One of the features of aging past ninety is accumulating many stories to tell. Perhaps fewer are left alive to challenge insignificant details.
The 1975 annual meeting of the Association of foundations for Medical Care was, as usual, a provocative and informative forum for mutual exchange of ideas. An entire day was devoted to exploring the problems which need to be solved in order to get an Independent Practice Association off the ground and solvent. How do you attract subscribers? How do you enlist the support of physicians?
One disturbing problem was not resolved, however, and the failure even to discuss possible solutions seems even more disturbing to me. That problem is this: what mechanism will be devised to set fair medical fees if your IPA should be so successful that it enlists every physician and sells every subscriber? That is, how do you anticipate the problems of a monopoly? While it is understandable that the potential problems of success are swept aside at a time when the immediate problem is to achieve a viable toe hold, it would be tragic to allow the time of formative philosophy to pass without the setting of goals.
Our fees are now set by the marketplace. As Adam Smith remarked, if you charge too much you lose to your competitors, and if you charge too little you will go bankrupt. The price of everything, Adam Smith said, is therefore always fair and right in a freely competitive market place. The fees of an insurance mechanism are therefore also fair and right if they are "usual and customary". The strong implication of that little phrase is that somewhat a competitive market exists as a standard.
In Pennsylvania we are peculiarly in a position to see what happens when a good hearted idea like Blue Shield becomes so successful that the market place disappears. What happens when you destroy the marketplace is that fees are set by committees, later demand to be a majority of the committee, and eventually demand to exclude physicians from the committees entirely on the argument that the foxes should not be watching the hen house. Frustrated by skillful insistence on charter and by-laws, such customer groups then resort to a different approach: They apply political pressure on the Insurance Commissioner to deny permission for premium increases. This whole process can be summarized as substituting the political process for the market mechanism. There are, after all, more patients than doctors, and this distortion of the marketplace inevitably leads to downward pressure on fees. If you accept Adam Smith's dictum that fees set by the market mechanism must have been fair, it follows that this whole shift leads to fees which must be unfairly low.
Well what do we do about this? First, let us acknowledge one left-handed fairness to it. It is very noticeable that there is no movement at all for IPA's are concentrated in the medically overserved areas because they almost invariably develop as an opposite reaction to closed-panel group practices in their areas. The whole pre-API movement has a suspicious look about it of having no genuine concern about pre-payment, but rather the motivations of a consumer cooperative movement. It is hard to know what to think of this. It certainly does add a disincentive to practice in overserved areas, and probably causes a certain number of outraged physicians to migrate to underserved areas. However, to the extent that physicians are willing to accept less income in order to have the other advantages of living in the suburbs, it can be expected that the total cost to the overserved community will remain the same or rise if the physicians surplus is reduced. Therefore, in the long run, the effort of starting HMOs is self-defeating financially except for those consumer power groups who can take special opportunities for themselves. The other less forward consumers will find themselves with fewer physicians availability, at higher costs.
To return to the problem of preserving a market mechanism for the establishment of fees, several ideas seem worth considering:
1. Limit the market penetration of any group to 20% of the market in its area.
2. Require that no group may exceed a 10% market penetration unless at least four other groups are genuinely competing with it.
3. Identify one whole specialty of medicine as excluded from the "total" coverage of the insurance plan, and use this free-enterprise specialty as a reference group for fees of other specialties. The relative value system would expand from this base.
4. Never start an IPA unless a closed-panel program exists in the area.
There are a number of unpleasant or demonstrably ineffective measurer which could be tried.
5. Limit physician income to a "reasonable" level.
6. Deductible and coinsurance.
Originally published: Friday, August 31, 2018; most-recently modified: Wednesday, May 29, 2019