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.

-JKR

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