A couple of years ago I asked, What happened with HMOs?:
Back in the 1970s, I remember occasionally reading a newspaper or magazine article about this mysterious thing called an HMO—a “health maintenance organization.”
The idea was that the medical system as we knew it (you go to the doctor when you’re sick and pay some money, or you go to the hospital if you’re in really bad shape and pay some money) had a problem because it gave doctors and hospitals a motivation for people to be sick: as it’s sometimes said today, “sick care,” not “health care.” The idea is not that health care providers would want people to be sick, but that they’d have no economic incentive to increase the general health in the population. This seemed in contradiction to Deming’s principles of quality control, in which the goal should be to improve the system rather than to react to local problems.
In contract, the way HMOs work is that you pay them a constant fee every month, whether or not you go to the doctor. So they are motivated to keep you healthy, not sick. Sounds like a great idea.
But something happened between 1978 and today. Now we all have HMOs, but there’s even more concerned about screwed-up economic motivations in the health care system. This time the concern is not that they want us to go to the doctor too much, it’s that they want to perform too many tests on us and overcharge us for ambulance rides, hospital stays, aspirins they give us while we’re in the ambulance or the hospital, etc. I guess this arises from the fact that much of the profit for HMOs is coming not from our monthly fees but from those extra charges.
What’s my point in writing about this? I’m not an expert in health care research, so I don’t have much to add in that direction. Rather, I’m coming at this as an outsider. . . .
After the post I received an email from economist David Rosnick:
If you want to know a bunch about this, I can surely put you in touch with my dad. He’s a former doc/exec handing quality at many large health insurers and has had a lot to say about the whole thing.
The short story as I understand it is that HMOs actually worked early on, but realized people got really really upset when told that their personal doctor sucked and the treatment recommended sucked. They’d bail for whatever insurer covered every damn thing. So insurers realized better to just jack prices rather than control costs.
A bit later, Michael Rosnick followed up:
1: HMO’s were in their infancy designed to be institutes to improve or at least maintain health. At the time I was Medical Director in CIGNA/LA, there was enormous pressure on employers to get out of the business of getting between doctors and patients. Or office was even raided by police when I (as per CIGNA guidelines) denied a patient who had breast cancer from high dose chemotherapy and bone marrow transplant. There were no long term studies to show it had value. CIGNA caved and OK’d it. Two years later the studies were in: it killed more than it helped. HMOs (Heath Maintenance care) have been replaced with MCOs ( Managed care usually called Managed Cost), since employers were interested in cost not outcomes. Providers do request/perform many more tests than appropriate, Sometimes just easier to give the patient what they want. Often doctors find it easier to order bunches of tests and then try to figure out why something is wrong rather than trying to come up with a differential diagnosis/list of explanations for symptoms and then testing out those hypotheses. The former leads all too often to going down rabbit holes of tests to explain abnormal tests. This also ignores was abnormal is since most lab tests are defined as normal if they are within 2SD. But by definition 5% of that population will be normal with abnormal results.
2: The discussion around controlled studies etc. misses many points. A good example is control vs experimental groups. Studies show that preventive care leads to better health. True but what is missing is what I long have called “the coalition of the willing”. Those who seek preventive care are more likely to be concerned about their health and eat better, exercise more don’t smoke etc. You can’t separate out those two. Same for diabetics getting A1C testing; those who do care about the results.
Large enough studies will alleviate some of these factors. Another factor is what is “better”. It is touched upon here, but again very large studies can find statistical differences with no clinical meaning.3: Cost effectiveness; another slippery mess. The best measure, which has a lot of subjectivity is QALY (Quality Adjusted Life Year); this attempts to assign a value not only of survival or improvement, but whether those years are “worth it”. Lots of current technology are on the very edges and often beyond. Painful, nauseating etc. treatments that “buy” a few months at a cost of $20K/month) that may be “worth it” to see a grandchild graduate or get married, but to society, nope.
4: Opportunity costs: important but usually worthless discussion since it all depends on whose costs. Employer, MCO, government (medicare) profiteers (Providers, hospitals, pharma). With employer based health care (a lousy idea to begin with) now following Medicare’s lead in shifting costs to Accountable Care Organizations (the new kid on the block for past 10 years) by paying the lump sums to be divided up amongst the ACOs providers: hospitals, surgeons, primary care, specialists….
5: Side note the AMA is/has always been the lobbying group for doctors; now around 30% of them. I never understood why the AMA is so feared.
6: Medical devices and drugs are another whole issue. Some are truly great; some are just a bit better; some are worthless. I don’t things have changed much but at least just a few years ago the best diabetes medication was an ancient cheap drug. But DCA (direct to consumer advertising) drives newer is better no matter what.
Lots to think about here. This is the cool sort of economics, where they use economic concepts to look at reality from different angles. So much more interesting than those silly analyses with attempted causal identification, or all that bloviating about how economists are great because they can think the unthinkable.
P.S. Someone else, who writes, “I’d prefer to remain anonymous as I frequently interact with the management teams at the large publicly traded insurance companies,” chimes in:
After passage of the ACA, health insurance companies have been required to spend 80%-85% of every dollar on medical expenses depending on the policy. As a result, the margin percentage they can make from insurance is capped and my conjecture is that this incentivized insurers to increase dollar margins by growing revenue (and focusing less on costs) and to transfer profits from the regulated insurance side of the business to the unregulated provider side (see UNH and Optum).
I don’t have the statistical background to support this conjecture, but it’s something I’d like to support more empirically.
Interesting. I belonged to the same HMO in the DC region pre- and post-ACA, with a break in between. Same organization and many of the same locations. In the early 2000s, it felt like a medical service that was funded like insurance. By the late 20-teens, I had the distinct sense I was dealing with an insurance company with a health care “front end.” All bureaucracy and nitpicking over “claims.” (As in, that ambulance ride is covered, but you the member need to contact our reinsurer in Texas to get reimbursed.) Couldn’t schedule routine bloodwork every six months without scheduling a matching 10-minute appointment with an overworked GP.
If you create a golem, it will turn on you eventually. I started practicing in the mid 1970s. At that time, doctors were in practices that they owned and hospitals were free standing. Hospitals required attendance at periodic meetings for doctors which were divided between administrative details and distribution of medical information. In the early 1980s we began hearing from people who presented models for our conduct which they called healthcare. MBAs from Minnesota told us that the problem with healthcare in the US was that “doctors didn’t think like businessmen.” I sat there thinking that not thinking like a businessman was what was right about doctors. Capital requirements for technology increased, and doctors were spending money on five thousand square foot houses in fancy suburbs resulting in the MBAs increasingly running things. Control the money, control the enterprise. Management did what it always does which is control and consolidate, seek out profit centers, discard cost centers. Electronic health records became a way to turn an appointment with your doctor into a measurable bit of piecework. The end result is that care from routine preventative primary care to highly specialized interventions is a cog in a big system. My primary care doctor sits typing into a electronic record while I am in the office with eyes on the screen not on my eyes.
My account is too long for an internet comment but way too short for the problem. I will stipulate that it glosses over some things and is tinged with self justification which is always distasteful.
It’s interesting to see how often the “doctor typing” and not looking at you scenario comes up. I’m sure I do the same. My training was around the transition from paper to electronic. And I wouldn’t want to go back at all! I still remember “studying” a note for 5 minutes trying to tell what the heck was written by my own attending, who I knew and worked with. Trying to decipher other doc’s notes was absolutely impossible. So instead, we’d start over and re-do all of the reasonable testing and workup. It absolutely killed efficiency and did result in worse outcomes.
I firmly believe that all of those “requirements” of what was necessary for patient documentation have always been there. It’s just that when it was on paper, audits were harder and cost more, so we got away with it. Once it was electronic, we still kept the (stupid) requirements, but now they could be checked. And so we type more. . . That fear of audits and the absolute usability nightmare that many EHRs are keeps us focused on the screen and not the patient. (BTW, the AMA changed the definition of the E&M codes years ago to make much/most of that documentation unnecessary. But it might take a generation or more of docs before they kick the habit.)
I was coincidentally thinking about this in the shower this morning from the dental care side of things. I wonder if the problem is scale? Is a large statewide network too large for this to work (HMOs)? Would it be economically feasible for individual primary care doctor level? Or perhaps a single practice? I’m imagining a monthly fee for primary care and then additional accident+catastrophic insurance to a large provider.
It would not be feasible at the primary care doctor level, nor even at the level of a large group practice. The problem is that the distribution of health care expenditures in a population has a very long right tail, very high variance. In an HMO or ACO, the provider organization is pre-paid and assumes responsibility for the subsequent costs of care. This, at least in theory, provides the organization with an incentive to contain expenditures.
But it takes a very large number of patients to assure that the expected financial outcome will closely approximate the population mean (on which the pre-payment amount is based). Otherwise put, in the patients seen by a single physician or even in a large group practice, there is too much risk that there will be one or two patients whose necessary expenditures will be astronomical and wipe out the practice. Only at a very large scale is this risk manageable.
“Lots to think about here. This is the cool sort of economics, where they use economic concepts to look at reality from different angles. So much more interesting than those silly analyses with attempted causal identification, or all that bloviating about how economists are great because they can think the unthinkable.”
there’s lots of very interesting non-silly work that estimates causal inference in health that is concerned with these exact health issues. a prominent example is the work by Amy Finkelstein and co-authors
agree that the concepts in health economics (adverse selection, moral hazard, selection, etc) are very interesting and applicable to the real world though!
There are plenty of anecdotes to go around – and they are interesting and relevant. But there are a few structural features of HMOs that are important, regardless of whether they comport with anybody’s personal experience. Economists have long worried about the asymmetric information between doctors and patients and how that is compounded by payment for services provided rather than health achieved. HMOs were designed to limit costs by addressing these problems. The gatekeeper model (also true of any managed care network and Medicare Advantage plans) is an attempt to limit unnecessary treatment – but often results in unhappy consumers. Employers have to deal with potentially lower costs vs. complaints from their employees – I suspect this plays out differently for different employers. Capitation (reimbursement is fixed per person covered rather than being based on care provided) is a common feature of these plans, also aimed at reducing costs.
One incentive that I think is often overlooked is that the cheapest way to reduce costs for an insurer is to insure healthy people. It was noted that this provides an incentive to keep people healthy. But it also provides an incentive to not insure people who are likely to get sick. Insurers getting a reputation for providing poor mental health care, for example, may be an effective way to keep those expensive long-term mental health care patients from joining a plan. Also, emphasizing health club memberships and other healthy benefits while having poor reputations for caring for people with chronic conditions, can be an effective way to get people to self select. My own view is that much of the competition between insurers is aimed at attracting healthy people and deterring sick ones rather than improving the quality of care. That position can certainly be debated and is not universally held – but as long as we are thinking about incentives, I think it is unwise to ignore the incentive to attract a health pool of people (it is certainly cheaper than trying to make a sick pool healthy).
The limits imposed by the ACA (noted in the P.S.) does change incentives somewhat, perhaps resulting in ways to find new revenue streams, much like airlines that offer low fares but charge for everything else.
“One incentive that I think is often overlooked is that the cheapest way to reduce costs for an insurer is to insure healthy people. It was noted that this provides an incentive to keep people healthy. ”
This is, and has always been, a fallacy. The problem is that you do not know which people are going to develop which diseases. So any preventive measures you want to apply are necessarily applied to a much larger group of people than the subset that ultimately would otherwise develop the disease(s) you are trying to prevent. When you count up the cost of applying a preventive measure to a large population subset (or even the entire population in some cases) and weigh them against the costs of treating the disease among the smaller subset that eventually would get otherwise get it, the former usually exceeds the latter. To make matters worse, the costs of prevention are incurred up front, and the avoided costs of prevented disease are deferred, making the trade-off even worse after discounting is applied. Yes, there are some preventive measures that actually do result in net savings of money, but they are few and far between.
The economic rationale for preventive care must lie in the value of improved health and longevity relative to the net expense it typically entails. It is, I think, like housing. We could all choose to live on the street instead of being housed–and it would be a lot less expensive. But only a minority of the homeless are in that situation voluntarily–we prefer to live in houses because it is better. Not only does it fail to save money, it is hugely expensive. Preventive care is like that, too.
You are partially correct, but only partially. In some cases you do know who will be sick – they have been sick in the past. Severe mental illness is like that. Also, lifestyle and heredity strongly influence the probability of having chronic conditions – and insurer need not predict who will develop these if they can get people to self-select. And, patients often are aware of how “good” different insurers are dealing with different types of claims – they will avoid insurers who are known to make it difficult to get treated the way they want to be treated.
Clyde –
> When you count up the cost of applying a preventive measure to a large population subset (or even the entire population in some cases) and weigh them against the costs of treating the disease among the smaller subset that eventually would get otherwise get it, the former usually exceeds the latter. To make matters worse, the costs of prevention are incurred up front, and the avoided costs of prevented disease are deferred, making the trade-off even worse after discounting is applied.
I’ve never understood why insurance companies, what seems to me illogically, are so reluctant to absorb the costs of preventative care (including medicines) when the failure to do so would seem to obviously lead to far more expensive care in the long run.
Perhaps your explanation here provides the answer. I still don’t really believe the math, but whether I believe it is irrelevant; what matters is whether the decision-makers at the insureance companies believe it.
It reminds me of story. I once took a job as a clerk at a bookstore when I was “in-between jobs.” I thought it would be kind of fun to have a low-stress job being surrounded by books. I actually enjoyed it a lot.
But it was fascinating in another way. I was, if I say so myself, a great employee. Always came on time, always provided great customer service, never slouched, didn’t steal merchandise, etc. But in general the store treated workers like shit. Crappy pay, and they always messed around with your hours in ways that were convenient for them – even if it was incredibly inconvenient for the worker. It was obvious that their business model was built on high turnover, and a lot of employee theft (they had some kind of euphemism like “shrinkage”), and low pay and low morale. They just didn’t care if people left or got fired. Somehow all of that got figured in to their business model. I guess they figured that their costs in training new employees was less than the costs of treating employees decently. So when I asked them to be flexible with my schedule in a way that worked for me, they said “no,” based on the logic that if they were flexible with my schedule they’d have to be flexible with the schedule for other employees as well. So I quit and they didn’t care that they lost a good employee, and that they’d have to train a replacement who wouldn’t likely be as good an employee who would contribute less to the bottom line.
I never believed that calculation would work out either. Why not treat the employees well, pay them decently, and have a high morale/relatively low turnover workforce? You’d have less employee theft and lest training expenses. Employees might actually give a shit about the store and provide better customer service and work more efficiently. Imagine that!
But I guess that in that situation, like with your description with the insurance companies, their management consultants convinced them my way of seeing would be less profitable.
I’ve been thinking about this recently with regard to insurance companies not paying for patients to use these new diabetes drugs for the purpose of weight loss. Imagine the cost benefits to insurance companies if these drugs could significantly reduce the prevalence of obesity in their insured.
How does it make financial sense to not cover those drugs? I know the drugs are expensive and you can prolly give me a good answer, but my priors are pretty fixed on this one.
“I’ve never understood why insurance companies, what seems to me illogically, are so reluctant to absorb the costs of preventative care (including medicines) when the failure to do so would seem to obviously lead to far more expensive care in the long run.
“Perhaps your explanation here provides the answer. I still don’t really believe the math, but whether I believe it is irrelevant; what matters is whether the decision-makers at the insureance companies believe it.”
The economic case against preventive care is even stronger from the perspective of an insurance company. As I said earlier, the costs are up front and the savings come later. But for a single insurer in a competitive market, there is no certainty that they will be the ones who accrue the future savings, as patients may transfer to a different insurer in the interim.
I do believe that the primary, probably the only reason that insurers offer any preventive care that is not mandated is as a marketing tool. It appeals to healthier people and helps them recruit a covered population that presents reduced risk to them. The fact that some of the preventive measures offered by insurers have doubtful effectiveness, or are even known to be ineffective, supports this.
> As I said earlier, the costs are up front and the savings come later. But for a single insurer in a competitive market, there is no certainty that they will be the ones who accrue the future savings, as patients may transfer to a different insurer in the interim.
Makes sense. And even if the customers don’t transfer, when your talking about huge numbers you’d have to account for the sizeable potential return from investing the money not spent up front – for the entire period before the expense ultimately occurs.
> The fact that some of the preventive measures offered by insurers have doubtful effectiveness, or are even known to be ineffective, supports this.
Perhaps this mostly just goes to a problem I think is ubiquitous: society absorbing external costs so companies can keep the profits rolling in. Even if in some theoretical model as a whole system, preventive costs are less than the long term costs, in the real world companies can exploit a method for disaggregation the two categories of cost. Certainly the fossil fuel industry has leveraged such a model on a hugely lucrative scale for a very long time.
The UNH Optum comment is very insightful. UnitedHealth Group (UNH) owns two major subsidiaries, UnitedHealthcare(UHC) and Optum. UHC is a regulated insurer subject to the medical expense limits, Optum is consulting/services side of the business.
If UHC outsources all their billing to Optum, then that allows Optum to set prices at the highest possible level to make Optum more profitable than UHC could be on its own. Of course UHC/Optum cannot collude on prices.
Back to the HMO comment, HMOs have a gatekeeper primary care doctor who as to approve all specialist visits. People hate this requirement. I can’t tell you how many times my kids broke an arm or leg and we had to wait for the primary to approve any trip to imaging, or ortho. It’s an awful way to limit access to care.
I find these kind of discussions interesting . . . because while they’re complex, it’s easy for those in the field to see how perverse incentives change how the work is done (or keep progress stagnant).
In my own surgical field, a “cost-cutting” measure 5 years ago found that surgery X was usually performed with procedure Y at the same time . . . so they “combined” those codes and reimbursed them at a lower rate than X+Y. But that lower rate was below the cost of supplies for ambulatory surgery centers. So surgeons feared that ASCs would stop allowing those surgeries. In the end, surgeons moved those surgeries to hospital ORs (or the patient was sent to academic centers which had a hospital OR) where the reimbursement was better and the patient and insurance was ultimately charged more. The cost ended up higher, fewer patients had the life/limb saving surgery, and society was worse off. A couple years later, the reimbursement was adjusted to make it (barely) “affordable” to do in some ASCs. But the damage is done, and I do them all in the hospital now.
Or in medical statistics: residency acceptance, hiring, and promotions for MDs depends on being “published”. But US doctors never get any “quality” training in statistics (at most 2 hours in medical school and exams that don’t go any deeper than sensitivity and specificity). So, we do what our mentors did: incorrectly applied t-tests with poor control groups and dichotomania. And many medical journals are edited/reviewed by similarly trained docs who don’t know what Bayesian statistics is, let alone how to evaluate it. The path of least resistance for new physicians is to just repeat what has gotten their mentors jobs and promotions. So the field gets stuck with NHST framework thinking as the one and only correct way of evaluating medical studies. Larger, well funded studies who have the budget to hire a statistician might do better, but us physician masses continue to slog on with Excel spreadsheets, arbitrary measurement cutoffs, and t-tests.
“This also ignores was abnormal is since most lab tests are defined as normal if they are within 2SD. But by definition 5% of that population will be normal with abnormal results.”
This would be true if the standard deviations were within person standard deviations over repeated measurements. But I think they’re across person and the quoted statement is therefore wrong. It does appear to be a silly and arbitrary generalization of the 2 sd rule of thumb, though.
Yes, the ACA spawned a vertical merger spree to duck the price caps.
https://www.thebignewsletter.com/p/how-obamacare-created-big-medicine
What a an absolute load of HS.
You have absolutely no clue what you are talking about and neither do most of the lay people on this blog.
Anon:
Can you elaborate? This isn’t twitter where people just express likes and dislikes. It’s a blog, and there’s enough room for you to provide as much detail as you’d like.