Interview: TIE from The Finance Buff

by Manshu on June 9, 2009

in Opinion

Update: The Incidental Economist now has his own blog and it can be found here.

The Incidental Economist (TIE) blogs on The Finance Buff, a blog that I have been following for quite long now.  I am really happy to present his interview and since he is a Health Economist, I thought it would be great to ask him questions on the current state of healthcare and his thoughts on the reforms process.

His answers were really quite insightful and I learned a lot. If you have any follow up questions or thoughts, please leave them in the comments here or at The Finance Buff, and TIE will be happy to respond to you.

Here is the interview and please consider subscribing to his feed.

Q1. Most people blog on their own and so in that respect you are quite different because you blog on The Finance Buff’s site. What is the story behind this?

I’ve subscribed to The Finance Buff’s (TFB’s) RSS feed for over a year and had interacted with him on the Bogleheads Investment Forum. In March 2009 he asked me for some ideas on naming his new bond website: Explore Bonds. In our exchanges I also suggested edits to a few of his posts. I guess he was appreciative because he invited me to submit to his blog. As for his side of the story, I only know what he wrote in his introduction of me to his readers.

Until this year I had never blogged, but I have always enjoyed writing. TFB put the blogging idea in my head, and co-blogging with him is fun. Plus, I benefit from TFB’s existing readership, and he takes care of all the technical details. I just get to sit back and write. It’s a nice arrangement for me.

Q2. One of the things that I find odd with the current health care system is that if I go to a doctor and they give me a bill of 300 dollars, I will have to pay that entire amount. But, when they present it to my insurer, they pay much less than that. How did such a system evolve and do you think this is something that should be fixed?

It’s classic bulk purchasing: large insurers get volume discounts. This is as it should be. The same phenomenon exists in many other markets. The bigger the insurer (the more policyholders) the more negotiating leverage it has with providers. Providers team up too (e.g. hospital networks) to gain bargaining power themselves. It’s a market power duel. I wrote a bit about this in two responses to reader comments to one of my posts.

I do not think we can or should fix this element of the system. We want insurers with market power to negotiate good prices on our behalf. What we should strive for is to have everyone covered by a sizeable insurer. But, if insurers get too large and powerful they may negotiate low prices from providers but not pass the savings on to policyholders. So, we don’t want insurers to be too powerful. We want competition among insurers, but not so much as to dilute their bargaining power with providers. Tricky!

Q3. The current plans for healthcare reform seem to be a little vague to people who are not very intimate with the industry, can you shed some light on the actions that will be taken in the next few years to reduce healthcare costs?

A lot of things may happen in the next few years but not all of them will reduce costs. Legislation is still being debated and developed in Congress so we don’t know what will happen. Though it is now a little bit out of date my post titled “Enter: Health Reform” reviews some of the ideas and issues Congress is considering.

Having said that, it seems likely that the following may be included in whatever passes Congress (if anything does): funding and incentives for health information technology (e.g. electronic medical records), encouragement through financial incentives or regulation of preventive services, funding for comparative effectiveness research (comparing treatments to each other rather than to placebo), provider efficiency incentives (to reduce unnecessary treatment), and reforms to Medicare.

The order in which I listed those reforms is from least effective to most effective in cost reduction. I do not think electronic medical records or more preventative care services will have any significant downward force on costs. In fact, they may increase our national health expenditures. On the other hand, I am certain that changes in payments to private Medicare plans (Medicare Advantage plans) will reduce the federal health care budget.

Another notion of costs is that borne by the individual. What might reduce premiums that non-elderly Americans pay for health care coverage? One thing likely to help are small group reforms, changes to the way in which individuals without access to employer coverage can buy health insurance. There is a lot of room for improvement in that market.

Q4. As far as healthcare reform is concerned, what do you think is low hanging fruit? What do you think can be easily achieved and give a big bang for the buck?

What gives the most bang for the buck is not easily achieved. Every dollar saved is a dollar from someone’s pocket. Hence, the political challenges. The cost-saving proposals that represent one-time shifts in the level of health spending are, in general, easier to achieve than those that aim to adjust the rate of increase in health expenditures.

A recent Washington Post article Using Value to Curb Health Costs (Alain Enthoven and Denis Cortese) addressed this issue well. I agree with the authors that the most effective way to reduce the rate of increase in expenditures is to change incentives and to erect barriers to inefficient care. Methods to do that include managed care (i.e. requirement of doctor referrals) and increasing patient cost sharing (to motivate patient price sensitivity). But we know patients hate these ideas. They’re bitter pills. One day we may have to swallow them.

Meanwhile, as mentioned above, it is easy to predict savings due to changes in how private Medicare plans are paid. However, those savings will only shift the level of spending, not affect the rate of growth. So this reform alone is not a long-term solution. And small group reform is more likely to reduce premiums for some Americans but raise health spending overall.

Q5. What would be the most difficult to achieve?

I think the biggest challenge on the cost front is preventing providers from gaming the system to increase their revenue. (For an excellent view of provider incentives see Atul Gawande’s recent New Yorker article “The Cost Conundrum.”)

Politically, everything is difficult when it comes to health reform. Right now the biggest fights are over: (1) the form of a public plan or if there should be one, and (2) the extent to which employer-based health insurance should be subject to income tax (from which it is now exempt). I expect fights over these issues to continue into the summer. I’ll be watching, and blogging.

I really enjoyed doing this interview and would like to interview other bloggers as well. If you are interested, please get in touch with me using the contact form.  I hope readers found this good too, please leave comments to let us know.

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