Affordable Care Act: Changing costly care?

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Douglas Hough

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Despite the Affordable Care Act being signed into law in 2010, health insurance costs are still on the rise. While some provisions of health care reform have already gone into effect, the complete overhaul doesn’t really begin until 2014. And there’s no sign that medical costs will be sinking anytime soon. There’s a whirlwind of debate about the act, with perhaps the biggest storm brewing over the individual mandate — it’s the face of a reform that launched 1,000 tiffs. Should Americans be wary of what’s to come?

In order to better understand arguments from proponents and opponents alike, we turned to Douglas Hough, Ph.D., associate professor at the Carey Business School and the Bloomberg School of Public Health at Johns Hopkins, for his expertise regarding the Affordable Care Act. Hough specializes in health care economics and behavioral economics in health care.

While health care reform reshapes the health insurance landscape, many Americans fear that it does little to contain the rising costs of medical services themselves. Are they wrong, and if so, how?

As difficult and tumultuous as the battle was over the Affordable Care Act, that effort was the easy part of health reform. The ACA dealt primarily with improving access to health care, especially for the 50 million Americans without health insurance. The Act did little to address the inexorable rise in health care costs. We need to do much more to redirect how our health care dollars are spent and to provide incentives for physicians and other health care professionals to address wellness as well as sickness. We should try to come closer to the ancient Chinese (practice) of paying physicians when they keep their patients well, rather than paying them on the volume of their sickness services. In addition, we need to encourage — maybe even force — individuals to take more responsibility — both financially and conceptually — over their health and health care. This involves recognizing that most illnesses will resolve themselves without major intervention, and that there are serious consequences to bad lifestyle choices — overeating, overdrinking and overmedicating.

The individual mandate is perhaps the most controversial portion of the Affordable Care Act. What are your views on this requirement?

The individual mandate is the most controversial, but — in my opinion — the most important part of the Affordable Care Act. If all the individual provisions that people like — the prohibition of exclusion because of pre-existing conditions, the inclusion of young adults on their parents’ health insurance plans — are to be financially feasible, everyone must be included in the insurance pool. That’s what insurance is all about — those who don’t need the insurance subsidizing those who do.

I am writing a book to be published by Stanford University Press in the fall, describing how behavioral economics can explain what is going on in health care and health care reform. One of the concepts I use is “hyperbolic discounting,” in which people overvalue consumption in the present relative to the future — and then regret their choices when the future arrives. That concept is reflected in health care with the resistance to the individual mandate. I argue that everyone would be better off — even those who oppose the mandate — if everyone were required to have health insurance.

That being said, the mandated insurance need not be the full-blown coverage that most of us have. Rather, a requirement for coverage of catastrophic health events and of high-cost care is what is needed.

The ACA attempts to increase coverage and control insurance costs by working within the current “free market” health care system. However, many critics maintain that health insurance costs will continue to skyrocket, and outcomes will continue to decline under a free-market system. Can the free market produce the cost savings and quality improvements that America needs?

First of all, we don’t have anything like a “free market” in the U.S. health care system, and I doubt that we ever will. The government — through Medicare and Medicaid — is much more involved as a purchaser of care than you would see in a typical market; in fact, the federal government acts as a monopsonist in the “market” for health care services to the elderly. As such, it will naturally distort the workings of that market.

Second, even if the government were not involved in the market for health care, I doubt that patients can ever be effective consumers of health care — again, back to behavioral economics. One of the major findings of this field is that people make different decisions when they are in a “cold” state or a “hot” state, and — more importantly — they do not appreciate the differences. (Hence, the hangover after a night of drinking or the remorse over blowing a diet with a pint of Ben & Jerry’s.) In health care, an individual can make considered, rational decisions about their demand for health care services when they are well (and thus in a cold state), but those decisions go out the window when the illness event occurs and the individual and his family demand that everything be done — regardless of the cost. Of course, this hot-state demand is facilitated by health insurance, because the individual pays relatively little of the “everything be done” costs.

Third, on the supply side, I doubt that there could ever be a free market in health care. Of course, you have the usual concerns about supplier-induced demand, in which physicians have the ability to influence how much health care is demanded by patients. In addition, there are some behavioral economics phenomena that influence physician behavior in ways that limit the effectiveness of a “market” for health care. For instance, it is well-documented that physicians in different communities practice differently. Physicians learn the basics of medicine in medical school, but they learn how to practice medicine when they are in residency and fellowship, and more importantly when they are finally out on their own. And the community of physicians where a doctor practices exerts a powerful influence over the medical decisions that a physician makes — when she orders a test, when she refers a patient to a colleague and when she performs a procedure. I would argue that this community has much more influence over the behavior of the physicians than any market pressures.

So, I would not put too much hope on a “free market” in health care to moderate the costs of care.

We would like to thank Douglas Hough, Ph.D., associate professor at the Carey Business School and Bloomberg School of Public Health at Johns Hopkins, for his insight. Questions for this interview were contributed by Jay MacDonald, contributing editor for