Four Ways to Improve the Efficiency of U.S. Healthcare Markets
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Healthcare Policy Dec 1, 2017

Four Ways to Improve the Effi­cien­cy of U.S. Health­care Markets

An econ­o­mist dis­cuss­es how to ensure the right mix of access, afford­abil­i­ty, and quality.

a doctor examines a patient

Yevgenia Nayberg

Based on insights from

Amanda Starc

It is no secret that Amer­i­cans spend an enor­mous amount of mon­ey, com­pared to the rest of the world, on health­care. But what is less clear is whether that spend­ing trans­lates into bet­ter care.

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One way to mea­sure that is to look at how effi­cient the health­care indus­try is, mean­ing that the ben­e­fits of health­care spend­ing exceed its costs, providers and insur­ers have incen­tives to par­tic­i­pate, there is healthy com­pe­ti­tion, and con­sumers are able to make informed deci­sions about care and coverage. 

Cur­rent U.S. health­care mar­kets present every mar­ket fail­ure you’ve ever thought of, plus a few you haven’t thought of yet,” says Aman­da Starc, an asso­ciate pro­fes­sor of strat­e­gy at the Kel­logg School. 

So how can we ensure that right mix of access, afford­abil­i­ty, and qual­i­ty? The good news is that a grow­ing body of research by Starc and oth­ers points to mul­ti­ple prac­ti­cal routes for achiev­ing this goal. 

Starc offers four rules” for improv­ing an indus­try whose effi­cien­cy we all rely on to feel healthy and protected. 

Rule 1: Ensure the Right Kind of Mar­ket Competition

You do not have to be a health­care econ­o­mist to know that com­pe­ti­tion — whether it is among insur­ers or health­care providers — is a good way to ensure high­er-qual­i­ty, low­er-cost care for con­sumers. Fed­er­al and state gov­ern­ments’ heavy involve­ment in health­care through pro­grams such as Medicare and Med­ic­aid, as well as leg­is­la­tion such as the Afford­able Care Act, means pol­i­cy­mak­ers are unique­ly posi­tioned to help ensure that mar­ket­place competition. 

One ques­tion is just what role the gov­ern­ment should play.There are some places where reduc­ing the government’s role could pro­mote com­pe­ti­tion. Con­sid­er how drug expens­es are han­dled by insur­ers. Cur­rent­ly, Med­ic­aid cov­ers almost 20 per­cent of drug costs in the U.S., leav­ing state gov­ern­ments to pro­vide drug cov­er­age to ben­e­fi­cia­ries. But a new work­ing paper by Starc and her Kel­logg col­leagues David Dra­nove and Christo­pher Ody sug­gests that shift­ing this cov­er­age to pri­vate Man­aged Care Orga­ni­za­tions (MCOs) would cut drug spend­ing by more than 22 per­cent with­out reduc­ing the num­ber or effi­ca­cy of the drugs offered to con­sumers. The cost sav­ings would come large­ly from the MCOs’ abil­i­ty to nego­ti­ate for low­er drug prices and steer con­sumers toward less expen­sive drugs and pharmacies. 

But encour­ag­ing greater com­pe­ti­tion is not as straight­for­ward as just remov­ing the gov­ern­ment alto­geth­er — and some­times poli­cies that would seem like­ly to pro­mote com­pe­ti­tion fall flat. 

For exam­ple, Starc pre­vi­ous­ly inves­ti­gat­ed the impact of a 2001 deci­sion to increase a sub­set of Medicare Advan­tage reim­burse­ments to pri­vate insur­ers. She found that although the increase was suc­cess­ful in attract­ing more providers, it pro­vid­ed a lack­lus­ter ben­e­fit to con­sumers. Only about one-fifth of the addi­tion­al reim­burse­ment was passed through in the form of low­er pre­mi­ums, co-pays, or deductibles. The remain­ing 80 per­cent went to insur­ers’ prof­its and advertising. 

That isn’t going to improve out­comes for con­sumers,” Starc says. As in many oth­er mar­kets, the gov­ern­ment needs to ensure robust competition.” 

Rule 2: Pro­vide Bet­ter Infor­ma­tion to Consumers

To ensure mar­ket com­pe­ti­tion, pol­i­cy­mak­ers can pro­vide con­sumers with crit­i­cal health­care infor­ma­tion, espe­cial­ly about cov­er­age options. They can also help con­sumers nav­i­gate that infor­ma­tion effectively. 

Take the case of the ACA health­care exchanges, through which mil­lions of peo­ple have cho­sen cov­er­age plans. These have become a flash­point for the Trump administration’s efforts to dis­man­tle the ACA, includ­ing recent­ly announced lim­its to exchange-relat­ed out­reach and enroll­ment peri­ods.

How you pro­vide infor­ma­tion to con­sumers is real­ly impor­tant in deter­min­ing what [plan] they’ll ulti­mate­ly pick.”

In this con­text, design deci­sions about the exchange web­sites — from the den­si­ty of the infor­ma­tion pre­sent­ed to how peo­ple are able to nav­i­gate the site — can have a pro­found effect on what plans are cho­sen. Starc says such web­sites should be focused on help­ing peo­ple pick the best plans for their needs, an objec­tive that will ulti­mate­ly deliv­er bet­ter mar­ket outcomes. 

How you pro­vide infor­ma­tion to con­sumers is real­ly impor­tant in deter­min­ing what they’ll ulti­mate­ly pick,” Starc says. Her stud­ies on pre-ACA exchanges show that about 20 per­cent of enrollees just choose the cheap­est plan pos­si­ble—even if it may not pro­vide ide­al cov­er­age for them. This real­i­ty makes fea­tures like a stan­dard­ized pre­sen­ta­tion of insur­ance prod­ucts, as well as tools that allow for eas­i­er com­par­isons, crit­i­cal to pro­vid­ing choice with­out over­load­ing insur­ance shop­pers.

Rule 3: Give Insur­ers the Incen­tive to Design Bet­ter Plans

Of course, the best-designed web­site in the world is not going to increase effi­cien­cy unless con­sumers actu­al­ly have good options to choose from. So it is impor­tant for insur­ers to design plans that yield bet­ter health outcomes. 

For exam­ple, Starc’s research shows that Medicare Part D plans that cov­er drug and med­ical expen­di­tures tend to be designed to keep con­sumers out of the hos­pi­tal, as com­pared to Part D plans that only cov­er drugs — an inef­fi­cien­cy of about $520 mil­lion, by her calculation. 

Part D insur­ers that choose to cov­er both types of costs [drug and med­ical] spend a lot more time doing things like mak­ing sure you’re tak­ing your asth­ma drugs and your blood pres­sure med­ica­tion,” Starc says. Because if you show up in the hos­pi­tal, that’s their mon­ey.” Charg­ing con­sumers low­er copays for pre­ven­ta­tive med­ica­tions — which effec­tive­ly means send­ing con­sumers the right price sig­nals — is one way for insur­ers to encour­age health­i­er behavior. 

There have to be incen­tives for insur­ers to treat their ben­e­fi­cia­ries holis­ti­cal­ly,” Starc says. 

Rule 4: Mind the Win­ners and Losers 

You also have to think about the fact that health­care reg­u­la­tion is going to cre­ate win­ners and losers,” Starc says. Think­ing about those trade-offs in a smart way is real­ly important.” 

One of the cen­tral ten­tants of the cur­rent ACA exchanges is that pre­mi­ums for old­er con­sumers are capped as a way of dis­trib­ut­ing costs across the pop­u­la­tion. Cap­ping old­er people’s pre­mi­ums at two to three times that of younger pol­i­cy­hold­ers low­ers prices for old­er con­sumers but rais­es prices for younger, gen­er­al­ly health­i­er ones. 

In the pres­ence of an effec­tive indi­vid­ual man­date, Starc’s research shows that this reg­u­la­tion is effec­tive. It curbs insur­ers’ abil­i­ty to charge old­er con­sumers as much as they pos­si­bly can (know­ing they are like­ly to pay), and reduces over­all insur­er prof­its. How­ev­er, it also lim­its insur­ers’ abil­i­ty to cut costs for younger con­sumers, who tend to be more price-sensitive. 

In the absence of an indi­vid­ual man­date, her research sug­gests the pos­si­bil­i­ty of dra­mat­ic pre­mi­um increas­es,” as younger con­sumers flee the mar­ket altogether. 

Starc sug­gests increas­ing fed­er­al insur­ance sub­si­dies for younger con­sumers as a way to make them more whole.”

Ulti­mate­ly,” Starc says, there are ways to get mar­kets to deliv­er health­care effi­cient­ly, as long as they’re reg­u­lat­ed care­ful­ly. At the moment, that reg­u­la­tion remains a work in progress.” 

Featured Faculty

Amanda Starc

Associate Professor of Strategy

About the Writer

Sachin Waikar is a freelance writer based in Evanston, Illinois.

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