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JAMA Forum Archive, 2012-2019: Health policy commentary from leaders in the field
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Why It’s So Hard for Insurers to Compete Over Technology

We are awash in choices about health insurance. Affordable Care Act (ACA) marketplaces offer about 40 plans, on average. Medicare beneficiaries can choose from among about 2 dozen to 3 dozen Medicare Advantage and prescription drug plans, respectively. At least half of all US workers are offered multiple coverage options by their employers. And many Medicaid enrollees can choose among managed care plans.

Image: iStock.com/michaelquirk

What’s the point of all these choices? In theory, customers will be drawn to those plans that offer good value for the money. That’s why plans offer different levels of cost sharing, for example, and differ in which and how many doctors and hospitals are included in their networks. Apart from requirements mandated by the federal government or the states, they also vary in the classes of care they cover. Some may offer more coverage for optical or dental care, for example. Customers can then shop for the plans they prefer most at a cost they can afford.

But for all this competition and choice, there is very little on the most important driver of health care spending: new technology.

Covering New Treatments

Aside from experimental treatments, what no plan can do very effectively is pick and choose which new treatments are covered. For instance, all plans cover cancer treatment. But no plan, to our knowledge, categorically refuses to cover expensive cancer drugs that extend life for such a short period that the cost isn’t justified (non–cost-effective treatments). In a world of choices, this is odd. Plans that covered only cost-effective treatments could be offered at lower and slower-growing premiums. Many consumers might prefer that.

There are lots of reasons why plans don’t compete over the cost-effectiveness of their coverage. Doing so requires good evidence on how well therapies work, but that evidence is often lacking. Insurers lack the right incentives to develop the evidence on their own because other insurers will free-ride on their efforts. And the government can’t pick up the slack because Medicare is barred from considering costs in choosing what to cover.

The law also poses an obstacle. The favorable tax treatment of employer-sponsored coverage encourages employers to offer expansive health plans. The courts are reluctant to construe contractual terms to allow insurers to refuse coverage, and they will sometimes side with “expert” opinions about medical need even where evidence of a treatment’s efficacy is lacking. And legal rules (including state coverage mandates and the ACA’s essential health benefits rule, which applies to individual and small group plans) may prohibit insurers from restricting the scope of coverage.

In principle, we could change the law to encourage plans to compete on cost-effectiveness. In practice, we doubt it would work. In a Brookings Institution article we coauthored with economist Amitabh Chandra, PhD, we explain why it wouldn’t work in detail, but here’s the gist:

Imagine a market with 2 healthy individuals, Jill and Bob, choosing from 2 plans—one called “Cost-Effective” and the other “Comprehensive.” The Cost-Effective plan, as its name suggests, covers only cost-effective treatments (eg, those that cost less than $100 000 per quality-adjusted life-year they provide). Its managers believe that a $3000 per year premium would be adequate to cover expected expenses for Jill and Bob. The Comprehensive plan in this imaginary market covers all treatments, much as plans do today, and is offered to Jill and Bob at a premium of $6000 per year. Jill and Bob both enroll in the Cost-Effective plan, Jill because it’s all she can afford and Bob because he is prudent.

Then, Bob contracts a deadly disease for which there is a $300 000 per year treatment that would extend his life only a month. Because the drug is not very cost effective, it is not covered by the Cost-Effective plan but is covered by the Comprehensive plan. Despite his prior prudence, he wants the treatment, so at the next open enrollment period he switches to the Comprehensive plan. Naturally, this would drive the Comprehensive plan’s premium up, making it even less affordable for Jill.

For reasons like this—very sick people would tend to choose it—a Comprehensive plan could never compete against a Cost-Effective plan. It would shut down. For reasons we go into in our Brookings article, risk adjustment—effectively forcing the Cost-Effective plan to compensate the Comprehensive plan for attracting sicker patients—cannot salvage the situation.

But there are other ways to preserve a market for plans that compete on cost-effectiveness. The Comprehensive plan, for example, could charge Bob a $300 000 premium when he switched to cover the expected costs of his care and still charge Jill just $6000. But that kind of “risk rating” was outlawed by the ACA. Few are interested in returning to the practice.

Alternatively, Jill and Bob could be forced to stick with their initially selected plans for much longer than a single year, which is the norm today. But competition only works when people can vote with their feet. Without permitting reasonably frequent switching, there’s not much point to establishing a competitive market in the first place.

Curbing Costly Low-Value Therapies

In short, there seems to be no palatable way to establish a health insurance market in which plans compete on cost-effectiveness. If we can only have 1 level of coverage in any given market, how do we slow the proliferation of costly therapies that don’t provide significant value?

One answer is to limit the scope of the tax exclusion for employer-sponsored coverage, which would encourage employers to be more budget-conscious. The ACA’s Cadillac tax, as well as a similar Republican alternative (now apparently abandoned), are both steps in the right direction.

Another answer would be to beef up Medicare’s process for deciding what the program will and won’t cover. Medicare could start, for example, requiring much better evidence for new therapies before opening the federal wallet. More ambitiously, Medicare could rewrite the regulations that, today, prohibit the agency from taking costs into account in making coverage decisions. If Medicare took the lead and started excluding more therapies, private insurers would probably follow suit.

These steps won’t be easy; in today’s political climate, they may be impossible. It’s tempting to hope that the market’s “invisible hand” will somehow fix the problem. But markets don’t hold much promise for reducing wasteful spending on glitzy new technologies. That’s up to us.

About the authors: 
Austin B. Frakt, PhD, is the Director of the Partnered Evidence-based Policy Resource Center, Veterans Health Administration; an Associate Professor at Boston University’s School of Medicine and School of Public Health; and a Visiting Associate Professor with the Department of Health Policy and Management at the Harvard T.H. Chan School of Public Health. He blogs about health economics and policy at The Incidental Economist and tweets at @afrakt. The views expressed in this post are that of the author and do not necessarily reflect the position of the Department of Veterans Affairs, Boston University, or Harvard University.  (Image: Doug Levy)
Nicholas Bagley, JD, is a professor of law at the University of Michigan and a contributor to The Incidental Economist. His research focuses on administrative law and health care, with a particular emphasis on health reform. (Image: Scott Soderberg/Michigan Photography)
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