For years, some Democrats have proposed a “single payer” or “Medicare for all” health system as the solution to the problem of millions of Americans going without health insurance coverage. Lack of coverage is a serious problem that must be corrected by government action, but “political control” single payer (as opposed to market control) is not the answer. If single payer means that all health care providers should be paid by the same government entity, this would probably mean a continuation of the current and all-too-pervasive open-ended uncoordinated fee-for-service system, with resource allocation and prices controlled by political forces. But the fundamental failures of traditional fee-for-service are becoming increasingly apparent, and this route would not lead us to improved quality or lower cost. The incentives are wrong and would continue to be so under a single-payer system. Medical groups working under per capita prepayment arrangements would also be forced to switch to fee-for-service, which inappropriately rewards providers for the volume of services they provide, not the value or health status they improve.
There are a number of reasons that fee-for-service does not improve the provision of care. First, medicine is a team endeavor. Quality and economy are produced and improved by teams of professionals working closely together in a well-coordinated effort. By not capitating payment, fee-for-service is a centrifugal force that acts as an incentive for doctors to act as individuals, instead of as part of a team. Second, fee-for-service rewards poor quality; if the doctor fails to make a correct diagnosis or performs a procedure poorly, the sick patient will need more services. The right diagnosis and correct procedure lead to a cured patient who doesn’t need more services. Third, fee-for-service does not reward the prompt solving of the patient’s problem. And it can lead to waste, fraud, and abuse. In July 2017, an official of the Government Accountability Office told the House Ways and Means Committee that the total improper payments in Medicare in 2016 approached $60 billion. Similar findings have been reported as far back as the 1970s. The need for many services is uncertain, and it can be impossible for the remote insurer or a government agency to determine what is really necessary.
Fee-For-Service And Single-Payer Alternatives
The main alternative to traditional uncoordinated fee-for-service is the integrated delivery system. Integrated delivery systems are mostly large multispecialty physician-led group practices with a proactive focus on the health of their enrolled population. Their incentives are aligned with the best interests of patients and the “Triple Aim” of better health, better care, and lower cost. Physician pay is primarily salaried, and therefore potential reimbursement does not bias treatment decisions. Integrated delivery systems have a culture of teamwork and shared responsibility for patients. There is full sharing of patient information and a commitment to populate the patient record and electronic health records, and to help develop and apply evidence-based best practice guidelines. Currently, there are at least 30 integrated delivery systems in this country. The best known are Kaiser Permanente, now caring for 11.8 million enrolled members in eight states and the District of Columbia; Intermountain Health Care System in the Rocky Mountain region; and the Geisinger Health System in Pennsylvania.
The alternative to single payer is for the government to do two things. First, create exchanges that encourage value-for-money competition among health plans; by that, I mean competitors should seek to improve their plan’s value instead of racing to the bottom on price. Second, make premium support payments on behalf of all legal residents that are nearly equal to a low-price plan offering coverage according to a standard package and meeting quality standards in each market area. This way, every consumer or household can make an informed, cost-conscious choice of plan; if the consumer wants to choose a more costly plan, he or she must pay the difference out of pocket with net after-tax dollars.
Competition over quality, service, and per capita payment for comprehensive care is the best way to introduce price competition. People can understand it, and total per capita cost is the measure of greatest economic importance. In fact, there are several populations in this country covered through managed competition: federal employees, retirees, and families; public employees, retirees, and families in California; state employees and families in Wisconsin; and University of California and Stanford University employees and families. This is not a new, untried idea. It has been in successful practice for more than 50 years, but it only affects a small fraction of the population, not enough to drive transformation of the entire delivery system. Traditional fee-for-service is too prevalent for providers to decide they must change.
The RAND Health Insurance Experiment, a randomized controlled trial, found that the Group Health Cooperative of Puget Sound based in Seattle, Washington, an integrated delivery system now a part of Kaiser Permanente, produced high-quality comprehensive care for a 28 percent lower cost than fee-for-service in the same community. Other studies reached similar conclusions. This integrated delivery system accomplished this in the absence of competition from similar organizations and in the absence of price-conscious customers. Preferably, the consumer will have a choice from among competing integrated delivery systems. Unfortunately, at the outset, there will be many areas of the United States without an integrated delivery system.
What about areas where there are no integrated delivery systems? There are now more than 900 accountable care organizations (ACOs), at least one operating in every state, and they care for some 32 million patients. ACOs are steps in the direction from fee-for-service to integrated delivery system as physicians learn to work together to improve value. Insurance companies are now contracting with ACOs and offering a comprehensive coverage contract based on them. In a competitive value-for-money environment, the incentives will make further integration in their best economic interest.
Some nonintegrated delivery system providers and insurers, out of fear of competition from better integrated delivery systems, will likely move toward becoming better coordinated and more economical. For example, in California, where Kaiser Permanente’s market share in the commercially insured market is now about 43 percent, more than twice that of Blue Cross, the next largest insurer. Blue Cross has formed “Vivity,” an insurance plan in Southern California linking seven major medical centers, and it offers a premium to California public employees that is about the same as Kaiser’s. The providers are paid per capita. In the north, Sutter hospitals, a nonprofit system of hospitals and medical groups, has formed a health maintenance organization (HMO) and is quoting a price near Kaiser’s. Additionally, Blue Shield of California is now forming networks of ACOs that can be marketed as HMOs or preferred provider organizations (PPOs). Of course, these innovations were motivated by competitive necessity. This pattern can be expected to be repeated in other regions, and therefore we don’t have to wait for Kaiser to spread to every region to experience its model.
Designing Ideal Managed Competition
Health services and health insurance are not naturally competitive in the sense that competition will lead to efficient and equitable outcomes. A wholly free market does not work in health insurance. Like the securities markets, there must be rules and structure to produce good outcomes. Major hurdles include designing rules against unstable “death spirals,” against competition to select risks versus to provide value for money for all enrollees, against market segmentation to produce price inelastic demand, and against cost-unconscious choice and uninformed choice. Rules and structure are needed to reward pursuit of the Triple Aim. To acheive equity, there must be guaranteed issue within the defined covered population, with no exclusions for preexisting conditions. For price sensitivity or cost-conscious choice, the competitors must be required to offer a standard comprehensive contract and the sponsor (employer or government) should pay for the low-price plan and no more than that—to encourage the most people to enroll and achieve price sensitivity for full-price (higher-price) premiums. Subsidies for participation and penalties for nonparticipation need to be strong enough to assure continuous participation at or near 100 percent of the target population. Otherwise, there may be “free riding” and destabilizing risk selection.
I rarely meet someone who has actually read his or her health insurance policy and even more rarely meet someone who has understood it. Health insurance contracts need to be standard so that people can understand and compare without having an advanced degree in actuarial science. For price-elastic demand, it is important that people can understand and switch plans without fear of encountering “air pockets” of coverage or tricky exclusions. Also, nonstandard contracts can be designed to select risks.
Markets need to work through exchanges, which can act as impartial brokers by eliminating direct contact between consumers and plans during enrollment, thus negating the opportunity to select risks. Modified community rating would offer the same price for the same coverage for all; however, a market may be subivided by age groups with appropriate subsidies for members of each group (for example, higher premiums and subsidies for older enrollees). There needs to be a credible, neutral source of quality-related information so consumers have reliable information on quality of care, service, and consumer satisfaction. Despite efforts to design against it, health risks and expected costs are likely to fall unevenly among the enrollees of different plans. Without appropriate countermeasures, some plans may seek to attract good risks and repel bad risks to improve their cost advantage. The process of risk selection can be very subtle; a health plan or medical group might avoid developing excellence in care of costly diseases to avoid attracting enrollees with costly conditions. Therefore, a process of risk adjustment must be applied to be able to compensate plans that systematically attract poor risks at the expense of plans that select good risks.
The Superior Alternative
In sum, the alternative to political-control single payer is consumer-choice market control; that is, for the government to create exchanges, offer premium support payments and access to the exchange, pay the price of the low-price plan in full (to facilitate universal access), and allow everyone to make an informed, cost-conscious choice of plan. The goal would be universal coverage and economical health care. This could be done in a streamlined, efficient manner. Eventually the 30–40 percent waste would be removed by increased competition. Under this scenario, it doesn’t really matter whether the government or private insurers are paying—what matters is that the incentives are right. But this would not be “single payer,” it would be multiple, competing payers.
One good way to pay for this managed competition model would be to abolish the tax exclusion for employer-sponsored health insurance, now costing some 1.6 percent of gross domestic product. However, more than 150 million Americans get their health insurance through their employers, and apparently they are satisfied with it. So even limiting the tax exclusion appears politically impossible. An alternative policy to foster managed competition would be by giving employers incentives to adopt private-sector exchanges and offer employees choices of plan.
What’s In It For The Parties?
Managed competition has proved to be an idea attractive to members of both political parties. In 1992, Congressmen Jim Cooper (D-TN), Michael Andrews (D-TX), and Charles Stenholm (D-TX) introduced the Managed Competition Act, with many Republican co-sponsors. In 1998, the Breaux-Thomas bipartisan Commission on the Future of Medicare recommended managed competition for Medicare. Subsequently, the Bipartisan Policy Center Commission, led by Alice Rivlin and Pete Domenici, recommended the same. More recently, around 2010, Senator Ron Wyden (D-OR) and Senator Bob Bennet (R-UT) developed a bipartisan proposal for universal insurance based on managed competition principles. They rallied 16 bipartisan sponsors (eight Republicans and eight Democrats). For the Republicans, this version of managed competition offers a cost-contained system and a solution beneficial for public finances. For the Democrats, it offers universal coverage equitably delivered.
Moving Forward
Despite the recent Republican failure to repeal the Affordable Care Act (ACA), its survival is not guaranteed. As Congresswoman Nancy Pelosi (D-CA) has recommended, the first thing to do is to continue the fight to preserve the ACA. Then, as Senators Lamar Alexander (R-TN) and Patty Murray (D-WA) have begun, Democrats should seek a bipartisan package of measures to stabilize the ACA markets. The failure of repeal and replace should make some Republicans willing to participate in such an effort. The package should include a stronger individual mandate and reinsurance for health plans to reduce their risks of participation, thereby facilitating lower premiums. There should also be explicit authorization of the cost-sharing reduction subsidies to make care more affordable for low-income families (although the future of the payments is uncertain). Democrats should continually seek improvements to the ACA.
Democrats should also join with Republicans to modernize Medicare along managed competition lines as recommended by the bipartisan commissions. That could be done by building on the successful Medicare Advantage program, and if the link to fee-for-service payment were severed, beneficiaries could still be offered comprehensive coverage at an affordable price linked to the low-price plan in each market area. Eventually, that could save billions of dollars in the federal budget.
The ACA was passed without a single Republican vote. That turned out to be a mistake. As Senator John McCain (R-AZ) and others have pointed out, far-reaching social legislation must be bipartisan to be durable. Democrats should seek bipartisan solutions.
