Nobel Prize-winning economist turned political commentator, Paul Krugman, wrote an excellent New York Times article about the challenges of applying traditional market forces to healthcare.
The debate arises out of the recent proposal from Rep. Paul Ryan about replacing Medicare coverage with payment vouchers. The guiding thought process is that, given an active consumer marketplace, funds controlled by health consumers and the ability for those consumers to make their own decisions will lead us to dramatically lower healthcare costs.
I’m a fan of letting market forces do their work. But I’ve long felt that we can’t create effective markets within healthcare. For market forces to function, several things must be true. First, you need pricing transparency. Consumers in the market need to have access to the costs of goods and services between different providers. Second, consumers need to be able to assess the differences between product offerings. Information about important parameters such as quality of outcomes, speed of recovery and impacts to quality of life must be accessible. Lastly, consumers need to be capable of understanding all of this information and making rational decisions.
Unfortunately, none of these items exist in healthcare. For example, a family member of mine recently underwent open heart surgery. The procedure began with a triple bypass operation, but once the surgeon was there, he decided an atrial valve replacement was needed as well. At that point, you can’t research the surgery to find out if it’s cheaper across the street at another facility.
Likewise, consumers generally aren’t capable of weighing price-value tradeoffs between different care options and coming to rational decisions. In many cases, decisions are guided by the physicians. In other cases, the life or death nature of the decision removes any real choices about competing providers or procedure that seem too expensive.
Elizabeth Boehm digs into this in her Harvard Business Review blog post, The Myth of Consumer-Driven Healthcare. Boehm argues that “determining the benefits of tests and treatments depends on many factors, including evidence of efficacy, consumer preference, and the level of invasiveness or side effects of the treatment.” As a result, these decisions are difficult for consumers and hampers competitive market factors from having a meaningful impact. Further, since “clinical knowledge doubles roughly every 18 months,” according to Boehm, it’s hard to imagine a situation where we could reasonably expect health consumers to keep pace.
So would the Ryan plan pull in the growth of government spending on Medicare? Absolutely. But not because of the emergence of meaningful market forces. Rather, the Ryan plan becomes a fixed contribution plan instead of a fixed benefit plan. Look at the way that retirement plans are handled in most cases today versus 30 years ago. Defined benefit plans commit employers to pay out a certain amount to employees after their retirement. The downside of the plan for employers is when their investments took a dip, they had to pay into the fund to ensure they’d have enough later. But when the investments went well, then they’d have overpaid with funds that could have been used for other things.
The Ryan plan is like a 401K. A certain amount goes in but there’s no guarantee what it’s actually going to buy you. If overall health costs stabilize, perhaps Medicare voucher recipients will be able to purchase comparable coverage to what they have today without additional out-of-pocket premiums. But that’s unlikely.
Medicare payment vouchers are a way to freeze per-beneficiary spending without the political nastiness of having to tell anyone they can’t have benefits or that expensive procedures won’t be covered. The decisions are pushed into the hands of the consumer.
The good news is individuals with the resources will have an easy route to “buy up” better health coverage. The bad news is most current Medicare beneficiaries will end up with less coverage than they have today. Thus leading to Medicaid-level reimbursements for providers, rationing of expensive treatments based on ability to pay, or both.
In the end, consumerism won’t move the cost needle meaningfully while still delivering good care. At this stage it’s a political cover strategy to squeeze money out of the healthcare system without having to make the hard decisions.