Supply Side Health Care Reform



Could the Netflix model work in health care? A doctor's office in Rochester, New York is aiming to find out. Good MD, a primary care office set up this year, charges patients a single, flat monthly fee for unlimited visits. Monthly charges are based on age, and extra services—whether stitches or strep throat tests—are provided for an additional fee, posted online and in the office. The practice doesn't accept private insurance at all. The result is a system that benefits not third-party payers, but doctors and patients, Good MD founder Dr. Thuc Huynh, told local TV station WROC. "Insurance isn't who reimburses me or dictates what we do together in terms of our treatment. So, it's a direct financial relationship."

This is what the future of health care reform could look like: It's provider-driven. It's consumer-focused, with an emphasis on both price and service. And while Good MD isn't the only doctor's office to try variations on this model, it's happening at the margins—at individual practices across the country. 

As Obamacare's has settled into place, the Republican party's promises to repeal and replace the law have stagnated. The law is still unpopular, but the coverage expansion has made the already difficult prospect of repeal harder than ever, and despite years of promises, no obvious replacement plan has emerged. Obamacare's critics in Congress are still opposed to the law, but increasingly seem unsure about what to do instead.

Provider-driven experiments like what's happening at Good MD could help point to a different way of thinking about the problem.

"[Obamacare] repeal is at least not immediately practical," says Robert Graboyes, a Senior Research Fellow with the Mercatus Center focused on health policy. "And to replace you need something to replace it with." That's a problem too, he says, because in order to craft a large-scale replacement bill that enough people could agree on, it would likely be necessary to jettison or weaken many important provisions.

Instead, Graboyes suggests that health care reformers look to supply-side reforms—small-scale fixes that make way for innovators to improve the system. 

It's a way of thinking about health care reform that emphasizes distributed improvements over centralized solutions, and that works from the assumption that lots of minor improvements can sometimes work better than one big overhaul. 

He describes the approach as a "World War II Pacific theater island hopping strategy—where you've got ten-thousand islands, you go after a few of them now, and you keep folks surprised as to which ones you're after." The work would be done piece-by-piece, and it would be focused on small victories rather than grand plans, with the understanding that just as markets make change at the margins, so should policy reformers.

Last year, Graboyes published a short paper outlining his principles for reform. Those principles include rewards for innovators, autonomy for providers, choices for consumers, and meaningful, transparent prices throughout the system. The essential idea though, is this: Find ways to transform the health system into a market, and then let the real reforms happen from the outside in.

At full scale, some of those reforms would be politically difficult—perhaps even more so than repealing Obamacare. But that's where the island-hopping strategy comes into play.

In the paper, for instance, Graboyes urges a move toward "a seamless market," without the fragmentation that results from the U.S. health care system's layered design, with Medicare, Medicaid, employer-sponsored coverage, and now Obamacare exchange plans all working through different silos.

That's an impossibly big job. And Obamacare, which builds on top of the existing layers, "severely limits the extent" to which this can be done, Graboyes says. Indeed, it makes the problem worse by organizing exchange-based insurance into overly standardized, government-defined tiers of insurance. This creates additional "gulfs of separation" between different types of insurance. And yet with a willing administration, he argues, this could be addressed administratively, through regulatory changes, by allowing greater flexibility for health plans.

Graboyes also points to the massive problems with Medicare's pricing formula, which distorts the practice of medicine (doctors do what they are paid to do) and drives up costs. The pathologies created by this system, he writes, "comprise the single greatest challenge to America's fiscal stability and the single greatest obstacle to health care innovation."

Yet there's clearly no way to fix its problems all at once. "That task would be so huge, and so overwhelming and so hard to encapsulate in a few words that the conversation dies," Graboyes says. Reformers should therefore attack the biggest and most obvious problems first, with the goal of slowly untangling the mess left by decades of price controls.

There are other islands to be taken as well. Various laws and regulations that inhibit specialty hospitals would have to be dealt with. "A lot of the really important reforms are going to have to happen at the state level," Graboyes says. These include overtly anti-competitive policies such as professional licensing requirements and Certificate of Need rules that require providers to obtain permission from local officials, who in many cases are simply acting on behalf of incumbent competitors. In many cases, state-level reforms have the advantage of being an easier lift politically than changes to federal law.

And while it is in some ways a different task, reforms at the Food and Drug Administration could help too. "We have built an information structure [at the FDA] that forces everything through narrow strictures," he says. That might have made sense decades ago when information was hard to acquire, but now we have the opposite problem: an excess of information. The old approach, which relies on centralized chokepoints, is out of date.  

Ultimately, it's the profusion of chokepoints that have taken hold of the health system that Graboyes wants to get rid of. The hope is that doing so, bit-by-bit, over time, will free up providers and consumers for even more experiments, many of which we can't even conceive of now, above and beyond Good MD's direct-care model. "There are so many small pieces we could begin doing now," he says. The first step is to start doing them.