Sunday, October 12, 2008

A Thought to Consider

Presidential candidate John McCain suggests that people should be encouraged by means of tax credits to give up employer-financed health care coverage in favor of individually purchased health insurance.

Usually I pay little attention to what candidates say about such issues, believing that their statements are intended mainly to influence the electorate. But this one caught my attention.

Explaining will be a little tedious, but bear with me.

There is the question of what it will take to cause providers to get serious about the high and rising cost of health care. Many, including me, believe that of the available alternatives, market forces show the most promise. In the case of predominantly non-profit health care, it is not so much the prospect of financial gain that gets the providers’ attention as the threat of financial loss.

In order to have a market, there must be buyers and sellers. In health care, the sellers are doctors, hospitals, drug companies and other providers.

But we have not yet settled on the identity of the buyer. During the managed care era of the 1990s, insurance companies and HMOs played that role – mainly on behalf of employers. They negotiated with providers and contracted with the ones offering the most favorable terms. Subscribers using those providers got full benefits. If they used other, “out of network” providers they paid more from their own pockets – often much more. Providers that failed to get contracts suffered sharp reductions in the number of patients they served and, thus, in income.

Insurance companies also engaged in “utilization management,” paying only for expensive services - like surgery and CAT scans – that they had certified in advance as being “necessary.”

The strategy achieved its financial goals. The cost of health care rose very little during the managed care era.

However, the public rebelled. People didn’t like to be restricted in their choice of providers and resented having the judgments of their physicians being second-guessed by insurance company “bean counters.” Eventually, employers decided that making their employees unhappy was not worth the savings and – except for some large HMOs like Kaiser - managed care was largely abandoned.

Looking back on it, utilization management by insurance companies was probably a mistake. They should have used financial incentives to get providers to do it rather than doing it themselves.

But market forces cannot work in health care without restricting choice of providers. If the insurance company has to pay any provider the subscriber chooses, it has no negotiating leverage.

What the McCain approach suggests is that while people wouldn’t tolerate restriction of choice when someone else was paying the bill, they would if they could realize personal financial savings by doing so. In other words, if health insurance company A came along and said it would provide coverage for $100 a month less than anyone else, but you would have to use designated providers, people would be more likely to accept it.

Just how this would work in practice McCain doesn’t say and the devil may be in the details,

But the basic concept seems worth thinking about.

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