Government
Intervention in
Health Care
Markets Is
Practical,
Necessary, and
Morally Sound
Len M. Nichols
T
he intensity of the opposition to health reform
in the United States continues to shock and
perplex proponents of the Patient Protection and Affordable Care Act (PPACA).1 The emotion
(“Abort Obama”) and the apocalyptic rhetoric (“Save
our Country, Protect our Liberty, Repeal Obamacare”),
render civil and evidence-based debate over the implications and alternatives to specific provisions in the
law difficult if not problematic. The public debate has
largely barreled down two non-parallel yet non-intersecting paths: opponents focus on their fear of government expansion in the future if PPACA is implemented now, while proponents focus on the urgency
and specifics of our health care market problems and
the limited number of tools we have to address them.
Frustration on both sides has led opponents to deny
the seriousness of our health system’s problems and
proponents to ignore the risk of governmental overreach. These non-intersecting lines of argument
are not moving us closer to a desired and necessary
resolution.
This essay, in the spirit of the Medical University
of South Carolina’s Pitts Lecture Series, aims to bring
these two debate strands together and to demonstrate that successful health reform need not end the
desirable reality of limited government in the United
States. It expounds on three fundamental points: (1) a
powerful moral case for expanding access to coverage
and care to all is grounded in scriptural concepts of
community and mutual obligation which continue to
inform the American pursuit of justice; (2) the structure of PPACA springs from an appreciation of and
approach to channeling market forces to serve social
ends that was developed and proposed by a coalition
of moderate and conservative Republican U.S. senators almost 20 years ago, and therefore the partisan
fault lines in the current debate are artificial; (3) the
most humane path to a better and more sustainable
health system lies in implementing (and amending
where appropriate) PPACA as fast and fully as we can.
The larger purpose of this essay is to articulate why it
is not possible to make our health system better, sustainable and serve us all without government playing
Len M. Nichols, Ph.D., is the Director of the Center for Health
Policy Research and Ethics and Professor of Health Policy at
George Mason University, Fairfax, VA. He is the Editor-inChief of the Community on Payment Innovation sponsored by
the American College of Cardiology and the American Journal
of Managed Care. He received his Ph.D. in Economics from the
University of Illinois, Urbana-Champaign, in 1980, an M.A.
in Economics from the University of Arkansas, Fayetteville,
in 1976 and a B.A. in Economics and Business from Hendrix
College in Conway, AR in 1975.
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specific and limited but absolutely crucial catalytic
roles.
poor does not justify collective involvement in food
redistribution, that the amount of food to be left in
the field is up to the landowner, and that no individThe Moral Sources of Government
ual landowner is responsible for ending starvation in
general. I am not a religious scholar, but here is how I
Intervention in Health Markets
Questions about the proper role of government are
respond to these good arguments.
fundamentally questions of what kind of commuThese three counter-arguments coalesce into one
nity do we want to live in, who is a full participating
question: how much is enough charity? There is no
member, who, if anyone, is excluded, and who gets to
simple answer, but the oft-repeated Old Testament
decide? Despite much recent scholarship,2 I continue
demand for a tithe or 10% of earnings — still practiced
to believe that the best descriptions of community are
by Orthodox Jews and some Christians today — would
the oldest descriptions we have. The first rule of comseem to negate the idea that each landowner gets to
munity that is relevant to our purposes comes from
decide “how much” for himself. Clearly it was expected
for hundreds of years that 10% would
be enough, but it was not left to each
This essay, in the spirit of the Medical University individual to decide idiosyncratically,
since they might be ill-informed or
of South Carolina’s Pitts Lecture Series, aims
overly selfish, or both. Similarly, and
to bring these two debate strands together and
more generally, the description of the
foundational Christian community
to demonstrate that successful health reform
in the New Testament’s book of Acts
need not end the desirable reality of limited
describes how “they would sell their
government in the United States.
possessions and goods and distribute
the proceeds to all as any had need.”7
Later in the same book, the early ChrisMoses’ third book of the Jewish Torah and Christian
tians “determined that according to their ability, each
Old Testament, and it is that preventable starvation is
would send relief to the believers living in Judea,”8
unacceptable.3 Landowners were admonished to leave
whom they feared would soon starve due to famine.
crops in the field while harvesting so that those who
Both of these examples suggest that “more” charity is
could not own land — widows and orphans — as well
required until all needs are met and that it should be
as those who were complete strangers without means
given proportionate to one’s means, and willingly.
who happened to be passing by, did not starve. All
I trace all this back to Leviticus by inferring that
people were believed to be made in the image of God
the original admonition was for a local landowner to
and therefore had the right to participate in the life of
respond to the poverty around him, the poverty he
the community. To have excess food and to knowingly
could see, the poverty he was aware of. The question
permit starvation was a violation of the Covenant
before us in the modern world, at least for those of us
between God and His Chosen People.
who are still guided by the moral force of scriptural
The community retains the right to set rules, or concommunities, is this: how do we respond to the wideditions of participation. Our oldest obligations have
spread knowledge that preventable starvation would
always been mutual, and it is perfectly acceptable for
occur on a large scale without redistribution mechadonors to require personal responsibility from bennisms, and that voluntary charitable contributions are
eficiaries. Leviticus does not say bring the poor home
today not commensurate with this scale?
and cook for them, nor does it say that all people
The reader may fairly wonder what any of this has
should have the same amount of food. But it is clearly
to do with health care. I claim that 21st century health
not acceptable to fail to leave food for the poor to glean
care has become like food, a unique gift capable of
for themselves (and thereby exhibit personal responsisustaining and enriching lives stricken with illness.
bility) so that sustenance, and thereby continued parAll of us could be stricken with debilitating illness at
ticipation in the life of the community, in life itself, is
any time, and in the United States pre-PPACA, if you
rendered possible. This lesson is repeated throughout
become unable to work, you are often unable to mainthe monotheistic scriptures, in the New Testament,4 in
tain health insurance and could thereby lose access to
the Qu’ran,5 and in the Book of Mormon.6
timely and efficacious care.
Now some might argue that this moral admonition
Yes, the Medicaid program exists, but it actually
to prevent starvation among passersby and the local
only covers 43% of the poverty population, contrary
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Len M. Nichols
to much rhetoric to the contrary.9 Furthermore, Medicaid eligibility rules prevent it from functioning as a
stop-loss for the middle class, since asset requirements
mean a middle class breadwinner suddenly stricken
with serious illness would have to first liquidate all
assets and bankrupt themselves before qualifying for
Medicaid. Yes, uncompensated care is provided in
many hospitals and by many clinicians, but due to a
variety of factors, it is often delivered too late and is in
some cases wholly unavailable at the time it could be
effective.
After an exhaustive review of the available evidence,
the Institute of Medicine concluded, “based on the preponderance of evidence,” that “providing health insurance to uninsured adults would result in improved
health, including greater life expectancy.”10 In other
words, our health care safety net is not adequate to
treat the tens of millions of uninsured who live among
us today. The point is, all of us could ultimately die
from lack of timely care which we could get if we have
good health insurance, and we all could become too
sick to work and then lose our health insurance and
thereby become like the starving biblical stranger at
any time. To refuse life-sustaining care as a matter of
policy because of a cost that the society as a whole can
afford to bear is a similar violation of the essence of
the Covenant that Moses, Jesus, and Mohammed all
taught their followers. The fact that this mutual obligation is fundamentally self-interested or self-protecting, does not make it less sacred.
The other scriptural principle that is relevant to
the scale question in our health care debate is stewardship.11 In Genesis, the first book of the Torah,
humankind is given dominion over the animals of
the planet and over the flora of the planet itself, and
with this dominion the responsibility for maintaining it all for future generations is also given, expected,
and accepted. In Leviticus, the concept of Jubilee or
debt forgiveness (every 49 or 50 years) is introduced
and required so that no family is permanently landless and no one is enslaved in perpetuity for debts
incurred by themselves or by their parents or grandparents. Finally, St. Thomas Aquinas, in his masterwork the Summa Theologica, addressed the question
of whether a poor man stealing food in order to survive is committing a mortal sin. His answer is no, and
he quotes Ambrose, an early Christian theologian, for
if a poor man is starving, he has a natural right to take
from those who have more than enough. Indeed, a fair
reading of Aquinas suggests that if the poor man is
starving, it is the rich man’s fault, for he has reneged
on his responsibility of stewardship.12
Now recall, nothing in Leviticus nor in the rest of
the scriptures nor in Aquinas suggests that everyone
should get the same amount of food. Stewardship does
not mean communism, in theory or in practice. But
neither does the call to stewardship permit preventable death from lack of access to routinely available
care to be rationalized away and ignored in the policy
sphere.
Clearly, the call for stewardship is a call for balance,
between the rights to the fruits of one’s own labors
and the need for social justice and full participation in
the life of the community. Such a balance may appear
possible only with an omniscient philosopher-king/
absolute ruler, or with divinely inspired and widely
accepted rulers (e.g., the Jewish theocracy when the
Torah was being written and first inculcated). But a
reasonable approximation could be obtained in the
modern world, within a republic wherein regularly
elected leaders adjust the policy dials between redistribution and self-reliance as knowledge, economic
and political priorities change. A constitution may
constrain legislative choices, but the main constraints
are political competition among competing factions
and points of view.
Below I will address how the PPACA does and does
not expand governmental power beyond currently
accepted uses and limits. For now the main point I
want to make is that this scriptural tradition of the
unacceptability of preventable death from starvation
is a legitimate moral basis to raise the question: how
much trouble should we go to so that our less fortunate fellow citizens (residents?) can have access to
insurance and necessary health care they might otherwise lack? We can argue about whether the PPACA
goes too far in reducing the liberty of the high income
and the already insured, as some would assert, and
I will address some key specifics in that argument
below. But we cannot, I think, question that we ought
to keep asking the question, if we claim to continue
to honor the religious tradition our Founders (mostly)
shared. We honor Moses himself as “lawgiver” with the
Ten Commandments outside state capitol buildings.
Indeed, his image is in the middle of the bas relief on
the portico above the entrance to the U.S. Supreme
Court building. We still put “In God We Trust” on our
money, the most common symbol of federal authority we have. So to say we have forgotten Leviticus and
the biblical roots of our policy morality, or that the
Bible is not relevant to policy disputes in modern society, is simply and manifestly not true, as our ongoing
debates over reproductive control and capital punishment attest. Some may choose to ignore the ancient
admonition from time to time, but it cannot be forgotten since we are reminded of it daily in so many
symbolic and real ways.
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Economic Rationales for Government
Intervention in Health Care Markets
standard-setting regulations, we will have sub-optimal resource allocation in goods and services that proReligious and moral arguments about intervening
duce externalities.
in health care markets are powerful, but the modern
Fourth, government as referee is necessary to maindiscipline of economics also contains plenty of logical,
tain competitive market conditions and performance.
practical, and empirical justifications for government
Market performance is seriously compromised, in the
intervention in health markets. There are five genersense of price exceeding marginal social cost, anytime
ally recognized economic functions of government
there are monopoly (or oligopolistic) sellers protected
in the traditional normative framework of public
by persistent barriers to entry, anytime there is seriously asymmetric information
between sellers and buyers about
the full set of implications of a
Religious and moral arguments about intervening
service or product, and a related
in health care markets are powerful, but the modern situation, anytime actual quality is difficult to discern without
discipline of economics also contains plenty of
specialized knowledge that is very
logical, practical, and empirical justifications for
expensive to obtain (by attending
government intervention in health markets.
medical school oneself, for example). Private vendors may alleviate
some information asymmetries
finance.13 First, to define and protect property rights,
for those who can pay, but government may also need
without which there will be no market transactions at
to monitor and regulate the quality and accuracy of
all. So some government is necessary for all markets to
the evidence that is used to communicate specialized
even exist, must less flourish.
knowledge where there are substantial health and
Second, to finance public goods like national defense,
safety risks to people using complex products and
for without taxation the free rider problem will lead to
services. These failures explain the existence of state
too little national defense spending and the society’s
and federal anti-trust laws, state insurance regulatory
freedom and independence from aggressive foreignbureaus and departments, the Food and Drug Adminers will be at risk. Health-enhancing research (e.g.,
istration and state medical (and other health profesthe NIH) and dissemination of that knowledge (e.g.,
sional) licensing boards.
AHRQ) are also public goods, and just like national
All of the examples of “market failure” outlined
defense, the free market will undersupply them in
above create conditions in which inefficiency is
the absence of a government financed research infraexpected to reign, i.e., price not equal to true marginal
structure. Some taxation, that in a republic may well
social cost. The last commonly (but not universally)
be higher than some citizens would want and might
accepted economic justification for government interbe interpreted as coercive for some, is therefore necvention in health markets is to correct an “unacceptessary for welfare enhancing public goods to be adeable” degree of income inequality. This is clearly a
quately supplied.
less scientific rationale for government intervention.
Third, government is usually necessary to effectively
But even if you ignore the biblical admonitions and
correct serious externalities, when costs or benefits are
justifications for the moment, there are at least two
borne or enjoyed by those who are not producing or
economic rationales for redistribution, both of which
consuming the good or service directly. Pollution and
are based on enlightened self-interest. One is that
education are the classic examples here. We all also
extreme inequality may lead to a high risk of social
share a compelling interest in making sure all our feltension and violence, so voluntary taxation to provide
low citizens (and residents) are immunized against
a basic basket of life-sustaining commodities for the
deadly or debilitating communicable diseases (e.g.,
poor also increases the social and economic freedom
public health departments, the CDC). We share in
of the taxed. The other is a kind of mutual social insurthe economic rewards of communication and transance. If there is a positive probability that the basis
portation infrastructure like the internet and interfor a person’s high income or wealth could disappear
state highways, or regional and national networks
(through illness or injury for example), then it might
of health information exchanges in which real time
be rational to agree to provide for those less fortunate
access to interoperable personal health data could
since someday you (or your children) might be in their
save lives every day (ONCHIT,14 Health Information
class and situation. Disability or retirement insurance
Exchanges). Without government investments and
might reduce this need, but not all risks are likely to
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Len M. Nichols
be insured (so called “Acts of God,” like hurricanes and
lightning strikes, for example), and some people may
then prefer a more robust social contract than would
otherwise be the case. Thus, there is also an economic
self-interest rationale for basic redistribution or safety
net spending.
So how do current (pre-reform) health market conditions compare to these classic sources of market
failure? Asymmetric information is extreme in health
service markets as well as in health insurance markets.
Doctors study for 7 to 17 years; this knowledge can
never be matched by patients. This is why there are
licensure requirements, authority for enforcement and
monitoring of which resides at the state level, according to our constitution. Many local hospitals, physician
groups, and insurers have considerable market power
that is difficult to remedy with traditional policy tools,
though both state and federal regulation and antitrust
remedies have been tried.15 People may know their
actual diagnoses before buying insurance from sellers
unable to discern it, and at the same time few regular
people can understand insurance contract language
and contingencies. That is why insurance markets are
regulated. Insurance is interstate commerce, so this is
partially regulated at the federal level, but the federal
government long ago delegated much health insurance regulation to the states, and much expertise and
authority resides there today as well.16 The most powerful among many externalities in health care markets
is that the appropriate price of insurance for any one
person depends on health service prices and utilization by members of the risk pool he/she is allowed or
forced to join.17 Therefore all people have a compelling
shared interest in how risk pool construction is done
by private markets and regulated by governments, and
how health services prices and utilization patterns
within those pools are set. By contrast, the price of ice
cream does not depend on who else buys it from the
same store you do, and thus produces no externalities
and need for regulatory oversight.
Finally, the most pervasive market failure in health
care is the absence of strong self-correcting or self-regulating mechanisms, as in most other markets. In most
markets, if supply prices rise faster than incomes, or if
quality differentials are undetectable, there is strong
pressure for the demand price to fall. Not so in health
care. Part of the reason for this is the sheer complexity of the markets (and the human body): there are
over 8000 codes for services physicians might provide
and be paid for. But there is also a lack of transparency about what services patients actually need, and
about what services, drugs or devices actually cost,
even to providers. This is partly caused by our necessary but somewhat problematic third-party payment
system: we must have insurance to enable access to
complex health care when we need it, but the very
comprehensiveness of the insurance most consumers
want and buy obscures the true cost of health care to
the ultimate consumer.18 Providers have learned over
time that most insured patients do not care about
prices and truth be told they are quite often not aware
of them themselves. Hence, health markets are simply prone to more unchecked cost growth far beyond
most other markets, in the absence of concerted countervailing buying power which, in most geographic
markets, only government is actually large enough to
provide, but our political distrust and fear of government prevents it from being used aggressively enough
to be effective.19
The Reform Law’s Structure Is
Based on Republican Ideas
Surprising as it may be, given the excess partisanship
we have suffered over health care, the structure and
core of PPACA are very similar to what John Chafee
(R-RI), Bob Dole (R-KN) and 16 other moderate and
conservative Republican senators proposed in 1993 as
their preferred alternative to the Clinton plan’s reliance on employer mandates.20 Their proposal included
guaranteed issue (ending health status discrimination) and modified community rating (premiums
adjustable only for age, family size, and geography)
in the non-group and small group markets, requiring
individuals to purchase health insurance to insure a
balanced risk pool, sliding scale tax credit subsidies,
and would have financed those subsidies with Medicare savings and a limit on the (still) open-ended federal income and payroll tax exclusion for employer
premium contributions. These provisions, designed
to enable all Americans to afford private health insurance and health care at an aggregate price tag our
society can afford, are the very heart of PPACA. This
is why unanimous Republican opposition to PPACA
is so hard to understand, especially since two of the
co-sponsors of Chafee-Dole are still sitting senators
and have long records in bi-partisan health legislation
(Grassley (R-IA) and Hatch, R-UT).
The reason cannot be that Chafee-Dole was just
a pipedream of liberal Republicans back then. The
American Conservative Union has developed a scorecard and rankings of conservatism for all members of
Congress for decades.21 In 2011, as a reference point,
the average score for all Republicans in the Senate was
83 (out of 100 perfect score, according to the ACU).
In 1993, senate republicans averaged 81 on the ACU
index. Democrat senators in 1993 averaged a 16 score
on the same index, by contrast. Those who co-sponsored the Chafee-Dole legislation averaged 76 on the
health care reform: controversies in ethics and policy fall 2012
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ACU index, and 9 of the 18 had scores above the current Senate Republican average of 83. The ChafeeDole legislation was co-sponsored by a coalition of
conservative and moderate Republicans.
So what can explain zero Republican votes for a
PPACA fashioned after Chafee-Dole and the 2006
bi-partisan Massachusetts’ reforms championed by
former Governor and Republican presidential nominee Mitt Romney?22 Though too long for this essay,
part of the story is a tale of personality clashes and
political tactical opposition to enabling Democrats
and new President Barack Obama to claim a major
victory, of course, but it is hard to overlook the real-
actual provisions in the reform law helps the reader
draw his/her own conclusions about the potential for
future bi-partisan solutions to our health care woes.
The Point of the Recent Reform Law
After all the Sturm und Drang of our endless political debate over health reform, PPACA is really about
two things: sending clear signals that (1) “business as
usual” is over, because we cannot afford it and it is not
working for more and more Americans every year;
and (2) two key business models, risk selection for
insurers and unaccountable fee-for-service for providers, must be fundamentally revamped for incentives to
After all the Sturm und Drang of our endless political debate over health
reform, PPACA is really about two things: sending clear signals that
(1) “business as usual” is over, because we cannot afford it and it is not
working for more and more Americans every year; and (2) two key business
models, risk selection for insurers and unaccountable fee-for-service for
providers, must be fundamentally revamped for incentives to be re-aligned
sufficiently for cost growth containment to become a reality.
ity that the extreme conservative position — that the
federal role in health care markets is already far too
large — has become the dominant Republican position in Congress.
This worldview can explain why the unprecedented
cuts in Medicare and Medicaid that the Ryan budget23
would impose are discussed in some Republican circles as mere down payments on limiting government
involvement in health care and other social fabric
repair missions. Essentially, the current Republican
caucus position is that no bi-partisan health policy
is possible unless Democrats relinquish the goal of
enabling all Americans to have access to care, since
both new federal insurance market rules and new federally-financed subsidies are necessary to make that
goal a reality, and those policies are wholly unacceptable to Republicans today. Democrats refuse to accept
the proposition that no Republican shares the goal nor
retains the willingness to help them fashion means
that are as consistent with market principles and consumer choice as PPACA actually is. But their tactical
response has been to deny that our public insurance
programs need serious reform and to attack the Ryan
budget as cruel and heartless, when in fact it might
be best and most usefully interpreted as an opening
gambit in a strategy that could yield the grand bargain
so many claim to yearn for. And so the impasse in Congress continues. I hope the following discussion of the
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be re-aligned sufficiently for cost growth containment
to become a reality. These two signal elements are necessary (but not sufficient) conditions for all Americans
to get health insurance coverage and access to quality
care that they and our country can afford.
Health care costs are growing faster than economywide productivity and therefore faster than incomes
do or can grow. This is the main reason increasing
percentages of Americans are uninsured, and why
family discretionary income and business investment
is increasingly constrained. Medicare and Medicaid
program cost growth are the primary sources of fiscal stress at the federal and state levels. Medicare and
Medicaid cost growth cannot be tamed without either
massive benefit and eligibility cuts24 or reducing the
cost growth of the system as a whole, since both public programs merely buy from the system we have on
behalf of our sickest and most vulnerable citizens. My
simple point is that reducing system-wide health care
cost growth is by far the most humane approach to fiscal balance (along with modest revenue increases, but
that’s an additional fight for another day).
Risk selection — devoting effort and resources to
exclude high risk individuals from an insurer’s risk
pool — is a problematic business model if our goal is to
cover all with private insurance, because it is a model
based on protecting the healthy from the sick. Risk
selection is a fine model, as long as you are healthy, but
journal of law, medicine & ethics
Len M. Nichols
is manifestly inadequate if you are sick and/or have a
modest income. All of us will get sick someday. PPACA
uses the regulatory power of the federal government
to force insurers to take all comers (guaranteed issue)
and charge prices that do not vary with health status
(except by age and then within defined limits, i.e.,
modified community rating). This does force more
risk pooling than at present, but only in the nongroup market, which currently serves between 5-10%
of Americans, depending on the state. There is already
guaranteed issue and de-facto modified community
rating in group markets, large (by employer preference) and small (by state regulation).25
It makes this arrangement feasible for insurers by
requiring all who are not so poor as to be eligible
for Medicaid to purchase private insurance in one
way or another. Therefore the post-PPACA risk pool
should be balanced, and forward-thinking insurers
who have invested in information systems and care
management techniques should be able to remain
in business and even thrive. Risk adjustment techniques will spread the second order differential
risk among insurers and compensate them for their
reduced ability to exclude the sick. All insurers must
play by the same rules, so no one should have a permanent or large risk selection advantage. Subsidies
make purchase feasible for all, and transparency
requirements plus the new market rules (guaranteed issue etc) incentivize insurers’ transitions from
risk selection to competing by helping all enrollees
find value — the best providers and health maintenance techniques — in the health care delivery system. In this way, the rule changes of PPACA channel
competition into more socially productive avenues
— higher value provider networks and better care
management and self-management techniques
— and away from socially unproductive activities
like risk selection. Thus the power of government
is being used in PPACA not to take over insurance
companies or markets but to outlaw self-interested
risk selection and to focus competitive forces in
ways that are more beneficial to consumers in general — all of whom will get sick someday — than the
status quo.
Fee-for-service was a good idea a hundred years
ago, when a doctor was as likely to kill you as heal
you.26 But fee-for-service obviously encourages volume, especially in markets with asymmetric information and third-party payment, and that is largely how
we have moved from spending 5% of GDP to 17% of
GDP on our way to 25% or more of GDP on health
care. We now spend per capita roughly twice the
OECD average, and we leave out 16% of our population altogether. It will be extremely difficult to “bend
the cost curve” without enlisting clinician’s self-interest in lowering cost growth. Therefore, changing the
incentive structure, i.e., changing how we pay clinicians and other providers, is an absolute pre-requisite for aligning provider self-interest with the social
interest in lower per capita health spending growth.
No private buyers are large enough to change delivery
system incentives unilaterally. This can best be done
in collaborative partnerships between public and private payers in conjunction with willing clinicians who
are ready to design sustainable incentive structures to
replace the current ones.
“Paying for value” can mean many things, but at the
most conceptual level, it is paying clinicians to maintain, improve, or manage the inexorable decline in
health of a group of patients with services delivered
with high technical quality, in an environment of positive patient experiences, and at minimally necessary
resource cost. This will require eventually dispensing
with the 8000 CPT code and 500 DRGs and moving to
much larger “bundles” of services, beyond traditional
hospital or clinic walls and siloes, ultimately focusing
on the well-measured health, functionality, and satisfaction of patients over longer and longer spans of
time. This incentive structure will also enlist clinicians
on the side of payers and patients in finding the most
efficacious and efficient combination of non-physician
personnel and ancillary services and products like
pharmaceuticals and medical devices, both of which
can be extremely expensive in the current opaque and
unaccountable environment. Productivity-based payments will still be part of the equation, but quality and
outcomes must also be major parts of the compensation scheme, and current incentives to provide more
services of low clinical value must be attenuated.
The Cost Containment Theory of PPACA
Contrary to much public lament, especially from deficit hawks who are unfamiliar with delivery system
realities, there is a theory of cost containment embedded within the recent health reform law. It starts by
inserting insurance market reforms to shift the balance of power from insurers toward transparency and
less discrimination against the sick. By reducing or
eliminating the incentive to select healthy risks, insurers will be forced to change their business model to
help all enrollees — relatively healthy and relatively
sick alike — find value within the health care system.
That means helping them find the best providers and
the right diagnostic and treatment modalities, as well
as the best techniques for them to maintain their own
health at home, away from providers and the expensive (and sometimes dangerous) delivery system. It
also means employing value-based-insurance design
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to enlist cost sharing in encouraging consumers to
make higher value choices. The limit on medical loss
ratio and transparency reporting requirements and
administrative simplification rules will channel competition among insurers into more socially productive
areas, for example, competing on premium price and
plan plus provider quality rather than on risk selection. This combination of insurance reforms will tie
future profits to delivery of better value to consumers,
not to better risk selection or claims denial tricks.
The second leg of the cost-containment theory is to
make it clear through Medicare price cuts that FFS is
not going to remain as profitable as it once was. Market basket update reductions, switching Medicare
Advantage plans from formulaic overpayment to a bidding system where compensation ultimately depends
on quality performance as well as the distribution of
competitive bids, reducing myriad overpriced procedures like imaging, etc., all help signal the key fact,
business as usual is over. This helps make health professionals and organizations more open to the significant incentive realignment that will be necessary if we
are to reduce cost growth without substantial benefit
or eligibility cuts.
The third leg is to develop and test new incentive arrangements, disseminate the techniques and
results, and hope they spread to the private sector and
catch on. Interestingly, the private sector may actually be moving faster than the federal government is
in that regard. AHIP recently reported the results of
a survey of their members that revealed new payment
modalities between plans and 150 primary care centered medical homes, 30 accountable care-type organizations, 16 bundled payment initiatives, and 3 fullrisk global capitation arrangements with integrated
delivery systems.27 All of these are the same types of
initiatives PPACA included for public programs, but
AHIP members have been able to put them in place
quicker than the federal government, partly because
providers know the federal government has signaled it
wants to move incentives in the same direction.
This is extremely good news, for what we ultimately
need for system-wide incentive realignment is for all
clinicians to have what they prefer: one set of performance incentives, one set of patient-acuity adjusters,
one set of feedback loops, instead of a different set
for each payer. Multi-payer payment reform is much
more likely to happen now that the private sector is
moving in the same direction as the federal government, but the federal government must continue to
push through public program payment policies and
collaborate where possible with private payers so
delivery system stakeholders understand that there is
no going back to rewarding volume without value.
554
Did PPACA Go Too Far in
Expanding Government Power?
This is the ultimate question for our political debate
over health reform. Proponents often begin their
defense by stressing what was not done. PPACA does
not abolish private insurance and create a single payer
system. PPACA does not impose price controls on providers or plans. Opponents emphasize what will be
possible if PPACA is allowed to stand as is. “If the federal government can make me buy health insurance,
what can it not make me do?” PPACA may not abolish
private insurance but it greatly increases federal regulation and sets in place tools that can be used later to
turn private insurance companies into regulated utilities. The medical loss ratio regulation is a case in point.
All these arguments are valid. PPACA does expand
federal regulation of insurance, but it does so because
guaranteed issue, modified community rating, purchase mandates, and subsidies are all necessarily
intertwined elements to enable all lower income individuals and families — who do not qualify for Medicaid — to purchase private health insurance. Furthermore, states are given considerable discretion
over how to run the newly regulated marketplaces
(exchanges) and whether to enforce the new insurance
rules themselves, if they want to avoid federal intervention. Thus, PPACA invokes the minimally necessary federal power to achieve the objective, to enable
all to purchase private health insurance. Which is why,
in health policy terms, the debate ought to be about
whether you share the objective, and if so how would
you rather achieve it, not whether the federal government has the constitutional authority to regulate this
form of interstate commerce.
I would agree the medical loss ratio regulation is
not minimally necessary, but it will not be important (or binding) once insurers have fully adopted
the new business models of value creation and jettisoned expensive risk selection capacity after 2014.
Kaiser’s MLR is in the mid-90s, for example, which
is far above the regulatory minimums. They devote
most of their administrative effort to enabling care
coordination techniques to spread among their members and providers. Insurers that mostly select risks
and do not practice care management techniques will
have to change their business models or sell their book
of business to those who are more interested in care
delivery value, and that is the point of the law. So again
at the core, the dispute is over the point of the law,
enabling all Americans to obtain the superior access
to care which health insurance does.
The constitutional question is important, but not to
health policy per se. The answers provided by Solicitor General Verrilli to some Supreme Court justices’
journal of law, medicine & ethics
Len M. Nichols
questions, “… what then can the federal government
not make me do?” were unsatisfactory, agreed. Perhaps the reason is because there is no answer that can
satisfy some opponents of expanding government’s
reach. It seemed fairly well established that not buying
health insurance affects interstate commerce when
the uninsured show up for care that remains uncompensated, and the annual scale of this commerce far
exceeds prior levels that were deemed sufficient by the
SCOTUS to permit federal regulation of commerce
examples in years past. So the “problem” may be not
with Verrilli’s answers but with the fact that since the
constitution permits federal regulation of interstate
commerce, if something is commerce, then it can be
realignments which could rein in system-wide health
care cost growth over time. Opponents argue that the
rule changes are a bridge too far for a federal government intended to be limited in principle and that the
risk to ruinous tax rates later is too high to make the
intervention worth the risk even if constitutional.
One’s assessment of the value of the gain and the
cost of the risks is ultimately not quantifiable or scientific, and therefore I would assert reasonable people
can end up on either side of the question. I believe the
moral case for health coverage expansion is strong,
that political competition, state capacity for innovation and common sense will limit the reach of federal
power as they always have, and that roughly 1% of
Let there be no mistake: some more targeted government intervention is
absolutely necessary to shift the balance of power toward consumers away
from insurers, and toward cost growth containment away from cost inflation
fueled by poor incentives and the absence of transparency about local market
power as well as open-ended third-party payment. Business as usual is over
because we cannot afford it. We can, however, build a sustainable system for all
of our fellow citizens if we choose to work together rather than sabotage
each side’s good ideas by indulging our own nightmarish fears.
regulated constitutionally, period. Whether the elected
branches of the federal government will choose to
regulate something in the future (broccoli and health
club memberships were discussed) is then a political
question, not a constitutional question. So asking Verrilli to espouse a limiting principle was an impossible
task. What most health policy analysts agree upon is
that the individual purchase mandate is the simplest
way, as part of a policy package including insurance
reforms and subsides, to enable all to acquire health
insurance. It is not about expanding federal power per
se. It is about avoiding adverse selection and trying to
make private insurance markets work for all.
One’s ultimate judgment about the wisdom of the
reform law then comes down to this. Federal power to
set rules and commandeer resources was invoked to
expand access to health insurance coverage for those
who are excluded from the current marketplaces by
health status or by income (or both). Proponents
argue the new rules are (mostly) the minimally necessary to accomplish the objective, and that the amount
of resources shifted around within and from outside
health care — less than 1% of GDP according to CBO28
— is small compared to the net social gains inherent
to expanding coverage and setting in motion incentive
GDP is a small price to pay for a far more just social
contract than we have now. I hope I have convinced
the reader of the reasonableness of this set of judgments, even if he/she does not reach outright agreement with them.
My concluding plea is this. Engage antagonists in
the debate not as mortal enemies but as fellow citizens struggling with complicated facts and judgments.
Opponents need to listen to honest analysts and admit
that our health care system is failing tens of millions
and is not sustainable, as the people who run its most
important and successful systems will tell you candidly enough. That is why they, by and large, support reform.29 And proponents have to recognize that
fears of too much government and taxes are real, and
therefore they must re-examine their preferred policy
solutions for ways to reduce the risk that government
will grow beyond the minimally necessary amount to
achieve the limited aims of PPACA. This surely entails
a budget failsafe that would limit coverage expansion if expected savings did not materialize,30 as well
as granting more state and local flexibility to achieve
the ends (cover all, constrain cost growth) with means
that might have broader appeal and therefore would
be more likely to succeed in different states (e.g., more
health care reform: controversies in ethics and policy fall 2012
555
S Y MPO SIUM
private insurance, less Medicaid expansion). But let
there be no mistake: some more targeted government
intervention is absolutely necessary to shift the balance of power toward consumers away from insurers,
and toward cost growth containment away from cost
inflation fueled by poor incentives and the absence
of transparency about local market power as well as
open-ended third-party payment. Business as usual
is over because we cannot afford it. We can, however,
build a sustainable system for all of our fellow citizens
if we choose to work together rather than sabotage
each side’s good ideas by indulging our own nightmarish fears.
References
1. P.L. 111-148.
2. Centers for Disease Control, “Community Engagement: Definitions and Organizing Concepts,” available at <http://www.
cdc.gov/phppo/pce/part1.htm> (last visited August 1, 2012).
3. Leviticus, Chapter 23, v. 22.
4. Matthew, Chapter 25, v. 45.
5. Qu’ran, Sura 76, v. 8, available at <http://www.quranexplorer.
com/Search/Default.aspx?q=feed the hungry&t=17&p=2> (last
visited August 1, 2012).
6. Mosiah, Chapter 4, v. 26; See also, Alma, Chapter 4, v. 13.
7. Acts 2:44-45.
8. Acts 11:29.
9. The Henry J. Kaiser Family Foundation. “Health Insurance Coverage of Children 0-18 Living in Poverty (under
100% FPL), states (2009-2010,” available at <http://www.
statehealthfacts.org/comparetable.jsp?ind=128&cat=3>; The
Henry J. Kaiser Family Foundation., “Health Insurance Coverage of Adults 19-64 Living in Poverty (under 100% FPL),
states (2009-2010) U.S. (2010),” available at <http://www.
statehealthfacts.org/comparetable.jsp?typ=1&ind=131&cat=3&
sub=177> (last visited August 1, 2012).
10. Some longitudinal research, cited by the Institute of Medicine,
Care Without Coverage: Too Little, Too Late. 2002. National
Academies Press. Washington, D.C. , found that the uninsured
have a 25% higher death rate than the insured . P. Franks,, C.M.
Clancy, and M. R. Gold, “Health Insurance and Mortality: Evidence from a National Cohort,” Journal of the American Medical Association 270, no.6 (1993): 737-741. This would suggest
as many as 22,000 deaths per year are due to being uninsured
today. S. Dorn, S, Urban Institute, “Uninsured and Dying
Because of It: Updating the Institute of Medicine Analysis on
the Impact of Uninsurance on Mortality,” available at <http://
www.pnhp.org/news/2008/january/make_that_22000_uni.
php> (last visited August 1, 2012). Recent literature, based on
a natural experiment permitting randomized clinical trial- like
study conditions, confirms and strengthens the IOM’s overarching judgment about very powerful health effects resulting
from gaining health insurance. Finkelstein et al. The National
Bureau of Economics Research, “The Oregon Health Insurance Experiment: Evidence from the First Year (2011) NBER
Working Paper 17190,” available at <http://www.nber.org/
papers/w17190>. This last paper also has a very useful discussion of key findings in the observational literature, and their
inherent methodological limitations.
11. L. M. Nichols, “Stewardship,” “Connecting American Values
with Health Reform,” Hastings Center, 2009, available at
<http://www.thehastingscenter.org/Publications/SpecialReports/Detail.aspx?id=3528&terms=connecting+american+valu
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12. T. Acquinas, Summa Theologica: Second Part of the Second Part,
Question 66, Article 7, available at <http://www.newadvent.
org/summa/3066.htm#article7> (last visited August 18, 2012).
556
13. J. Stiglitz, Economics of the Public Sector, 3rd Edition, (New
York: W. W. Norton and Company Incorporated, 2000).
14. U.S. Department of Heath and Human Services: Office of
the National Coordinator of Health Information Technology,
available at <http://healthit.hhs.gov/portal/server.pt/community/healthit_hhs_gov__home/1204> (last visited August 1,
2012).
15. L. M. Nichols, “Making Health Markets Work Better With Targeted Doses of Competition, Regulation, and Collaboration,”
St. Louis University Journal of Health Law and Policy 5, no. 7
(DATE):7-26; P. B. Ginsburg, Center for Studying Health System Change Research Brief, “ Wide Variation in Hospital and
Physician Payment Rates Evidence of Provider Market Power,”
available at <http://hschange.org/CONTENT/1162/1162.pdf>
(last visited August 1, 2012); L. M. Nichols et al., “Are Market Forces Strong Enough to Deliver Efficient Health Care
Systems? Confidence Is Waning,” Health Affairs March/April
2004; Competition in the Healthcare Marketplace: Hearing
Before the Subcomm. On Consumer Prot., Product Safety, and
Ins. Of the Comm. On Commerce, Science, and Transp., 111th
Cong. 85-99 (2009) (statement by Len M. Nichols).
16. L. M Nichols and L. J Blumberg, “A Different Kind of ‘New
Federalism’? The Health Insurance Portability and Accountability Act of 1996,” Health Affairs, 17, no.3 (1998):25-42.
17. Insurers compete for business through premiums that are more
driven by risk selection than care management techniques,
but transaction costs and regulations force more risk pooling
than is commonly assumed. No one in any market is put in a
risk category all by themselves, all are pooled to some degree.
Workers in large firms are in the most diverse risk pools, but
even people buying in the non-group market are pooled with
those the insurer anticipates to be similar health risks (M.
V. Pauly and L. Nichols, “The Nongroup Insurance Market:
Short on Facts, Long on Opinions and Policy Disputes,” Health
Affairs, no. [2002]). And contrary to the theoretical predictions of the classic Rothschild-Stiglitz model of insurance market failure, in real life it is the low risk that find willing sellers, not the high risks. Underwriting is a much more powerful
part of the real world, even with transaction costs forcing some
pooling, than theory often realized J. P. Newhouse, “Reimbursing Health Plans and Health Providers: Efficiency in Production Versus Selection,” Journal of Economic Literature 34, no.
3 (1996): 1236-1263.
18. Newhouse, Id., has a nice discussion of this relationship. Also
see his book; J. P. Newhouse, Pricing the Priceless: A Health
Care Conundrum (Cambridge, MA: MIT Press, 2002).
19. See <http://www.ahipcoverage.com/2011/10/20/materialsfrom-ahip%E2%80%99s-summit-on-shared-accountability/>
(last visited August 1, 2012); AHIP updates these counts regularly, for the payment models mentioned continue to spread.
For more on AHIP’s work in this area, see A. Higgins et al.,
“Early Lessons from Accountable Care Models in the Private
Sector: Partnership between Health Plans and Providers,”
Health Affairs 30, no. 9 (2011): 1718-1727; and “Transforming Care Delivery,” AHIP Issue Brief, January 2012, available
at <https://www.ahip.org/templates/Issues/documentResults.
aspx?id=9677&cat=242> (last visited August 18, 2012).
20. 1770, 103rd Congress, 1st Session, November 23, 1993. The
Republican co-sponsors were: Chafee (RI), Dole (KN), Bond
MO), Hatfield (OR), Bennett (UT), Hatch (UT), Danforth
(MO), Brown (CO), Gorton (WA), Simpson (WY), Stevens
(AK), Warner (VA), Specter (PA), Faircloth (NC), Domenici
(NM), Lugar (IN), Grassley (IA), Durenberger (MN).
21.. The American Conservative Union, available at <http://
conservative.org/american-conservative-union-announces2011-ratings-of-congress/14126/> (last visited August 1, 2012).
22. L. M. Nichols, “Health Reform Massachusetts Style: Ink Blot
Test and Lesson for Us All,” New America Foundation Health
Policy Program Issue Brief 2 (2006): 1-3, available at <http://
www.newamerica.net/files/nafmigration/Doc_File_3030_1.
pdf> (last visited August 20, 2012).
journal of law, medicine & ethics
Len M. Nichols
23. CBO Analysis of US House Budget Committee Chairman Paul
Ryan’s Proposal, available at <http://budget.house.gov/News/
DocumentSingle.aspx?DocumentID=288099> (last visited
August 1, 2012); CBO Analysis of US House Budget Committee Chairman Paul Ryan’s Proposal, available at <http://www.
cbo.gov/ftpdocs/121xx/doc12128/04-05-ryan_letter.pdf> (last
visited August 1, 2012).
24. Id.
25. M. V. Pauly, and B. Herring, “Risk Pooling and Regulation:
Policy and Reality in Today’s Individual Health Insurance Market,” Health Affairs 26, no. 3 (2007): 770-779.
26. A. Flexner, Medical Education in the United States and Canada, Carnegie Foundation for Higher Education, 1910. New
York (the text can be accessed free of charge on line at <http://
www.archive.org/stream/medicaleducation00flexiala/medicaleducation00flexiala_djvu.txt>.
27. See <http://www.ahipcoverage.com/2011/10/20/materialsfrom-ahip%E2%80%99s-summit-on-shared-accountability/>
(last visited August 1, 2012); AHIP updates these counts regu-
larly, for they continue to expand. For more on AHIP’s work in
this area, see Higgins et al., supra note 19; and “Transforming
Care Delivery,” supra note 19.
28. Congressional Budget Office, “Analysis of the Major Health
Care Legislation Enacted in March 2010,” available at <http://
www.cbo.gov/sites/default/files/cbofiles/ftpdocs/121xx/
doc12119/03-30-healthcarelegislation.pdf> (last visited August
1, 2012 ).
29. Health CEOs for Health Reform, “Realigning US Health Care
Incentives to Better Serve Patients and Taxpayers,” New America Foundation Health Policy Program White Paper, June 12,
2009.
30. See an example of a failsafe outlined in H, Baker, T. Daschle,
and B. Dole, Bipartisan Policy Center, “Crossing Our Lines:
Working Together to Reform the US Health Care System,”
available at <http://www.bipartisanpolicy.org/sites/default/
files/BPC_Crossing_Our_Lines_Report.pdf> (last visited
August 1, 2012).
health care reform: controversies in ethics and policy fall 2012
557
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