Renegotiating Reimbursement: Good Policy or Good PR?

Yesterday Partners Health Care, Massachusetts largest health system, voluntarily disposed of its current contract with Tufts Health Plan and renegotiated a new four year agreement that is expected to lower the health reimbursements they receive by about $105 million dollars over the next four years.

This is significant.  In a conversation I had with a Partners executive two months ago he shared that the Partners negotiating team often leaves their contract meetings with groups like Tufts feeling "proud" of the deals they are able to strike with health insurers.  My impression was that Partners, with the largest market share of any hospital system in Massachusetts, knows it can throw its weight around and does quite willingly.

Not any more.  Partners' decision to rework its contract with Tufts, following a similar renegotiation last year with Blue Cross Blue Shield that is estimated to save $240 million dollars, was likely due to the following.

• Altruism: although not likely the biggest factor, Partners CEO Gary Gotlieb did state that one reason for accepting smaller increases in reimbursements going forward is the growing burden of health care costs on families and businesses.
• Government pressure: the political environment in Massachusetts, and in many areas of the country, is such that all hospitals understand that costs must be cut voluntarily or else the government is likely to do it for them.  With Massachusetts congress toying with rate setting as a way to control out of control medical costs, hospitals would rather be a part of a pre-emptive solution.
• ACOs: Partners was recently announced as one of 32 Pioneer ACOs set to begin this year.  As part of the agreement, ACOs commit to generating at least 50% of their revenue from business models similar to that of the Pioneer Medicare program.  This can only be accomplished through agreements with insurers, employer health plans, and/or Medicaid (called "Participation of Other Payers" in the CMS Pioneer ACO Fact Sheet).  As part of Partners' new agreement with Tufts, approximately 70% of the patients in the plan will now be reimbursed via a global payment structure, shifting significant risk to Partners and forcing them to find ways to contain costs for all their patients, not only the Medicare population.  This is exactly the goal of the ACO, and to the extent that Partners' participation in the Pioneer program is influencing this new agreement with Tufts, the ACO model is succeeding.

Whatever the reasons, I applaud any move by hospital systems to voluntarily forego future payment.  Additionally, I applaud any move toward global payments and the taking on of risk by hospital and physician groups.  However, scale must always be kept in perspective.  While $105 million dollars is no small amount, with an annual budget of over $8 billion dollars and capital expenses totaling $3.2 billion dollars over 5 years, it doesn't seem like so much.  Additionally, there has been little talk of where the $105 million dollars in "cuts" to Partners bottom line will come from.  The hope is that money will be saved through care coordination and a focus on the high utilizers or perhaps a reduction in capital investments year over year.  I imagine that if savings do not materialize, however, chronically underfunded mental health and substance abuse programs will instead be on the chopping block, and this would be an unwelcome result.

Despite my significant skepticism of the hospital market environment in Massachusetts and at the risk of being duped by what may turn out to be simply a PR move, I am encouraged that, whether it be altruism, the political environment, government policies, the market at work, or some combination of these, the system appears to be working.  At least for today.

Price Discrimination and Hidden Negotiations

Uwe Reinhardt of the New York Times blog Economix recently wrote about an issue that has been perplexing me of late. How do hospitals and providers in the same state and even the same community charge such different prices for the exact same services they provide? Similarly but in the reverse, how do health insurance companies, seemingly competing with each other in the same market, pay such different prices for the exact same services? Isn't our free market health care system supposed to lower costs through good old-fashioned market competition?

I thought so, but it doesn't seem to.

The contribution of high and rising unit costs to our overall health cost crisis was the subject of the recent September Health Affairs issue. The same cost conundrum was detailed in 2003 and has been described in many other times and places as well. In addition to describing the problem, the recent Health Affairs issue also includes a section devoted to "strategies to cut costs" which includes the following ideas: a weight loss program, telehealth innovation, successful collaborative care models, and bundled payment reform. But haven't we seen this all before?

None of these ideas address the fact that price discrimination and hidden negotiations are contributing to the rising costs in our system. There seems to me to be three (overly simplistic) options to reduce high unit costs.

1. Improve price competition among payers and providers. Massachusetts recently introduced recommendations on provider price reform. One recommendation was to open up the secret negotiations that now take place between hospitals and insurance companies in an effort to introduce transparency to the process. The goal is to reduce some of the variability that now exists by introducing real competition back into the "market."
2. The second idea was also approached in the same recommendation set and is considerably farther left. Regulate prices. If the market can't be relied upon to drive competition, the other option is to strip competition from the system entirely. In this setting I can imagine some immediate concerns: heavy government control, decreased innovation, lower salaries, not mention a serious lack of political feasibility. There is a third option, however.
3. Many countries (Germany, Switzerland, Belgium) operate systems whereby providers and payers negotiate prices on a regional level, but in a coordinated fashion. The negotiations do not occur between individual hospitals and insurance companies, but rather take place between formed coalitions. This encourages active participation, allows for regional variability, but eliminates the price discrimination and hidden negotiation practices currently employed in the US.

Even with a very introductory understanding of economics I am able to see that the current system of price setting is extremely inefficient. It neither allows the free market to function (which requires widely available information among all parties involved) nor for government oversight. In the current system monopoly (in markets where large providers dominate) and monopsony (in markets where large insurance dominates) run free. Both are market failures.

We must move from a hidden process of back-room deals to a more transparent and competitive system. If we are not able to, government price regulation may be our only choice, because our high and growing unit costs are entirely unsustainable.

JK-R

Thoughts on Employer-Based Insurance in U.S.

I fail to understand why corporations oppose moving away from the employer-based insurance schemes which have predominated in the United States the past 70 years. As health care premiums continue to rise and corporations are forced to spend more than ever on their employees' health, I would think that they would jump at the opportunity to shift some of the coverage responsibility to the government. This would free up time, energy, and resources to focus on their business related objectives. Additionally, the government would be better equipped to gain expertise in health coverage compared to corporations which could result in more efficient delivery of care and improved health for the population. The government would be less distracted by profit seeking goals and would instead focus on improving the health of its citizens and delivery of care through a more cost-effective approach.

Despite drastic increases in health care premiums and overall costs for health care, corporations, in general, are opposed to getting rid of the employer-based model. One opposing stance is that by providing health insurance to their employees this increases employees’ loyalty. This is probably true, but if everyone was covered through a government funded insurance plan, companies would be liberated from the expectation to provide health benefits. The fact that employers are expected to provide coverage is a historical accident dating back to the 1940’s. By shifting to a government program, this would free up businesses to increase loyalty through other means, such as increased pay or higher bonuses at year end.

A second view expressed is that corporations feel that they are better at managing health care costs than the government. If this is the case, why are companies spending so much time and energy coming up with new ways to provide coverage? Furthermore, why are corporations continuing to increase cost sharing with employees, who ultimately carry the burden as a result? To me, this suggests that companies are unable to keep up with rising costs and therefore are failing to control costs effectively. Perhaps, corporations would argue that costs would be even more outrageous if the government controlled insurance plans, but I have not seen any actual data to support this. I am not trying to suggest that corporations are at fault for the rising health care costs, but I am arguing that they are not in any better position to curb rising costs than the government.

Corporations may also believe that they would end up paying more in taxes to cover a government insurance program than the costs they incur now to provide coverage for their employees. I find it difficult to believe that the tax burden placed on corporations to fund a public insurance plan would be greater than the amount they pay for their employees right now. The car industry provides a good example of how large the health care burden is on business; Chrysler, for example, spends more on health care than they do on steel. That is probably why the CEO of Chrysler is one of the lone business leaders to support a government insurance plan over employer-based plans.

Lastly, corporations may argue against government plans on principle or ideology. In essence, those who believe this are taking responsibility to make sure that their employees are covered and that they have adequate opportunities to pursue better health. However, as health insurance premiums and overall costs continue to rise, employers are finding it more difficult to provide for their employees. As corporations are less able to provide insurance, the government will have to take on more of the coverage responsibility.

As a result of the numerous ways to reduce health care costs – from full coverage, managed care, preferred provider, cost-sharing, health savings accounts, and more – a confusing web of options have been developed by employers. However, none have proven to be the silver bullet for cost containment within the employer-based model. As fewer companies are able to keep ahead of the costs, a better option may be a single payer public plan. With one agency providing coverage, premiums could be lowered through broader risk pools and administrative costs could be reduced. Additionally, companies would see significantly reduced cost for health care and, most importantly, patients would see more money invested in their health.