Download 20 - Iona

Chapter 20
Can Competition Improve the US Healthcare System?
1. What are the criteria for a competitive market?
 Information: Consumers must have sufficient information to
choose the quantity and type of services based on prices, quality,
and other characteristics of the services being supplied.
 Consumer incentives: Consumers must have financial incentives
so that the value of the services used is not less than the cost of
producing those services.
 Consumer choices: The market needs to respond to what
consumers are willing to pay. If consumers demand more of some
services, the market should provide more of those services. If
consumers differ in their preferences on how much they are
willing to spend on different types of services, the market has to
be able to respond to those varied consumer demands.
 Supplier incentives: Suppliers of the goods and services must
have an incentive to produce those services (for a given level of
quality) at the lowest cost.
 Price markups: The prices charged by suppliers for their services
should reflect their costs of production. (This will occur when
suppliers compete on price to supply their services.)
If a market has the above it will maximize social welfare by having both
efficiency in allocation and efficiency in production.
2. Medical markets are distorted from being efficient both on the
supply and demand side.
On Demand Side
 Consumer incentives are affected by the tax treatment of health
insurance, leading to over-insurance and too much demand.
Subsidy both to employees and employers.
 Consumers have little information on the quality and
appropriateness of care
 Many employers limit their employees’ choice to only one health
plan so less incentive of insurer to respond to employee
preferences (shop for cheaper plan?) or to lower premium.
 Many employers contribute more to more expensive health plans
if they offer choice, leading to employees opting for excess
insurance. Contribution should be fixed $ not fixed %.
On Supply Side
 Government regulations limit price competition by providers,
licensing for health professionals, CON laws for new providers,
pricing of health insurance policies (distortions caused by
community rating), state mandates specifying health insurance
benefit coverage, and rules covering provider networks, such as
Any Willing Provider laws.
 Supplier-induced demand from fee-for-service reimbursement
3. An unexpected example of efficiency is the Medicare Part D drug
benefit, which has cost less than projected
 In 2004, the Congressional Budget Office (CBO) projected that it
would cost $122 Billion in 2012, but actual cost was $55 Billion
 Part D provides a fixed subsidy to beneficiaries who can choose
any plan they want.
o Choose a more comprehensive plan, you pay extra.
o Choose less comprehensive plan, you save $
 Drug plans compete for enrollees by offering lower premiums.
o Drug formulary limits choice but enables insurer to get
discounts from Rx makers.
o Drug plans also impose extra costs for brand name drugs vs.
generics.
 So competition on supply & demand side worked here.
4. How to make medical care more like competitive market, thereby
improving efficiency?
o End or limit tax exemption for employer paid insurance.
o Remove restrictions on market entry; to eliminate laws promoting
anticompetitive behavior, such as CON and AnyWillingProvider
laws; to override state mandates that increase health insurance
costs; to eliminate state insurance regulations requiring
community rating; to enforce the antitrust laws
o End requirement that managed care insurers for Medicare and
Medicaid can’t rebate to enrollees any savings that materialize
but must instead expand benefits to equalize costs with other
plans.
o Provide more info on quality of services at differing providers.
End regs that prohibit it.