Moral Hazard

Submitted by hci3-usr on Saturday, October 24, 2015 - 12:00

Newtown, CT – October 24, 2015

“The features of markets described in economic textbooks are not found in the healthcare industry and thus inhibit efficient operations of supply and demand” – This quote from our friend Rob Burns continues with: “These features include lack of price information and pricing transparency; lack of data on product quality; the resulting inability to assess the comparative value (defined as quality divided by cost) of products and services; asymmetric information between providers and consumers; imperfect agency relationships between physicians and their patients; the heavy role of government as both a buyer and regulator; and moral hazard flowing from insurance coverage leading to distortions in market efficiency.” For the non-economists, the translation is pretty simple. Consumer-patients have no real idea about the price of the services they’re buying; some of them don’t care because they’re insulated from that price; they can’t assess the comparative quality of physicians and hospitals because there’s a significant lack of useful information available; and the providers, who should be seeing after their welfare, are often torn away from that goal by bad financial incentives. Fixing all this, however, isn’t as complicated as it seems.

What this means to you – First, the shift to far greater cost-sharing is solving some of the moral hazard problem. It’s creating other potential problems of patient self-rationing needed care, but that could be countered with value-based insurance designs. Second, pricing transparency is making significant advances thanks to States enacting needed legislation. There aren’t enough of them doing it, but we can see that the momentum has shifted towards good solutions. Third, transparency in quality could be achieved if the States that are enacting all-payer claims databases use them to calculate real quality measures. We will be contributing to that in the next few weeks, so stay tuned. Fourth, payment reform is spreading, trying to reduce the imperfect agency relationship between providers and patients. There is, however, significant resistance to all of this from the industry that has benefited from all the economic distortions. For example, earlier this year the payers and hospitals in Oregon mounted a successful lobbying effort to kill a transparency bill. There’s also a group of misguided employers that are pushing the Supreme Court to dispense them from having their TPAs provide data to all-payer databases. That’s just crazy. Similarly, there’s a group of yahoos that has banded to repeal the “Cadillac Tax”, which is one of the ways in which we can address moral hazard. And finally, stupid mistakes in designing and implementing new payment models can be more lethal than not implementing them at all. This week the champion of ACOs, Dartmouth-Hitchcock, left the Pioneer program. There are good reasons for having done so, but we should worry about the growing perception that these programs can’t work. They can, when designed right. We have seen how the market can function much like other markets. It takes concerted effort and a willingness to accept feedback and make continuous course corrections. It also takes unrelenting determination. So stick with it.

Sincerely,

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