By David Dranove

In a recent New York Times blog, Uwe Reinhardt places much of the blame for high and rising medical prices on passive employers. He argues that employers should work just as hard to reduce healthcare benefit costs as they work to reduce other input costs. But he then observes:

“One reason for the employers’ passivity in paying health care bills may be that they know, or should know, that the fringe benefits they purchase for their employees ultimately come out of the employees’ total pay package. In a sense, employers behave like pickpockets who take from their employees’ wallets and with the money lifted purchase goodies for their employees.”

I think that Reinhardt gets the economics wrong here and, in the process, he puts too much of the blame on employers. Reinhardt is right in one respect – employees care about their entire wage/benefit packages. If benefits deteriorate, employers will have to increase wages to retain workers. Thus, it seems that if an employer reduces benefit costs, it must increase wages by an equal amount. If that is true, we can understand why employers are passive.

The correct economic argument is a bit more nuanced. Employees do not care about the cost of their benefits; they care about the benefits. If an employer can procure the same benefits at a lower cost, the employer need not increase wages one iota. In this regard, there is nothing special about health benefits. Suppose an employer offers employees the use of company cars. Workers don’t care what the employer paid for the cars, and if the employer can purchase cars at a deep discount, it will pocket the savings.

Continue reading “Are Employers to Blame For Our High Medical Prices?”

By David Dranove

The recent Medicare report on variation in hospital “prices” is not exactly news. In fact, I wonder why anyone (including the NY Times and NPR) covered it, let alone make it a lead story.

As you probably know, Medicare reported that hospital charges for specific treatments, such as joint replacement surgery, greatly vary from one hospital to another. (This includes charges for all services during the hospitalization, including room charges, drugs, tests, therapy visits, etc.) Everyone in the healthcare business knows that charges do not equal the actual prices paid to hospitals, no more than automobile sticker prices equal the prices that car buyers actually pay. Except that for the past thirty years, the gap for hospitals greatly exceeds (in percentage terms) the gap for cars. This is not just a nonstory, it is an old nonstory.

So reporters tried to give it a new spin. One angle concerns the uninsured, who may have to pay full charges. I will write about this in a future blog. Another angle is that by publishing these charges, Medicare will encourage patients to shop around. That is the subject of this blog.

I suppose it is okay to tell patients that the amount they might have to pay out of their own pockets may vary from one hospital to the next. But the published charge data is useless for computing out of pocket payments; in fact, it may be worse than useless. As even the NY Times noted, insured patients make copayments based on prices that their insurers negotiate with hospitals. These prices are essentially uncorrelated with charges. So a patient who visits a hospital with low charges may well make higher out-of-pocket payments than a patient who visits a high charge hospital. It is a crap shoot.

Continue reading “The Rest of the Story About Hospital Pricing”

By David Dranove

The Illinois hospital dinosaurs continue to defy evolution and prove that they are not extinct. I am talking about our health facilities planning board, which just turned down another Certificate of Need application for a new hospital, this time in the northwest suburbs of Chicago. The board justified the decision by stating that the new hospital would harm existing hospitals.

I know that the Chicago School of economics tells us that regulators serve the interests of those they regulate, usually at the expense of the public. But just because the Illinois planning board sits in Chicago, that doesn’t mean they have to slavishly follow the Chicago School. They could act in the public interest at least once in a while! (Though if the board started approving too many new health facilities, someone might notice that they are not needed and put them out of a job.)

Continue reading “Zombie Hospital Economics”

By David Dranove

I have been taking a vacation from blogging as I try to get through a very busy academic quarter. But my last blog, “My Son the Electrician” elicited a lot of comments and I have always wanted to follow up. And today I see that the Chicago Sun Times has generously quoted me, in particular noting how I liken physicians to entrepreneurs. Lest anyone get the wrong impression, let me briefly explain what I mean.

Like entrepreneurs, physicians launch their careers by making large investments – up to ten years of post-graduate training. Such investments do not come with a guarantee. Entrepreneurial physicians – those who own their own practices or work in small partnerships, must build their practices and maintain relationships with other physicians. All successful physicians, whether entrepreneurs or employees, enjoy personally and professional satisfying careers and comfortable, sometimes more than comfortable, incomes. But only physicians entrepreneurs have ultimate responsibility for their practices and their patients.

Continue reading “Physician Entrepreneurs”

By David Dranove

I have been absent from the blogosphere for about two months. The fact is, there just isn’t all that much new to write about. Healthcare spending growth continues to moderate, but not by enough to stave off forecasts of doom for Medicare and Medicaid. Nor can employers begin to shift money from health benefits back into wages. But wheels are turning. Health networks are expanding as providers prepare to offer ACOs and/or increase their bargaining clout. A handful of states are poised to start up exchanges with the feds ready to take the reins in the laggard states. Aon/Hewitt is about ready to launch a private sector exchange. We will start to learn whether exchanges save or destroy private health insurance.

The Affordable Care Act has had many detractors but at least it has disrupted the status quo. We needed to see fundamental changes in how we pay for and deliver healthcare services and the ACA has delivered. But ACA has brought us a very particular set of changes. Time will tell if we have chosen the right path.

Even as the industry changes the way it does business, one critical aspect of change is missing. The faces are all the same. The same large systems that dominated the fee for service world seem poised to dominate the shared savings world, and the same insurers that dominated the traditional employer-based insurance market stand ready to dominate exchanges. Value might be created when old businesses play by new rules, but even more value is created when new players are free to enter and perhaps even break the rules.

Entry is the engine that drives economic progress. Entrants bring new technologies to manufacturing and new service models to sales. Threatened by entry, incumbents strive to innovate and improve customer service. This is as true in high tech industries as it is in the service economy. Research confirms that entry is ubiquitous – in a typical manufacturing industry, fully one third of established firms are replaced by entrants within five years. Though the data is not as readily available, turnover in the service sector is likely even higher.

Continue reading “Unleashing the Innovation Monster”

By David Dranove

In last Sunday’s New York Times, Paul Krugman extolled the virtues of Medicaid. Here are some excerpts from this astonishing column:

“Medicaid has been more successful at controlling costs than any other major part of the nation’s health care system.”

“How does Medicaid achieve these lower costs? Partly by having much lower administrative costs than private insurers.”

“Medicaid is much more effective at bargaining with the medical-industrial complex.”

“Consider, for example, drug prices. Last year a government study compared the prices that Medicaid paid for brand-name drugs with those paid by Medicare Part D — also a government program, but one run through private insurance companies, and explicitly forbidden from using its power in the market to bargain for lower prices. The conclusion: Medicaid pays almost a third less on average?”

In the days since this column was published, I have spoken with many experts on Medicaid who are uniformly appalled by it. While I may not reach the same audience as the New York Times (at least not yet!), I feel compelled to set the record straight on Medicaid’s “successes.”

Continue reading “Setting the Record Straight on Medicaid’s “Success””

By David Dranove

Coming Soon, North Shore University Health Systems Medical Office Building.

For me, this is sad news. I am not saddened that North Shore University Health is opening yet another medical office building. It is where they are opening that gets me. They are taking over a two story building that used to house a Border’s Bookstore. My Border’s Bookstore. Sure, Border’s may have been a bit corporate, but this was still a great bookstore. They sold best sellers there, of course, but they also carried all the classics and lots of eccentric titles. Heck, they even briefly carried one of my own books! They had a vast selection of books about military history and an amazing travel section. My wife lost herself for hours in gardening and my sons ogled the aisles of mystery and fantasy novels. Border’s also had vast CD and DVD departments (with classical CDs and Criterion Collection movies) and the café sold a chocolate bundt cake that was out of this world. Maybe best of all, the building had an odd layout with lots of nooks and crannies and surprises around the corner. For a corporate bookstore, it oozed charm. Medical office buildings never ooze charm.

Continue reading “A Sign of the Times”

By David Dranove

Last week I attended a conference on health policy at the University of Chicago, where I moderated a panel that examined implementation of the Affordable Care Act. For much of our time, the panel focused on Accountable Care Organizations. Panelists and attendees wondered whether ACOs would meet the same fate as Integrated Delivery Systems of the 1990s. Some in the audience mentioned that when it comes to integration, electronic medical records could be a game changer. EMRs could be used to monitor and reward cost saving decision making, for example. But most ACOs are still figuring out how to use EMRs for clinical decision making; their use in helping managerial decision making remains far off.

As more and more speakers expressed skepticism about the future of ACOs, a physician in the audience offered a truly fresh perspective, one that makes me feel much more optimistic. I never learned this physician’s name, so I will call him Dr. Yes. Before I summarize Dr. Yes’ argument, it is helpful to turn back the clock to the late 1990s, when IDSs were taking the health industry by storm. Perhaps the defining feature of IDSs in the 1990s was the integration of hospitals and primary care physician practices. This strategy failed in large part due to classic agency problems. In a nutshell, an agency relationship can fail because of incentive problems (the principal is unable to effectively motivate the agent) or selection problems (the principal employs the wrong type of agent.) IDSs suffered both. When hospitals acquired physician practices, they converted entrepreneurs into employees who resisted any kind of incentive payments. As employees, primary care physicians did not work as hard or show as much commitment to their practices. Moreover, those physicians most eager to give up their autonomy were those looking to dial down their practices and lead the “quiet life.” In these ways, IDSs experienced both incentive and selection problems, with devastating results.

Continue reading “Dr. Yes”

By David Dranove

In Tuesday’s Wall Street Journal Op-Ed pages, physicians from Harvard and University Pennsylvania Medical Schools criticize subsidies for expanding the use of health information technology (HIT). The physicians cite a recent review article that failed to find consistent evidence of cost savings associated with HIT adoption. If true, this is bad news for the health economy, as supporters claim that HIT could cut health spending by as much as $1 trillion over the next decade.

How can something that is so avidly supported by most health policy analysts have such a poor track record in practice? In a new NBER working paper by myself, Avi Goldfarb, Chris Forman, and Shane Greenstein, we label this the “Trillion Dollar Conundrum.” One explanation may be that most HIT studies examine basic technologies such as clinical data repositories, while most of the buzz about HIT focuses on advanced technologies such as Computerized Physician Order Entry. In our paper, we offer a rather different explanation for the conundrum, one that would have eluded physicians and other health services researchers who failed to consider the management side of HIT.

My coauthors on this paper are experts on business information technology. They are not health services researchers. When I approached them to work on this topic, they insisted on viewing HIT much as one would view any business process innovation. As I have learned, this is by far the best way to study most any issue in healthcare management. Those who advocate that “healthcare is unique” – usually by ignoring broadly applicable theories and methodologies—often strain to explain data that are easily understood using more general frameworks. Such is the case with HIT.

Continue reading “The Trillion Dollar Conundrum”

By David Dranove

It was the worst of systems. It was the worst of systems.

For decades, policy analysts have debated how we to strike a proper balance among access, quality and cost in our healthcare system. This debate has missed a crucial point: we do not have one healthcare system, we have two. And both are broken. Fortunately, if we fix one the other may heal itself.

The first system is the one that we encounter when we seek treatment for an illness. This system defines how much we pay out of pocket, which depends which providers we seek and what treatments they deliver. This system also defines how much our providers are paid, including rewards for exceptional quality and penalties for substandard quality. Historically, patients have relied on their physicians to guide them through the complexities of this system. In recent years, supporters of consumer-driven healthcare have argued for a bigger role for patients. They make the important point that patients will never make a serious effort to balance access and quality against cost unless they are responsible for all three.

Continue reading “A Tale of Two Systems”