Fly-Over Country

Moral hazard and health care reform

The debate over health care reform reflects a fundamental ideological disagreement. Liberals think the private market has failed and that government should step in to redress that failure.  Conservatives contend that the real problem is that the government and other third-party payers (insurance companies) are distorting the market: Since someone else is paying for our care, we demand much more care, and the price goes up.  To fix that problem, conservatives say, we need to set up systems that make individuals bear more of the financial responsibility for their care so they demand fewer services.

Malcolm Gladwell summarizes this view:

"Moral hazard" is the term economists use to describe the fact that insurance can change the behavior of the person being insured.  If your office gives you and your co-workers all the free Pepsi you want—if your employer, in effect, offers universal Pepsi insurance—you'll drink more Pepsi than you would have otherwise. . . The savings-and-loan crisis of the nineteen-eighties was created, in large part, by the fact that the federal government insured savings deposits of up to a hundred thousand dollars, and so the newly deregulated S. & L.s made far riskier investments than they would have otherwise. . . Insurance is an attempt to make human life safer and more secure.  But, if those efforts can backfire and produce riskier behavior, providing insurance becomes a much more complicated and problematic endeavor.

In 1968, the economist Mark Pauly argued that moral hazard played an enormous role in medicine, and, as John Nyman writes in his book "The Theory of the Demand for Health Insurance," Pauly's paper has become the "single most influential article in the health economics literature."

. . . What Nyman is saying is that when your insurance company requires that you make a twenty-dollar co-payment for a visit to the doctor, or when your plan includes an annual five-hundred-dollar or thousand-dollar deductible, it's not simply an attempt to get you to pick up a larger share of your health costs.  It is an attempt to make your use of the health-care system more efficient.  Making you responsible for a share of the costs, the argument runs, will reduce moral hazard: you'll no longer grab one of those free Pepsis when you aren't really thirsty.

There's an obvious problem with this:

The moral-hazard argument makes sense, however, only if we consume health care in the same way that we consume other consumer goods, and to economists like Nyman this assumption is plainly absurd.  We go to the doctor grudgingly, only because we're sick.  "Moral hazard is overblown," the Princeton economist Uwe Reinhardt says.  "You always hear that the demand for health care is unlimited.  This is just not true.  People who are very well insured, who are very rich, do you see them check into the hospital because it's free? Do people really like to go to the doctor? Do they check into the hospital instead of playing golf?"

Nor is there any reason to believe that we’d make more efficient choices if we bore more of the financial responsibility.  Unless we were qualified to make medical decisions – and unless we’re doctors we aren’t – we’re as likely to cut back on beneficial treatment as wasteful treatment.  Indeed, our reluctance to spend a little now might cost a lot later.  In fact, this appears to be exactly what happens:

In the late nineteen-seventies, the RAND Corporation did an extensive study on the question, randomly assigning families to health plans with co-payment levels at zero per cent, twenty-five per cent, fifty per cent, or ninety-five per cent, up to six thousand dollars.  As you might expect, the more that people were asked to chip in for their health care the less care they used.  The problem was that they cut back equally on both frivolous care and useful care.  Poor people in the high-deductible group with hypertension, for instance, didn't do nearly as good a job of controlling their blood pressure as those in other groups, resulting in a ten-per-cent increase in the likelihood of death. . . The focus on moral hazard suggests that the changes we make in our behavior when we have insurance are nearly always wasteful.  Yet, when it comes to health care, many of the things we do only because we have insurance—like getting our moles checked, or getting our teeth cleaned regularly, or getting a mammogram or engaging in other routine preventive care—are anything but wasteful and inefficient.  In fact, they are behaviors that could end up saving the health-care system a good deal of money.

This is entirely consistent with the much-discussed article by Dr. Atul Gawande.  Gawande found vast regional disparities in the per capita cost of health care.  For example, the per capita cost in McAllen, Texas is twice as high as the per capita cost in the statistically indistinguishable Texas city of El Paso.  That’s not because the residents of McAllen demand twice as much health care as the residents of El Paso, but because physicians in McAllen prescribe twice as much.  Patients accept this because they have no basis to tell their physicians that they don’t need the third test or the invasive procedure or the monthly follow-ups, but they aren’t in any sense demanding services over and above what patients in El Paso receive.  And if they bore more of the financial responsibility they’d be as likely to decline useful measures as wasteful ones.

Conservatives get health care wrong because their ideological frame is wrong.  If the market is always good and the government is always bad, then it’s inconceivable that we need government to fix a market failure.  Unfortunately, we do have a market failure in health care, and only the government can fix it.  This means that it is essentially impossible to work out a broad bipartisan solution.  If it's a solution then it won’t be bipartisan, and if it's bipartisan then it won’t be a solution.

Graph of the day

This is why Barack Obama should be more aggressive on . . . well, everything, but especially on health care reform.

A lawyer's thoughts about physician compensation

This roundtable discussion got me wondering whether some of my complaints about the way lawyers are compensated might also apply to doctors.  For example, some of the most valuable time I devote to a client consists of nothing more than thinking about the case, perhaps while gazing out a window or taking a shower (I do some of my best work in the shower.)  But if a client sees "Thinking about the case while taking a shower" on the bill, I'm not going to get paid for that time -- particularly if I'm working for a large corporate client with bean counters paid to flyspeck my bills.  I will only get paid for time that can be described with vigorous action verbs regarding specific deliverables (like a legal brief) or approved actions (like appearing in court).  This is unhelpful, because briefs and court appearances that aren't preceded by thinking will inevitably turn out badly.

Many clients similarly resist being charged for conferences with other lawyers.  They consider this wasteful.  That is stupid, because the second most valuable thing I can do for a client is sound out another lawyer on a thorny issue, particularly if the lawyer has experience on that issue.  Such time can obviate hours of research (which clients also don't want to pay for -- apparently believing that lawyers acquire detailed knowledge of all of the countless potentially applicable statutes, regulations, cases, and other legal sources through some osmotic process).

In a perfect world this would have no effect on the way lawyers practice, but we don't live in a perfect world.  If you believe (as I do) that we'd all be better off if lawyers spent more time thinking, then you ought to oppose a system that refuses to pay them for it.  If the system pays for ill-considered motions but not for thinking, you'll get less thinking and more ill-considered motions.

It appears to me that something similar is happening in the medical practice.  Doctors get paid for office visits, but they don't get paid if they talk to us on the phone.  (This leads to office visits that could have been resolved with a phone call.)  Any time they spend contemplating our care outside an office visit they do for free.  They may refer us to another doctor for specialized care, but they don't get reimbursed for time they spend consulting with one another to improve our care.  If they wish to make real money doctors must spend all their time doing procedures, and the primary care docs who ought to be doing most of the heavy lifting make very little in comparison to the specialists.  These financial incentives shape the care we receive.  This roundtable comment makes that point:

In a recent New Yorker article, Atul Gawande vividly illustrated one of the greatest fiscal threats to American health care: over-utilization. Dr. Gawande and others, including President Obama, have blamed this practice of over-utilization of medical services on physicians and their traditional “fee-for-service” compensation model, which is thought to create a perverse incentive for physicians to do more than is actually needed, since the more care they provide, the more money they get.

In this, they are half right: over-utilization is a driver of cost, and it is in part driven by doctors’ economic incentives. The underlying cause, however, is a bias within the physician compensation system that extravagantly rewards surgical procedures performed compared to “cognitive” services like diagnosis and medical management.

In the E.R., for example, sewing a facial laceration pays far better than accurately diagnosing a heart attack. The same principle applies to any procedure — from angiograms to colonoscopies.

The predictable consequence is that physicians gravitate toward lucrative procedural specialties. They perform more and more procedures, using expensive new technologies, driving costs ever higher.

Meanwhile, office-based primary care doctors struggle. The compensation for an office visit is a tiny fraction of that for the simplest procedures. The family physician must rush from patient to patient just to keep pace with static or diminishing reimbursement. Fewer and fewer medical students are going into primary care.

If we changed the way that lawyers and doctors get paid, lawyers and doctors might end up  being happier, and we could all be better off.

Response from Sen. Blanche Lincoln's office

Today I received an email from Katie Laning Niebaum, Communications Director for Sen. Blanche Lincoln, politely taking issue with my criticism of Sen. Lincoln's position on health care reform:

It is incorrect to portray her as an obstacle to the President’s health care reform objectives.  She has fought for it her entire career in Congress and is communicating regularly with the White House on ways to get it done.

She passed along links to releases here and here outlining Sen. Lincoln's positions on health care reform.

I'm impressed that Sen. Lincoln's communications office would detect a post on an obscure blog like this, let alone respond to it, and I suggested to Ms. Niebaum that she put herself in for a raise.  My concern about Sen. Lincoln's stance on the public option remains, but I appreciate the response -- it's more than I've received from my own Sen. Evan Bayh.  A tip of the hat to Ms. Niebaum.

And speaking of insurance companies . . .

The LA Times recently published a devastating report on three major health insurance companies' refusal to end the practice of rescission.  What's rescission?  Paul Waldman explains:

Here's how it works. As Stupak's committee, investigations by a couple of news organizations and some state insurance commissioners, and lawsuits by policyholders have revealed, many insurance companies routinely take the opportunity of a serious accident or illness by one of their policyholders to launch an investigation to see whether they can drop the policyholder from coverage. They don't do this when you first sign up for your policy -- instead, they cash your premiums every month, waiting until you actually file a major claim. At that point, they begin poring over all your past medical records and every form you ever filled out for them, to see if they can find a reason to claim that you violated the terms of your policy. It doesn't even have to have anything to do with the illness in question -- for instance, the Los Angeles Times cited the case of a nurse in Texas who was booted from her insurance policy "after she was diagnosed with aggressive breast cancer, for failing to disclose a visit to a dermatologist for acne."

. . . Think about this for a moment. Somewhere in America today, a woman is sitting in her doctor's office, experiencing the worst moment of her life, as she learns she has breast cancer. Death is staring her in the face. She's wondering whether she'll be there to raise her children or meet her grandchildren. But there's something she doesn't know as she walks out of the office and begins to plan how to tell her family that she could be dead soon.

What she doesn't know is that because she was just diagnosed with cancer, her insurance company is launching an investigation of her, in the hopes that they can find a mistake on one of the many forms she's filled out over the years. One of their employees is poring through her records, and that employee's job is to see if the company can come up with some rationale, any rationale, for cutting off her coverage, so they won't have to pay for the treatment for her cancer. And of course, once they do drop her, she won't be able to get coverage from any of the other insurance companies. Because she has cancer.

Waldman calls this "evil", and he has a point.  But we don't have to go that far to conclude that it's unacceptable.

When you get sick, your insurer suddenly goes out of the taking-your-money business and enters the paying-for-your-health-care business.  There's no profit in that.  That's why the insurance company executives testified that they're going to keep right on rescinding sick people's coverage.  This is the system that opponents of a public plan are defending.  These are the insurance companies whose profits they are defending.  They should be called to account.

Blanche Lincoln is a centristy centrist

Sen. Blanche Lincoln (D-AR) argues that health care reform shouldn't include a public plan, because that would drive out private competition:

“One of our biggest concerns is that it doesn’t need to be a government plan that usurps that ability to compete in the marketplace, which I’m concerned that a totally government-run option would do,” she said.

Here's digby on the competitive market Sen. Lincoln wishes to preserve in Arkansas:

The Justice Department considers an industry to be “highly concentrated” if one company has 42 percent of the market. In Arkansas — Senator Lincoln should take note — Blue Cross Blue Shield has 75 percent of the market. If you take government self-insurance plans out of the equation, it's higher. The state ranks as the ninth most concentrated in the country. Is it any wonder that insurance premiums have risen five times as fast as wages?

Here's Barack Obama at today's press conference, explaining that a public plan would eliminate private competition only if the insurance companies couldn't offer consumers a better deal:

Why would it drive private insurance out of business? If private insurers say that the marketplace provides the best quality health care; if they tell us that they're offering a good deal, then why is it that the government -- which they say can't run anything -- suddenly is going to drive them out of business? That's not logical.

"Now, the -- I think that there's going to be some healthy debates in Congress about the shape that this takes. I think there can be some legitimate concerns on the part of private insurers that if any public plan is simply being subsidized by taxpayers endlessly that over time they can't compete with the government just printing money, so there are going to be some I think legitimate debates to be had about how this private plan takes shape.

"But just conceptually, the notion that all these insurance companies who say they're giving consumers the best possible deal, if they can't compete against a public plan as one option, with consumers making the decision what's the best deal, that defies logic, which is why I think you've seen in the polling data overwhelming support for a public plan.

I really do not get the stated opposition to the public plan.  According to the critics, it would be so popular that it would drive private insurers out of the market.  Every time I hear this I want to respond, "Wait a minute.  You oppose what you say would be an incredibly popular reform because it would be bad for insurance companies?  Really?  That's your argument?"  In his own polite way, that's what Obama said.  I hope someone in the establishment media is paying attention.  Because people like Blanche Lincoln should be asked to explain why they put insurance companies' interests ahead of the people's interest.