Can Market Forces Work in Health Care? Perspectives from Business Leaders Bill Kramer Presentation to the Pacific Northwest Regional Economic Conference May 11, 2006

Health Economics Fundamentals Asymmetric information between buyers and sellers (Arrow)  Providers drive most utilization Weak links between process and outcomes  Medical practice varies a lot (Wennberg); tremendous waste Product heterogeneity (Pauly, Robinson)  Differences between routine care, urgent care, once- in-a-lifetime care The “10/69” rule (Berk & Monheit)  Danger of adverse selection and risk skimming “Institutional arrangements” and market structure play a major role (Starr)  Providers and insurers have strong influence in current system

How the Issue is Framed “Free markets” vs. “Government-run” healthcare system

How the Issue Should be Framed Can market forces be used effectively in health care? What are the appropriate roles for the private sector and government?

Market Forces What are we talking about? Choice Price sensitivity Information Competition

Are market forces functioning in the U.S. health care system? No, not much. Choice? Most employers offer only one health plan Price sensitivity? Consumers shielded from most costs Information? Seldom available or understandable to consumer Competition? High concentration of providers or insurers in many markets; many providers and insurers compete on risk avoidance rather than value to consumers (Enthoven)

Lessons from Basic Health Economics Market forces have the potential – if allowed to operate and are used wisely – to improve the health care system. We need to: Address supply-side as well as demand-side issues Avoid dependence on a single simple solution Focus on opportunities for improving quality and cost effectiveness among the highest cost cases and services Preserve pooling, group purchasing Use effective purchasing strategies – both private and public sector (e.g., Medicare)

Employer Purchasing Strategies Theme: be a “market maker” Offer real choices to employees – different health plans and providers, not just varieties of co-pays and deductibles. Encourage employee engagement and personal accountability, including paying an appropriate share of the costs – at point of enrollment as well as point of service. Ensure that employees get the information they need to make choices. Encourage competition among providers – based on cost effectiveness and quality, not just risk selection and underwriting. (Note: “risk adjustment” mechanisms may be needed.) Exercise purchasing power – individually and collectively.

What the Private Market Can’t Do Very Well Provide access to insurance or health care to low-income or very ill people Ensure that reliable standardized information is available to consumers Maintain appropriate balance of power between suppliers and consumers This means there is a role for government.

A Possible Pragmatic Strategy A “hybrid” approach Structure the market to create: –real choice –healthy competition –useful information –incentives for improving value (quality/cost) Focus government role on: –providing coverage or care to low income and very sick –ensuring that information is reliable and available –maintaining healthy markets