Monday, April 30, 2012

It's the Hospitals Stupid!

Massachusetts has been leading health reform at the state level since passing far-reaching legislation in 2006 that was the blueprint for the Affordable Care Act.  They are at it again.  As Martyna Skowron, a colleague from Harvard School of Public Health writes, the Massachusetts House and Senate are close to releasing their versions of comprehensive payment reform legislation for the state healthcare system.  What they're likely to propose may surprise you.

Much has been made of the problem of prices in our health care system.  Uwe Reinhardt, back in May 2003, wrote an article in Health Affairs titled It's the Prices Stupid: Why the United States Is So Different From Other Countries.  He's been writing about the issue ever since.  In short, payers in the US system pay far more for the same services in absolute dollar amounts than payers in other health systems around the world.

Why?  Extending the argument one step further, as I did in this post late last year, we find ourselves at the doorstep of the hospitals who set those prices.

What follows is an excerpt from the Massachusetts Attorney General's Preliminary Report on the drivers of health care costs in the state.  It is titled Investigation of Health Care Cost Trends and Cost Drivers and was released last year.

"We focused our investigation on contracting practices and contract prices (i.e., the prices negotiated between health insurance companies and hospitals and physicians for hospital inpatient and outpatient care, and professional services) for commercial health insurance for the period 2004 through 2008. While our investigation continues and our analysis is not final, our preliminary review has revealed serious system-wide failings in the commercial health care marketplace which, if unaddressed, imperil access to affordable, quality health care. In brief, our investigation has shown:
  1. Prices paid by health insurance companies to hospitals and physician groups vary significantly within the same geographic area and amongst providers offering similar levels of service.
  2. Price variations are not correlated to (1) quality of care, (2) the sickness or complexity of the population being served, (3) the extent to which a provider is responsible for caring for a large portion of patients on Medicare or Medicaid, or (4) whether a provider is an academic teaching or research facility. Moreover, (5) price variations are not adequately explained by differences in hospital costs of delivering similar services at similar facilities.
  3. Price variations are correlated to market leverage as measured by the relative market position of the hospital or provider group compared with other hospitals or provider groups within a geographic region or within a group of academic medical centers.
  4. Variation in total medical expenses on a per member per month basis is not correlated to the methodology used to pay for health care, with total medical expenses sometimes higher for globally paid providers than for providers paid on a fee-for- service basis.
  5. Price increases, not increases in utilization, caused most of the increases in health care costs during the past few years in Massachusetts.
  6. The commercial health care marketplace has been distorted by contracting practices that reinforce and perpetuate disparities in pricing."
Does this surprise you?  In a nutshell, hospitals have been able to set high prices for their services which insurance companies must pay because hospitals possess monopolistic market share in specific health care markets.  While we would hope there is more sense to the prices we pay for health care, such that we are paying more for better care, more timely care, or because we have more complex disease, this is not the case.

The question now is: what do we do about it?  The free market can only help if competition is introduced into the market.  Instead, hospitals have been consolidating, making the problem worse.  Is it now time for the government to step in again?  The Massachusetts legislature will likely unveil proposals that endorse a multi-pronged approach.  The biggest prong will be encouraging global payment and setting "milestones for growth."  Furthermore, they are likely to enable the state to step in if growth is not limited to these milestones.  Additionally the proposal will likely include provisions to increase price transparency, ensure more competitive market behaviors, and promote further research into cost drivers and policies that encourages providers and consumers to utilize more cost-effective care.

It should be interesting and may again influence decisions made on the national stage in regards to price reform in the future.


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