Health Reform: Last Call for Competitive Markets?

The new health care exchanges to be implemented in health care reform offer competitive market advocates a tremendous opportunity. If the exchanges work well, they will prove that market forces and consumer choice can improve quality and slow the growth of health care spending. If the exchanges fail, however, the next round of health reform will likely move away from market solutions toward a heavier government hand.

Everyone wants higher-quality care, expanded access, and slower health care spending growth. For decades, the rhetoric of health reform has pitted advocates of market solutions, choice, and competition against advocates of government intervention and regulation—a false dichotomy. Markets do not function efficiently unless regulations ensure that consumers have access and comprehensible choices and producers are actually forced to compete. The Patient Protection and Affordable Care Act (PPACA) is designed to make health insurance markets function more competitively, especially for long-ignored low-income and small business consumers.

While opponents paint the PPACA as government-run health care or “socialized medicine,” the opposite is true. Its central innovation is the exchange, a marketplace in which the uninsured can buy coverage. States are charged with establishing exchanges. Health plans will offer their wares. Consumers, armed with low-income subsidies, will make choices. Small businesses will shop the exchanges for the best deal in a larger pool. Choice and competition will move the markets.

Advocates for a single payer system, Medicare for all, or the “public option,” are deeply skeptical. They doubt that insurance companies will compete to the benefit of consumers. Market enthusiasts would do well to stop shouting about socialized medicine and instead work hard to be sure the states set up efficient, customer-friendly exchanges. It could be their last chance to prove their point.

Health care market solutions are hard to implement. In markets for cars or hair cuts consumers have many choices, pretty good information about price and quality, and time to look for the best deal. But a patient in the throes of a heart attack has neither the time nor the knowledge to shop for the best options. He wants to be rushed to the hospital, secure in the knowledge that skilled doctors will treat him and insurance will pay. The desire for that security (plus the fact that employer-paid health benefits are not treated as taxable income) has led to private or public insurance coverage for most health expenditures. The down side of such third-party payment is that consumers have little incentive to shop for the best buy, and providers have little reason to hold down costs.

Those who believe more market discipline would improve quality and efficiency in health care take two approaches, both reflected in the PPACA. The first, reflected in the “Cadillac tax,” targets over-generous insurance. Higher deductibles and co-payments force consumers to spend their own money for routine or optional care. The hope is that consumers, armed with improved information about costs and outcomes, will be less likely to overuse care. Providers, knowing the consumer must pay, will avoid prescribing marginally useful tests and procedures.

Limiting insurance, however, cannot go far without the risk that consumers will defer needed care if they have to shell out cash. Moreover, the bulk of health expenditures are related to serious conditions that would be covered by insurance even under a high-deductible plan labeled “catastrophic coverage.”

The second approach, improving competition among health plans, is likely to prove more effective, especially if the options include integrated health systems with demonstrably high value per dollar. The hope is that informed buyers will seek quality at the lowest possible cost and that health plans, competing for the consumer dollars, will incent providers to become more efficient. Up to now the health insurance market has primarily served large employers with the clout to bargain. Small employers and individuals have been unable to buy affordable insurance, and the ranks of the uninsured have risen dramatically. Exchanges could create efficient markets to serve millions more, and enable competition and choice.

To work well the exchanges must overcome the obstacles of the past. Health plans must not be allowed to cherry pick healthy clients by excluding those with pre-existing conditions or dropping coverage when clients get sick. Individuals must not be allowed to forego coverage when they are healthy and demand it when they get sick—hence mandated insurance. Exchanges will work best for large pools of consumers, which states could expand by including state employees. Small states can band together to create bigger pools to attract more competitors. Exchanges must also provide consumers with clear choices and information about costs and patient outcomes.

This sounds like a lot of regulation. It is. Advocates of market solutions must understand that the alternative to regulated markets is not the status quo. The status quo encourages inefficiency, uneven quality, soaring costs and declining coverage. If the exchanges—and the new regulations—work well, more consumers will move onto exchanges. For example, new retirees might use Medicare subsidies to continue coverage on the exchange rather than shift to conventional Medicare. Low-income workers, who move in and out of the labor market frequently, could keep their exchange coverage rather than periodically applying for Medicaid.

The PPACA will test the theory that competitive markets improve the quality of care and hold down cost increases. If exchanges work badly because political opponents of PPACA refuse to cooperate or insurance plans think they can hold out for better deals, market solutions will be discredited. The next round of health reform might resemble the opponents’ caricature of PPACA. It might actually be socialized medicine.