All Roads Lead To Here

” Reform of the health care financing and delivery system is inevitable.” I wrote those words in 1991.  I made that prediction based on economics: health care cost inflation had average twice the rate of general price inflation since the end of World War II; 2 million Americans had lost employment based health insurance in the preceding year; and access to care was becoming a major issue as hospitals closed in increasing numbers.

My prediction was not radical or out of the mainstream, yet it took almost 20 years to come true. The delay was due in part to politics, but it also resulted from a change in economic fundamentals for the health care system: health care cost inflation moderated, the economy grew extremely fast; and the resulting  tight labor market led to an increase in employment-based health insurance coverage. In fact, in the late 90s the US experienced one year in which the number of uninsured did not grow for the only time since the Census bureau has been measuring the number of uninsured. In the 21st century the economic fundamentals of the health care system have returned to the conditions that lead me to make my 1991 prediction.

At the time however it looked like my prediction was going to come true much sooner. In the 1992 Presidential election the polls ranked health care on of the most important issue on the voters’ minds. As a result, President George H.W. Bush and candidate Bill Clinton both had health reform proposals and those proposals were remarkably similar.  They both would reform the health insurance market by creating purchasing cooperatives where consumers without access to employment-based coverage could purchase coverage on the same terms as those with employment-based coverage, risks were to be pooled within the cooperatives, and they both would have subsidized the purchase of private insurance for lower income families. Both candidates’ proposals were attempts to place consumers in the center of a market-based system for allocating health care resources.

The health delivery system has undergone significant changes in the 18 years between the presentation of those proposals and the passage of the Affordable Care Act. The system has become more concentrated and integrated. Information systems and quality measures have been develop that hold the promise of great efficiency and transparency. New insurance products have emerged (supported by legislation) that gives consumers new incentives to manage their care. However, those consumers are still faced with increasing costs, decreasing access to care, and uncertain quality.

During that same 18 year period health care reform proposals retained their similarities: proposals either removed the private health care financing system entirely, or it reformed it to level the playing field for all purchasers of health insurance.  Accomplishing that second goal requires a mechanism for pooling risks.

Pooling in large employment-based groups works because the choice of coverage is bundled with other choices (taking the job) mitigating risk selection. Pooling individuals together to purchase health insurance doesn’t work in the current health insurance system because the better risks in the pool can be enticed out of the pool by competing insurers.  Increasing competition among insurers in such a market may actually increase the costs of coverage for most consumers.

A variety of reforms popular with consumers including guaranteed issue, eliminating pre-existing conditions exclusions and community rating act to reduce the insurers’ ability to exclude poorer risks. They also increase the insurers expected costs and thus their premiums.  The better risks in that type of market may opt out of purchasing health insurance at all, or delay that purchase until it is clear that they need health care services.  The result would be increased insurance premiums for most people.

Providing incentives toward the purchase coverage alleviates these issues to some extent. These incentives can be subsidies or penalties. The degree to which the risk pooling problem is alleviated depends on the strength of these incentives. The Affordable Care Act has a mandate where the financial consequences of not purchasing coverage is relatively small, but the psychic costs of breaking the law may have a greater effect than the penalty itself.

Reducing health insurers ability to compete on the basis of enrollee risk forces them to compete by reducing the costs of care.  This works if consumers have adequate information on the quality of care offered through a health plan. That information is only available if there is a health information infrastructure to collect and good measures of health care quality. If those two elements are in place then consumers in the reformed health insurance market will have an ability to choose between health plans based on the price and quality of care provided in each plan.

Changing insurers incentives in the reformed health insurance market changes the way they interact with health care providers.  Health plans’ success in the market will be contingent on their ability to offer coverage that provides lower cost and/or higher quality care.  As a result changes in the insurance market will result in a change in the incentives of health care providers with the intent that future health care cost inflation results directly from increases in health and not from defects in the market place.

So all proposals that attempt to systematically address health care cost inflation must start with reforming the health insurance market.  Reforming the health insurance market requires a mechanism for pooling risk.  This is an element of the Affordable Care Act and its an element of Representative Paul Ryan’s proposal for reforming Medicare.

The economic factors that led to my original prediction eventually resulted in  the enactment of the Affordable Care Act. Those factors will  remain regardless of the outcome of its legal and political challenges. Alternatives to the ACA that build on the private market will have to address risk selection. Over the last thirty years solutions to that problem all share elements incorporated in the Affordable Care Act.

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