Saturday, September 26, 2009

Health Care - Some Substance

The trouble with commercial insurance companies is that they are not in the business of reducing risk. They are in the business of lending money. The risk thing is just their way of collecting deposits and determining which depositors to repay. As a general principle, however, they want to insure the largest possible risk, as that creates the largest amount of deposits and, therefore, the largest amount of profits.

Insurance companies compete for premiums on price, but that does not give them an incentive to reduce the risks for which those premiums are collected. An insurer cannot own an insured’s best practices. If your insurance company teaches you how to reduce your risk, you can still shop elsewhere and offer your new, improved risk profile as an inducement to the new carrier to lower its rates. So what’s in it for the commercial carrier to reduce your risk?

Captive insurers provide a different dynamic. They can have lowering their premiums as an objective, as they do not seek to make money for their stockholders on money they get from their insureds (the two groups being identical). So captives are a source of risk-reduction innovation. Nevertheless, mutual insurance companies, which are really very large captives, are not thriving. Mutuals tend to have difficulty raising capital, don’t get the focus from their owners that true captives get, and end up being bureaucracies that exist to provide claims-handling jobs to their employees.

Still, there ought to be a way to tweak the health insurance company’s business model so that it seeks to reduce losses. One way to do that, I suggest, is for the insurance companies to ally themselves, through investment or otherwise, with providers of medical technology. In other words, just as a car company offers financing, medical technology companies should offer health insurance, with enhanced benefits to users of their products. But since no one company offers enough cost-saving technologies to support an entire insurance company’s worth of enhancements, the medical technology industry needs an insurance company that advances a wide array of devices and technologies and makes its money if those technologies actually work to reduce costs.

Imagine, then, a health insurance company that offered reduced co-pays and deductibles for treatments with (or, in some cases, relapses or sequellae after using) a given treatment. Just as patients shop for “in network” docs and hospitals, they would seek out practitioners who use “in network” technology. Because the insurer would receive money from its arrangement with the vendors, it would not seek to maximize the risk it insures. That would give it the ability to pressure competitors into adopting similar subsidies, which would in turn encourage the use of the company’s technologies, making more money for the company even as it loses market share on insurance.

To put it another way, just because insurers have always been bankers, it’s not at all clear why bankers are the only ones who can be insurers. If bankers can use insurance to attract deposits, why can’t manufacturers use it to attract customers? If your product will save lives and reduce costs, why not agree to sell insurance against those costs at a price that reflects the savings you think you can generate? All the manufacturer needs is someone to provide the insurance function, and that someone ought to be a free-standing operation that can make each manufacturer’s product more appealing by offering incentives for the use of many manufacturers’ products.

Indeed, the insurer should offer subsidies for the use of competing products, so that each manufacturer prospers only if it makes the best version of the thing it makes, with that call being made by medical professionals, not by the insurer. Of course, the manufacturers will have to pay to be granted favorable treatment under the insurance policy, a preference analogous to in-network and out-of-network coverage of providers. But competition among in-network technologies should be encouraged.

Anyway, the idea of an insurance company that makes its money from the enhanced sales of “in-network” technologies could facilitate the adoption of good technologies, lower the cost of insurance, and improve the health of insureds. Just a thought…


  1. I find this to be an intriguing idea. However, I think that there is one major difficulty with it.

    There is an underlying assumption that all advances in technology are good for patients, and I don't believe that there is any evidence to prove that point. There is the possibility of significant over utilization of the technology without any benefit to anybody except higher costs to the system as a whole.

    You state,
    "If your product will save lives and reduce costs, why not agree to sell insurance against those costs at a price that reflects the savings you think you can generate". If you could find a way to be assured that only nece4ssary tests are used,then the idea may have some legs

  2. Irwin -

    I am not assuming that all new toys are worth playing with. For one thing, the doc will decide what toys he wants to play with. Using bad tools is still going to be malpractice.

    Also, the new insurance company only makes money if it promotes things that work. If it promotes crap, it loses money on any subsidy it gives for its use, and it makes little or nothing on its promotional activities as the thing won't really sell. Maybe we need a rule that the insurance company cannot accept a flat fee but must get paid on some contingent basis tied to the effectiveness of the technology. But I just don't see the company or docs promiscuously adopting hare-brained things. (And don't forget the FDA...)

  3. You erroneously assume that there is a true market place in the health care industry under our "fee for service" health care delivery system. I refer you to the June 1st Guwande article in the New Yorker magazine.

    The over utilization is caused by the MD's and the owners of the technology equipment (and sometimes they are the same person).

    The idea of a flat contingent fee won't work because it goes to my original point that we really do not have the tools to measure the effectiveness of a particular technology.

    Malpractice is not an issue since they are not "bad tools", only misued tools.

    I will send you an op ed piece done by two of our Scholars about a new Texas law that mandates utilization of Cardiac X-ray technology.

  4. I think you underestimate the importance of the insurance function in this proposal. The insurer will subsidize the use of the products in which it has an interest. That means (i) the overuse, if there is any, is paid for by the manufacturer, not the patient or his employer, and (ii) the insurer has an incentive to promote only products that in its opinion really work. For example, the CT scans mentioned in the op-ed piece would not save the insurer any money if it does not prevent heart attacks, so it would presumably not offer a subsidy for its use.

    I have no doubt that in creating the company, one could give it enough of a stake in the effectiveness of the things it promotes to prevent its endorsing things that its experts believe in their best judgment won't work. Absent evidence of effectiveness, the judgment of experts with skin in the game is a pretty good surrogate.

    If, as you say, a flat contingent fee won't work, then it won't work. I posited only "a rule that the insurance company ... must get paid on some contingent basis tied to the effectiveness of the technology." Why you selected a flat contingent fee as your test case is not clear to me. The insurance function should create ample opportunity for the effectiveness of the technology to matter to the insurer.

  5. I think it's important not to get lost in the trees. Many are suggesting that Wall Street bankers' pay be restructured so that the bankers have less of an incentive to put their banks' money at risk. Without getting into whether such a regulation would be self-defeatingly procrustean, I note the concept: changed incentives bring about changed conduct.

    The point of my post about insurers is that their current incentive is to maximize premium, which means maximizing the risks they insure. That's bad for the economy, because when the risk "matures," there is a multiplier effect. So I am proposing, as a principle, that the business model of health insurance companies be changed so that they have an incentive to reduce risk. If it were in the interest of health insurers to reduce unnecessary tests (aka defensive medicine) or readmissions at hospitals, wouldn't those companies be a more effective force for making that happen?

    I believe that an interest in risk-reduction technologies would helpfully change the insurers' incentives regarding risk. But if not, then maybe something else will do it. I wouldn't want to give up the idea of changing the insurers' business model just because I didn't figure out how to do it on my swing at the ball.

    In this sense, BHO has it exactly right in trying to recast "healthcare reform" as "health insurance reform." Unfortunately, the Democrats don't believe in tweaking incentives. They are hostile ipso facto to anyone who responds to financial incentives, so they don't look there except when there is some populist anger to be mined, as in the Wall Street pay thing. (These are the guys who pretend that retention payments to key employees are "bonuses," right?) It's unfortunate that the people are not pissed off about insurance companies being bankers. If they were, this thing would be fixed in a week-end.

  6. Larry- A couple of responses;

    1. My initial comment to your post was "I find this to be an intriguing idea".

    2. What I was trying to point out in the remainder of my responses was (a)- the current state of measuring the "comparative effectiveness" of current procedures, especially the hi-tech ones is only in its earliest stages, and not yet a proven "science". Every week one hears about the latest round of tests or trials that has brought a currently accepted procedure into question; b)- not all unnecessary tests are "defensive medicine"- as a matter of fact I think that defensive medicine is not nearly the prime cause of the over utilization of technology- which I believe is chasing the big dollar by both MD's, high tech companies and big pharma;

    3. I don't understand the point you are making in the first paragraph of the 9/27 -10:05 AM post. - I don't follow how any overuse will be the responsibility of the patient,his employer or the manufacturer. Please clarify

  7. Irwin -

    1. I was hoping you could follow up on your #1. If the idea is intriguing, what can we do to make use of it?

    2. (a) I understand the status of technological knowledge, but I don't understand how an insurance company acting as a gatekeeper by taking an interest in technologies it believes in would be bad thing.

    (b) You may be right about the motivations behind the over-testing. But why do insurance companies - including Medicare - pay for all these tests? Would they continue to do so if they didn't make their money on managing money? Or would "medical necessity" (i.e., defensive medicine) be offered as an excuse to keep the money flowing? It's the old rule that when things happen, there is often a good reason and a real reason. You have identified what may be the real reason - greed - but that still leaves the good reason - defensive medicine in a tort system that makes it necessary. If you remove the good reason by malpractice reform, maybe you expose the real reason to rejection. Exposing "real reasons" is fun, but it doesn't provide a basis for action if a "good reason" - e.g., fear of law suits - remains. (I use "good" to mean logically sufficient, not societally beneficial.)

    3. I think you're right not to understand the point I was making, as I'm not sure it's right. I was trying to argue that to the extent that the insurance company, supported by the technology manufacturer, subsidizes the use of a given technology, the manufacture is paying for the use, and, therefore, for any overuse. But unless the technology is wholly ignored in the insurer's price setting, I agree that higher use means higher aggregate benefit costs. So never mind on that one.

  8. larry- I just don't trust the insurance companies to be the sole gatekeeper.

    I think they have a place at the table, but it should probably be through an Office of Technology Assessment, which would be a part of HHS, but drawn from a group of providers, payors and health care wisepersons. Something akin to what has been proposed by BHO in his health plan. They would be the ones to fine tune the concepts of comparative effectiveness. (It would also be helpful if we went back to the pre-Gingrich FDA rules on allowing the TV advertising for pharaceuticals which clearly do more harm than good.)

    I also do not mean to imply that all new technology or advances in pharaceuticals are bad. Quite the contrary. What I am concerned about is the cost of the new technology, and that they are used

    All of this interchange only proves that it has been too long since we all had dinner together. Lets try to remedy that ASAP.

  9. Irwin -

    There is no "the insurance companies." There is only the new insurance company I am proposing whose business model is different from the ones you don't "trust."

    Are you saying that you don't "trust" private enterprise, period? But you do "trust" Congress?

    OK, then.

  10. If you are suggesting only one new insurance company, then I am OK with that with the proviso that, the new company would still have to have my "Office of Technology Assessment" that would make the determijnations as to the effectiveness of the technology.. (We are getting close to a single payor option).

    As to the "trust" of private enterprise, I trust any body after an audit. I don't distrust Congress, and I also think government does things pretty well. Besides its the only deck of cards that we have to play with. I would go for benevolent despotism, if I were the benevolent despot

  11. Well, no, I'm proposing a new insurance model - several companies that would replace the old ones by out-competing them on price. In order for that to happen, the new company would have to deliver more efficient care. So the OTA would be superfluous.

    We'll just have to agree to disagree about whether the government does this sort of thing well.

  12. Larry- go back to my comment #8. You idea will work with transparency and oversight by the government.

    Why should I solely trust the guys who brought us the current fiscal mess; sub prime loans; the AIG mess; all of the fancy mortgage financings;the failure of the credit markets etc etc. It was a fault of private enterprise with the culpability of a laissez faire government when it came to regulation.

    The government runs the Medicare program pretty well. What I have always said to you was that I was concerned about the delivery system. Laissez Faire and fee for service medicine will do nothing to stem the rate of inflation in health care costs. Fee for service medicine is a hunting license to steal from the public. We need an overseer for unnecessary and excess utilization. Insurance companies cannot do it alone.

    Your idea has a lot of merit if you couple it with an OTA made up of all the constituents.

  13. Irwin-

    Why do you use the word "trust." No one should ever "trust" businessmen to act other than in their own interests. Our form of capitalism is about channeling selfishness, not wishing it away. But carrots and sticks are not the same thing as bureaucrats making decisions for private experts. I'm trying to change the risks and rewards so that the players don't have to be trusted. Or an OTA needed.

    I agree that fee-for-service is a problem. But an OTA won't fix that. A new paradigm - maybe monthly fee medicine - may be necessary. I just don't "trust" an OTA to make a positive contribution. Financial interest is not the only kind of agenda one brings to a decision.

  14. A.I don't accept your narrow definition of capitalism, nor in your statement that businessmen only act in their own interests.

    B.Websters defines "trust" as

    "1 a : assured reliance on the character, ability, strength, or truth of someone or something b : one in which confidence is placed"

    That was the context of my remarks.

    C. Why do you feel that bureaucrats decisions are necessarily inferior to the decisions of "private experts". Are Paul Voelker, and Larry Summers "bureaucrats" or "private" experts.

    D. You also may be classified as an optimistic/libertarian, if you feel that the players don't have to be trusted. What is needed is 100% transparency.

    E. Why are your insurance companies able to make a more positive contribution, than a group made up of all the interested parties? I don't get it.

  15. Irwin -

    A. What definition of "capitalism" am I using?

    I did not say that businessmen always act in their own interests. I said that (in setting public policy) we should not act as if they will act other than in their own interests. We have to adopt strategies, and I don't see how we can adopt a strategy that assumes other than that self-interest will govern the actions of business. I'm fine with that, by the way, if self-interest is properly understood to include reputation, brand protection, and other motivations to fair dealing and quality. To what public policy difference from my positions does your disagreement on this point lead you?

    B. How are you using the word "trust"? Are you worried about character or competence or both? If competence, are you unaware of the connotational leakage in most readers' minds to a disparagement of character?

    C. I do not have to believe something is "necessarily" so to adopt a strategy that assumes it will be so. One need only compare the Mercedes to the Trabant to know why I think private experts do things better than public ones.

    Who are Volcker and Summers' analogues in private enterprise? You have to compare apples to apples. Moreover, a couple of smart guys in key positions are not evidence of institutional competence. Your OTA will be more than one smart guy.

    D. To be classified in the passive voice - how Kafkaesque. I think what I think. What possible difference could classification make? Transparency is over-rated. Populists use it to very bad effect. Just ask any bellboy in Las Vegas what transparency did to his tips this year. With properly focused interests, transparency is both unnecessary and counterproductive. (Look at what Sarbabes-Oxley has done to capital formation.)

    E. A group made up of all the interested parties is called a "congress." And you wonder why I doubt their ability to act wisely? Yikes.

  16. Boy, this give and take seems to have come down to an issue of whether it is better to rely on private enterprise or government, and whether or not government can do anything right.

    I don't think that either side has a monopoly on brains and ability. There are plenty of geniuses and idiots on both sides.

    You state "are you unaware of the connotational leakage in most readers' minds to a disparagement of character?"- I don't know where you are going with that comment. Please clarify

    I also don't understand your analogy of the Mercedes and the Trabant. Governments are not in the business of making cars,and that was a particularly inept government anyway. There are many things that only a government can do, and there are plenty of examples of the ineptness of private enterprise.

    Getting back to the original thrust of your piece, I still find your idea intriguing. However it will never work practically or politically as solely a venture of private enterprise

  17. Irwin -

    Yes, and no. The issue is not whether Government can do "anything" right. WWII came out just fine. But the question is whether to rely on private enterprise or government to provide health insurance. Since we have a free enterprise economy, I think we should start from the rebuttable presumption that insurance should be a private enterprise function, like telephone service. When it appears that regulating the enterprise is impossible, then actual nationalization makes sense. I am suggesting that the simple expedient of adjusting the carrot that health insurers chase is all it would take to make private insurers workable. Thus, while the question comes down to on whom we will rely, the pivotal issue is not "Who can do it better?" but "Can private enterprise do it at all?" Because private enterprise is how we do things here.

    Your approach seems to assume that we, as a society, have no preference for one method or another. I think we do, and should, not because that method always produces the best result, but because entrepreneurship is central to our culture and our national worldview. Thus, we are not arguing about who should do healthcare but about how we should decide who should do healthcare.

    The phrase "I don't trust" is used so often to suggest that the person not trusted is deficient in character that it is impossible to use that phrase merely to mean "I don't believe x is competent to do y" without suggesting to the hearer that a lack of competence is not the accused's only failing. Webster says you can mean only the latter, but no one ever hears the phrase that way, which is why I say there is "conotational leakage" from what you might be trying to say to what almost any hearer will understand you to be saying. Put another way, I am suggesting that if you held a higher regard for the character of insurance executives, you would have found another way to say that they cannot in fact limit the use unnecessary technology - that your failure to seek another way reveals and implies your low regard for those executives, and, since I was proposing a new kind of insurance company, for the unnamed executives who might be expected to run such a company.

    Governments are not in the business of making cars or of providing health insurance. A public insurance company that really has to provide economically sound insurance (as opposed to a transfer payment) would produce the Trabant of health plans. At least, that's the point of the analogy.

  18. Let me add a few other things that government has done well.

    Social Security
    Unemplyment Insurance
    Workers Compensation
    FDIC, and there are many others

    There are many other examples of Federal (V.A, Medicare)and State governments providing excellent health services.

    I disagree that health care- Except for medicare, we have relied entirely on the private insurance industry, and they have been a abysmal failure in holding down health care, or coming up with any innovations in changing the delivery system.

    On the contrary, as you point out in your original blog, the whole thrust of your idea was the failure of the private insurance to be anything more than a bank.

    What I have been suggesting is not a nationalization of the health industry- rather my suggestion was for a public/private venture of private insurance companies, government, and providers.

    With respect to "trust", my comments were not totally a question of the character of the insurance officials, rather it is in part, a question of their competencey in being able to do it. They certainly have no track record of success in this area.

    All of the push for change in the delivery system has come from Academia, or from the government.

    Good discussion


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