Can Health Care Consumers Make Optimal Purchases?

Answer: No, or at least so says a recently published paper from the National Bureau of Economic Research (http://www.nber.org/papers/w18166.pdf). Excerpts:

ABSTRACT
We study the Medicare Part D prescription drug insurance program as a bellwether for designs of private,
non-mandatory health insurance markets, focusing on the ability of consumers to evaluate and optimize
their choices of plans. Our analysis of administrative data on medical claims in Medicare Part D suggests
that less than 10 percent of individuals enroll in plans that are ex post optimal with respect to total
cost (premiums and co-payments). Relative to the benchmark of a static decision rule, similar to the
Plan Finder provided by the Medicare administration, that conditions next year’s plan choice only
on the drugs consumed in the current year, enrollees lost on average about $300 per year. These numbers
are hard to reconcile with decision costs alone; it appears that unless a sizeable fraction of consumers
value plan features other than cost, they are not optimizing effectively.

1. Introduction
Health-care systems with mandated health insurance financed from some combination of consumer, employer, and government sources are standard in all developed countries except the
United States, where about 18 percent of the non-elderly population is currently uninsured (Gruber, 2008), and many of the insured face financially risky gaps in coverage. The health cost of
incomplete coverage is substantial: In comparison with other countries, the United States ranks 25th in the survival rate from age 15 to age 60, which impacts the population of workers and
young parents whose loss is a substantial cost to families and to the economy. (These statistics are based on World Health Organization data for 2006, and U.S. Census data on
population by age in 2006.) If the U.S. could raise its survival rate for this group to that of Switzerland, a country that has mandatory standardized coverage offered by private insurers, this would prevent more than 190,000 deaths per year. The elderly in the United States aged 65 and older do have universal coverage under the Medicare program, with prescription drug coverage (Medicare Part D) added in 2006. This may explain the somewhat better comparative performance of the United States for seniors, a rank of 14th in life expectancy at age 65. Since the U.S. has a population that at retirement has the poorest health in the developed world, this is a medical accomplishment, but it is very costly – U.S. health expenditures per capita are 50 percent higher than those in any other country. Medicare Part D provides the Medicare-eligible population with universal access to a subsidized market for non-mandatory standardized prescription drug coverage through governmentapproved contracts sponsored by private insurance firms; see Bach and McClellan (2005). This new market is representative of a trend toward “consumer-directed healthcare” that relies on consumer behavior and competition among insurance firms to attain satisfactory allocation of health care resources with limited government regulation, and is one model for more comprehensive reform of health care insurance (see Newhouse, 2004; Buntin et al., 2006; Goodman, 2006; and the references therein). Overall, Medicare Part D is considered a success story: Despite a rocky start, enrollment rates are high (In the first year of Medicare Part D, more than 90% of the eligible population obtained prescription drug coverage, either from a Medicare Part D plan or a source with comparable coverage (Heiss, McFadden, and Winter, 2006)., consumers have a broad choice of sponsors, and premiums are lower than anticipated by policymakers and insurers (Heiss, McFadden, and Winter, 2006, 2007; Goldman and Joyce, 2008; Duggan, Healy, and Scott Morton, 2008). (We have pointed out elsewhere (Heiss, McFadden, and Winter, 2009) that variety in available levels of coverage has diminished sharply for individual buyers in the first three years of operation of the Part D market. Offerings of plans with the most comprehensive coverage have collapsed, and plans with intermediate coverage are at risk of a death spiral of rising premiums and falling enrollment, a phenomenon predicted for this market by Pauly and Zeng (2004) as a consequence of adverse selection, and observed in other health insurance markets; see Cutler and Reber (1998). Union and employer-provided retiree plans that are coordinated with Part D, and Medicare Advantage plans that bundle drug coverage with other medical services in an HMO-like setting, are not subject to the same selection pressures, and continue to offer a variety of coverage levels. However, health insurance provided under retiree plans is dropping in the working population, and individual policies for prescription drugs will become more important in the future.)

5. Conclusions

Calculations of the ex post costs for all available plans, without and with drug substitution, and of the optimal choices under various expectations models and decision rules for each individual, suggest that less than 10 percent of individuals enrolled in plans that are ex post optimal with respect to consumer inclusive cost (premiums and co-payments). Relative to the benchmark of a static decision rule, similar to the Plan Finder provided by CMS, that conditions next year’s plan choice only on the drugs consumed in the current year, enrollees lost about $300 per year, on average. While these losses are rather modest when compared to the losses associated with not enrolling at all, an issue we have studied extensively in earlier research, they are difficult to reconcile with decision costs alone. It appears that a sizeable fraction of consumers either value plan features that are not reflected in total cost, or else do not optimize effectively. Our results then do not support the proposition that consumers can make and benefit from good choices in private health insurance markets, and direct health care resources to their best use.

Dr. McCanne's comment:

If over 90 percent of purchasers of the Medicare Part D drug plans fail to choose the plans that are best for themselves, then how could we ever expect them to make wise decisions in selecting the best plans from the much more complex plans of the state health insurance exchanges, or, for that matter, from the choice of Medicare Advantage plans or the plan choices to be offered in the proposed premium support (voucher) markets?

The last sentence from "Conclusions" in their paper: "Our results then do not support the proposition that consumers can make and benefit from good choices in private health insurance markets, and direct health care resources to their best use."

This is really important. Inserting very expensive, profoundly wasteful insurer administrative intermediaries into the system under the guise of choice - choices that cannot be made on a rational basis, choices that are all worse than a single, comprehensive publicly-administered plan would be - is the ultimate of reckless decisions made by the policy community and the politicians that they work for.

My comment:

Note that the introduction includes international data proposing that 190,000 Americans aged 15 to 60 die each year because they do not have health care financing. But it goes on to say that despite a glaring lack of financial access to health care for pre-retirement Americans, we pay 50% more per year than do other first world countries. But this paper is really about the 'consumer-directed health care' inherent in the Medicare Part D program, and whether senior Americans are using their options wisely to purchase drug plans. The program, for the reasons cited above in the "Introduction" section, is considered a policy success, though these authors have noted in other papers that the range of choices available in this program is sinking. Ultimately these authors conclude that fewer than 10% of the senior population in the US is able to optimize their purchasing power in this so-called market. I reiterate what the authors said and Dr. McCanne quoted above: "Our results then do not support the proposition that consumers can make and benefit from good choices in private health insurance markets, and direct health care resources to their best use."

Ladies and gentlemen, we have had an opportunity to test the notion that health insurance purchases in a 'free' market will optimize the distribution of health care goods and services. Unfortunately, market forces do not apply to the purchase of health care. It is time to move past the market-oriented health system 'reform' strategies both major political parties are touting. We must begin to look for alternative methods to organize health care delivery in the US. We can not afford the pretense of market forces in health care. Lives are being lost.

Dr. Joe Jarvis