“Competition in health care fails for several fundamental reasons. First, patients often lack the information needed to assess both their care needs and the quality of their care. Second, illness and health care needs are inherently difficult to predict, exposing people to financial risks that they must insure against. This risk gives rise to an insurance system that shields patients from the price of care, dampening their incentive to use care judiciously and to seek care from providers offering high-quality care at affordable prices. The information problem, amplified by insurance, reduces the ability and incentives for patients to seek low-price, high-quality providers and impedes well-functioning markets. This problem has been magnified lately by consolidation of health care providers.
[..] [Insurance] premiums reflect the mix of beneficiaries in the risk pool. Though it may seem optimal for individuals to be able to purchase the insurance plan they most desire, the set of plans and the associated premiums will change as people select their plans. Apart from equity concerns, this dynamic creates inefficiency because diseases often have lifelong spending implications whereas insurance policies typically have a term of only a year. It is thus impossible, with existing institutions, to insure against the lifetime risk associated with illness without public policies to promote risk pooling. Other markets face similar challenges, but the magnitude of these problems is greater in health care. A separate concern is that competing insurers, which can hold down premiums, fragment the payment system. This can allow consolidated providers to charge more and, because providers must accommodate different insurer systems, may add to administrative costs. On balance, all these concerns suggest that an unregulated health care market is unlikely to lead to desired outcomes.
[..] Markets have promoted efficient reallocation of resources (e.g., from inpatient to outpatient care or from nursing home to community-based care) in ways that publicly run systems may not. Furthermore, there is evidence that private plans in Medicare (Medicare Advantage plans) can obtain better care at lower cost than the traditional fee-for-service Medicare program can. However, these positive results in Medicare may not generalize to commercial markets, because Medicare Advantage plans have institutional advantages, such as the ability of patients to get care from nonnetwork providers at Medicare prices, that allow them to pay, roughly, Medicare prices rather than commercial prices.
[..] Value-based insurance design has increased the use of high-value services but has rarely addressed the use of low-value services. Reference-pricing plans have changed behavior and lowered spending but have been limited to selected services such as imaging and orthopedic procedures. Tiered and narrow-network plans have also shown some success but have exacerbated problems such as surprise billing.
The slow diffusion of these competition-promoting plans probably reflects employers’ hesitance to impose the financial risk on workers that higher cost sharing entails, as well as hesitance to disrupt existing provider relationships. Without widespread diffusion, the amplifying effect that these plans would create by lowering market prices, as opposed to just steering patients, will not occur. The core problem is that for markets to work, patients must face the economic consequences of their choices, but labor-market concerns dampen employers’ enthusiasm for adopting plans that impose such consequences.
Efforts to increase price sensitivity in the choice of health plans often focus on supporting insurance exchanges, which remove the labor-market barriers to efficient plan construction, and removing policies, such as the tax deductibility of insurance, that shield decision makers from the full price of a health plan. Such efforts could promote diffusion of plan designs that encourage efficient use of care and reduce costs.
Yet exchanges are not without drawbacks. Risk adjustment remains a challenge, and there is considerable evidence that beneficiaries make poor plan choices. People who choose plans with less generous coverage or narrow networks may not fully appreciate the risk they’re accepting and may avoid needed, high-value care. Similarly, elimination of the favorable tax treatment of health insurance would surely induce more price sensitivity in people choosing health plans but could weaken the stability of the risk pool and lead to even less generous plans, which, though requiring lower premiums, would impose greater risk, create greater disparities, and possibly lead to worse health care choices.
As a result, any action to support plan competition and encourage adoption of strong patient incentives by plans would probably need to be accompanied by safeguards that maintain market stability, minimize the consequences of poor plan or care choices, and — because efficiency does not imply equity (and may, in fact, exacerbate inequality) — address inevitable disparity concerns.
The problems with health care markets are significant, but in evaluating their merits, we need to compare them with other systems, such as government-run models. Government management of the health care system has its own set of inherent weaknesses. For example, fiscal and industry pressures can cause government payment rates to be too low and poorly allocated across services and geographic markets. Some health care sectors, such as long-term care hospitals, are overpaid. Examples such as the sustainable-growth-rate system, the Merit-based Incentive Payment System, and the Medicare Stars program in Medicare Advantage all illustrate challenges with efficient government-program design. Perhaps most important, in practice the outcomes from government-managed health care depend crucially on how well the government functions.
Fortunately, we do not have to choose between unimpeded markets and complete government control. In fact, many of the “single-payer” health care systems around the world have some market components, and many are actually expanding the role of markets. The more important question is how government and markets can complement one another. Essentially, we do not need to abandon markets — we can make them better. Specifically, relatively incremental actions, such as continued support for ACA marketplaces, continued efforts to increase the effectiveness of transparency initiatives, procompetitive reforms to reduce the deleterious consequences of provider consolidation, and regulations to prevent the most severe market failures, such as limits on surprise billing or more aggressive caps on excessive prices in the commercial market, seem like first-order ways to improve market functioning with a relatively light touch. If we fail to improve market functioning, stronger government involvement will most likely be needed.”
Full article, Chernew ME. New England Journal of Medicine, 2020.10.8