to physical exams, it nonetheless took eight to twelve days to get an appointment with a physician or physician extender. Moreover, only a handful of providers suggested that patients seek care at an urgent care center. These findings suggest that the third step in health care access, scheduling an appointment with a physician, has much room for improvement. At least accurate lists of providers, including whether the provider is accepting new patients, should be available for patients when they make choices about health plans.

Second, patients in commercial plans tended to fare somewhat better than their counterparts in Covered California plans, in terms of both getting appointments and the time to appointment. However, not only were these differences relatively small and often statistically insignificant, they were dwarfed by the overall difficulty of getting appointments with the desired provider. So, although it was marginally more difficult to get timely care in Covered California plans than their commercial counterparts, substantially increasing access requires more than just equalizing access in the two types of insurance coverage.

Conclusion

Improving access to care by improving access to affordable health insurance is one of the main goals of the Affordable Care Act. However, as our analysis has shown, access to health insurance is not necessarily synonymous with access to health care services. Network accuracy is an important, albeit heretofore largely overlooked, component of access for patients. At the same time, as earlier reforms in Massachusetts have shown, increasing the number of insured people without a commensurate increase in capacity further exacerbates the situation. The more frustrated people become as they are trying to access care, the more likely they are to defer or forgo care, or to choose more expensive options such as emergency departments.

http://content.healthaffairs.org/content/35/7/1160.abstract

***

Comment:

By Don McCanne, M.D.

Covered California is one of the best functioning health insurance exchanges established under the Affordable Care Act (ACA), yet 70 percent of patients enrolled were not able to schedule an appointment with an initially selected physician from the provider list. This was not a problem unique to the ACA exchanges since the same was essentially true for individual insurance plans offered outside of the exchanges.

The fundamental defect is in having selected a health care financing system dependent on private insurance plans. Private plans use innovations such as narrow provider networks and high deductibles which improve the business outcome for the insurer at a cost of impairing health care access for the patient.

It is obvious that we would all benefit by replacing our current dysfunctional health care financing system with a single payer national health program – an Improved Medicare for All. Yet the political outlook seems quite dim right now. The leading advocate for single payer reform, Bernie Sanders, having failed to gain enough support for the Democratic nomination for president, is currently in negotiations with Hillary Clinton, an avowed opponent of single payer, in which he will withdraw his demand for Medicare for All in exchange for other beneficial health care policies such as the expansion of federally qualified community health centers.

We have a formidable task before us. The majority of the nation does want Medicare to be expanded to cover everyone, yet the two dominant political parties are controlled by conservatives and neoliberals, both supporting the private insurance industry. We must continue with our efforts to inform the public on the superiority of the single payer model, but we also have to step up our efforts in coalition and grassroots organizing. We may have majority support for the concept of Medicare for All, but we do not yet have a critical mass for political action.

We need to keep in mind that our mission is not to assuage our own egos by gaining a political victory, but it is the much more noble goal of improving the health care of the nation. That should make us want to continue to carry the torch in spite of the unfavorable political climate. We have a lot of work to do.

Physicians for a National Health Program is a nonpartisan educational organization. It neither supports nor opposes any candidate for public office.

Secret Shoppers Find Access To Providers And Network Accuracy Lacking For Those In Marketplace And Commercial Plans

By Simon F. Haeder, David L. Weimer and Dana B. Mukamel
Health Affairs, July 2016

Abstract

The adequacy of provider networks for plans sold through insurance Marketplaces established under the Affordable Care Act has received much scrutiny recently. Various studies have established that networks are generally narrow. To learn more about network adequacy and access to care, we investigated two questions. First, no matter the nominal size of a network, can patients gain access to primary care services from providers of their choice in a timely manner? Second, how does access compare to plans sold outside insurance Marketplaces? We conducted a “secret shopper” survey of 743 primary care providers from five of California’s nineteen insurance Marketplace pricing regions in the summer of 2015. Our findings indicate that obtaining access to primary care providers was generally equally challenging both inside and outside insurance Marketplaces. In less than 30 percent of cases were consumers able to schedule an appointment with an initially selected physician provider. Information about provider networks was often inaccurate. Problems accessing services for patients with acute conditions were particularly troubling. Effectively addressing issues of network adequacy requires more accurate provider information.

From the Discussion

Two patterns emerged from our survey. First, and most striking, new patients in either Covered California or the comparable commercial plan had very low prospects—less than 30 percent—of securing an appointment with any randomly chosen provider. The odds got only slightly better in terms of getting an appointment with any provider in the practice. The results were particularly disheartening in the case of patients presenting with acute conditions. Although the average wait time was reduced by about half when compared to physical exams, it nonetheless took eight to twelve days to get an appointment with a physician or physician extender. Moreover, only a handful of providers suggested that patients seek care at an urgent care center. These findings suggest that the third step in health care access, scheduling an appointment with a physician, has much room for improvement. At least accurate lists of providers, including whether the provider is accepting new patients, should be available for patients when they make choices about health plans.

Second, patients in commercial plans tended to fare somewhat better than their counterparts in Covered California plans, in terms of both getting appointments and the time to appointment. However, not only were these differences relatively small and often statistically insignificant, they were dwarfed by the overall difficulty of getting appointments with the desired provider. So, although it was marginally more difficult to get timely care in Covered California plans than their commercial counterparts, substantially increasing access requires more than just equalizing access in the two types of insurance coverage.

Conclusion

Improving access to care by improving access to affordable health insurance is one of the main goals of the Affordable Care Act. However, as our analysis has shown, access to health insurance is not necessarily synonymous with access to health care services. Network accuracy is an important, albeit heretofore largely overlooked, component of access for patients. At the same time, as earlier reforms in Massachusetts have shown, increasing the number of insured people without a commensurate increase in capacity further exacerbates the situation. The more frustrated people become as they are trying to access care, the more likely they are to defer or forgo care, or to choose more expensive options such as emergency departments.

http://content.healthaffairs.org/content/35/7/1160.abstract

Covered California is one of the best functioning health insurance exchanges established under the Affordable Care Act (ACA), yet 70 percent of patients enrolled were not able to schedule an appointment with an initially selected physician from the provider list. This was not a problem unique to the ACA exchanges since the same was essentially true for individual insurance plans offered outside of the exchanges.

The fundamental defect is in having selected a health care financing system dependent on private insurance plans. Private plans use innovations such as narrow provider networks and high deductibles which improve the business outcome for the insurer at a cost of impairing health care access for the patient.

It is obvious that we would all benefit by replacing our current dysfunctional health care financing system with a single payer national health program – an Improved Medicare for All. Yet the political outlook seems quite dim right now. The leading advocate for single payer reform, Bernie Sanders, having failed to gain enough support for the Democratic nomination for president, is currently in negotiations with Hillary Clinton, an avowed opponent of single payer, in which he will withdraw his demand for Medicare for All in exchange for other beneficial health care policies such as the expansion of federally qualified community health centers.

We have a formidable task before us. The majority of the nation does want Medicare to be expanded to cover everyone, yet the two dominant political parties are controlled by conservatives and neoliberals, both supporting the private insurance industry. We must continue with our efforts to inform the public on the superiority of the single payer model, but we also have to step up our efforts in coalition and grassroots organizing. We may have majority support for the concept of Medicare for All, but we do not yet have a critical mass for political action.

We need to keep in mind that our mission is not to assuage our own egos by gaining a political victory, but it is the much more noble goal of improving the health care of the nation. That should make us want to continue to carry the torch in spite of the unfavorable political climate. We have a lot of work to do.

Physicians for a National Health Program is a nonpartisan educational organization. It neither supports nor opposes any candidate for public office.

POINT: Should Pulmonary/ICU Physicians Support Single-payer Health-care Reform? Yes

By Adam W. Gaffney, MD, Philip A. Verhoef, MD, PhD, Jesse B. Hall, MD, FCCP
Chest, July 2016

As pulmonary and critical care physicians, we aim to utilize the highest quality evidence, in conjunction with our understanding of the pathophysiologic and social determinants of health, to provide the best care for patients. By taking such an evidence-based approach
to the realm of policy, we conclude that only a single-payer system can address the problem of rising health-care costs, while simultaneously ending the grave inequalities that continue to plague our critically ill health-care system.

From the Division of Pulmonary and Critical Care Medicine (Dr Gaffney), Massachusetts General Hospital; and the Section of Pulmonary and Critical Care Medicine (Drs Verhoef and Hall), University of Chicago.

COUNTERPOINT: Should Pulmonary/ICU Physicians Support Single-payer Health-care Reform? No

By Gilbert G. Berdine, MD

Health-care providers compete with each other for the patronage of health-care consumers. Providers can compete by increasing quality or convenience or by decreasing price. Over time, ceteris paribus (all other things being equal), a competitive health-care market will see increases in quality or convenience at lower prices. The term “single-payer” is a euphemism for monopoly. A monopoly requires legal barriers against new competition entering the market. Monopolies have no reason to improve quality or convenience and have no reason to lower price as customers have nowhere else to go for a needed good or service. Over time, ceteris paribus, a monopoly will offer a declining quality of product or service at less convenience to customers at ever-increasing prices. There are no exceptions to these rules.

The best solution to the health care problem is to let people make choices without interference by the government. This approach is known as the free market.

The market always leaves the participants better off, in their own view, than government intervention; there are no exceptions.

From the Departments of Internal Medicine and Medical Education, Texas Tech University Health Sciences Center, and Free Market Institute (Dr. Berdine).

REBUTTAL:

From Drs. Gaffney, Verhoef, and Hall

Dr Berdine argues that in an unhindered competitive health-care marketplace, the market will clear at a price and quantity of goods/services that, as if by definition, leaves all parties maximally satisfied. This argument is little more than a tautology that would, if possible, result in a health-care dystopia that society would not accept.

A free market for health care is not only undesirable: it is, as economists have noted for decades, a fantasy. Fundamentally, the degree of information asymmetry between the buyer (the patient) and the seller (the provider) prevents health care from conforming to the theoretical tenets of free-market economics. Kenneth Arrow famously contended that the uncertainty intrinsic to health care makes it unique from other goods and services. The health economist Bob Evans has argued that not only has there never been a pure free market in health care but that “inherent characteristics of health and health care make it impossible that there ever could be.” On the contrary, he argues, attempts to inject market mechanisms into health care are fundamentally about redistribution. As health-care costs are shifted from public to out-of-pocket sources, those with higher incomes invariably benefit.

As others have noted, the savings made possible through a single-payer system would allow extension of health care as a social right to the entire nation. In contradistinction with a fantastical health-care free market, such a program is both attainable and desirable.

REBUTTAL:

From Dr. Berdine

“Health insurance” is no longer pooled risk in America. The first step to making health care affordable is to separate catastrophic and insurable costs from routine health maintenance. It is impossible to subsidize an entire nation.

http://www.sciencedirect.com/science/article/pii/S0012369216416028

Until August 26, 2016, the POINT article will be available for free at the following link; then it will be behind a paywall, as are the COUNTERPOINT article and the two REBUTTALS:

http://authors.elsevier.com/a/1TKr62p-km2aS

***

Comment:

By Don McCanne, M.D.

The POINT article by Drs. Gaffney, Verhoef and Hall explains why physicians (and everyone else) should support single payer reform, with special emphasis for pulmonary/ICU physicians. (Chest is a publication of the American College of Chest Physicians.) The article is accessible for free until August 26, 2016.

The rationale for single payer reform presented in this article is based on PNHP’s Physicians’ Proposal for Single-Payer Health Care Reform.

Although a tremendous amount of data has been generated explaining why the advances of the Affordable Care Act are grossly inadequate and why we need a single payer system, this Point/Counterpoint is useful because the counter argument is presented by an advocate of free markets. Dr. Berdine uses standard college economic textbook principles to explain why only a competitive free market will bring us higher quality at lower prices, with “no exceptions.”

In their Rebuttal, Drs. Gaffney, Verhoef and Hall explain how a free market in health care is a fantasy. It is important that we put the free market nonsense to rest and move forward with enacting and implementing a program that really will work – a single payer national health program, aka an Improved Medicare for All.

POINT: Should Pulmonary/ICU Physicians Support Single-payer Health-care Reform? Yes

By Adam W. Gaffney, MD, Philip A. Verhoef, MD, PhD, Jesse B. Hall, MD, FCCP
Chest, July 2016

As pulmonary and critical care physicians, we aim to utilize the highest quality evidence, in conjunction with our understanding of the pathophysiologic and social determinants of health, to provide the best care for patients. By taking such an evidence-based approach
to the realm of policy, we conclude that only a single-payer system can address the problem of rising health-care costs, while simultaneously ending the grave inequalities that continue to plague our critically ill health-care system.

From the Division of Pulmonary and Critical Care Medicine (Dr Gaffney), Massachusetts General Hospital; and the Section of Pulmonary and Critical Care Medicine (Drs Verhoef and Hall), University of Chicago.

COUNTERPOINT: Should Pulmonary/ICU Physicians Support Single-payer Health-care Reform? No

By Gilbert G. Berdine, MD

Health-care providers compete with each other for the patronage of health-care consumers. Providers can compete by increasing quality or convenience or by decreasing price. Over time, ceteris paribus (all other things being equal), a competitive health-care market will see increases in quality or convenience at lower prices. The term “single-payer” is a euphemism for monopoly. A monopoly requires legal barriers against new competition entering the market. Monopolies have no reason to improve quality or convenience and have no reason to lower price as customers have nowhere else to go for a needed good or service. Over time, ceteris paribus, a monopoly will offer a declining quality of product or service at less convenience to customers at ever-increasing prices. There are no exceptions to these rules.

The best solution to the health care problem is to let people make choices without interference by the government. This approach is known as the free market.

The market always leaves the participants better off, in their own view, than government intervention; there are no exceptions.

From the Departments of Internal Medicine and Medical Education, Texas Tech University Health Sciences Center, and Free Market Institute (Dr. Berdine).

REBUTTAL:

From Drs. Gaffney, Verhoef, and Hall

Dr Berdine argues that in an unhindered competitive health-care marketplace, the market will clear at a price and quantity of goods/services that, as if by definition, leaves all parties maximally satisfied. This argument is little more than a tautology that would, if possible, result in a health-care dystopia that society would not accept.

A free market for health care is not only undesirable: it is, as economists have noted for decades, a fantasy. Fundamentally, the degree of information asymmetry between the buyer (the patient) and the seller (the provider) prevents health care from conforming to the theoretical tenets of free-market economics. Kenneth Arrow famously contended that the uncertainty intrinsic to health care makes it unique from other goods and services. The health economist Bob Evans has argued that not only has there never been a pure free market in health care but that “inherent characteristics of health and health care make it impossible that there ever could be.” On the contrary, he argues, attempts to inject market mechanisms into health care are fundamentally about redistribution. As health-care costs are shifted from public to out-of-pocket sources, those with higher incomes invariably benefit.

As others have noted, the savings made possible through a single-payer system would allow extension of health care as a social right to the entire nation. In contradistinction with a fantastical health-care free market, such a program is both attainable and desirable.

REBUTTAL:

From Dr. Berdine

“Health insurance” is no longer pooled risk in America. The first step to making health care affordable is to separate catastrophic and insurable costs from routine health maintenance. It is impossible to subsidize an entire nation.

http://www.sciencedirect.com/science/article/pii/S0012369216416028

Until August 26, 2016, the POINT article will be available for free at the following link; then it will be behind a paywall, as are the COUNTERPOINT article and the two REBUTTALS:

http://authors.elsevier.com/a/1TKr62p-km2aS

The POINT article by Drs. Gaffney, Verhoef and Hall explains why physicians (and everyone else) should support single payer reform, with special emphasis for pulmonary/ICU physicians. (Chest is a publication of the American College of Chest Physicians.) The article is accessible for free until August 26, 2016.

The rationale for single payer reform presented in this article is based on PNHP’s Physicians’ Proposal for Single-Payer Health Care Reform.

Although a tremendous amount of data has been generated explaining why the advances of the Affordable Care Act are grossly inadequate and why we need a single payer system, this Point/Counterpoint is useful because the counter argument is presented by an advocate of free markets. Dr. Berdine uses standard college economic textbook principles to explain why only a competitive free market will bring us higher quality at lower prices, with “no exceptions.”

In their Rebuttal, Drs. Gaffney, Verhoef and Hall explain how a free market in health care is a fantasy. It is important that we put the free market nonsense to rest and move forward with enacting and implementing a program that really will work – a single payer national health program, aka an Improved Medicare for All.

NBER Working Paper No. 22338: Strategic Formulary Design in Medicare Part D Plans

By Kurt Lavetti and Kosali Simon
National Bureau of Economic Research, June 2016

Abstract

The design of Medicare Part D causes most Medicare beneficiaries to receive fragmented health insurance, whereby prescription drugs and other medical care are covered by separate insurance plans. Fragmentation of insurance plans is potentially inefficient since separate insurers maximize profits over only one component of healthcare spending, despite many complementarities and substitutabilities between types of healthcare. Fragmentation of some plans but not others can also lead to market distortions due to differential adverse selection, as integrated plans may use drug formulary designs to induce enrollment by patients who are profitable under Parts A & B, while stand-alone drug plans have no such incentive. We study whether the design of insurance plans in Medicare Part D reflects these two differences in incentives using data on the universe of Part D plan formularies, drug prices, and Medicare claims data. We find evidence consistent with both hypotheses. Relative to fragmented plans, integrated plans systematically design their drug formularies to encourage enrollment by beneficiaries with medical conditions that are profitable under Parts A & B. However, integrated plans also more generously cover drugs that have the potential to causally reduce medical costs. These large differences in incentives and plan design between integrated and fragmented plans are likely the precursors of substantial differential selection of enrollees, and the basic design of Medicare Part D abets this covert selection.

From the Introduction

A growing share of all public expenditures on health insurance in the US is paid to private companies that deliver public health insurance benefits. Medicare Parts C and D, which account for about one-third of all Medicare expenses, are delivered entirely by private companies, and 39 states have contracts with private managed care organizations to deliver Medicaid benefits (KFF, 2014). Although the intention behind privatization is generally to increase efficiency, in the case of Medicare Part D the split between public and private provision of benefits has also introduced several strategic opportunities for insurers that may have reduced efficiency and increased total costs.

We focus in this paper on insurer behavior in responding to these Part D incentives when designing plans, and not on the resulting consumer behavior or net welfare effects. The selection effect that we identity, however, clearly increases the cost to Medicare, and Part D formularies provide a mechanism for MA plans to select patients by medical condition with surgical precision.

From the Summary and Discussion

Finally, the results of this research are useful for understanding the extent to which the fragmentation of health insurance generally affects plan design, which is the primary channel through which adverse or advantageous selection is likely to arise in insurance markets.

http://www.nber.org/papers/w22338

***

Comment:

By Don McCanne, M.D.

The simple conclusion of this highly technical paper is that fragmentation of health insurance – using the example of Medicare Part D drug benefits – results in differences in plan design and incentives that allow insurers to engage in adverse or advantageous selection. The insurers use this to attract the healthy and avoid the sick. This results in reduced efficiency and in increases in total costs.

Although the example used was Medicare Part D drug benefits, the principle extends throughout our entire fragmented health care financing system, heavily dependent on private insurers that use plan innovations to benefit their own bottom lines.

A single payer system obviously does not use plan design to attract the healthy and repel the sick. Everyone is served equitably.

NBER Working Paper No. 22338: Strategic Formulary Design in Medicare Part D Plans

By Kurt Lavetti and Kosali Simon
National Bureau of Economic Research, June 2016

Abstract

The design of Medicare Part D causes most Medicare beneficiaries to receive fragmented health insurance, whereby prescription drugs and other medical care are covered by separate insurance plans. Fragmentation of insurance plans is potentially inefficient since separate insurers maximize profits over only one component of healthcare spending, despite many complementarities and substitutabilities between types of healthcare. Fragmentation of some plans but not others can also lead to market distortions due to differential adverse selection, as integrated plans may use drug formulary designs to induce enrollment by patients who are profitable under Parts A & B, while stand-alone drug plans have no such incentive. We study whether the design of insurance plans in Medicare Part D reflects these two differences in incentives using data on the universe of Part D plan formularies, drug prices, and Medicare claims data. We find evidence consistent with both hypotheses. Relative to fragmented plans, integrated plans systematically design their drug formularies to encourage enrollment by beneficiaries with medical conditions that are profitable under Parts A & B. However, integrated plans also more generously cover drugs that have the potential to causally reduce medical costs. These large differences in incentives and plan design between integrated and fragmented plans are likely the precursors of substantial differential selection of enrollees, and the basic design of Medicare Part D abets this covert selection.

From the Introduction

A growing share of all public expenditures on health insurance in the US is paid to private companies that deliver public health insurance benefits. Medicare Parts C and D, which account for about one-third of all Medicare expenses, are delivered entirely by private companies, and 39 states have contracts with private managed care organizations to deliver Medicaid benefits (KFF, 2014). Although the intention behind privatization is generally to increase efficiency, in the case of Medicare Part D the split between public and private provision of benefits has also introduced several strategic opportunities for insurers that may have reduced efficiency and increased total costs.

We focus in this paper on insurer behavior in responding to these Part D incentives when designing plans, and not on the resulting consumer behavior or net welfare effects. The selection effect that we identity, however, clearly increases the cost to Medicare, and Part D formularies provide a mechanism for MA plans to select patients by medical condition with surgical precision.

From the Summary and Discussion

Finally, the results of this research are useful for understanding the extent to which the fragmentation of health insurance generally affects plan design, which is the primary channel through which adverse or advantageous selection is likely to arise in insurance markets.

http://www.nber.org/papers/w22338

The simple conclusion of this highly technical paper is that fragmentation of health insurance – using the example of Medicare Part D drug benefits – results in differences in plan design and incentives that allow insurers to engage in adverse or advantageous selection. The insurers use this to attract the healthy and avoid the sick. This results in reduced efficiency and in increases in total costs.

Although the example used was Medicare Part D drug benefits, the principle extends throughout our entire fragmented health care financing system, heavily dependent on private insurers that use plan innovations to benefit their own bottom lines.

A single payer system obviously does not use plan design to attract the healthy and repel the sick. Everyone is served equitably.