But who pays the payers: Insurer incentives to deliver health

Ari Friedman,  Health Care Management, The Wharton School; Siyabonga Ndwandwe, Macalester College; and Esther Nivasch, Columbia University

Abstract: Recent reforms have focused on cost-containment at the expense of health-improvement, yet the latter offers the potential for enormous welfare gains. Medical systems typically under-invest in certain types of highly cost-effective care such as prevention, systems change, and behavioral incentives. Yet the key role of insurers in impeding development and adoption of healthcare innovations has never been comprehensively examined. Methods: Classic theoretical models of the economics of health insurance are reviewed for their implications regarding investment in health, as are empirical results on the failure of insurers to invest in health even when cost-effective. Interventions from a database of cost-effectiveness studies are classified according to a system suggested by the theoretical analysis, and insurers surveyed to ascertain their coverage of these interventions. Findings: The assumptions embedded in classic models of health insurance—specifically the assumption of fully informed, rational consumers and the assumption that the purpose of health insurance is to insure against the financial consequences of medical care—have led to scant incentives for insurers to invest in health improvement. Interventions delivered outside the medical system are found to be more cost-effective yet less likely to be covered than those delivered inside it. Conclusions: Given the thousands of potential medical conditions, demand for insurance does not cause traditional health insurers to be sufficiently concerned for the health of their customers. One solution is to pay insurers for health delivery rather than for insuring against the financial cost of medical care. Proposals for each different insurance market (public, private, publicly-funded but privately-delivered, and uninsured) are suggested. More generally, this paper offers a framework for understanding recent and future health reform proposals based on the idea that insurer incentives are a critical component of any health system.