Can Market Forces Work in Health Care?

1

• Can Market Forces Work in Health Care?
• Perspectives from Business Leaders
• Bill Kramer
• Presentation to the
• Pacific Northwest Regional Economic Conference
• May 11, 2006

2
Health Economics Fundamentals

• Asymmetric information between buyers and sellers
  (Arrow) ? Providers drive most utilization
• Weak links between process and outcomes ? Medical
  practice varies a lot (Wennberg) tremendous
  waste
• Product heterogeneity (Pauly, Robinson) ?
  Differences between routine care, urgent care,
  once-in-a-lifetime care
• The 10/69 rule (Berk Monheit) ? Danger of
  adverse selection and risk skimming
• Institutional arrangements and market structure
  play a major role (Starr) ? Providers and
  insurers have strong influence in current system

3
How the Issue is Framed

• Free markets
• vs.
• Government-run
• healthcare system

4
How the Issue Should be Framed

• Can market forces be used effectively in health
  care?
• What are the appropriate roles for the private
  sector and government?

5
Market Forces

• What are we talking about?
• Choice
• Price sensitivity
• Information
• Competition

6
Are market forces functioning in the U.S. health
care system?

• No, not much.
• Choice? Most employers offer only one health
  plan
• Price sensitivity? Consumers shielded from most
  costs
• Information? Seldom available or understandable
  to consumer
• Competition? High concentration of providers or
  insurers in many markets many providers and
  insurers compete on risk avoidance rather than
  value to consumers
• (Enthoven)

7
Lessons from Basic Health Economics

• Market forces have the potential if allowed to
  operate and are used wisely to improve the
  health care system. We need to
• Address supply-side as well as demand-side issues
• Avoid dependence on a single simple solution
• Focus on opportunities for improving quality and
  cost effectiveness among the highest cost cases
  and services
• Preserve pooling, group purchasing
• Use effective purchasing strategies both
  private and public sector (e.g., Medicare)

8
Employer Purchasing Strategies

• Theme be a market maker
• Offer real choices to employees different
  health plans and providers, not just varieties of
  co-pays and deductibles.
• Encourage employee engagement and personal
  accountability, including paying an appropriate
  share of the costs at point of enrollment as
  well as point of service.
• Ensure that employees get the information they
  need to make choices.
• Encourage competition among providers based on
  cost effectiveness and quality, not just risk
  selection and underwriting. (Note risk
  adjustment mechanisms may be needed.)
• Exercise purchasing power individually and
  collectively.

9
What the Private Market Cant Do Very Well

• Provide access to insurance or health care to
  low-income or very ill people
• Ensure that reliable standardized information is
  available to consumers
• Maintain appropriate balance of power between
  suppliers and consumers
• This means there is a role for government.

10
A Possible Pragmatic Strategy

• A hybrid approach
• Structure the market to create
• real choice
• healthy competition
• useful information
• incentives for improving value (quality/cost)
• Focus government role on
• providing coverage or care to low income and very
  sick
• ensuring that information is reliable and
  available
• maintaining healthy markets