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

Ezekiel Predicts the End of Insurance Companies by 2020

Ezekiel Emanuel boldly proclaims that insurance companies will be extinct by 2020 in last week's New York Times article. He believes that Accountable Care Organizations (ACO) will push them out of the market. It will be interesting to follow his prediction over the next 8 years to see if he is correct.

Emanuel explains that ACOs will eventually bear all the financial risk for patient care when they are implemented which will eliminate the need for insurance companies. ACOs, which will be composed of groups of doctors, other providers, and hospitals, will work together to provide the full range of patient care. Eventually, he sees patients paying a flat rate directly to ACOs, who, in turn, will provide all services needed. The advantage of the ACO model is that it incentivizes providers to keep the patient healthy and focus on prevention, rather than provide care only at the point of illness. Additionally, it will integrate care for the patient, creating better collaboration between different providers.

At the moment, 60% of insured citizens under age 65 in the U.S. are insured through their employer. In these cases, the financial risk falls on the employer, not the insurance company. This leaves the insurers there to help with processing claims and to provide negotiating power with hospitals and doctors. However, ACOs will charge a flat premium, which should reduce the amount of administrative work required to process and file insurance claims on a case by case basis. In situations where insurance companies take on financial risk for patients’ health – such as small businesses and individuals – they have enough market power to cherry pick healthy patients, charge high premiums, and deny patients’ claims. When ACOs start being implemented, insurance companies will be competing with ACOs for these patients. This will infuse better competition and should reduce the need for patients to hassle with insurance companies over coverage.

Emanuel also breaks down the difference between ACOs and HMOs in a very concise manner. First, ACOs and HMOs are similar such that patients are members of the organization and members pay a flat fee. In other words, payment is not done on a fee for service manner in either of these models of care. However, Emanuel emphasizes that ACOs will be local groups of providers, not large national corporations like many HMOs, so ACOs will be able to better respond to local patient needs. Also, ACOs will be financially incentivized to keep patients healthy rather than only getting paid to treat the sick. Lastly, he points to the advancements in electronic medical records as well as the science of care integration as improvements since the HMOs’ day.

Personally, I am not fully convinced that insurance companies will be extinct by 2020. It may be that I do not understand ACOs to the depth that Emanuel does. But, maybe in the end, ACOs will become large enough that they will just take over coverage responsibilities as well. Time will only tell.

BWC