Defining ‘Health Care Reform’

Economix - New York Times Blog
March 27, 2009, 7:01 am
Defining ‘Health Care Reform’
By Uwe E. Reinhardt
Defining ‘Health Care Reform’
Uwe E. Reinhardt is an economics professor at Princeton.

In his news conference Tuesday night, President Obama stated that he was willing to be flexible on negotiating with Congress on the budget for the 2010 fiscal year, but that he would stand firmly by his commitment to “health care reform.” It sets off the question of what he and others mean by that term.

Here is a brief explanation of what he’s probably referring to.

As a horizontal economist lying in a hospital bed, I, like most patients, tend to think of health care as a caring human activity in which I repose my trust.

As a vertical economist, however, I naturally think of health care as just another economic sector with the following distinct facets:

1. a demand side (by which I mean patients or their agents, private and public health insurers, who procure health care and pay for that care)

2. a supply side (the providers of health care and of health care products)

3. a health-insurance system, intended to protect individuals and households from excessive financial loss due to medical bills, and also to help patients procure health care at negotiated prices

4. an information infrastructure supporting and linking patients, insurers and providers of care with one another, and

5. a regulatory infrastructure intended to keep transactions in this market honorable, fair to both sides, and oriented toward the ultimate social goals of a health system.

Ambitious as he is, the president would like to reform all of these facets of the health sector.

First, on the demand side, he would like to move the United States closer to the almost-century-old goal of attaining universal health-insurance coverage. The idea is to endow with adequate purchasing power the rapidly growing number of low-income Americans who cannot afford to pay for health care of a satisfactory quality. I shall explain in a next post what all that entails, especially how much it might cost in added public spending.

Next, also on the demand side, the president would like to reform the manner by which we pay the providers of health care. The general idea is to align payments with actual “performance” through what is now known as “pay-for-performance” or simply P4P. Ideally such a system would be based on so-called “bundled payments” for an entire medical case treated in accordance with evidence-based clinical practice guidelines.

Although an old idea, it has eluded implementation so far, because it is horrendously difficult to achieve in practice. For a taste of how difficult it is, the reader may wish to view this and this.

The ultimate objective of this demand-side policy, however, is to goad the supply side through financial incentives into delivering genuinely clinically integrated health care, in place of the traditionally fragmented care they now deliver. It would require a major realignment of professional and economic power on the supply side.

Third, on the health insurance facet, the president would like to develop a well-functioning market for individually purchased health insurance, as an alternative to the employment-based system which covers most insured non-elderly Americans.

There now is such a market, but it covers only a small fraction of non-elderly Americans, primarily because it is highly fragmented and, moreover, in most states pegs the individual’s insurance premiums to that individual’s health status. To reform this market, the president would establish a National Insurance Exchange.

This can be thought of as the analogue to a farmers’ market on which competing insurers offer their products, subject to a set of regulations that make transactions in the market transparent and honorable, and the competition among insurers fair.

A major contentious issue here is whether the insurers competing in this market should include a newly established public insurance plan like Medicare, but for the non-elderly.

Fourth, on the information facet supporting both sides of the market, the president and Congress jointly already have earmarked close to $50 billion for the development of an electronic health-information infrastructure.

That infrastructure would contain an electronic medical record, through which clinicians anywhere in the health system can have access to an individual patient’s medical record, intended to safeguards of the patient’s right to privacy.

Over the longer run, there would also be a so-called personal electronic health record that links individual patients electronically to their medical record and to their primary care physicians.

Such an information infrastructure would make available, to patients and other users, information on the quality of health care rendered by individual providers of health care — e.g., hospitals and physicians. This access would facilitate better cost- and quality-control emanating from the demand side of the system.

It would also disseminate information from what should be called “cost-effectiveness analysis,” but, as was discussed in earlier posts, has been constrained to be mere “comparative effectiveness analysis” (see this and this for more on this subject).

Finally, to make all of these pieces work harmoniously together — toward the social goals of improving the health status of Americans by providing all of them with access to timely care, and of protecting their budgets from undue inroads of medical bills — there would have to be a whole set of additional government regulations, mainly on the health insurance industry.

This is a challenging set of tasks, some of which warrant further discussion. I plan to trigger it with some subsequent posts.