Market-Oriented Initiatives in Health Care:
What Have We Learned?
Academy Health
June 3, 2007
Professor James C. Robinson
University of California, Berkeley
OVERVIEW
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Goals: equity, efficiency, innovation
Tradeoffs among goals
Performance: biotechnology
Performance: insurance
Conclusions
Principles of Evaluating Market
(and non-market) Initiatives
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Apples to apples
Compare real market initiatives to real
governmental initiatives
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Not real markets and idealized governmental initiatives
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Not real governmental and idealized market initiatives
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A favorite tactic on the political left
A favorite tactic on the political right
Market failure and government failure
More Principles
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Be clear on the goals or standards against which
performance is being evaluated
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Markets tend to be good at some tasks, governmental
initiatives tend to be good at others
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Cherry-picking goals can pre-determine the comparison
Pick the most important set of goals
Consider synergies and tradeoff among goals
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Success on one goal may facilitate or undermine
success against others
Three Goals of Health Care Initiatives
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Equity: Access to services/products is based on
health status, values, and preferences, not income
or wealth or employment or race or religion
Efficiency: Services are produced at lowest
possible cost, highest possible quality, lowest
administrative burden, most appropriate mix
Innovation: Continual development of better drugs,
devices, procedures, forms of organization
Synergies among Goals
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Equitable access promotes efficiency
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Efficiency promotes innovation
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Lowers administrative costs of enrollment churning,
uncompensated care, unfunded mandate
Effective purchasing of today’s services gives signals to
entrepreneurs and investors on where to focus
Innovation promotes equity
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New technologies become cheaper with experience,
diffuse to even most disadvantaged populations
Tradeoffs among Goals
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Equity can stifle efficiency
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One-size-fits-all forms of payment and regulation distort
incentives, foster moral hazard, fraud, bureaucracy
Efficiency can stifle innovation
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Low prices, ease of entry (e.g., bio-similars) undermine
incentives for risk-taking, investment in fixed assets
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Dynamic (Schumpetrian) competition v. static competition
Innovation can impede equity
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New clinical opportunities can increase disparities
Sectors for Evaluation:
Biotechnology
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Dynamic technology, with promise of significant
benefits to sickest patients, potential for radical
transformation of care for all patients
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High scientific and commercial uncertainty (long
lead time till revenue), major capital needs
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Genomics, personalized medicine, stem cell therapy
Sector as a whole is yet to be profitable
Attractive economic spinoffs: jobs, training, etc.
Sectors for Evaluation:
Insurance
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Insurance as income re-distribution
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Pooling of (known) unequal risks
Motivate the chronically well to support the chronically ill
Insurance as purchasing
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Methods of payment give incentives to providers
Other incentives for providers: quality improvement,
review of appropriate use patterns
Design of cost-sharing give incentives to patients
Biotechnology:
Equity
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Biotech products are directed at severe needs
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High prices and cost-sharing are financial barrier
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Not population health but focus on the neediest
But charitable donations help most patients in need
The US purchasers (CMS, private insurers,
employers, individuals) are financing R&D for the
entire world, including other rich nations
Biotechnology:
Efficiency
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Very high “value-based” pricing
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Most biotech firms still not profitable; external access to
capital (VC and pharma licensing) remains crucial
Most clinical gains to date have been incremental
Debate over physician “buy and bill” incentives
Overall, however, biotech has best scientific basis
in medicine; expensive but worth it
Biotechnology:
Innovation
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The US biotech industry is the envy of the world
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Major new products target major unmet needs
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Cancer, auto-immune diseases, rare genetic conditions
Mutual benefits for basic and applied science
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New products, firms, capital investment, jobs
Technology transfer: US universities are the world’s envy
Genomics, diagnostics, stem cell are revolutionary
Biotechnology:
Positives
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Biotech is classic Schumpetrian industry
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High initial investments, high risk, with major potential
rewards (more clinical than financial, it appears)
To date, no lack of investment and entrepreneurship
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Bio-generics and pressure for lower prices may reduce risktaking. Short-term concern over early-stage investments?
Rapid vertical integration between pharma and biotech
Extensive global competition for biotech investments
Biotechnology:
Challenges
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Biotechnology is not “disruptive technology”
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It is high cost, not low cost and low functionality
It clearly raises the cost of care
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Cost-effectiveness ratio is not very favorable
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Often by converting fatal diseases into chronic illness
Longevity gains often measured in weeks or months
Continued access to private capital is not certain
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Especially for early stage firms, frontier technologies
Biotechnology:
Summing Up
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Equity: 8/10. Targets the sickest patients with
greatest unmet needs; charitable programs blunt
cost-sharing requirements
Efficiency: 6/10. High prices, weak costeffectiveness, modest breakthroughs in short run
Innovation: 10/10. Envy of the world; no
centralized system can come close (e.g.,Germany)
Insurance: Income Redistribution and
Purchasing of Health Care Services
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Two functions of insurance must be evaluated
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Redistribution: motivating the healthy to pay for the sick
and the rich to pay for the poor
Purchasing: creating appropriate incentives for providers
and consumers through network (provider payment) and
benefit (cost sharing) designs
Insurance as Redistribution:
Equity
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The US insurance sector fails 46 million at any one time,
many more at some time (churning)
Under-insurance (excessive cost sharing) for low income
and chronically ill patients
Tax exclusion of health benefits favors high income
taxpayers and those with gilt benefit designs
Medicare taxes fall on all workers, including uninsured, and
favor all elderly, including wealthy
Minneapolis and Portland subsidize Miami and Manhattan
Insurance as Redistribution:
Efficiency
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The mix of public/private insurance imposes high
administrative costs
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Enrollment, disenrollment, marketing
Confusion and chaos (e.g., Part D)
Tradeoff betw. admin costs and fraud in Medicare
Private insurance reduces incentive distortions of
income taxes (on job creation, labor force
participation), compared to Europe
Insurance as Income Redistribution:
Innovation
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Health Savings Accounts
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Incentives for saving are important, but skewed
distribution of need attenuates social benefits
“Consumer” benefit designs “protect the healthy from ill”
The erosion of entitlement thinking
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Health care is not free. It is a scarce social resource that
should be cherished and used when most needed.
Personal responsibility should play a part.
Insurance as Income Redistribution:
Positives
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The US seems really and truly not to want NHI
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Blue Cross was created as alternative to NHI
Employment-based coverage as alternative to tax-based
Consumer-driven coverage as alternative to
employment-based and tax-based coverage
The mixed system performs not too poorly, given
this (controversial) philosophical stance
Insurance as Income Redistribution:
Challenges
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The US insurance system challenges most
people’s concept of fairness
It undermines whatever social solidarity we have
The administrative costs are horrific
It gives the whole US market-oriented economic
philosophy a black eye in global discussions
Insurance as Purchasing of Health Services:
Equity
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Efforts by insurers to get lowest prices undermine
provider ability to offer charity care
But insurer as purchaser is agent of enrollee in
obtaining wholesale pricing
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Retail prices would be even more unfair for those most
in need and least able to bargain
The uninsured pay the highest prices, if they pay
Insurance as Purchasing of Health Services:
Efficiency
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US pays highest prices for health services
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Continual conflict between insurers and providers
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Providers hate HMOs, Medicare FFS, Medicaid
Multi-payer system reduces risk to providers
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MD and RN earnings; drugs and devices
This reduces imperative for lobbying
Cost sharing facilitates generic substitution etc.
Insurance as Purchasing of Health Services:
Innovation
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The multi-payer system facilitates experimentation
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Methods of provider payment (DRG, capitation, EOC)
Disease management for chronic conditions
Methods of provider organization
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Medical groups, vertical integration, specialty facilities
Transparency and performance monitoring
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Report cards, pay-for-performance
Insurance as Purchasing of Health Services:
Positives
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Multi-payer systems foster experimentation and
diversity in organization and delivery of care
The US system fosters more transparency,
performance measurement than many
It is less subject to capture by providers
It offers less pork to politicians
Insurance as Purchasing of Health Services:
Challenges
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Multi-payer systems lack cost control power
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This may be a good thing (for innovative sectors)
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Conflict and confusion at the plan/provider interface
Exhaustion and low expectations
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Dynamic versus static efficiency
Case rates? Specialty organization? DM and QI?
Consolidation among insurers and providers
Insurance as Redistribution and
Purchasing: Summing Up
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Tradeoffs between the two functions of insurance?
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Single-payer governmental systems are more effective at
pooling risk, forcing healthy to pay for sick
Multi-payer (mixed public/private) systems allow more
experimentation in care delivery/organization
Universal coverage within a multi-payer system?
Biotechnology and Insurance:
Summing Up
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Equity
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Efficiency
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Biotechnology: 8/10
Insurance (distribution): 4/10
Biotechnology: 6/10
Insurance (purchasing): 6/10
Innovation:
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Biotechnology: 10/10
Insurance (purchasing): 6/10