New Marketplace
Private Sector Pitfalls in U.S. Health Care (10:16)

“In every country in the world, including the U.S. and China, some people are pretty unhappy with their health care system,” says Leemore Dafny, Professor of Business Administration at Harvard Business School and Leader for NEJM Catalyst’s New Marketplace theme.

“But some of the reasons for that unhappiness are pretty fantastic,” she says. “People are living longer. They’re expecting better lives. More than half a billion people have climbed out of poverty in China alone over the last few decades, and healthy life expectancy in China surpassed that of the U.S. as of 2016.”

A Chinese baby can expect to live 68.7 years in good health, compared to 68.5 in the United States, according to the World Health Organization. Overall life expectancy is about 2 years higher in the U.S. than China, 78.5 years versus 76.4, but the last 10 years of life in the U.S. is not expected to be healthy.

What does Dafny, an American health care economist, have to offer if China now has a longer healthy lifespan than the United States? And with the U.S. spending 18% of its GDP on health care and still having about 10% of its population uninsured, not to mention underinsured?

“I’m here because I believe there’s wisdom in an old saying: ‘Do as I say, not as I do.’ As a parent, I repeat that often, and I would like to humbly offer our Chinese hosts some lessons that we have learned from the United States,” she says.

China faces some of the same challenges that every developed and developing country faces — but magnified by its numbers. These include rising costs, an aging population, and increasing expectations of what health care can do for us.

“We, in the U.S., are so impressed by the Chinese health care reform that provided basic coverage and access to so much of the population. But China needs more access, and its population is demanding better care,” Dafny says. “Given the scope of this challenge and the pace at which citizens are expecting improvements, it makes sense that China is looking to the private sector in its quest to provide better, comprehensive care to urban and rural residents. I think it’s a wise decision.”

She notes that there are many benefits to having for-profit firms in any economic sector, health care or otherwise, such as the ability to raise capital, to hire talent, and to scale and grow quickly, responding to the market. Of course, there are downsides as well, particularly if one doesn’t anticipate them. Dafny imparts some lessons that the U.S. has learned about these downsides.

“We have learned that, when health care access is offered, people usually consume more,” she says. “That might be the desired and expected outcome, but we’ve also discovered they don’t always consume the right things, and health care providers don’t always organize themselves in a way to deliver the right things to them.”

Three main ingredients make up a successful health care market involving private and for-profit firms, according to Dafny: robust competition among suppliers, someone managing the budget, and rules and referees.

She provides some historical context: When the U.S. was developing its health care system, the idea of competition was not really present. There was great need, and providers and insurers started forming to fill that need.

“The idea of health care as an entrepreneurial opportunity was not something that occurred to most people, and that led us to do things like reimburse on the basis of whatever service or product was delivered and at some reasonable markup above cost. That’s how we got fee-for-service,” Dafny explains.

“It led us to have planning commissions to ensure we didn’t have duplicative facilities because, ultimately, we were going to have to cover the costs of any entrants. And it led us to a system where we didn’t pay much out-of-pocket because no one chooses to become sick, and benevolent providers would give us just what we needed and nothing more. Also, we had the Hippocratic Oath, and who would make money off of sickness?

“That all seems so naive now. We have learned that, when providers divide a market rather than compete to gain business, they provide worse care. We have learned that, when insurers don’t engage in utilization management and careful review, we get a lot of care that is either unnecessary or inappropriate. And we have learned that, when we subsidize health care, we get more of it, and we develop and use more costly technologies.”

“Some of this is the welcome result of progress and affluence, but some of it is just plain waste,” says Dafny. How can China do it differently, and better?

Returning to the first ingredient for a successful health care market — competition — Dafny warns not to shelter incumbents from competition by creating too many cozy relationships or exemptions. “If one group of providers is upset, say, that another is providing cheaper or better service, then the first group has to figure out what they uniquely can provide and be allowed to charge a rate that reflects that unique service,” she says.

“If they don’t do the hard work of figuring this out now, they will cross-subsidize services. They’ll provide too many services under the same roof, and you will have a distorted signal of what a service truly costs. The market responds to signals, from price and profit, and you may get more of the services you don’t need or want if prices don’t adjust to reflect value.”

Second, regarding budget, Dafny says it’s important to develop an effective insurance industry because insurers will shape the buy side of the market and ultimately manage the total budget. The United States allowed insurers to consolidate, leading to limited competition among them. Not regulating the industry in terms of what it could do until passage of the Affordable Care Act in 2010 caused a lot of damage.

“We have relatively passive buyers in the U.S.; the level of fraud in our system is one symptom of that,” Dafny says. “A more important symptom is the fact that buyers have not worked out a way to pay more sensibly than fee-for-service.”

Lastly, “like any game without clear, sensible rules and regulations and somebody watching to make sure they’re followed, you won’t get a great match,” says Dafny.

One example of a rule is requiring any insurance plan to cover a set of essential benefits with a maximum on out-of-pocket spending. Another example is having candidates for elective surgeries covered by public insurance receive a rating for how valuable and successful their surgery is likely to be from an independent medical authority that cannot perform or profit from the surgeries, and then using those ratings to prioritize surgeries performed. Examples of referees include competition authorities, and regulators who measure, report, and publicize quality of service in a consistent way.

“In sum, I believe the private sector can deliver on Chinese hopes for it and can perform much better than it has in the U.S., but a market only works with the right ingredients,” Dafny concludes.

“Protecting and enabling competition is critical to getting the benefits of a marketplace. You also need informed buyers who have a budget constraint and are willing to make trade-offs when they purchase or finance health care. Finally, putting in place rules and regulators is necessary, as well, even in a market economy. My hope is that China will embrace these lessons so that the Chinese model becomes one for other countries, including my own, to emulate.”

From the NEJM Catalyst event China’s Changing Health Care: Global Lessons at Scale, held at Jiahui Health in Shanghai, April 25, 2019.

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