Monday, July 23, 2007

What was the Value Proposition of HMOs again?

by Ken Houghton

I'm late to the party, so I just want to do this short and simple*. George W. Bush, quoted here:
Bush spent a fair amount of time talking about health care yesterday, as well.

"The immediate goal is to make sure there are more people on private insurance plans. I mean, people have access to health care in America," he said. "After all, you just go to an emergency room."

If you want long and justly vituperative reasoned, check out Amanda Marcotte:
I want a return on my health care dollar. I want the money I pay in to come out in benefits to me, not in checks made out to stockholders.

It's that stockholders thing I want to think about.

Let's stipulate that Lewis Thomas was correct in this book. The phenomenon of doctors getting rich was not ceteris paribus in the late 1920s, or any time before the end of World War II. It is basically a two-generation phenomenon. Ask any doctor who has been practicing for more than 20 years and they can tell you exactly the year it changed.

1994. The Rise of the HMO, coincident with the death of the Clinton Health Care Initiative.

Now, if we assume the HMO has a viable value proposition,** then surely that value was in the stated mission of having patients more able to take control of their health and treatments. Indeed, it would be slicing the pie so that there were more pieces—maintenance steps taken by the insured—and that would balance any decline in revenues to the provider.***

So instead of waiting until one has a heart attack, people would take an aspirin every day if they were in a high-risk group. And they would go to the doctor early in their sickness, before a cold became a flu, before they made others ill, or when cancer treatment would still be highly effective, or at least before someone decides it's not cost-effective that you live.

So when we see this report note:
The area where the U.S. health care system performs best is preventive care, an area that has been monitored closely for over a decade by managed care plans. Nonetheless, the U.S. scores particularly poorly on its ability to promote healthy lives, and on the provision of care that is safe and coordinated, as well as accessible, efficient, and equitable.

we might be forgiven for being encouraged. Until:
On each of these indicators [not visiting a physician when sick, not getting a recommended test, treatment or follow-up care, not filling a prescription, or not seeing a dentist], more than two-fifths of lower-income adults in the U.S. said they went without needed care because of costs in the past year.

So it appears that the utility of the HMO is on a lower utility curve than the emergency room. And, according to George W. Bush, that's the way it should be.

If the President of the United States—remember, he's a Harvard MBA—doesn't see any value in HMOs, why did anyone else?

*Well, I wanted to be short.
**It must be so, or the market would not have developed. (Why are you laughing?)
***Note that in this model, consumer surplus should have increased due to the reduced payments to doctors and competition amongst the HMOs and insurance companies. If this didn't happen, we must assume there is some inefficiency in the system that, of course, the free market will correct.

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