|
PERSPECTIVEA New Policy Framework For Health Care Markets
The frustration with health care markets recorded in the paper by Len Nichols and colleagues reflects the general, and accurate, perception that these markets typically do not work well. But markets respond to the framework of rules and tax incentives in which they must operate, and in health care this framework works against efficiency. The sensible response is not to reject market-based approaches in health care as inherently ineffective in achieving efficiency and cost control. Nor is it to add yet another layer of rules and government micromanagement. It is instead to fix the framework so that markets will foster efficiency.
The survey of twelve communities reported on by Len Nichols and colleagues records the same sense of dismay and frustration among participants in the private health care market that we hear throughout the country. The authors believe that the Community Tracking Survey (CTS) supports their view that market-based strategies have an inherently limited ability to improve efficiency and moderate costs. While rejecting the "third way" of 1990s-style managed competition as "probably dead," they suggest possible ways in which nuanced regulations from presumably efficient and nimble government agencies might fine-tune the market and move it toward a more successful outcome. Rather than simply accepting the authors’ view of the health care world, however, readers should pause and think about the nature of markets and, in particular, analyze the framework of laws and incentives that influence the operation of markets in health care. The solution to a poorly designed framework is not to add another layer of rules to try to micromanage the results of a bad design, but to reexamine the policy framework within which the market operates.
It is important to remember an important characteristic of markets. Markets develop and evolve in response to consumers’ demands, and they do so in many different ways depending in part on the framework of government rules affecting them. For instance, when government provides a free education to children who live in certain catchment areas, the housing market adapts to the preferences of parents. Prices in the housing market reflect the quality of local schools, and real estate agents respond to a market for information on schools for prospective homebuyers. Or if government rules determine the prices and services that must be offered—for example, in Medicare—a market for lobbyists emerges, and their fees reflect the value to providers associated with successfully influencing those rules. Markets never go away. They simply adapt to the environment created for them. The framework of government rules and incentives can mean the difference between a functional and a dysfunctional market, however. The framework in health is an especially important factor in the widely perceived "failure" of health care markets. Decisionmakers in health are strongly influenced by market signals. But government rules and incentives in health care virtually guarantee that these market signals will lead to actions that frustrate public goals and the long-term interests of consumers. The most important element of the framework is the tax treatment of private health expenditures, and in particular the more than $140 billion in federal and state tax relief enjoyed by families if they hand over the control of health insurance to their employers. This drives the entire market in ways that help explain the frustration of the CTS respondents. The rules of the tax exclusion require employers to own and control most employees’ insurance, which helps create the illusion that health coverage is not an inherent part of the labor compensation package, but a completely unrelated business cost, like buildings or raw materials. This in turn means that employee-consumers of health care make decisions differently than consumers in other markets, such as housing or automobiles, who weigh costs and benefits and whose decisions generally foster efficiency. For most health care consumers, the incentive typically is for decisions to maximize the benefits they receive—seemingly enjoyed at someone else’s expense—and not to maximize value for money. The inevitable result is inefficiency and rapidly rising costs. The illusion also means that employers’ efforts to give their employee-consumers greater control over how to spend this part of their compensation—a critical feature of an efficient market—is typically interpreted as "cost shifting" and fiercely resisted. So how might we create an environment in which markets would begin to function in health care more like they do in other sectors? The wise course is not that suggested by the authors, which leaves perverse incentives in place and adds new rules in an effort to counter market responses to those incentives. It take steps to create a more rational framework.
Tax policy. The tax treatment of health care should be changed over time to reduce the market-distorting bias that favors employer control of health coverage rather than consumer control of health dollars. This would begin to create consumer incentives more like those in nonhealth markets, as well as turning employers and employees from adversaries into partners seeking efficiency. One step in the right direction would be to expand tax credits and other tax relief for non-employer-sponsored coverage and for consumers’ direct expenditures, preferably in combination with a phased-in ceiling on the tax exclusion. Information. Nichols and colleagues argue that public investment in information systems is needed for more efficient decision making. Collective investment in information can be helpful, but we should remember that creative information systems typically follow the power to choose, while the absence of choice reduces the incentive for investments in information. That is why federal employees, who have a wide range of plan choices, can rely on consumer-friendly information from a range of private sources, such as guides available from nonprofits and unions, in addition to government-sponsored material. By contrast, it is hardly surprising that information markets do not develop for private-sector employees who have no choice of plans. Alternative groups and intermediaries. Tax policy and regulation today militate against having most nonemployer organizations emerge as informed and powerful intermediaries acting on behalf of consumers. This is especially problematic in the small-business sector, where employers have little power or sophistication when negotiating with insurers or providers. So tax and insurance rule should be altered to encourage farm bureaus, unions, and ethnic organizations—even consortia of churches or other religious organizations—to create stable insurance pools and bargaining for coverage. The result would be a strengthened consumer market. Competition. Efficient markets require strong competition among suppliers. The authors report that limited competition is a cause of frustration among survey respondents. To the extent that the design or enforcement of antitrust laws fails to stimulate competition, it should be reviewed. Nichols and colleagues also note that the "natural attachment of patients to specific providers" tends to sustain high-price virtual monopolies. But when employers, not actual consumers, are the immediate payers, there is little incentive for consumers to challenge or avoid expensive local monopolies. By contrast, effective choice by price-sensitive consumers soon weakens natural attachment in favor of value for money—just ask any long-distance telephone company. Thus, tax changes and other steps to foster consumer control of health dollars would complement regulatory steps to spur competition. Markets in health care today generally do not work well in achieving the goals of efficiency and cost restraint. The authors describe the frustrations of employers and providers, both with each other and with the reluctance of patients to seek efficiency and restrain their demands. But the legal and economic framework governing most health care markets distorts incentives and consumer decisions. So it would be far wiser to start correcting that framework than to write an obituary for markets.
Stuart Butler (stuart.butler{at}heritage.org) is vice president, Domestic and Economic Policy Studies, at the Heritage Foundation in Washington, D.C.
This article has been cited by other articles:
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Top
The Existing Framework
A More Rational Framework
