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

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