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Leading policy-makers and scholars explain how market forces, deregulation, and consumer choice can work to improve health care for all Americans.

Commentary

A Dog's Breakfast
Daniel L. McFadden, Wall Street Journal, 2-16-07

Daniel McFadden, a former Nobel Prize winner in economics, reports his research on the Medicare Part D drug benefit since its inception. McFadden argues that Part D represents an important controlled experiment in the workability of consumer–driven health care, and concludes that the plan is working much better than many had expected:

...when one looks at plan choices made, one finds that consumers were relatively consistent in recognizing their self–interest. Most consumers selected among the lowest–cost plans available in their area. Consumers with significant drug needs enrolled early, while those with no immediate needs mostly enrolled later to preserve their option value of obtaining insurance at non–penalized rates. There is some evidence that consumers did not fully appreciate the consequences of the gap, and enhanced policies that covered the gap were not heavily demanded, even though the additional coverage they offered was close to actuarially fair.

The picture that emerges is that elderly consumers were mostly able to navigate the Part D market and reach reasonable choices, despite its novelty and complexity. Two concerns with insurance markets that also arise for the Part D market are adverse selection, in which only the sickest seek insurance, and insurers respond by cherry–picking, refusing coverage for individuals and conditions likely to increase claims; and moral hazard, in which insurance coverage encourages additional treatments by reducing the incremental costs of these treatments.

Adverse selection has so far been avoided in the Part D market because the voluntary enrollment rate is high, including a high proportion of healthy seniors who currently are net contributors to the system. Further, adverse selection is not a problem for plan switchers because participating insurers must take all comers, and are reimbursed by Medicare based on each individual's experience rating. There is moral hazard in the sense that prescription drug use is increasing for seniors newly insured under part D, to 4.4 from 3.3 prescriptions on average per month, according to our survey.

This increase must be assessed in terms of its health consequences. Dana Goldman at RAND Corporation has found that making at least some drugs available to seniors at lower cost more than pays for itself in decreased incidence and cost of health problems. For example, reducing the copay on statins to $10 from $45 for a 30–day supply increased plan prescription drug payments, but the increased adherence of patients to the therapy at the lower copayment reduced cardiovascular incidents and attendant hospitalization costs, so that total annual health costs per patient in his study fell to $5,180 from $5,470.

A recent study of the VA population indicates that statins increase adult life expectancy by nearly two years, apparently because they act as anti–inflamatories as well as reducing cholesterol. Anecdotal evidence indicates that Part D coverage will reduce medical problems and hospitalization costs enough to offset a significant portion of its cost. However, reduced adherence to therapies by consumers who hit the gap will probably have a significant adverse effect on health outcomes that we will begin to see in 2007. A humorous proposal is that employers could lower their total health–care bills by putting statins and anti–hypertensives in the water cooler. What is clear is that an integrated approach is needed to evaluating health–care costs, and programs like Part D that can deliver effective preventative drugs may pay for themselves.

My overall conclusion is that, so far, the Part D program has succeeded in getting affordable prescription drugs to the senior population. Its privatized structure has not been a significant impediment to delivery of these services. Competition among insurers seems to have been effective in keeping a lid on costs, and assuring reasonable quality control. We do not have an experiment in which we can determine whether a single–product system could have done as well, or better, along these dimensions, but I think it is reasonable to say that the Part D market has performed as well as its partisans hoped, and far better than its detractors expected.

A health insurance market like Part D probably requires this level of active management to work well; after–the–fact oversight in the style of the SEC or FTC is inadequate. If privatization is going to work elsewhere in health care, active market management will be needed.

McFadden’s findings are important because they represent an emerging consensus that market driven programs can work in the health care sector, provided that—as he notes—the "rules of the game"—including transparency, competition, and financial incentives for providers and payers—are focused on delivering measurable value to consumers.



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