A recent article in Time magazine by Steven Brill, “Bitter Pill: Why Medical Bills Are Killing Us,” is a brilliantly written expose of the excesses and outrages of health care pricing. In reaction to the story, some have suggested the price controls are the appropriate (or the only) way to rectify the situation. A recent story in the Washington Post’s Wonkblog, “Steven Brill’s 26,000-word health-care story, in one sentence,” suggests that US health care costs and cost growth are so high because we do not use rate setting, i.e., price controls.
In fact, I think it’s not easy to establish whether that is indeed the case. We don’t get to use randomized controlled trials for health policies or systems, so it’s difficult to figure out how effective a policy like rate setting is. Let me start with some simple examinations of patterns in data to see if something jumps out that strongly supports (or contradicts) the assertion that price controls reduce health care costs.
Continue reading “Are Price Controls the Answer?”
Filed Under: OP-ED, THCB
Tagged: Costs, Economics, health economics, Managed Care, Martin S. Gaynor, Massachusetts, Medicare, Price controls, rate settings, Steven Brill
Feb 27, 2013
You may have received a refund check in the past few months from your health insurer. This is not your individual reward for staying healthy; it is your insurer’s punishment for making too much money because you did.
Obamacare includes what the health care technocracy calls the “MLR rule” – minimum requirements for medical-loss ratios – or the percentage of premiums collected by health insurers that must be spent on medical care or refunded. The inverse of the MLR is the percentage spent on administration and marketing, and earned as profit. Obamacare sets minimum MLRs of 80 percent for individual and small group plans, and 85 percent for large groups.
Aside from its obvious populist appeal, this profit regulation mechanism signifies a belief, now enshrined in legislation, that health insurance markets do not work. Without such a rule, the architects of Obamacare believe, insurers can name their prices, however inflated, and we all just pay.
In the short term, that is true. Most health insurance plans price only once per year, are subject to long delays in cost trending information and multi-year underwriting cycles, and endure the meddling of a carnival midway’s worth of employee benefits tinkerers, agents, brokers, consultants, and other conflicted middlemen. But in the long term, over multiple annual cycles, premiums do rise and fall, and the health insurance industry’s fortunes with them.
Continue reading “Good Business Models and Bad Business Models.”
Filed Under: Health Plans, THCB
Tagged: Aetna, Amerigroup, Coventry, Fraud, Health Insurance Markets, health insurance premiums, Managed Care, MLR, The Affordable Care Act, Wellpoint
Sep 6, 2012
Several years ago I had dinner with a woman who had served in the late 1990s as the national Chief Medical Officer of a major health plan. At the time, she said, she had developed a strategic initiative that called for abandoning the plan’s utilization review and medical management efforts, which had produced heartburn and a backlash among both physicians and patients. Instead, the idea was to retrospectively analyze utilization to identify unnecessary care.
This was at the height of anti-managed care fervor. A popular movie at the time, As Good As It Gets, cast Helen Hunt as the mother of a sick kid. When someone mentioned an HMO, Ms. Hunt’s character let fly a flurry of expletives. America’s theater audiences exploded in applause.
Apparently, the health plan’s senior management team bought into cutting back on medical management but saw no need for retrospective review. After all, if the health plan abandoned actions against inappropriate services, utilization and cost would explode. Fully insured health plans make a percentage of total expenditures, so more services, appropriate or not, meant the plan’s profits would increase.
And that’s how it played out. Virtually all health plans followed suit, dismantling the aggressive medical management that had been managed care’s core mechanism in driving appropriateness. In the years following 1998, health plan premium inflation grew significantly, for a short period reaching 5.5 times general inflation, but averaging 4 times general inflation through today. Medical management became all but a lost, or at least a scarce, discipline in American health care, which is its status now.
Continue reading “Why Medical Management Will Re-Emerge”
Filed Under: THCB
Tagged: accountable care, Brian Klepper, Cost of Healthcare, Health Plans, HMO, Managed Care
Aug 1, 2012
I’ve had a couple of meetings recently with leading figures in UK health policy – one of them a senior figure at a doctors’ organisation, the other at a private health company – who both talked excitedly about the lessons Britain could learn from the US.
That’s rarer than you might think. Our National Health Service may be cautiously embracing market-led reforms, but there’s still plenty of scepticism about the US’s full-on competitive system, and people here tend to be nervous about citing it as an inspiration.
Still, the two figures I am referring to, both leading players in the British Government’s NHS reform programme, were talking not about US healthcare as a whole, but about one particular organisation with something of a cult following on this side of the Atlantic.
I am referring to Kaiser Permanente, and its ideas are about to become very big over here.
Kaiser is one of those iconic organisations that aren’t just known for what they do, but whose names come to define their particular way of doing things – in Kaiser’s case, managed care.
It is the classic managed care organisation, running all the disparate parts of the local health system as a fully integrated whole, and deftly incentivising doctors to make sure patients receive their care in the part of the health system where it can be delivered most efficiently.
Continue reading “The KP Model in the UK”
Filed Under: The Business of Health Care
Tagged: Competition, Health Care Reform, Kaiser Permanente, Managed Care, managed care organisation, NHS, Pay for Performance, UK health system
Jun 17, 2012
Working in the health care space has forced me to give up many hopes and expectations that I had a few years ago. Forgive me for being cynical (it’s an easy feeling to have following the country’s largest health IT conference, as I reported a month ago), and indeed some positive trends do step in to shore up hope. I’ll go over the redeeming factors after listing the five tough lessons.
1. The health care field will not adopt a Silicon Valley mentality
Wild, willful, ego-driven experimentation–a zeal for throwing money after intriguing ideas with minimal business plans–has seemed work for the computer field, and much of the world is trying to adopt a “California optimism.” A lot of venture capitalists and technology fans deem this attitude the way to redeem health care from its morass of expensive solutions that don’t lead to cures. But it won’t happen, at least not the way they paint it.
Health care is one of the most regulated fields in public life, and we want it that way. From the moment we walk into a health facility, we expect the staff to be following rigorous policies to avoid infections. (They don’t, but we expect them to.) And not just anybody can set up a shield outside the door and call themselves a doctor. In the nineteenth century it was easier, but we don’t consider that a golden age of medicine.
Instead, doctors go through some of the longest and most demanding training that exists in the world today. And even after they’re licensed, they have to regularly sign up for continuing education to keep practicing. Other fields in medicine are similar. The whole industry is constrained by endless requirements that make sure the insiders remain in their seats and no “disruptive technologies” raise surprises. Just ask a legal expert about the complex mesh of Federal and state regulations that a health care provider has to navigate to protect patient privacy–and you do want your medical records to be private, don’t you?–before you rave about the Silicon Valley mentality. Also read the O’Reilly book by Fred Trotter and David Uhlman about the health care system as it really is.
Continue reading “Why Healthcare Is Different (No, Really)”
Filed Under: THCB
Tagged: Andrew Oram, disruptive technology, HITECH Act, Managed Care, patient behavior, Silicon Valley
Mar 27, 2012
“The law of unintended consequences is what happens when a simple system tries to regulate a complex system. The political system is simple, it operates with limited information (rational ignorance), short time horizons, low feedback, and poor and misaligned incentives. Society in contrast is a complex, evolving, high-feedback, incentive-driven system. When a simple system tries to regulate a complex system you often get unintended consequences.” – Stephen Dubner and Steven Levitt, Freakonomics
When The Patient Protection and Affordable Care Act (PPAC) and its companion legislation was ratified by Congress and signed by the President into law, there was a great expectation for sweeping change. Yet, change is a scary proposition for 180M Americans who believe the devil they know (employer based private coverage) is preferred to a government run system.
Seniors are suddenly doing the math and wondering if their beloved Medicare will default on their watch. More than 50% of these same seniors, when polled, shared they do not want a government run healthcare system ——even though Medicare is a government run system. People are confused, angry and wary. Yet PPAC is now law and despite its obvious flaws and potential for unintended consequences, it is unlikely to be repealed or deconstructed. For better or worse, it is the foundation for Managed Care 2.0.
Managed Care 2.0 – Reform is setting the stage for a new era of American healthcare – Managed Care 2.0. In launching this new period anchored by expanded access and insurance market reforms, we are expecting to say farewell to the three decade era of Managed Care 1.0 – a barren stretch of fiscal and social desert marked by spiraling costs, misaligned financial incentives, massive underfunding of Medicare and Medicaid obligations, fraud, over-treatment, public to private cost shifting, historic rates of chronic illness and the slow erosion of employer sponsored healthcare leading to an astounding 40M Americans without insurance.
Where Managed Care 1.0 was a time characterized by consolidation of stakeholders, cost shifting, risk shifting and scorched earth, Darwinian battles on the supply and delivery side, Managed Care 2.0 will begin, as one pundit called it, “ the battle for the soul of medicine”. Continue reading “Managed Care 2.0″
Filed Under: Health Plans
Tagged: Managed Care, The Affordable Care Act
Dec 4, 2010
BY DAVID HANSEN
Most in the current health reform debate agree on the need to curtail health care costs. Despite this, few discuss directly how health services are priced, though clearly this a central issue. Prices have both immediate impacts and longer term impacts. Immediate impacts include dividing up who pays what burden of current costs. However, I’d like to focus below on what should be a longer term impact of price mechanisms: driving inefficiency out of business.
An economic sector, to stay healthy, needs mechanisms to kill inefficient business approaches, while either prodding efficiency improvements or moving customers and staff to better performing entities. In most sectors, lower prices adequately incent customers to drop inefficient suppliers. In medical care, however, suppliers seem to have too much power over prices, and thereby price loses effectiveness as the sector’s cleansing agent.
Evidence of pricing’s ineffectiveness for health services is found in the huge price variations that can be observed for similar services. Where markets function well, pricing variation across suppliers reflects quality or feature differences. For example, cars of similar attributes, such as the Honda Accord vs. the Toyota Camry, are priced approximately the same. In medical care, however, prices for services vary inexplicably widely. The State of California recently published price information by hospital for a couple dozen common surgeries. This information was for average gross (pre-discount) charges, which, when combined with previously available data on discount levels, can be used to estimate average net (post discount) charges paid by customers. The net charges for coronary bypass surgeries (CABG), as an example, vary by twentyfold between the hospitals with the lowest and highest charges. The average charge for the highest quartile of hospitals is twice that of the lowest quartile of hospitals. This pricing pattern is similar across all surgical procedures included in the California data. Note that there is no relationship between charge levels and hospitals’ apparent quality. Some hospitals with good objective ratings for CABG surgeries and excellent reputations, such as UCLA Medical Center, charge little, while lesser known hospitals nearby with no or average ratings charge several multiples more.
That hospitals offer discounts of 70%+ for large health plans, with individuals paying far more for that same service, is another issue. Price discrimination for less essential services like vacation travel is one thing, but charging multiples more when a dying individual has no market clout: Can we as a society accept the morality of such practices?
But back to my main issue: A market that functioned well would transfer patients from hospitals in the expensive quartile to hospitals of equivalent quality in the least expensive quartile. In most markets, consumers would make the decision to change to better value vendors, but consumers in medical care lack both sufficient information and incentives to do so. Most privately insured Americans are insensitive to prices paid for expensive health services, such as medical care received in years with surgeries or other major medical events. Once annual costs for a patient reach the tens of thousands—and most hospitalizations quickly bring charges over ten thousand dollars—few insured patients face additional costs. Even patients with high-deductible plans linked to medical savings accounts carry no share of medical expenses for charges at such levels. This customer insensitivity to fees gives hospitals price setting powers that vendors in most other sectors would envy, and they use this power to keep prices high and inefficient operations on life support.
There was once hope among policy wonks that managed care would have both the incentives and market clout to funnel services to the most efficient suppliers. During the last dozen years, however, health providers have effectively countered managed care’s market power by leveraging local monopolies and the stickiness of patients’ relationships with specific physicians. One useful strategy for a hospital chain, for example, is to secure a “must-have” hospital for a health plan, such as the premier hospital in a wealthy suburb to which the spouses of executives for health plans’ clients insist on having access. Access to this hospital can then be leveraged in negotiations to attain higher prices for all hospitals across the chain.
For Medicare and Medicaid, the government has used its legislative and monopsony powers to attain advantageous prices. Service fees are stipulated by the government, rather than being subject to negotiations with individual hospitals. The result is fees that, for a given procedure, are lower than private payers are typically offered. Liberals are proposing a new government health plan available to all, and some proposals provide for such a plan to take advantage of low Medicare’s payment levels. However, a new government plan will, unlike Medicare, face competition; thus, a new government plan’s ability to dictate pricing will be reduced by competitive pressures, just as it is for existing health plans. Besides, even if a new government plan is able to attain Medicare pricing, this won’t help the rest of the market with the bulk of the currently insured population.
However, there is an alternative set of policy options that could benefit all patients: government stipulation of fee ceilings that would apply across the board. Where the market functions inadequately to determine minimum acceptable efficiency levels from care providers, the government should step in if it can and enable better market performance. Government already has a price system set up for Medicare, so limited new administrative requirements would be called for. A maximum permitted price can be set initially at, for example, 30% above Medicare rates. This ceiling would be a maximum for all payers, whether self-pay patients or insurance companies. Medicare rules would apply in terms of defining care incidents, so that providers would have difficulty tacking on charges for peripheral services to make up for revenue losses resulting from price ceilings.
Providers will universally object to a price ceiling proposal, as an effective ceiling would threaten their market power. However, only the weakest links among providers would actually see revenue reductions. More efficient providers would gain market share as the less efficient withdraw from what is for them, as opposed to efficient providers, unprofitable service lines. By policy intent, price ceilings would push every provider toward service lines where they excel and out of others.
Another advantage of price ceilings for all in the market is to decrease barriers to entry for new health plans, such as ones started by regional physician groups or local cooperatives. Negotiating with hospitals and other care providers is expensive, and a large market share is needed before good deals are won. Ceilings on fees would reduce an advantage for large health plans, and thus many reformers’ goal of increasing competition among payers would be advanced.
An objection to price ceilings is that they would discourage innovation of medical technologies. In theory ceilings could create disincentives for new medical procedures that are of higher quality, but more expensive than those already approved for payment by Medicare for the same disease. However, this issue plagues the existing system already, as most payers refuse to pay for medical procedures with yet unproven merit. Thus, the addition of price ceilings would not create the problem. In fact, it might make it easier to address the issue, since it a standard approach could be established readily. A single approval process could be initiated for medical procedures with promising, if not yet fully convincing, evidence of better quality at higher cost.
If the health sector is to remain market based and keep costs down, price mechanisms must work to cleanse the sector of inefficiency. However, neither patients nor health plans are in a position to make price a driver of who succeeds and who fails in the sector. Government, on the other hand, could make price more of a factor in the sector, and the policy complexity for doing so is relatively low. The result would be more pruning of the inefficient and prodding of the efficient, and the health sector would be set on a significantly lower cost curve.
David Hansen has aided organizations with health care strategy, IT planning, and new venture development for a couple decades, both in Scandinavia and in the USA. He holds graduate degrees in Economics and Business Administration from the University of Bergen, Norway and the University of California. He, like thousands of other health economists, has dreamed of significant health care reform in his lifetime.
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Filed Under: Uncategorized
Tagged: Costs, David Hansen, Health Care Reform, Managed Care, Medicare, THCB Marketplace
Jul 27, 2009