Maxim Pinkovsky on managed care

by on December 21, 2012 at 3:59 am in Economics, Medicine | Permalink

This result is not a shocker, but I have never seen the actual work done on this point:

The Impact of Managed Care Backlash on Health Care Costs
During the late 1990s, there was a substantial cultural, media and legal backlash against the cost-containment practices of managed care organizations (particularly, HMOs). Most states passed a variety of laws in this period that restricted the cost-cutting measures that managed care firms could use. I exploit panel variation in the passage of these regulations across states and over time to investigate the effects of the managed care backlash, as proxied by this legislation, on health care cost growth. I find that the backlash had a strong effect on health care costs, and can statistically explain much of the rise in health spending as a share of U.S. GDP between 1993 and 2005 (amounting to 1% – 1.5% of GDP). I also investigate the effects of the managed care backlash on intensity of care, hospital salaries and technology adoption. I conclude that managed care was largely successful in keeping health care costs on a sustainable path relative to the size of the economy.

The paper is here, and it is Maxim’s job market paper from MIT.  A number of his other papers, at the link, look interesting as well.

prior_approval December 21, 2012 at 4:24 am

‘I conclude that managed care was largely successful in keeping health care costs on a sustainable path relative to the size of the economy.’

And yet, there was a ‘substantial cultural, media and legal backlash’ – I wonder what a public choice perspective would say of the market forces that obviously influenced the entire American system of governance enough to ensure an increased 1-1.5% of American GDP went to them.

Probably that such market participants might be willing to make donations to those institutes and centers that further such goals – the best way to generate an effective backlash.

Because a backlash based on something like a classroom full of dead children would likely fade away, much like the backlash based on mass murder at a movie theater a half year ago did. But the sponsored organizations and centers will continue to represent industry interests over the long term, regardless of what it means for others, helping orchestrate the necessary backlash when called upon.

Anyone else find it odd that the same people saying ‘government out of health care’ previously are now the ones insisting government involvement in mental health care is the best way to ensure that America remains far and away the most armed society on Eartth? Talk about backlashes to deflect backlashes against previous backlashes – almost as if the point was the backlash, and not actual policy that motivated it.

So Much For Subtlety December 21, 2012 at 4:30 am

The US is hardly the most armed society on Earth. And no, I don’t find it odd. People with schizophrenia are at best 1% of the American population. The percentage of users of State-managed health care will be roughly 100 percent. So two orders of magnitude greater. One has a lot greater impact on society than the other.

It seems reasonable to me, as it ought to be to anyone else, that there are core competencies for the State. Protecting insane people from harm, even harm they inflict on others, is probably one of those core competencies. Providing the full range of medical services to everyone in America is not.

prior_approval December 21, 2012 at 10:07 am

Well, in terms of gun ownership, the USA is an indisputed number 1. by a margin far too great to dismiss. And considering that the U.S pretty much spends 50% of the total world budget on defense, it is reasonable to assume that not only is the U.S. provably the best armed in terms of personal gun ownership, but also in essentially any other measure of mass slaughter. (Yes, the statistics in terms of defense spending are open to some interpretation – Chinese or Russian recruits are paid less than American ones, and the defense budget numbers from either country are certainly less reliable than the published American figures, even allowing for a fairly large U.S. black budget.

So Much for Subtlety December 21, 2012 at 10:20 pm

Well no, you mean among States that collect good data, the US is the undisputed leader in legal gun ownership. That doesn’t make them Number One at much.

The fact that the US spends lot of money on defense doesn’t mean much either. The US Defense Department employs a lot of civilians. The Chinese MoD does not. The US system is massively wasteful when it comes to procurement and research. That is not true for most of the non-Western countries. So it does not follow the US has any particular capability when it comes to mass slaughter. The US Army is small and Americans are not inclined to use it.

dan1111 December 21, 2012 at 4:58 am

There is nothing logically inconsistent about wanting a largely private healthcare system, while also thinking the government should have a role in care for the seriously mentally ill.

I don’t find the combination of these two positions odd at all. Though nor do I find it odd that you are taking a caricature of a conservative position and trying to bash conservatives with it.

prior_approval December 21, 2012 at 10:09 am

‘There is nothing logically inconsistent about wanting a largely private healthcare system, while also thinking the government should have a role in care for the seriously mentally ill.’

Really? Because that is certainly not my memory of the Reagan era, and the wave of mentally ill homeless in DC as various budgets were cut in favor of other priorities.

Cliff December 21, 2012 at 10:35 am

Was it budget cuts, or legal reform? In the 70′s, most state mental health laws were re-written to avoid involuntary commitment except as a last resort (previously you had rebellious children being committed, etc.). Many seriously mental ill prefer to be on the streets than committed.

dan1111 December 21, 2012 at 11:57 am

1) An example of one occasion in which two beliefs did not coexist is not proof that they are logically inconsistent.

2) Your original point was about “the same people” holding different views on two current issues. It’s not clear how events from 30 years ago are relevant to that point.

3) Your interpretation of the events themselves is open to question, as Cliff points out. I can’t find any evidence of Reagan cutting mental health programs. Most such care was provided at the state level, and de-institutionalization was driven by lawsuits, not budget cuts.

Ray Lopez December 21, 2012 at 4:25 am

To me the shock is how trivial and small such deleterious effects were: “My results indicate that because of the managed care backlash, health care costs in a state with average HMO penetration in 1995 grew by 0.1 percentage point more per year than they would have otherwise, which is equal to the average change in the health care share across states in 2005.” – 0.1% compounded is not enough IMO to “move the needle”.

Mike December 21, 2012 at 7:13 am

Yet that was a full 1% of GDP difference over the period of the study. $150B/year sounds like a lot of money.

Cliff December 21, 2012 at 10:36 am

0.1% of a really big number is a big number.

So Much For Subtlety December 21, 2012 at 4:27 am

During the late 1990s, there was a substantial cultural, media and legal backlash against the cost-containment practices of managed care organizations (particularly, HMOs). …. I conclude that managed care was largely successful in keeping health care costs on a sustainable path relative to the size of the economy.

We may well miss that backlash. As stupid as it was. Because presumably now the Federal government will act as a giant HMO. Some of the claims about Obamacare were that it would act to keep a lid on expenses by managing care better. So what was wrong for the private sector has become a virtue in the public sector. It is trivial to predict none of the usual suspects who were enraged by HMOs denying care will see anything wrong with the Feds doing the same.

Roy December 21, 2012 at 7:16 am


At least you could get government to go after your HMO

RPLong December 21, 2012 at 7:48 am

SPOT-ON! Great comment.

dan1111 December 21, 2012 at 7:57 am

Good point, but I would amend it slightly: there may be rage, but it will be directed at private-sector actors within the system, not the government.

Bill December 21, 2012 at 10:20 am

This observation depends on whether ACOs are still regulated by state laws, as HMOs are, and whether federal law pre-empts as intending to occupy the field.

mulp December 23, 2012 at 1:51 am

An ACO is nothing like an HMO as used by the author.

An ACO is where the medical professionals are paid a fixed price for delivering a defined result anyway they deem best.

The insurance HMO which what the author studied is where an insurance company clerk tells the doctor go-no-go on each step of diagnosis and treatment, forcing the doctor to spend time justifying to the clerk the medical need so her computer terminal says ok.

HMOs from 1960 to about 1990 were doctor run institutions where medical professionals took on patients at fixed costs and provided all care, using their medical knowledge and research to determine the best outcome with the least medical interventions which means best quality. Just like taking your new car in to the dealer to be fixed three times is a sign of poor quality service, three times to do what should have been done once in the factory is also too expensive, the fee-for-service system with many independent contractors results in multiple tests and procedures because no system exists except for billing insurance.

ACO are biting off the HMO solution in small bites.

What amazes me is insurers which are data driven, failed to do anything to collect useful data and process it to figure out how to create ACOs based on their bundling of services into single payments. My theory is insurers see returns in terms of 10% of revenue, so $10,000 annual premiums is twice as good as $5000. The greater the bloat in US health care, the greater the revenue and profits for the insurers because all work from the same bloat.

HMOs were a real threat to insurers – doctors hired their own actuaries and data analyzers, and needed no insurance for anything but the reinsurance of high risk.

JWatts December 21, 2012 at 12:07 pm

” It is trivial to predict none of the usual suspects who were enraged by HMOs denying care will see anything wrong with the Feds doing the same.”

Actually, there is some evidence that those groups will still act.

During the 1990′s (1994) the Democratic governor of Tennessee enacted TennCare after the failure of Bill Clinton’s healthcare legislation. TennCare created a subsidized, state health insurance pool with a substantial amount of state and federal money to back it up. The program was given an original 5 year Federal Medicare/Medicaid waiver and additional money. The state was also explicitly allowed to make healthcare decisions outside of the normal Medicare/Medicaid rules.

By 1995 the state had enrolled 1.2 million out of 5 million Tennesseans. So roughly 1/4th of the state was in a subsidized health care exchange. And generally speaking the program was a success. It contracted with HMO’s and the state paid a fixed amount per year per enrollee. Their was a strong incentive for the HMO’s to contain costs. Part of that cost containment necessarily included restricting services. Particularly mental care and name-brand prescription drugs.

The Tennessee Justice Center (funded by the Southern Poverty Law center) backed or initiated various lawsuits to expand coverage and enrollment beyond the TennCare limits. This coupled with reduced Federal funding as the waiver expired made the program unsustainable. Despite, the state and Governor’s repeated protests that complying with the various Court order consent decrees were unaffordable, the state was repeatedly sued in order to expand benefits.

Rather that except a somewhat limited health care plan that none-the-less provided insurance to 25% of the states population, the ‘do gooder’ groups insisted that the program be expanded in various ways. While, this wasn’t the only reason costs were going up, they fought very hard to prevent the state when it attempted to reduce the covered population to around 20%. Between 200-300K of the highest income enrollees were to be kicked out of the program.

By 2005 the state decided to call it quits and has transitioned the program back to a standard Medicaid program.

The perfect is the enemy of the good.

So Much for Subtlety December 21, 2012 at 10:26 pm

The same was true for the NHS. Originally it was thought that the NHS would save money because people would get treatment earlier which would be cheaper than letting a disease become serious and so needing emergency treatment (and where have I heard that recently?). It did not turn out that way. Needless to say there was an expansion of the things covered until the British government could not afford it. Which is basically why Britain declined to the Third World sh!thole it is today. Something for America to look forward to.

But they didn’t get angry about it and I doubt the same anger directed at HMOs will be directed at the Feds. After all, the Feds are a soft touch. No one wants to deny anyone benefits, and if they have no financial incentive to do so, they won’t. However at some point treatment will have to be rationed. The question is at what level and will the American government sacrifice everything else before putting the slightest limits on health care spending? The British experience is not good. British soldiers in Afghanistan cannot get proper equipment, the British Navy has more Admirals than ships, the British Army more generals (if you include Brigadiers) than tanks, but on the other hand if you want a sex change, or feel you should have been born with one fewer legs, or have been screwing around with your boyfriend but you want a traditional marriage to a good Asian boy like your parents demand and so need your hymen restored, sure, no problem.

JonF December 22, 2012 at 6:27 pm

The UK may not be Shangri-la, but it is not a “Third World Sh!t hole”. No, it’s not. Anyone who thinks that ought visit a real Third World sh!t hole: Haiti, or Mali. Maybe Somalia or Myamar.

mulp December 23, 2012 at 1:23 am

He should simply visit an ER or public or “free” clinic in major population centers to see how “great” things are in the US. If faced with waiting hours, my guess he would consider it third world…

ezra abrams December 21, 2012 at 9:54 pm

page 7
brodie documents news …anecdotes…patients being denied essential care…

people are being tossed out to die on the street, but this gets mentioned in passing as a sort of anecdotal thing…to me this is economics at its worst; fancy math that ignores the main question which should be settled first:
If HMOs were in fact sving money (which no doubt mean’t large CEO salarys) by tossing sick people out on the street to die…don’t we need to take careof that FIRST ??? before doing a lot of fancy regression stuff on spending effects ???

mulp December 23, 2012 at 12:55 am

EMTALA was passed in 1987 because hospitals were kicking sick people to the streets because they couldn’t pay, but that had nothing to do with HMOs. Of course, this was after hospitals became for-profit to cut costs of health care from the high costs of care in public hospitals (government run with government employees) and in not-for-profit hospitals (usually religious established but by then independent). The big cost excesses came from unpaid bills of the poor and working poor.

My point is kicking the sick to the curb had nothing to do with HMOs, but for profit.

ezra abrams December 21, 2012 at 10:00 pm

the use of the word “backlash” is nonscientific and loaded.
If an HMO is boosting its CEOs salary by limiting 1st time moms to 48 hospital hours for childbirth, and states legislate more then 48 hours, that is not “backlash” – it is Dickensian scum prevention legislation

Possibly you all know that the resturant chain Dardens (olive garden) pays its ceo 15,000,000 dollars ayear, and has a program to turn full time workers into partime, to avoid bennies like healthcare.

Not that I intend anyone harm, but you can see how marxist revolutions start and get out of hand..

Tom West December 22, 2012 at 2:01 pm

It was the American reaction to HMOs that made it clear to me that Canadian style universal healthcare coverage would never work in the USA. The reason that Canada’s costs are so much lower than that of the US’s is because they do manage care in various ways. Certain operations are not performed at end of life, high priced drugs with low chance (but > 0) of success are not paid for, there are waiting times for many things, exhaustive testing is not performed, etc.

All of these saving only marginally lower general health-care outcomes (at least measured by cross-border hospital studies for similar health-issues), but they do have some effect, and they are visible cases of choosing not to make large expenditures for marginal outcomes, which truly sucks if you’re the one being left out.

However, the fact is that there is no magic bullet. Since the Americans seem unwilling to make those trade-offs, I cannot see how their health-care costs will not continue to consume an ever increasing share of their GDP.

(Canadians do have one big advantage. With no/minimal local health-care competition, there’s no looking across the room to the person in the next bed and seeing they’re getting better treatment. The US is far enough away that it’s not “real”, which prevents large-scale calls for health-care expenditures that would, in the end, be deleterious to the Canadian economy.)

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