Monday, June 8, 2009

Making the Case for the Public Plan, Part I: The Difficulty of Private Health Insurance Regulation

As health reform moves to the top of the Congressional agenda, we will be hearing a lot about a possible "public option" in the plan. Earlier this Spring I began thinking about whether a public option was absolutely necessary to a successful reform. I started out hoping that it wasn't, because Republican leaders despise it, and Democrats have sometimes let the "perfect be the enemy of the good" in health reform. But I'm now convinced that a public option is necessary, and I hope to spend a few posts explaining why.

To begin with, we should get clear on exactly what insurers do. I have tried to summarize it in a one page chart, which appears here. The right column focuses on the purely positive role of insurers--how they add value to the health care system. With massive amounts of data at their disposal, they can identify best and worst providers, good and bad treatments, and even spot dangerous side effects in drugs and devices. They can invest in new technology to better process claims. To the extent that they retain long-term relationships with customers, they have an incentive to reduce costs by keeping those patients healthy.

But the structure of the US health insurance market makes it difficult for most private insurers to respond to such incentives. About 21% of insurance policyholders cancel their plans in any given year, meaning that the average customer's commitment to a plan lasts for about three years. That's just not enough time for an insurer to gain much investing in the health of its members.* There are many more profitable strategies--which lead me to the left side of the column, bad insurer practices.

Health care costs are highly concentrated among a small portion of the population. As AHRQ notes, "Half of the population spends little or nothing on health care, while 5 percent of the population spends almost half of the total amount." (The famed 80/20 rule also applies in health care expenditures.) This creates almost irresistible pressures for private insurers to "risk select;" i.e., to avoid covering those who need care most. While "pre-existing conditions" exclusions and recissions are most common in the individual insurance market, they and other tactics can undermine the idea of risk-pooling at the core of any feasible insurance scheme. Given that many private insurers began thriving by cherry picking (and lemon dropping) the healthiest (and sickest) customers, they have long resisted regulation of risk selection.

But now, as the chances for reform increase, leading private insurers are beginning to soften their approach in order to argue that a public plan is not necessary. They are promising to accept "guaranteed issue" coverage, "with no pre-existing condition exclusions." They have even promoted plans for "risk adjustment," which "spreads costs for the highest-risk individuals." Would regulation like that preclude the need for a public option?

I don't think so, because there are so many other ways for insurance companies to drive away the sickest customers. As noted in the chart, subtler selection can include refusal to respond to needs of high cost patients in order to drive them away, and attracting a disproportionate share of low‐risk individuals. For example, a plan might decide to increase coverage of gyms and cosmetic procedures (to attract fit customers) and devise complex forms to be filled out monthly in order for a patient to get oxygen or insulin (to repel customers with congestive heart failure or diabetes). These are not merely hypothetical concerns. The Netherlands is often held up as a model for US reform because of recent moves there to make their traditionally solidaristic system more market-oriented. But risk selection threatens to unravel the Dutch "middle ground:"

[After the Dutch moved in a more American direction, insurers] have more tools for managing care, which can also be used to select risks. . . . Insurers have more room to define the precise entitlements of their insured groups, which can be used to select favorable risks. Third, insurers are allowed to sell mandatory health insurance together with any other type of non–life insurance (such as supplementary health insurance, sick leave insurance, and car insurance), which prior to 2006 was not allowed.

In particular, supplementary health insurance can be an effective tool for risk selection, because insurers are allowed to reject applicants based on their health status. Fourth, insurers are free to give premium rebates to groups for the mandatory basic insurance, which prior to 2006 was not allowed. A group can have any risk composition, and the "organizer" of the group can selectively enroll preferred members only. Although the rebate for the basic insurance is at most 10 percent, insurers can give these groups any rebate on supplementary health insurance or other insurance products. . . . Given the increasing incentives and expanding tools for risk selection, further improvements of the risk-equalization method are necessary to prevent insurers from engaging in risk selection, which occurs, for example, in Switzerland.

US insurers are sure to import methods like that, and to continue along current lines of risk selection. As health policy expert Karen Pollitz has noted, all of the following tactics can be used to risk select:

--“Street” underwriting
--Selective marketing (including in competing markets)
--Renewal rating
--Closed blocks
--Benefit designs
--Payment practices
--Provider network design

Congress or HHS or state insurance commissioners could try to outlaw or restrict risk selection practices one by one. But as Pollitz has noted, as of 1997, the "US Department of Labor had resources to review each employer-sponsored group health plan under its jurisdiction once every 300 years." The Bush years probably did not significantly address that shortage. Moreover, "state insurance department staff levels declined 11% in 2007 while premium volume increased 12%." The personnel simply aren't there, and when they are, they are as likely as not to be outgunned by private sector attorneys, lobbyists, and experts-for-hire. The right way to discipline private insurers is to have competition from a public option--not to allow them to continue a risk-selection race-to-the-bottom by deflecting regulation.

I have taught health care regulation at both Seton Hall and Yale Law Schools, and my students have always been dismayed by the cat-and-mouse games that regulators and insurers play to control (and evade control of) risk selection. I have very little faith that DOL, HHS, or their state equivalents (who are also often tasked with regulating life and auto insurance and banks) can really make private insurers accountable, no matter how ingeniously the insurance exchanges are designed.

So that's a case for the public plan largely based on the problems with private insurance regulation. For a positive case, which I'll develop in my next post, I'll focus on the middle column of the chart--eternally contested insurer actions designed to ration access to providers.

*For recognition of this problem in the context of bariatric surgery, and a creative plan for solving it, see Ronen Avraham and K.A.D. Camara, The Tragedy of the Human Commons, 29 Cardozo Law Review 479 ("bariatric surgery is just one example of insurers' failure to cover prospectively efficient treatments. A similar confluence of insureds switching insurers frequently, high transaction costs of individualized contracts, and medical-industry lobbying explain insurers' failure to cover other prospectively efficient treatments.").

X-Posted: Concurring Opinions.

Wednesday, May 13, 2009

Greaney on the Public Plan

Is genuine health reform possible? Several recent developments are promising. President Obama's big Congressional majorities (plus the Specter defection) are reminiscent of the Johnson-era milieu that led to Medicare and Medicaid. Key interest groups are less "Harry and Louise" and more "try to appease." Most importantly, the failures of managed care, consumer-directed health care, and other artifacts of the "ownership society" are now self-evident. As unemployment rises, lack of insurance spikes, compounding the misery of many of those unlucky enough to get thrown out of work.

What could derail real health reform? Most likely, fake health care reform, particularly the kind that assumes there is something near a "free market" in operation now. As health care antitrust scholar Thomas Greaney argued yesterday, markets for health care are often very concentrated or riddled with barriers to entry:

The unfortunate fact is that a majority of the country is served by a few dominant insurers. (In 16 states, one insurer accounts for more than 50 percent of private enrollment; in 36 states, three insurers have more than 65 percent of enrollment). Likewise, because of lax antitrust enforcement, most markets are characterized by dominant hospital systems and little competition among high-end physician specialists.

In these circumstances, which economists call 'bilateral monopoly," the players often reach an accommodation in which they share the monopoly profits rather than compete vigorously. A prime example is the experience in Massachusetts, where Blue Cross/Blue Shield, the dominant insurer, reached an understanding with the dominant hospital system, Partners Healthcare, that entrenched higher prices for health insurance and hospital care.

Some might hold out hope that the Obama administration's new emphasis on antitrust enforcement might solve that problem, but I would not hold my breath. After losing seven hospital merger cases in a row, the government is not exactly in a position to go storming into health care markets to demand competition. Only new antitrust laws are likely to accomplish much in that direction, and even if they were by some miracle adopted this year, I can't imagine them having much effect within any reasonable time frame.

Friday, March 6, 2009

The Life Cycle of Objectionable Drug Marketing Practices

[This is a guest post by Nathan Cortez, assistant professor of law at the Dedman School of Law at Southern Methodist University. Cortez has published in the peer-reviewed Food and Drug Law Journal and teaches international health, pharmaceutical and administrative law. I've learned a lot from his work, and I'm happy he's agreed to let me post this here.]

By Nathan Cortez

The pharmaceutical industry spends some serious coin on sales and marketing—anywhere between $30 billion and $57 billion per year. And this money funds much more than the ubiquitous ad campaigns to which we’ve grown accustomed (sing along if you know the “Viva Viagra” jingle). Over the years, sales and marketing departments have conjured up increasingly creative marketing practices of questionable legality. For example, drug companies have funded “research” and “educational” grants of questionable validity, sponsored continuing medical education (CME), paid ghost writers to generate favorable journal articles, provided free gifts, meals, and entertainment to prescribers, paid prescribers as speakers, consultants, or preceptors, and even hired former college cheerleaders to gain access to prescribers. Most of these practices have been condemned, and many have been prosecuted, resulting in billions in settlements for federal and state governments. The pharmaceutical industry can’t even give away free drugs without being punished.

Last Monday, the New York Times highlighted yet another objectionable drug marketing practice: targeting medical schools. As the article explains, drug companies have long had ties to medical schools and their students by funding endowed chairs, faculty prizes, research grants, capital improvements, and even volunteering employees to teach classes. Students get showered with enough free pizza and trinkets to think that they might already have prescribing privileges. More recently, the Times reports that the faculty at Harvard Medical School has come under fire for its ties to drug companies that hire faculty as speakers, consultants, or even board members. More than 200 Harvard Med students have objected, leading the school to convene a 19-member panel to reevaluate the school’s conflict-of-interest policies (meanwhile, the University of Minnesota Medical School is loosening them).

In the “Life Cycle of Objectionable Drug Marketing Practices,” we’re currently at the “media coverage and public outrage” phase. Gradually, most of the practices listed in the initial paragraph have either disappeared or have lost their allure. Media coverage and public outrage is quickly followed by government outrage (possibly even Congressional hearings) and promises of self-regulation by the drug companies to preempt more stringent regulation. Self-regulatory efforts like the PhRMA Code and the AMA Ethical Guidelines provide some bright-line standards for complying with ridiculously broad laws like the federal anti-kickback statute and its complicated safe harbors. If companies still don’t get the hint, the government simply tells drug companies what not to do.

And if none of these events ends the Life Cycle of the Objectionable Drug Marketing Practice, litigation usually does. Pretty much every major pharmaceutical company has settled a Corporate Integrity Agreement with the government for violating federal drug marketing laws—the latest being a staggering $1.4 billion settlement paid by Eli Lilly to settle claims that it illegally marketed its anti-psychotic drug Zyprexa. By settling, companies thus avoid the “death penalty”—being excluded from Medicare and Medicaid.

Although the drug companies never die, the practices usually do, precipitated by an avalanche of government investigations, whistleblower suits, shareholder suits, and even marginally-related product liability suits. Federal and state lawmakers also pile on. In the last few years, nine states have enacted (and dozens have considered) pharmaceutical marketing laws, requiring disclosures of marketing payments made by drug companies to potential prescribers, in addition to caps on payments, disclosure of sales representative activities, and other prohibitions. Indeed, the Senate Finance Committee is currently considering a federal bill that would explicity preempt state laws.

Thus, the Objectionable Drug Marketing Practice dies a violent death. It can rest in peace, but the sales and marketing departments can’t. Because they have to find new ways to drive market share.

Sunday, February 15, 2009

We Have Moved to a New Website, Please Visit Us There

We Have Moved to a New Website, Please Visit Us There


Wednesday, February 11, 2009

New Candidates to Head HHS Emerge, Suspense Mounts

Two additional candidates have emerged as possible nominees to be secretary of health and human services, reports The Washington Post. According to Democratic sources in and around the White House, those candidates are Lloyd Dean and Jack Lew.

Dean is chief executive of San Francisco-based Catholic Healthcare West and was recently named one of the top 25 minority health care executives by Modern Healthcare Magazine. Lew was involved in health care reform during the Clinton Administration and worked in the White House Office of Management and Budget, according to The Post. One small snag, reports The Post, is that Lew was recently confirmed as deputy secretary of state.

Yesterday we reported that Kansas Governor Kathleen Sebelius was at the top of Obama's list to replace former Senator Tom Daschle as the nominee for U.S. Secretary of Health & Human Services. Sebelius removed herself from consideration for a cabinet position last December, citing the need to reform Kansas' budget. However, The Wall Street Journal reports that Gov. Sebelius told Ron Pollack, president of Families USA, that she would accept the nomination for secretary of health and human services.

Tuesday, February 10, 2009

Sebelius, Podesta on Obama's Short List to Replace Daschle

We are pleased to announce that we have moved to a new website, The article below, and a host of other new links and resources, may be found there and here.

A top official in the Obama administration says that Kansas Governor Kathleen Sebelius is at the top of the list to replace former Senator Tom Daschle as President Obama’s nominee for Secretary of Health & Human Services, according
to the AP/Kansas City Star. This comes after Daschle withdrew his nomination last week, leaving many wondering about the future of U.S. health care reform.

Sebelius has been praised by advocacy groups for the “watchdog role” that she played for eight years as insurance commissioner before she became governor. The Kansas Governor was an early supporter of Obama’s campaign for the presidency. After Obama won the election in November, she was in consideration for several cabinet posts. In early December though, she announced that she had removed herself from consideration for a Washington job, citing Kansas' budget problems that needed her attention.

Also on Obama’s short list is former White House chief of staff under President Clinton, John Podesta, and Tennessee Governor Phil Bredeson. Some advocacy groups are reportedly lining up to oppose the nomination of the Democratic governor from Tennessee. Bredeson remains under consideration but was not as likely as Sebelius to make the final cut, the senior official said.

As governor, Bredesen reduced the state's Medicaid beneficiaries by 170,000 adults in 2005 as a result of budget constraints, and reduced benefits for thousands more TennCare beneficiaries, according to the AP/Austin American-Statesman. In 1980, Bredesen founded a health maintenance organization called HealthAmerica Corp., which became the country's second-largest HMO before he sold it in 1986 for about $400 million.

Critics of Bredesen, who say he has administered the largest public health insurance cuts in U.S. history, say that the cuts illustrate why he is "the wrong person to lead an effort to expand health insurance coverage."

Others argue that Bredesen had to make difficult decisions that ultimately led to the preservation of Tennessee's struggling health care system, thereby averting disaster.