One Researcher’s Perspective: Assessing the Right Combination of Market and Policy Levers for Value

Oct. 14, 2020
Michael E. Chernew, Ph.D. of Harvard Medical School has published an op-ed in The New England Journal of Medicine that assess the pros and cons of attempting to trigger value in the U.S. healthcare system

A healthcare researcher has published an analysis of the market-based healthcare system in the United States that is critical of several key elements of healthcare market dynamics, yet stops short of condemning the system overall. Michael E. Chernew, Ph.D., of the Department of Health Care Policy at Harvard Medical School in Boston, published on Oct. 8 in The New England Journal of Medicine online a “Perspective” op-ed entitled “The Role of Market Forces in U.S. Health Care.”

As Chernew states at the outset, “Prior to the explosion of Covid-19, which has sent shockwaves through the U.S. health care system, controlling the growth of health care spending was a central health policy issue. Once Covid-19 is largely behind us, health policy will return to this goal with perhaps even more urgency, because the fiscal pressures on public and private payers, which were substantial before the pandemic, will be even greater. The key to success moving forward, as we recover from the Covid-19 shock,” he says, “will be to create a more efficient delivery system. We will have to reduce the amount of low-value care delivered and address excessive prices that burden payers and distort incentives. The important question is how to do that.”

Chernew expresses a considerable level of ambivalence towards the element of market dynamics in U.S. healthcare. As he notes, “Markets are the foundation of our economy. When functioning well, they convey between buyers and sellers enormous amounts of information about production costs and consumer demand. They promote efficient production and cost-reducing innovation.”

That said, he continues, “No market functions perfectly, however, and health care markets are more imperfect than most. One indication of the failure of competition is the wide variation in prices for care across markets,” he writes, pointing to a map showing the ratio of inpatient commercial health insurer prices compared to Medicare prices, across all 50 states and the District of Columbia. “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. Rural markets are, not surprisingly, a problem, but even many urban markets are very consolidated,” he notes.

Among the underlying challenges in our system, Chernew says, is the highly problematic nature of the system that produces health insurance premiums. Because those premiums are tied to the risk pools involved with beneficiaries in individual insurance pools, there is a disconnect between the risks associated with individuals across their lifetimes, and the constant shift of individuals across different health insurance populations; he doesn’t explicitly name problems inherent in the current, still-mostly-employment-based, health insurance system, but clearly that is one very large element in this.

What’s more, despite the fact that there are weaknesses inherent in market-based healthcare systems, Chernew says that “Markets have proven successful in many ways — for example, they have been effective at encouraging innovative care delivery and financing approaches, such as telemedicine, and new payment models, such as accountable care organizations and episode-based payment. 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.”

Meanwhile, Chernew notes that initiatives designed to increase the price sensitivity of patients who are pondering which services or providers to seek care from, have had “very little success, primarily because patients rarely use the transparency tools that are available, decisions are complex, and patients fear disrupting their relationships with their physicians.”

Chernew believes that “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.”

In the end, Chernew opines, one need not be extreme on either side. Instead, he says, “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,5 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.”