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| Medicare Reform and Prescription Drugs: Ten Principles | |
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A major problem for all health insurance is overcoming the distorted incentives providers face. For example, under fee-for-service reimbursement (which is the way Medicare pays doctors), physicians have an incentive to overprovide services because the more they provide the more they are paid. By contrast, under a fixed-payment system (which is the main way Medicare pays hospitals), the staff has an incentive to underprovide because they get the same amount of income regardless of how much or how little they do. In the private sector, competition among insurers helps hold some of these distortions in check. However, Medicare is a monopoly. As a result, Medicare's only method for avoiding overprovision or underprovision of services is to burden providers with paperwork and regulations. Medicare also threatens to punish providers in a way no private insurer can: by criminalizing what it regards as serious contract violations. When ordinary mortals have contract disputes they must resort to the civil courts. They can't send the other party to prison. Few people familiar with the way Medicare functions believe it is efficient. To the contrary, almost everyone believes it is quite wasteful. That is one reason why Congress created the Medicare+Choice program and why other proposals would allow senior citizens to enroll in competing, private sector health plans. In the eyes of some, the ideal model is the Federal Employees Health Benefit Plan (FEHBP). Under this arrangement, federal employees and their employer, the federal government, pay community-rated premiums to enroll in competing, private sector health plans. Although there is competition in this system, the competitors are not allowed to charge premiums that reflect an individual's expected health care costs. Because of the community-rating requirement, healthy people are overcharged and unhealthy people are undercharged relative to the costs they are likely to generate. In the eyes of some, the ideal model is the Federal Employees Health Benefit Plan (FEHBP). Under this arrangement, federal employees and their employer, the federal government, pay community-rated premiums to enroll in competing, private sector health plans. Although there is competition in this system, the competitors are not allowed to charge premiums that reflect an individual's expected health care costs. Because of the community-rating requirement, healthy people are overcharged and unhealthy people are undercharged relative to the costs they are likely to generate. Observers of the FEHBP system have long known that health plans in the system have an incentive to avoid the sick and attract the healthy. But about a decade ago, researchers at the National Center for Policy Analysis discovered something more insidious. Under managed competition (as FEHBP-type insurance has come to be known), health plans have strong incentives to underprovide to the sick and overprovide to the healthy.41 Risk-adjusted premiums that cause Medicare to pay more for sick enrollees and less for healthy ones can ameliorate this problem somewhat. However, mathematical modeling by Goodman, Pauly and Porter has shown that risk-adjustment cannot eliminate the problem and under some circumstances can make it worse.42 In designing a reformed Medicare, we must be careful not to repeat these mistakes. In particular, we need FEHBP-type competition in which the competitors have good incentives rather than bad ones. How can that be done? Under the FEHBP system, federal employees join health plans for a period of 12 months; once a year, they reselect their health plan during an "open season." A better structure is to have long-term enrollment - lasting, say, three to five years. Under this arrangement, enrollees also would be able to have long-term relationships with physicians and health care facilities because they would have long-term relationships with the health plans that contract with those physicians and facilities. During the contract period, enrollees could switch health plans at any time. However, a switch of plans would require consent of both the new and the old plans and would almost always necessitate a lump sum payment from one plan to the other. For example, if a sick and high-cost enrollee switched from Plan A to Plan B, A would have to compensate B for the extra expected costs B would subsequently incur over and above the annual premium B would receive on the patient's behalf. If a healthy and low-cost enrollee switched from Plan A to Plan B, B would have to compensate A for the difference between the premiums it was collecting and the health care costs it likely would have incurred. Under this system, health plans could not dump their sick enrollees on other plans without compensating the other plans for their expected losses. Nor could health plans lure healthy enrollees from another plan without compensating the other plan for its lost profit. In such a system, health plans would have an incentive to compete for the sick rather than to avoid them. Plans would also have an incentive to specialize in, e.g., cancer care or treatment of heart disease. Any plan that discovered ways to provide better care for less money would attract patients from other plans. And the other plans would gladly agree to the transfers because they could reduce their losses (by paying the new plan something less than what the patients would have cost if there were no transfers.) In other words, an ideal Medicare system is one in which health plans have no incentive to overprovide or underprovide care and a continuous incentive to improve their quality and lower their costs. |
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