Market-Oriented Initiatives in Health Care: What Have We Learned?

1. Market-Oriented Initiatives in Health Care:What Have We Learned? Professor James C. Robinson University of California, Berkeley Academy Health June 3, 2007

2. OVERVIEW • Goals: equity, efficiency, innovation • Tradeoffs among goals • Performance: biotechnology • Performance: insurance • Conclusions

3. Principles of Evaluating Market(and non-market) Initiatives • Apples to apples • Compare real market initiatives to real governmental initiatives • Not real markets and idealized governmental initiatives • A favorite tactic on the political left • Not real governmental and idealized market initiatives • A favorite tactic on the political right • Market failure and government failure

4. More Principles • Be clear on the goals or standards against which performance is being evaluated • Markets tend to be good at some tasks, governmental initiatives tend to be good at others • Cherry-picking goals can pre-determine the comparison • Pick the most important set of goals • Consider synergies and tradeoff among goals • Success on one goal may facilitate or undermine success against others

5. Three Goals of Health Care Initiatives • Equity: Access to services/products is based on health status, values, and preferences, not income or wealth or employment or race or religion • Efficiency: Services are produced at lowest possible cost, highest possible quality, lowest administrative burden, most appropriate mix • Innovation: Continual development of better drugs, devices, procedures, forms of organization

6. Synergies among Goals • Equitable access promotes efficiency • Lowers administrative costs of enrollment churning, uncompensated care, unfunded mandate • Efficiency promotes innovation • Effective purchasing of today’s services gives signals to entrepreneurs and investors on where to focus • Innovation promotes equity • New technologies become cheaper with experience, diffuse to even most disadvantaged populations

7. Tradeoffs among Goals • Equity can stifle efficiency • One-size-fits-all forms of payment and regulation distort incentives, foster moral hazard, fraud, bureaucracy • Efficiency can stifle innovation • Low prices, ease of entry (e.g., bio-similars) undermine incentives for risk-taking, investment in fixed assets • Dynamic (Schumpetrian) competition v. static competition • Innovation can impede equity • New clinical opportunities can increase disparities

8. Sectors for Evaluation:Biotechnology • Dynamic technology, with promise of significant benefits to sickest patients, potential for radical transformation of care for all patients • Genomics, personalized medicine, stem cell therapy • High scientific and commercial uncertainty (long lead time till revenue), major capital needs • Sector as a whole is yet to be profitable • Attractive economic spinoffs: jobs, training, etc.

9. Sectors for Evaluation:Insurance • Insurance as income re-distribution • Pooling of (known) unequal risks • Motivate the chronically well to support the chronically ill • Insurance as purchasing • Methods of payment give incentives to providers • Other incentives for providers: quality improvement, review of appropriate use patterns • Design of cost-sharing give incentives to patients

10. Biotechnology:Equity • Biotech products are directed at severe needs • Not population health but focus on the neediest • High prices and cost-sharing are financial barrier • But charitable donations help most patients in need • The US purchasers (CMS, private insurers, employers, individuals) are financing R&D for the entire world, including other rich nations

11. Biotechnology:Efficiency • Very high “value-based” pricing • Most biotech firms still not profitable; external access to capital (VC and pharma licensing) remains crucial • Most clinical gains to date have been incremental • Debate over physician “buy and bill” incentives • Overall, however, biotech has best scientific basis in medicine; expensive but worth it

12. Biotechnology:Innovation • The US biotech industry is the envy of the world • New products, firms, capital investment, jobs • Major new products target major unmet needs • Cancer, auto-immune diseases, rare genetic conditions • Mutual benefits for basic and applied science • Technology transfer: US universities are the world’s envy • Genomics, diagnostics, stem cell are revolutionary

13. Biotechnology:Positives • Biotech is classic Schumpetrian industry • High initial investments, high risk, with major potential rewards (more clinical than financial, it appears) • To date, no lack of investment and entrepreneurship • Bio-generics and pressure for lower prices may reduce risk-taking. Short-term concern over early-stage investments? • Rapid vertical integration between pharma and biotech • Extensive global competition for biotech investments

14. Biotechnology:Challenges • Biotechnology is not “disruptive technology” • It is high cost, not low cost and low functionality • It clearly raises the cost of care • Often by converting fatal diseases into chronic illness • Cost-effectiveness ratio is not very favorable • Longevity gains often measured in weeks or months • Continued access to private capital is not certain • Especially for early stage firms, frontier technologies

15. Biotechnology:Summing Up • Equity: 8/10. Targets the sickest patients with greatest unmet needs; charitable programs blunt cost-sharing requirements • Efficiency: 6/10. High prices, weak cost-effectiveness, modest breakthroughs in short run • Innovation: 10/10. Envy of the world; no centralized system can come close (e.g.,Germany)

16. Insurance: Income Redistribution and Purchasing of Health Care Services • Two functions of insurance must be evaluated • Redistribution: motivating the healthy to pay for the sick and the rich to pay for the poor • Purchasing: creating appropriate incentives for providers and consumers through network (provider payment) and benefit (cost sharing) designs

17. Insurance as Redistribution:Equity • The US insurance sector fails 46 million at any one time, many more at some time (churning) • Under-insurance (excessive cost sharing) for low income and chronically ill patients • Tax exclusion of health benefits favors high income taxpayers and those with gilt benefit designs • Medicare taxes fall on all workers, including uninsured, and favor all elderly, including wealthy • Minneapolis and Portland subsidize Miami and Manhattan

18. Insurance as Redistribution:Efficiency • The mix of public/private insurance imposes high administrative costs • Enrollment, disenrollment, marketing • Confusion and chaos (e.g., Part D) • Tradeoff betw. admin costs and fraud in Medicare • Private insurance reduces incentive distortions of income taxes (on job creation, labor force participation), compared to Europe

19. Insurance as Income Redistribution:Innovation • Health Savings Accounts • Incentives for saving are important, but skewed distribution of need attenuates social benefits • “Consumer” benefit designs “protect the healthy from ill” • The erosion of entitlement thinking • Health care is not free. It is a scarce social resource that should be cherished and used when most needed. Personal responsibility should play a part.

20. Insurance as Income Redistribution:Positives • The US seems really and truly not to want NHI • Blue Cross was created as alternative to NHI • Employment-based coverage as alternative to tax-based • Consumer-driven coverage as alternative to employment-based and tax-based coverage • The mixed system performs not too poorly, given this (controversial) philosophical stance

21. Insurance as Income Redistribution:Challenges • The US insurance system challenges most people’s concept of fairness • It undermines whatever social solidarity we have • The administrative costs are horrific • It gives the whole US market-oriented economic philosophy a black eye in global discussions

22. Insurance as Purchasing of Health Services:Equity • Efforts by insurers to get lowest prices undermine provider ability to offer charity care • But insurer as purchaser is agent of enrollee in obtaining wholesale pricing • Retail prices would be even more unfair for those most in need and least able to bargain • The uninsured pay the highest prices, if they pay

23. Insurance as Purchasing of Health Services:Efficiency • US pays highest prices for health services • MD and RN earnings; drugs and devices • Continual conflict between insurers and providers • Providers hate HMOs, Medicare FFS, Medicaid • Multi-payer system reduces risk to providers • This reduces imperative for lobbying • Cost sharing facilitates generic substitution etc.

24. Insurance as Purchasing of Health Services:Innovation • The multi-payer system facilitates experimentation • Methods of provider payment (DRG, capitation, EOC) • Disease management for chronic conditions • Methods of provider organization • Medical groups, vertical integration, specialty facilities • Transparency and performance monitoring • Report cards, pay-for-performance

25. Insurance as Purchasing of Health Services:Positives • Multi-payer systems foster experimentation and diversity in organization and delivery of care • The US system fosters more transparency, performance measurement than many • It is less subject to capture by providers • It offers less pork to politicians

26. Insurance as Purchasing of Health Services:Challenges • Multi-payer systems lack cost control power • This may be a good thing (for innovative sectors) • Dynamic versus static efficiency • Conflict and confusion at the plan/provider interface • Exhaustion and low expectations • Case rates? Specialty organization? DM and QI? • Consolidation among insurers and providers

27. Insurance as Redistribution and Purchasing: Summing Up • Tradeoffs between the two functions of insurance? • Single-payer governmental systems are more effective at pooling risk, forcing healthy to pay for sick • Multi-payer (mixed public/private) systems allow more experimentation in care delivery/organization • Universal coverage within a multi-payer system?

28. Biotechnology and Insurance: Summing Up • Equity • Biotechnology: 8/10 • Insurance (distribution): 4/10 • Efficiency • Biotechnology: 6/10 • Insurance (purchasing): 6/10 • Innovation: • Biotechnology: 10/10 • Insurance (purchasing): 6/10