Why Price Transparency Cannot Cure American Healthcare

Why Price Transparency Cannot Cure American Healthcare

Jonathan Klein[*]

 

“Price transparency” is a buzz-phrase one tends to hear a lot in discussions over healthcare reform. Price transparency laws, which require covered health care providers to disclose to consumers cost estimates for health care services, are attractive to lawmakers on both sides of the aisle, and it’s easy to see why. They ostensibly empower consumers by making more pricing information available to them. In theory, consumers can then use this information to shop around, ultimately saving money both at both the individual and systemic levels. As Nino Monea, Class of 2017, noted, greater price transparency will probably generate at least some savings for individuals and the healthcare system as a whole. In this article, I explore the situations in which price transparency is most likely to reduce health care costs, and suggest ways to expand the impact of transparency mandates on the cost of health care.

Perhaps most importantly, transparency laws are premised on consumerism—a premise that is somewhat controversial. Many people are reluctant to view health care as simply another other market good, amenable to price shopping and marketplace competition.[2] Concerns about “reducing” health care to the status of a market good are evident in the language we use: Are those who undergo surgeries patients, or merely “consumers”? Many doctors and patients resist viewing health care as any other market commodity, and as a result may be less comfortable doing what consumers do: shopping for the best combination of price and quality. People feel attached to their doctors, to their hospitals, and to the care they know. They may not be willing to leave the comfort of what’s familiar simply for a better price across the street.

In addition to concerns about the commodification of health care, patient preferences about their roles in the health care decision-making process may also deter shopping. One meta-analysis on patient preferences found that as many as 80 percent of patients preferred to take an active or collaborative role in the decision-making process.[3] These patients were more likely to seek out, or at least to inquire about, alternative treatments. These patients, by extension, may be more likely than passive health care participants to seek out lower-cost providers.[4] Ultimately, if price transparency mandates and other market-driven solutions are to successfully lower the costs of health care, then a paradigm change may be necessary: Patients must acknowledge that the market for health care, while unique in many ways, is ultimately still a marketplace in which they can—and should—seek out the best value for their money.

In more concrete terms, transparency laws are premised on price sensitivity. This means that consumers react when prices are too high. In most markets other than health care, consumers respond predictably to pricing information. Take, for example, two gas stations on opposite sides of the street: When one sells gas for a quarter less than the other station, rational consumers will choose the cheaper station, all else being equal (and emphasis on this point, because other factors like product quality and brand loyalty will alter the decision-making process for some consumers).

However, the healthcare market is fundamentally different than other markets. Consumers of health care often do not have time to shop for lower prices. In emergencies, the decision where to seek treatment is often dictated by geographical constraints (i.e. which emergency room is closest to the patient) and hospital facilities (i.e. whether a hospital has the equipment and staff necessary to treat the patient’s illness). This means price transparency in health care has a limited impact except for elective operations, where patients have time to shop for lower prices. But because emergency care is a relatively small portion of overall spending—estimates range from 2 to 10 percent[5]—price transparency still has the potential to significantly reduce health care costs.

Even for elective procedures, many consumers have too few incentives to seek out lower-cost care. As Jeremy Salinger, Class of 2017, notes, the market for healthcare is fundamentally different than other consumer markets because the party receiving healthcare—the patient—is often not the same party who pays for that care. This is the third-party insurance system, and it distorts patient incentives in a variety of ways. An important distortion that is sometimes overlooked in discussions about healthcare reform arises from the asymmetry between patient and payor preference. If consumers paid the full cost of their healthcare, we would expect rational consumers to be perfectly price-sensitive (provider quality and all other factors being equal). Uninsured patients must pay the full cost of their health care and, consequently, are most likely to search for the lower-cost provider.[6]

One useful way to discuss the different degrees to which patients care about the cost of health care is to categorize patients into different “zones” based on the size of their financial incentive in finding cheaper care. The uninsured patient falls into the first of three such incentive “zones.”[7] On the other end of the spectrum, in a third incentive zone, are patients who have no direct financial stake in the decision-making process.[8] For example, some patients with premium insurance plans may have no co-pays or deductibles, and as a result may be disinclined to search for lower-cost providers. In the middle of the spectrum are patients who have some financial incentive to seek out lower-cost health care; the strength of the incentive corresponds to the cost-sharing burden on the patient.[9]

Caps on patients’ out-of-pocket expenses may have the unintended consequence of making consumers less price sensitive. The Affordable Care Act, by capping cost-sharing (whether in the form of deductibles, co-pays, or co-insurance) at $6,600 for individual and $13,200 for family plans,[10] may disincentivize patients from seeking out lower-cost providers once they reach the cost-sharing cap.

In addition to the psychological hurdle discussed earlier, there are also practical problems with the implementation of a transparency mandate. Unlike many other consumer goods, health care is often not fungible, even for the same type of procedure.[11] In other words, many patients and procedures tend to be unique. This presents a challenge for health care providers, who are often unable or unwilling to give advance estimates unless they can evaluate the patient’s medical history in detail.[12] Inherent uncertainty in diagnosis also makes it difficult for patients to compare prices: Because physicians often cannot make a definitive diagnosis until the patient undergoes testing or an exploratory procedure, patients are poorly positioned to know whether a test or procedure is necessary and whether the hospital is charging an above-market rate.[13] While transparency mandates may have a limited impact on complex, costly procedures, they are likely to achieve cost savings where health care is easily consumed. For example, the markets for prescription drugs and flu shots are highly price-competitive in part because these items do not need to be tailored to the particular needs of each patient.

Even when providers are comfortable giving quotes in advance, many patients find themselves comparing apples to oranges.[14] One study of California hospitals found that not all hospitals included the total cost of the operation in their price quotes; they often excluded doctors’ charges and facility fees, which can account for a significant portion of the overall cost.[15] The presence of these “hidden fees” makes it difficult for consumers to accurately compare total price—the most relevant number from a consumer’s perspective—across providers. If lawmakers create an inclusive definition of what price must be disclosed, then they can help level the playing field for consumers.

Even if consumers gain better access to useful price information, there are reasons to believe that price transparency mandates will either not change or will increase the overall cost of health care. As Mr. Monea suggested, there are at least two circumstances in which price transparency mandates are especially unlikely to succeed. First, in markets with a single provider (for example, specialists in rural markets), the only way for consumers to seek out a lower-cost provider is to travel out of market, which may not be feasible for ill patients or lower-income patients who cannot afford to travel. New Hampshire’s experience confirms that mandated price transparency has minimal impact on rural health care markets.[16] Second, price transparency mandates may facilitate collusion by giving health care providers better access to their competitors’ pricing policies.[17] In this scenario, transparency laws could enable providers to discreetly call competitors, determine how much they charge for a particular procedure, and ultimately set their prices at the same rate.[18] Ultimately, this means that price transparency is likely to save consumers—or patients, depending on one’s perspective—money only where patients have meaningful choices between higher- and lower-cost providers.


[*] J.D. Candidate, Harvard Law School, 2016; B.A., University of Georgia.

[2] For an overview of the debate over health care as a market good, see Edmund J. Pellegrino, The Commodification of Medical and Health Care: The Moral Consequences of a Paradigm Shift from a Professional to a Market Ethic, 24(3) J. Med. Phil. 243 (1999).

[3] Jochnanan Benbassat, Dina Pilpel & Meira Tidhar, Patients’ Preferences for Participation in Clinical Decision Making: A Review of Published Surveys, 24(2) Behavioral Med. 81, 85–87 (1998).

[4] Id.

[5] See Louis Jacobson, Does emergency care account for just 2 percent of all health care spending?, PolitiFact (Oct. 28, 2013), http://www.politifact.com/truth-o-meter/statements/2013/oct/28/nick-gillespie/does-emergency-care-account-just-2-percent-all-hea/ [https://perma.cc/7YHB-VX7D] (citing Michael H. Lee, Jeremiah D. Schuur & Brian J. Zink, Owning the Cost of Emergency Medicine: Beyond 2%, 62(5) Ann. Emergency Med. 498 (2013), http://www.annemergmed.com/article/S0196-0644(13)00313-2/pdf []).

[6] Cf. Alan B. Krueger & Ilyanan Kuziemko, The demand for health insurance among uninsured Americans: Results of a survey experiment and implications for policy, 32(5) J. Health Econ. 780 (2013) (finding significant elasticity of demand for health care insurance among uninsured).

[7] Lecture by Prof. Christopher Robertson, Visiting Professor, Harvard Law School (Oct. 2014) (articulating the concept of “zones of insurance” to describe the different financial incentives facing health care consumers).

[8] Id.

[9] Id.

[10] See Out-of-pocket maximum/limit, U.S. Ctrs. for Medicare and Medicaid Servs. (Jan. 3, 2015), https://www.healthcare.gov/glossary/out-of-pocket-maximum-limit/ [https://perma.cc/SK75-8Z59].

[11] See, e.g., Mathew W. DeCamp, Ethics and the Physican-Patient Relationship: Medico-moral Consequences of Commodification, 19 Einstein Quart. J. Biol. Med. 135, 136 (2002) (rejecting health care as a commodity in part because it is not a fungible good); Pellegrino, infra note 14 (discussing fungibility in the context of commodification).

[12] See Kate Stockwell Farrell, Leonard J. Finocchio, Amal N. Trivedi & Ateev Mehrotra, Does Price Transparency Legislation Allow the Uninsured to Shop for Care?, 25(2) J. Gen. Internal Med. 110 (2009).

[13] Renee Y. Hsia, Abbas H. Kothari, Tanja Srebotnjak & Judy Maselli, Health Care as a ‘Market Good’? Appendicitis as a Case Study, 172 Archive Intern. Med. 818, 819 (2012).

[14] See Farrell et al., supra note 11, at 110–111.

[15] Id.

[16] See Ha T. Tu & Johanna R. Lauer, Ctr. for Studying Health System Change, Impact of health care price transparency on price variation: The New Hampshire experience (2009), http://www.hschange.org/CONTENT/1095/1095.pdf [https://perma.cc/TFN6-YU93].

[17] See Paul B. Ginsburg, Shopping for Price in Medical Care, 26(2) Health Affairs w208, w214–15 (2007) (explaining how price transparency mandates could facilitate collusion among health care providers).

[18] Id.

Saving the Affordable Care Act if the King v. Burwell Challenge Succeeds

In this essay, I will assume that it is the day after the Supreme Court’s decision in the upcoming case of King v. Burwell, the latest challenge to the Affordable Care Act, and will further assume that the Supreme Court has found for the plaintiffs in a decision roughly along the lines of that handed down by the DC Circuit panel in Halbig v. Burwell. I will propose and discuss a method that the Obama Administration could use to ensure that the ACA continues to function as intended even after such a ruling, or that the Obama Administration could implement in advance of such a ruling as a means of rendering the King challenge substantively moot. Those familiar with King may wish to skip the “Background” section of this essay, and move directly to the section entitled “Goals and Constraints”.

Saving the Affordable Care Act if the King v. Burwell Challenge Succeeds

Freilich Jones[*]

 

Abstract

In this essay, I will assume that it is the day after the Supreme Court’s decision in the upcoming case of King v. Burwell, the latest challenge to the Affordable Care Act, and will further assume that the Supreme Court has found for the plaintiffs in a decision roughly along the lines of that handed down by the D.C. Circuit panel in Halbig v. Burwell. I will propose and discuss a method that the Obama Administration could use to ensure that the ACA continues to function as intended even after such a ruling, or that the Obama Administration could implement in advance of such a ruling as a means of rendering the King challenge substantively moot. Those familiar with King may wish to skip the “Background” section of this essay, and move directly to the section entitled “Goals and Constraints”.

 

Background

Sometime this coming summer, the Supreme Court will decide the case of King v. Burwell,[2] the latest challenge to the Patient Protection and Affordable Care Act (hereafter the “ACA”).[3] Unlike the previous challenge to the ACA to reach the Supreme Court (NFIB v. Sebelius),[4] King does not attack the constitutionality of the law. It is a much narrower case, focusing on the way a single critical provision of the ACA has been implemented by the IRS. Section 36B of the ACA governs the manner in which the tax credits that allow low-income individuals to purchase health care are calculated and distributed. Under this section, a taxpayer is only eligible to receive tax credits based on the plans offered on and enrolled in through, “an Exchange established by the State under 1311 of the Patient Protection and Affordable Care Act,” with §1311 of the ACA authorizing states to establish health exchanges. While the drafters of the ACA expected each state to establish their own exchange, more than 30 states declined to do so. The federal government then stepped in pursuant to authority granted to it under the ACA’s § 1321, which empowered the federal government to “establish and operate [an] Exchange” within any state that was unwilling or unable to set one up by a specified date. The plaintiffs in King claim that the IRS may not give tax credits to individuals and families signing up in exchanges facilitated by the federal government since those exchanges were set up by the federal government pursuant to §1321, not by the “State under §1311.” The Administration claims that a less myopic reading of the ACA allows the IRS to grant tax credits to taxpayers in states that use either type of exchange.

If the King challenge succeeds, the results would be devastating to the system established by the ACA. As Timothy Stolzfus Jost has written in the New England Journal of Medicine, such a ruling would quickly cause a catastrophic chain reaction throughout the American health insurance system:

First, nearly 5 million Americans who chose an insurance plan through the federal exchange using a premium tax credit would lose that credit—and probably their health insurance. Since the enforceability of the ACA mandates that large employers provide and individuals obtain health insurance depends on the availability of tax credits, those mandates could also disappear or be seriously undermined in two thirds of the states. Insurers, however, would still be required to offer coverage regardless of applicants’ preexisting conditions. Absent the premium tax credits and the mandates, the risk pool for insurers in states with federally facilitated exchanges would deteriorate rapidly, causing premiums to rise precipitously. The individual insurance market could indeed collapse entirely in these states, leaving millions of Americans uninsured.[5]

This essay will not address the merits of either side of King, or the precise extent of the damage a ruling for the plaintiffs in King would cause the ACA system. Both issues have been ably explored elsewhere. Instead, we will assume that it is the day after the Supreme Court’s decision in King, and that the Supreme Court has found for the plaintiffs, holding that tax credits may only flow to those who have signed up for health care plans through state-established exchanges created pursuant to the ACA’s § 1311, and may not flow to those who have acquired their plans through the exchanges established by the federal government in more than 30 states under the ACA’s § 1321. I will propose and examine a method that the Obama Administration could use to ensure that the ACA continues to function as intended even after such a ruling. Alternatively, the approach I propose could be implemented in advance of such a ruling, rendering the King challenge moot.

 

Goals and Constraints

Any King workaround must meet at least the following requirements if it is to be taken seriously:

  • Keep the ACA system afloat by ensuring the continued flow of tax credits to the residents of all states.
  • Use only the policy tools actually available to the Obama Administration. This means that any workaround dependent on passing legislation through Congress, now unified under Republican control, is unlikely to succeed. Similarly, no workaround can reasonably depend on the active cooperation of the states that originally refused to set up exchanges, or that have been since fallen under the control of those opposing the success of the ACA’s exchange program. Effectively, this means that any workaround cannot depend on any State that is not under Democratic Party control, as opposition to the ACA has become too important politically to the Republican Party for the Administration to rely on Republicans for support.
  • Avoid the precedential landmines that will likely be created by a ruling for the plaintiffs in King. Any ruling in King that goes against the Obama Administration will likely be based on a close textualist critique of the statutory text governing the provisioning of tax credits. Any workaround must be designed to survive a textualist judicial review and cannot rely for its defense in court on purposivist legal doctrines, as the Supreme Court will likely have dismissed such arguments insofar as they apply to the provisioning of 36B tax credits.

Our task is seemingly impossible. How can the Obama Administration get around a Supreme Court decision in King using only federal rulemaking, and the cooperation with those state governments in which the Democrats control both houses of the state assembly as well as the governor’s mansions? A close examination of the text of the ACA shows, however, that such a workaround may in fact be feasible.

 

The Workaround

The workaround depends on the interaction of two seemingly unrelated provisions in the ACA:

  • If a state is unwilling or unable to establish and operate a qualifying exchange by January 1, 2014, “the Secretary shall (directly or through agreement with a not-for-profit entity) establish and operate such Exchange within the State and the Secretary shall take such actions as are necessary to implement such other requirements.” (42 USC § 18041(c)(1)) (emphasis added).
  • The ACA defines an exchange as “a governmental agency or nonprofit entity that is established by a State” for the purposes of Section 1311. (42 USC 18031(d)(1)) (emphasis added).

In combination, these two provisions allow the Administration to conclude an agreement with a nonprofit health exchange established by one state under the ACA’s § 1311, under which that nonprofit health exchange would operate health exchanges in other states that were unable or unwilling to establish exchanges of their own. While such exchanges would be run pursuant to the federal government’s ACA § 1321 authority to operate exchanges in states that cannot or will not do so themselves, they would still have been “established” by a “state under 1311” of the ACA. Individuals and families signing up for health care plans through exchanges operated under such an arrangement would be signing up through exchanges “established by the State under 1311,” and would therefore be eligible for tax credits. In effect, the federal government would be incorporating its entire exchange operation into the nonprofit entity created by one of the states. Furthermore, the workaround meets our three requirements for any workaround to King to be taken seriously. First, it requires only federal rulemaking, and the cooperation of a single state government, to succeed. Second, it depends on a very literal reading of the text of the ACA, precisely the sort of reading that the Supreme Court is almost certain to endorse if it finds for the plaintiffs in King. This reliance on the Supreme Court’s reasoning in King would make the workaround more likely to survive lower court review. Third and finally, this workaround will ensure that individuals in every single state of the Union can continue to receive the tax credits that enable them to afford health insurance.

 

Potential Problems

At this point, it is fair to ask whether any other provisions of the ACA might make difficult to implement this approach. There are two potential concerns, although both can be overcome. We will address each in turn.

The first critical issue that the Administration would need to avoid in adopting this approach would be running afoul of section 1311(f)(1) of the ACA,[6] which states that an exchange may only operate in more than one state if “each State in which such an Exchange operates permits such operation; and the Secretary approves such regional or interstate exchange”. The Obama Administration has at least three ways to circumvent this restriction. First, the Administration could convince a state to establish some 50 nonprofit exchanges. The Federal government would then contract with each nonprofit exchange to operate only in a single state. Second, the Administration could try to issue a rule making it very difficult for any state to fail to permit the operation of an interstate exchange. As a third option, the Administration could take advantage of the ACA’s §1311(f)(2), which allows states to “establish one or more subsidiary exchanges if (A) each such Exchange serves a geographically distinct area; and (B) the area served by each such Exchange is at least as large as a rating area described in section 2701(a) of the Public Health Service Act”. Under this structure, the main “umbrella” exchange would not operate anywhere; it would serve exclusively as a sort of holding company. Each subsidiary exchange would operate in exactly one state, avoiding the need to request state permission to operate interstate exchanges. Since states are distinct geographic areas, and all states are at least as large as the rating areas described in section 2701(a) of the Public Health Service Act, the requirements necessary to establish and operate a subsidiary exchange would be met. Of these three options, the first and third seem the most likely to survive subsequent judicial review. It is difficult to imagine how the second option might be accomplished, since the plain text of the ACA clearly gives states effective veto power over interstate exchanges. Between the first and the third options, the third seems preferable, as it is likely easier to manage a nested group of exchanges than it is to manage 50 completely independent exchanges.

In addition to 1311(f)(1), there is one argument that, at first glance, might appear to cause problems for our proposed workaround, but at second glance would not. 26 USC 36B(b)(2)(A), the very provision that lies at the heart of the King suit, refers to “the monthly premiums for such month for 1 or more qualified health plans offered in the individual market within a State which cover the taxpayer, the taxpayer’s spouse, or any dependent (as defined in section 152) of the taxpayer and which were enrolled in through an Exchange established by the State under 1311 of the Patient Protection and Affordable Care Act…”. The phrase “the State under 1311”, by including a definite article rather than an indefinite article, clearly points back to some specific state. While at first glance there is a possibility that this definite article could refer back to the state of the enrollee’s residence, a closer look makes clear that this is not so. “The State”, in this case, refers back to the “state” mentioned in the phrase “qualified health plans offered in the individual market within a State which cover the taxpayer” earlier in 36B(b)(2)(A). As long as the qualified health plans covering the enrollee are offered on an individual market “within state”, not specifically the state of the enrollee’s residence, the law clearly contemplates that it may cover that taxpayer. Since the phrase “the state under 1311” refers back to this previous phrase, which discusses only the plans covering the taxpayer that are on an exchange established by (read “any”) state, it actually reinforces the idea that an exchange in one state may cover a taxpayer in another.

A word of caution: while my review of the language of the ACA suggests that these are the only two real issues that must be addressed for the workaround to be implemented, it is possible that there are more. This possibility would need to be more fully explored before this workaround could be rolled out.

 

The Workaround in Practice

Seven states will have both houses of their legislatures, and their governors’ mansions, controlled by the Democratic Party after the 2014 election and inauguration process has been completed: California, Connecticut, Delaware, Hawaii, Oregon, Rhode Island, and Vermont. One of these, President Obama’s birth state of Hawaii, is at the time of writing also the only state to have established a nonprofit health exchange system. These seven are the states that would likely be most willing and able to work with the Administration to authorize and establish nonprofit exchanges that would be capable of executing the workaround. That being said, actually convincing any of these seven state legislatures and state administrations to pass the necessary laws would certainly require some amount of lobbying, and close political coordination with the White House.

The first step in implementing the workaround described above would therefore be for the Obama Administration to work with one (or more) of these seven states to pass state laws that:

  • Establishes a not-for-profit health exchange with 50 subsidiary exchanges, or 50 not-for-profit exchanges, as described above.
  • Authorizes the new exchanges(s) to contract with the federal government to provide exchange services. There would be no need for the legislature to pass any provisions explicitly allowing (or requiring) the nonprofit exchange to provide ACA related exchange services in other states; all the state need do is authorize the nonprofit exchange to contract to provide services to the federal government (or others) related to the management of exchanges.
  • Includes any other provisions necessitated by the laws governing nonprofits, state-chartered institutions, and health-care related institutions in the state establishing the not-for-profit exchange.

The state would then staff and set up the new exchanges. Concurrently, the federal government would contract with the exchanges, or subsidiary exchanges, to take over the management of the federally facilitated exchanges in those states that had not established exchanges of their own to that point. This contract would, in addition to other factors, likely need to:

  • Provide federal dollars to cover the costs states would incur in setting up the new nonprofit exchanges.
  • Be structured in such a way, and be of a long enough term, that the arrangement would survive actions taken by political leaders hostile to the ACA should they come to power in the state creating the nonprofit exchange, or win both the Presidency and Congress. This would almost certainly require additional rulemaking in one, and maybe more, federal departments.
  • Insulate the state that creates the exchange from financial and legal liability for exchange activities in other states. No state, however supportive of the ACA, would be willing to sign on to an arrangement that gave anything less than total insulation from such liability.
  • Allow the exchanges to operate within the requirements of relevant health industry regulations, such as HIPAA, Medicare/Medicaid, and state-level insurance and health regulations in the states in which each exchange would be expected to operate.

Finally, while this workaround does provide a legally feasible way to ensure that the ACA exchange system continues to function in all 50 states in the event of an adverse ruling in King, the implementation of this workaround could be politically controversial. Opponents of the ACA would charge the Administration with taking advantage of a technicality, of exploiting the interaction of two little-noticed provisions of a huge act to seemingly get around the will of the Supreme Court, and the wills of the more than 30 states that have refused to establish their own exchanges. However, in the absence of alternative proposals that would enable the system to continue to function in all 50 states without the cooperation of either Congress or all 50 state legislators, it might ultimately be necessary for the Administration to confront the political controversy that would accompany the implementation of this, or any similar, workaround.

 

Conclusion

The Obama Administration, and other supporters of the ACA, should not overestimate their chances of prevailing over the King plaintiffs in the Supreme Court. Assuming that Justices Alito, Scalia, and Thomas replicate their votes against the ACA in NFIB v. Sebelius, and that Justices Breyer, Ginsburg, Kagan, and Sotomayor replicate their votes in favor of the Obama Administration, the ACA will only survive if one or both of Chief Justice Roberts and Justice Kennedy find against the King plaintiffs. While reasonable people can debate the probability of this occurring, it would be the height of shortsightedness for the Administration, or any other supporters of the ACA, to pretend that the ACA is not in grave danger. With that in mind, the Administration and supporters of the ACA should immediately begin to explore ways to ensure that the ACA survives a ruling for the plaintiffs in King, if they have not started doing so already.[7] One way to do so is the workaround sketched out in this essay. By incorporating the entire federal exchange operation into a not-for-profit health exchange system created by one of the states, the Obama Administration would ensure that health tax credits could be flow to all eligible taxpayers no matter their state of residence, and ensure that the Affordable Care Act is not made unworkable, without needing to achieve the impossible by gaining the buy-in of a hostile Congress and intransigent state legislatures.


[*] J.D. Candidate, Harvard Law School, 2016; B.S., University of Chicago.

[2] See Halbig v. Burwell, 758 F.3d 390 (D.C. Cir. 2014), cert. granted sub. nom King v. Burwell, No. 14-114 (Nov. 7, 2014).

[3] Patient Protection and Affordable Care Act of 2010 (“ACA”), Pub. L. 111-148, 124 Stat. 119.

[4] Nat’l Fed. of Indep. Bus. v. Sebelius, 567 U.S. 519 (2012).

[5] Timothy Stoltzfus Jost, Subsidies and the Survival of the ACA—Divided Decisions on Premium Tax Credits, 371 New England J. Med 890 (2014), available at https://www.nejm.org/doi/full/10.1056/NEJMp1408958 [https://perma.cc/TE9D-RLRH].

[6] ACA § 1311(f)(1), supra note 2 (codified at 42 U.S.C. §18031(f)(1)).

[7] As of December 23, 2014, HHS Secretary Sylvia Matthews Burwell refused to say whether the administration would be drawing up a contingency plan to be implemented in the event the Supreme Court rules for the plaintiffs in King. See Jason Millman, HHS won’t say if it’s preparing for a Supreme Court Obamacare nightmare, Wash. Post: Wonkblog (Dec. 23, 2014), http://www.washingtonpost.com/blogs/wonkblog/wp/2014/12/23/hhs-wont-say-if-its-preparing-for-a-supreme-court-obamacare-nightmare/ [https://perma.cc/HY43-TT3Z].

Recap of JOL Midterm Election Panel

On Monday, November 10, the Journal on Legislation hosted Professor Steve Ansolabehere (a Harvard government professor who consulted this year with CBS News on its election night coverage specializes in electoral politics, public opinion, and media) and Professor Elaine Kamarck (a Kennedy School professor and former White House senior staffer who created the National Performance Review, the largest government reform effort in the last half of the twentieth century, focuses on government efficiency and policy implementation). Moderated by JOL Membership Development Co-Chair Will Burgess, the panel discussed implications from the previous week’s elections and the political climate going forward to 2016. Here’s a quick recap of some of the panelist’s insights: Continue reading “Recap of JOL Midterm Election Panel”

Competitive Ideas for Reducing Healthcare Costs

Competitive Ideas for Reducing Healthcare Costs

Jeremy Salinger[*]

 

I. Introduction

Nino Monea, Class of 2017, recently proposed that making price information for medical care available to consumers online would increase the transparency in healthcare shopping, which in turn would lead to greater competition among healthcare providers and lower costs to consumers. Mr. Monea’s analysis focused on the relationship between healthcare providers (hospitals, doctors, etc.) and consumers (you and me), but this is only one of three relationships in the healthcare industry where increasing competition can lead to price reductions. In addition to competition between providers for consumers, proposals to encourage competition must also consider competition between payers (insurance companies) for consumers and competition between providers for payers.

This comment will explore the impact of increasing competition in all three of these relationships and argue that lowering healthcare costs through competition would be best accomplished by focusing on competition between payers for consumers and between providers for payers. I also suggest a few ways in which legislation can be used to this end. It should be noted at the outset that these suggestions are offered only because they demonstrate ways in which competition can be increased. These proposals have other important policy implications, which I ignore for the purpose of maintaining a limited scope.

 

II. The Provider-Consumer Relationship

It makes sense to begin the discussion by assessing the relationship which Mr. Monea focused on: the relationship between providers and consumers. In doing so, it emerges that there is room to increase competition between providers for consumers in order to lower prices, but the impact is stymied by the role of payers. Third party payers, insurance companies, hide pricing for medical services, making it so most consumers never see the sticker price of their medical care.[2] When a consumer goes to a doctor or hospital, that individual is responsible for the cost only up until they reach their annual deductible. Once a consumer’s cost of care surpasses his or her deductible, most insurance plans require that the consumer only pay a copay, a small, standard fee, or coinsurance rate, a percentage of the costs, for their medical care. For individuals receiving health coverage through their employer, the average deductible in 2013 was $1,135.[3] For those with copays, a system of greater price clarity—even if fully realized—will only save money up until they reach the $1,135 mark because after that point, consumers pay a standard copay for all of their providers within their network and so become indifferent to provider prices. For those with coinsurance plans, consumers remain price sensitive, but their value to saving becomes pennies on the dollar, decreasing the incentive to perform diligent research on cutting costs. Moreover, many plans offer out-of-pocket maximums, which cap the amount that someone with that plan can pay each year on their healthcare.[4] Once the maximum is reached, insurance companies pay the full costs of medical care, leaving consumers indifferent to prices. Sticker prices might be reduced through greater competition, but total savings to consumers is unlikely to significantly increase through competition in this area.

 

III. The Payer-Consumer Relationship

The next relationship to assess is that between consumers and payers. Greater competition among insurance companies for consumers would translate into lower prices for consumers. One of the major achievements of the Affordable Care Act was the establishment of state online marketplaces, formally called “exchanges,” where consumers can shop for health insurance. The marketplaces encourage competition between payers by allowing consumers to compare prices and features of various plans on one website. In Massachusetts, for example, an individual student in Cambridge can log onto the Massachusetts Health Connector, type in their name and zip code, and compare 103 options from 9 different companies sorted by 5 levels of comprehensiveness.[5] A website can most always be modified to help increase clarity and transparency, but the reductions in health spending stemming from even greater price transparency between consumers and payers would be negligible.

But there are at least two other ways new legislation could increase competition in this area. The first is by reducing barriers to entry for new competitors. Such legislation might include favorable tax laws for new entrants or reductions in the red tape that prevents new competitors from entering a given state’s insurance market. In doing so, a state can increase the supply of insurance companies, furthering the competition between them. The second option is to allow consumers to insure with companies across state lines. Presently, most states only allow for in-state health insurers to offer health coverage to consumers, and this limitation is largely a relic of history that does not serve a present, practical purpose.[6] If, however, more states passed legislation opening up their borders to out-of-state insurers, or the federal government made a law forcing the issue, consumers would have access to a greater number of insurance companies. In this model, state marketplaces would be replaced by a national or regional marketplaces of insurance plan options.[7] In doing so, consumers would gain access to a dramatically increased number of insurance suppliers, increasing competition between payers for consumer business, and ultimately resulting in reduced healthcare costs for consumers. Increasing the number of insurance companies reduces the bargaining power of payers in their negotiations with providers which puts an upward pressure on prices, but this point is addressed with a proposal in the Section IV below.

 

IV. The Provider-Payer Relationship

The final relationship to be considered is that of the payer and the provider, and here too more competition could reduce prices for consumers. Insurance companies rarely pay a provider’s sticker price for healthcare. Instead, payers and providers negotiate over the prices that are to be paid for various treatments. These negotiated costs are then passed on to the consumers through insurance premiums. If the hospital maintains the upper hand during a negotiation, the hospital can set high rates for reimbursement, and insurance companies will pay those rates in order to keep that hospital in the health plan. Those costs are then shifted to consumers. In some areas, health care providers hold regional monopolies, giving them strong pricing power and allowing them to drive up costs.[8] Increasing insurance company bargaining power in these negotiations, however, will result in lower negotiated prices which translates into lower healthcare premiums for consumers.[9] Increasing competition between hospitals for inclusion in health plans can help increase payers’ bargaining power.

One option to increase the bargaining power of insurance companies in its negotiations with providers is to increase the number of available health systems in any given area. This would reduce health care costs because if one health system demands high prices, insurance companies can negotiate with that health system’s competitors and exclude that first health system from its insurance plans. Health systems available in a given region could be increased in a number of ways. States could subsidize the creation of new health systems or by providing tax or other incentives for new health systems to enter particular markets, for example. Alternatively, state attorney generals could apply anti-trust laws on a regional level to break up local healthcare monopolies or oligopolies.[10] Utilizing existing anti-trust law or passing specific, health system based anti-trust legislation, however, should be done cautiously because breaking up larger health networks might damage economies of scale, negating the advantages of reduced hospital bargaining power.

Another way to increase bargaining power of insurance companies vis-à-vis healthcare providers is to restrict the number of hospitals with which insurance companies can negotiate discounted rates. If each insurance company is restricted to negotiating with only one health system in each region, those health systems would compete by lowering prices in order to be the preferred system of an insurance company so that people with that company’s coverage utilize their medical services. Insurance would then cover medical care provided in-network and emergency services. Beyond increasing competition, such a mandate would promote greater coordination of patient care as patients will receive most of their medical care within one health system. Enhanced coordination will lead to reduced costs for providers and a greater quality of care for patients such that they will then need to spend even less on healthcare.[11] Increasing the number of insurance companies available to consumers does reduce payer bargaining power as alluded to in the end of Section III, but requiring each payer to form selective contracts with one provider greatly reduces that effect by shifting the burden of competition onto the providers who must compete in order to be included on insurance plans.

 

V. Conclusion

Increasing competition between providers for consumers can help lower prices, but this effect is likely to be small given the role of payers in the healthcare system. Instead, any legislation intending to reduce the cost of health care by increasing competition should focus on competition between payers for consumer and competition between providers for payers. Legislation addressing these important relationships can be state or national. State legislatures can pass laws to make their states more welcoming to new insurance companies to increase the supply of insurers. Congress can pass a bill to amend the Affordable Care Act and to establish a national or regional marketplaces for insurance in place of individual state marketplaces. Both of these proposals would increase the number of payers available to consumers, increasing competition between them and incentivizing payers to reduce their prices. Another method is to increase competition among healthcare systems for contracts with payers in order to increase the bargaining power of payers, resulting in lower prices for consumers. Increasing competition can be accomplished through breaking up larger health systems or through requiring payers to contract with only one provider at a time. Increasing competition in all three relationships, however, would be the most comprehensive approach and have the greatest impact on reducing healthcare prices for consumers.


[*] J.D. Candidate, Harvard Law School, 2017; B.A., University of Pennsylvania.

[2] See Elise Gould, Econ. Pol’y Institute, Increased health care cost sharing works as intended: It burdens patients who need care the most (May 8, 2013), https://www.epi.org/publication/bp358-increased-health-care-cost-sharing-works/ [https://perma.cc/G8AK-TZGM].

[3] Matthew Rae, Nirmita Panchal & Gary Claxton, Kaiser Family Foundation, Snapshots: The Prevalence and Cost of Deductibles in Employer Sponsored Insurance (Nov. 2, 2012), https://www.kff.org/health-costs/issue-brief/snapshots-the-prevalence-and-cost-of-deductibles-in-employer-sponsored-insurance/ [https://perma.cc/UWP7-MGYN].

[4] Copays, Deductibles and Coinsurance: How do out-of-pocket costs work?, Cigna, https://www.cigna.com/individuals-families/understanding-insurance/copays-deductibles-coinsurance [https://perma.cc/9K7F-9Y49].

[5] See Massachusetts Health Connector, State of Massachusetts, https://www.mahealthconnector.org/ [https://perma.cc/VTA3-C6SG].

[6] See Richard Cauchi, Allowing Purchases of Out-of-State Health Insurance, Nat’l Conf. of State Legislatures, http://www.ncsl.org/research/health/out-of-state-health-insurance-purchases.aspx [https://perma.cc/XSJ5-EUJZ].

[7] Stephen T. Parente, Roger Feldman, Jean Abraham & Yi Xu, Consumer Response to a National Marketplace for Individual Health Insurance, 78 J. Risk & Ins. 389 (2010), available at https://onlinelibrary.wiley.com/doi/full/10.1111/j.1539-6975.2010.01393.x [https://perma.cc/RED8-R2QF].

[8] See Clark C. Havighurst & Barak D. Richman, The Provider-Monopoly Problem in Health Care, 89 Ore. L. Rev. 847 (2011).

[9] Peter Ubel, Are Insurance Companies the Key to Lower Prices?, Forbes (Oct. 1, 2012), https://www.forbes.com/sites/peterubel/2012/10/01/are-insurance-companies-the-key-to-lower-prices/ [https://perma.cc/A2R7-BNX3].

[10] Avik Roy, Hospital Monopolies: The Biggest Driver of Health Costs That Nobody Talks About, Forbes: The Apothecary (Aug. 22, 2011, 7:00 PM), https://www.forbes.com/sites/theapothecary/2011/08/22/hospital-monopolies-the-biggest-driver-of-health-costs-that-nobody-talks-about/ [https://perma.cc/35VJ-HCRT].

[11] See Improve Care Coordination, U.S. Dep’t of Heath and Human Servs., https://www.healthit.gov/topic/health-it-basics/improve-care-coordination [https://perma.cc/GW8A-WYML].

JOL Co-Hosts Election Night Party at HLS

On this past Election Day, November 4th, hundreds of members of the Harvard Community attended the HLS Election Day party and issue discussion. The event hosted by the Journal on Legislation, Harvard Law School Democrats, and Harvard Law Republicans obtained overwhelming bipartisan support and attendance.

The event commenced with a key announcement early in the seven o’clock hour that Republican Senator McConnell achieved reelection in Kentucky. With this reelection, Sen. McConnell may very likely become Senate Majority Leader, as the Republican Party would ultimately claim a majority in the Senate as the night ensued and results were tabulated. Continue reading “JOL Co-Hosts Election Night Party at HLS”

Sen. Snowe Speaks with Dean Minow about Why Congress Isn’t Working

On October 30, Harvard Law School’s Dean Minow hosted Senator Olympia Snowe and Jason Grumet, Director of Bipartisan Policy Center. Held just a few days before the Mid-term elections, the talk focused on bipartisanship in Congress and why it isn’t working.

The talk opened up with a video on the Bipartisan Policy Center’s Commission on Political Reform, which put together members from both sides of the aisle in order to produce a “bipartisan blueprint” for strengthening our democracy. Proposals included implementing bipartisan redistricting commissions to end state gerrymandering, electoral reforms such as voter registration and a single day for primaries, campaign finance reforms such as improved transparency and disclosures, and congressional reforms such as ending filibuster abuse and extending members’ work week through Friday. Continue reading “Sen. Snowe Speaks with Dean Minow about Why Congress Isn’t Working”