Category Archives: Economics

The big free-market impact of the Affordable Care Act

medium_4560586060The messed-up launch of the federal health insurance marketplace website is getting lots of attention these days, and rightly so. But ObamaCare is going into effect one way or the other, and we’re already seeing some significant changes in the economy as a result. The US health care system is a complex mix of public and private players with varying incentives and behaviors. Those who think the Affordable Care Act is a government takeover of health care may have difficulty accepting how it’s stimulating the free market.

And yet, the impact is significant. Here are a couple examples:

  • The availability of subsidized health insurance and the ban on medical underwriting (i.e., charging more or denying coverage based on pre-existing conditions) are increasing labor market flexibility, which should hold down unemployment and increase growth. We correctly fault Europe for restrictive labor practices that make it hard to fire workers –thereby discouraging hiring. But we have not looked critically enough at our own policies, which create “job lock” as employees hang on to their jobs and forego entrepreneurial ventures for fear of losing their health benefits. The New York Times covered this topic yesterday.
  • You would be forgiven for assuming that health insurers negotiate hard with doctors and hospitals in order to offer competitive premiums to their customers. As it turns out, they have really not competed on price in recent years. You have probably seen stories about how health plans are now competing hard for new members under ObamaCare. That means they are reacting to the reality (or even threat) of comparison shopping, which is enabled by the much-maligned federal exchange and the state exchanges. Health plans have sharpened their pencils and realized that to compete they need to negotiate harder with their providers. So now hospitals and doctors are complaining about being squeezed. But since we’ve been told that price of services –not utilization– is the main reason US health care costs are so much higher, shouldn’t we be pleased that the free market is finally acting? There are ways providers can maintain or even grow their incomes under ObamaCare –but they’ll have to move away from fee-for-service to do it. That doesn’t bother me.

photo credit: David Hilowitz via photopin cc

By David E. Williams of the Health Business Group

Healthcare Social Media Review is up at BrandEngagement

BrandEngagement hosts a thoughtful, thorough edition of the Healthcare Social Media Review, a roundup of blog posts about the use of social media in health care. My post about the value of patient reviews is featured in a section on Patients & Social Media. The other post in that section is by Forbes writer Dan Munro, who writes that ZocDoc is the only health care app to make the list of top mobile apps.

ZocDoc lets patients find doctors and make appointments. It’s kind of like OpenTable, which does the same for restaurants. But interestingly, neither Munro –who focuses on the service for consumers– nor the commenter –who talks about data sales– puts their finger on the key driver of ZocDoc’s business model, which is that physicians are the main customers.

Like OpenTable, ZocDoc is a lead generation tool that providers (whether restaurants or doctors or dentists) will pay for in order to get customers in the door. But ZocDoc’s value proposition goes a bit further, which is that it also enables providers to enrich their mix by picking up more desirable commercial patients and even those from specific high-reimbursing health plans.

So ZocDoc is more like an OpenTable that lets restaurant owners bring in more high-tipping, beautiful people and screening out those who are less desirable and less profitable.

ZocDoc does have some potential utility for consumers but I hope next year’s list of apps will include something where the consumer is the app’s true target customer.


By David E. Williams of the Health Business Group.

Some big health plans must think exchanges will succeed

More aggressive drafts of the Affordable Care Act (ACA) included a public option that would have set up a government run health plan to compete with private insurers. That got shot down in an effort to broaden the base of support for the law. Although I’m not a fan of government-run businesses, I do think it would have been an interesting experiment to see whether private plans would have sharpened their game in the face of new competition, especially since many areas of the country current lack robust competition among commercial health plans.

While the public option never made it, the ACA’s insurance marketplaces are on their way in just a few days. Exchanges promote competition by giving buyers the chance to compare health plans on an apples-to-apples basis. Price becomes a more important decision factor in efficient marketplaces. Even if the exchanges get off to a rocky start they are already sending shudders through the ranks of the established brand name health plans. You can tell from the Wall Street Journal article (Health Insurers Scramble to Keep Healthy Customers), which depicts at least some plans resorting to aggressive or even deceptive practices to keep customers from defecting to exchanges.

The plans are scared that current members will go to exchanges for lower premiums and possible government subsidies. Humana sent a letter that the Kentucky Department of Insurance considered misleading. The company was trying to get its members to renew early for 2014 by threatening to switch them to a pricier policy if they didn’t. Aetna has also run into trouble.

This behavior reminds me of what I see with consumer products in other markets that have become more competitive, and that pleases me. It reminds me of AT&T getting aggressive on renewals and upgrades when Verizon was about to get the iPhone. Or like what happened when the long distance business was deregulated and MCI offered an innovative Friends & Family plan. Or when various fast food chains offered value menus. In these cases consumers won out once they learned to navigate the new environment, and established companies had to sharpen their game to continue to compete.

Health insurance has a long, long way to go to approach the competitiveness and consumer focus of other industries. Due to various constraints it may never get there. And yet the introduction of exchanges looks like it may turn out to be a bigger step in that direction than I had expected.


Eagerly awaiting the death of defensive medicine

I’ve always been annoyed by proponents and defenders of defensive medicine, i.e., doctors ordering unnecessary tests to stave off lawsuits. Not always, but often enough, it is a case of physicians shirking responsibility, blaming others, and acting in a self-serving manner. Attitudes haven’t changed that much, if Defensive medicine: A solvable problem in Healthcare Finance News is to be believed.

A Medscape survey cited in the article asked physicians who’s been sued to give advice to others:

Among the remarks: “Document more often, more thoroughly… get rid of rude, demanding, noncompliant patients… practice more defensive medicine.” One advisor went so far as saying: “Don’t assume ANYTHING!! If it hurts, CAT scan it. If it hurts between the nose and the toes, consider it a heart attack and stress-test everyone from 9 to 90!”

A 2010 survey of physicians found that doctors thought 26 percent of health care costs were due to defensive medicine.

Although there may be a knee-jerk reaction to test more rather than less, there’s no evidence that the amount of testing has anything to do with the likelihood of a lawsuit. In a fee-for-service environment, more testing puts more money in the doctor’s pocket, so I’ve always been skeptical of the “defensive medicine” explanation for over-testing.

Now that capitation in various guises is coming into vogue, physicians and hospitals are going to look at things a little differently. I’ll bet the same doctor who recommends indiscriminate scans and stress tests today will find some other approach to risk management once financial incentives are re-aligned. With a bit of luck, that will sound the death knell of defensive medicine.

Thankfully there are other approaches to protecting against lawsuits, including not making errors in the first place and apologizing when mistakes do occur. I’m sympathetic to physicians who get sued, but we shouldn’t make too much of their defensive medicine advice.


By David E. Williams of the Health Business Group.

ObamaCare and tax evasion

The Affordable Care Act (aka ObamaCare) may help reduce tax evasion, especially in states that don’t expand Medicaid eligibility. That’s because people whose projected income is between 1x and 4x the poverty level will be eligible for federal subsidies to purchase insurance on the new marketplaces (also called exchanges). There’s an incentive to report more income in order to be eligible for subsidies.

Kaiser Health News (In states that don’t expand Medicaid, some of the uninsured may still get help) doesn’t discuss the tax compliance issue directly, but does note that there’s a potential strategy for people to estimate their incomes optimistically in order to qualify for subsidies.

I’ve seen anecdotal evidence of this phenomenon in Massachusetts, since RomneyCare was instituted. Some babysitters and other informal workers started asking their employers for letters stating their hours and wages in order to qualify for subsidized insurance here. It may or may not have made economic sense for these workers to start declaring income, but it gave one more push toward getting on the books and going legit.

Cracking Health Costs: Interview with Al Lewis

Al Lewis, inventor of “disease management” and Tom Emerick, former head of global benefit design at Walmart, have teamed up to write Cracking Health Costs: How to Cut Your Company’s Health Costs and Provide Employees Better Care a guidebook for businesses looking to save on health care expenses right away.

In this podcast interview, Al discusses the “snake oil” wellness industry, explains why an ounce of prevention is not worth a pound of cure, touts domestic medical tourism and describes how the disease management field has reacted to his earlier indictment of them: Why Nobody Believes the Numbers: Distinguishing Fact from Fiction in Population Health Management.

As always, Al is informative and entertaining.

Obamacare and entrepreneurship

A front page Wall Street Journal article (Risk averse culture infects U.S. workers, entrepreneurs) bemoans the lack of people willing to start businesses. Although the extent of the issue may be overstated, I firmly believe the trend is real and very damaging because it depresses the US growth rate and retards job creation.

There are many potential causes for this problem, and the WSJ mentions most of the main ones. I’m sure the GOP doesn’t see it this way, but from my perspective three of the national party’s main policy approaches are strong contributors to the problem:

  • #1 is opposition to Obamacare. I’ve been arguing since 2007 (see When socialism is good for capitalism) that many would-be entrepreneurs are rightly frightened to leave their jobs because they fear they won’t be able to get health insurance due to pre-existing conditions. Massachusetts (which the article cites as a place that doesn’t suffer from risk aversion) addressed this problem with its universal health care law. Obamacare seeks to do the same on a national level. And in fact a new study estimates that 1.5 million additional people will become self-employed due to Obamacare
  • #2 is opposition to immigration. If you’re an immigrant or worked with immigrants it’s completely obvious that as a whole they are more open to taking risks and becoming entrepreneurs than the native born population. We should welcome immigrants with open arms, especially those with skills and an entrepreneurial bent.
  • #3 is opposition to the smooth operation of government. The willingness to risk default by not raising the debt limit was and is shocking and counterproductive. Uncertainty in the policy environment kills private initiative

There are areas where GOP positions are on the right side of this issue, in particular in limiting regulations and paperwork for entrepreneurs. But those issues are modest compared to the three I’ve mentioned.

I have absolutely no expectation of this happening, but if the country united on universal health care and immigration it would make a major difference to growth and employment.