Barron's: What you pay for determines what you get .
Good for HRCs excellent care,
TA
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interactive.wsj.com
HMOs: The Law and Economics
What you pay for determines what you get
By J.D. Kleinke
What's next for the trial lawyers of America? How
about a class action against millions of parents on behalf of
children who have discovered that there is no Santa Claus?
Such is the intellectual weight behind the recent wave of
lawsuits against several major HMOs, filed as a
pre-season warm-up for the litigation expected from the
enactment of a "patients' bill of rights."
The same lawyers who sued the tobacco industry on behalf
of millions of voluntary smokers have filed a series of
class actions against Humana, Aetna/US Healthcare and
others for the failure to disclose that managing care means
managing costs.
The "substance" of the suits is that the nasty HMOs failed
to explain to their innocent customers that they charge
lower rates because they browbeat doctors into providing
less expensive care.
HMOs carved out a large share of the U.S.
health-insurance market because they represented a
lower-priced, cost-controlling alternative to traditional
indemnity insurance, with its unlimited choices and access.
Now these same organizations are under legal attack for
seeking to control costs. How they do so is a classic lesson
in caveat emptor, one some plaintiffs' attorneys clearly do
not think American consumers should have to learn on their
own.
Here it is, free of charge: When someone signs up for the
lowest-priced health plan offered by his employer or by
Medicare, he is likely to pay for it later when he actually
needs medical care.
"You get what you pay for" is what a 10-year-old learns
when he buys and tastes his first imitation chocolate
bar-unless there happens to be an underemployed trial
lawyer cruising the candy counter.
Markets and Marketing
While there is some perverse pleasure in watching lawyers
and HMOs attack each other, this frivolous exercise means
we all will lose in the end. Litigation to take the teeth out
of the HMOs will distort and delay the natural evolution of
a U.S. health-care marketplace.
Some of those plaintiffs may actually prefer cheap health
coverage. Those who prefer better coverage they realize
what they are really getting for their money -- can buy
differently next open season. Or they can pressure their
employers for a different plan or try "buying up" from the
current plan with their own dollars. This is a process best
left for the marketplace to sort out, not the courts.
Such market-based sorting does require consumer
education, starting with the lesson that cheaper coverage
means cheaper care. A lower price for what sounds like a
generous benefits package means the HMO has every
incentive to reduce costs, contract with the cheapest
hospitals in town and micromanage physician activity.
Lawsuits, however, serve only to compound consumer
ignorance about the central reality of managed care: All
that HMO marketing fluff about providing "quality" health
care, prevention and "wellness" care turns out to be just
that -- marketing fluff.
There is no Santa Claus in health care, any more than there
is a Santa Claus in the rest of a market economy. Higher
quality costs more, whether for a good pair of shoes, a
gourmet restaurant meal or easy access to the best
medicine.
How the HMOs' Orwellian ad copywriters got this fact of
life exactly backwards is the result of one of the more
bizarre twists in the helter-skelter history of the U.S.
health-care system. Contrary to popular belief, the modern
HMOs did not start out as a cheaper alternative to
indemnity insurance in the late 1980s, but got their start in
the early 1970s as a social movement, an idealized
alternative to commercial insurance.
In 1970 the typical health plan had the same deductibles of
today -- generally $200-$500 a year, a substantial sum for
the average American family back then. It left that family
accountable for managing a much larger portion of its own
medical care than the same deductible does today. (This is
precisely the kind of personal responsibility sought through
today's radical idea of medical savings accounts and
high-deductible insurance.)
The welfare-state builders of the early 1970s saw this
accountability as too burdensome for the average American
family -- the same argument that opponents use against
MSAs, interestingly -- and so sought a paternalistic
alternative. They created a new kind of health-insurance
organization that owned or controlled its own doctors and
hospitals, required no deductibles (instead providing
"first-dollar coverage"), emphasized preventive care and
offered a generous prescription drug benefit.
New Model Clinic
In a political compromise to counter the push for
nationalized medicine, President Nixon signed the HMO
Act of 1973 into law, ushering in the first modern HMOs.
They were zealous, usually politically progressive,
aggressively not-for-profit organizations. They were an
attempt at building a system of socialized medicine --
based on some of the nobler if financially unsustainable
principles of public health -- inside the current system.
Most of those early HMOs failed, only to be resurrected
and repackaged during the health-care cost crisis of the
1980s.
As their champions grew up and joined Corporate
America, the public-health premise at the philosophical
heart of those HMOs also got a classic 1980s makeover:
Suddenly, the concepts of first-dollar coverage, preventive
care and richer drug benefits were "cost-effective."
Nobody had any data to prove this; it was simple common
sense to those commercializing managed care.
But they were wrong. Higher-quality care is not cheaper;
prevention does not save money; healthier populations cost
more money, at least in the short run. A few runaway
breast-cancer cases are a lot cheaper than 100,000
mammograms for healthy women.
As compassionate human beings, confronted by this
horrific disease, we shrink from so cold a calculus; as
effective marketers, so do the HMOs. This contradiction at
the heart of managed care emerges only after the marketing
is done and the customers are signed up: The typical HMO
talks out of one side of its mouth about its obsessive quest
for "quality" health care -- while out of the other it's
screaming at doctors, hospitals and drug companies about
controlling costs.
Chilling Facts
The HMO industry's own data reveal the intractability of
the problem on its most precious turf: prevention. Kaiser
Permanente recently released a study showing that a new
vaccine prevents pneumococcal pneumonia in infants. It
immunized 19,000 babies; 38 infants in the study's
nonimmunized control group of 19,000 contracted the
disease.
This is great news for babies and parents, but not for
Kaiser. Assuming that the four-shot regimen will cost as
little as $50 an infant (a highly conservative estimate for
the vaccine and clinical labor), the total cost to an HMO
for immunizing 19,000 infants is $950,000. The cost of
treating those 38 children spared pneumococcal
pneumonia, at an average of $5,200 per illness, would
have been $197,600. The accounting is clear: The vaccine
costs five times what it returns.
Better doctors, like better drugs, also cost more. A
little-noticed study published last year in the Journal of the
American Medical Association found a direct relationship
between physician scores on board exams and the intensity
of resources they order for patients. A better educated
doctor is more cognizant of a greater variety of clinical
problems potentially affecting a patient, and thus orders
more diagnostic tests to rule them out. Such "high
utilization" physicians are precisely the ones the HMOs
seek to drive out of their networks.
Nearly every aspect of preventive care runs aground on the
rocky shore of extra costs
SO THE HMOS HAVE NO VESTED INTEREST IN MANAGING
ANYONE'S HEALTH.
But is this grounds for a lawsuit?
<<<<<<<<<<<<< The marketplace will ultimately turn against theHMOs. >>>>>>>>>>>>>>
They have had a great run over the past decade
because a large segment of the market wants more
affordable coverage and has yet to realize what this
affordability entails. Class actions subvert the process by
seeking to twist HMOs into something consumers may find
less unpalatable.
In the end, we as consumers should be managing our own
care with our own money, rather than running off to court
when we find out too late that we were suckered by the
Santa Claus marketing of the managed-care industry. Class
actions are not the way to regulate a health-care system that
needs to reform itself through market forces.
J.D. KLEINKE is a medical economist and author based in Denver. His latest book is Bleeding
Edge: The Business of Health Care in the New Century. |
