POLICY/HEALTH PLANS/HOSPITALS: More on the punking of Milt Freudenheim

Freudenheim has been the health care reporter at the NY Times for a long time — a quick Googling suggests 1993 was when he started. So letting this piece of propaganda from the health plans slip by him and writing an article about it called Low Payments by U.S. Raise Medical Bills Billions a Year is basically unforgivable. Especially after the article he wrote last week talking about delays in payments from payers, that completely ignored the huge lawsuits about the issue in the 1990s and again left his readers without most of the story.

The argument in today’s article is basically this. Evil Medicare and Medicaid pay hospitals and doctors so little that they are forced, forced I tell you, to bill private insurers more to make up the difference. We know that’s true because Millman & Robertson says so. (Those of you sniggering at the back of the class who thought that M&R’s job was to help insurers reduce their payments and spending obviously don’t understand….)

Except that halfway down the page the argument changes. Now it says, the huge unreimbursed cost of treating the uninsured is so great an extra burden on hospitals and doctors that they are forced, forced I tell you, to bill private insurers more to make up the difference.

The article then wraps with a grab-bag of quotes from random observers, none of whom suggest any solution to this and two of whom represent organizations (Employers and Health Plans) who have done their damnest over the years to scupper any solutions to the uninsurance problem that is now apparently just killing them. But let’s ignore that for now.

The one person who could have given Milt a good explanation was apparently not answering his phone. Uwe Reinhardt gave as good an explanation of this phenomenon as any at a 1994 HSR conference. The story is that sometimes costs go up faster in the public programs and sometimes they go up faster for private sector payers, but the difference between them is pretty minimal. At that conference Uwe put up a chart that I can’t find, but the data is in the table below (look at the bottom section which shows average annual increase in spending by source over time)

Source of funds

Essentially what this shows you is that in the 1970s public expenditure grew a bit faster than private sector spending (14% vs 12.0%), in the 1980s they grew at about the same rate (private grew slightly faster), in the 1990s public expenditure grew a bit faster than private again (5.9% vs 5.1%) and in 2000–20001 public spending grew even faster than private (9.4% versus 8.2%). Over time of course the overall share of public spending as a proportion of all spending has gone up, but not that much. Uwe’s explanation was that his friends in the insurance business told him that when public costs went up faster than private costs it showed how efficient the private sector was, and when it was the other way around, it showed that Medicare and Medicaid were cost shifting to the private sector!

Well, Freudenheim has bought that hook, line and sinker!

The truth is of course that providers will charge whomever they can whatever they can, and the balance of bargaining power providers hold over payers goes up and down (and in the last few years has been going up) with all payors across the board, while their ability to stick rate increases to different payors (public versus private) varies only slightly. But look again at the overall numbers, There’s never a time when the cost increases for private and public payers are radically different. If you read the NY Times article today you could be forgiven for thinking that Medicare is paying 20% less into the system and that the private side is paying 40% more.

It’s terrible to hear that the poor innocent health insurers have been forced, forced I tell you, to pay these huge extra amounts since the Medicare Balanced Budget Act of 1998 reduced Medicare payments. After all their huge profits of the 1990s have collapsed as they’ve been forced to absorb the extra costs, and the 2000s have been nothing but a sorry tale of woe as insurer after insurer has seen its profits and its stock price hurtle into the abyss, as you can clearly see from this chart

Health plans

But from the Freudenheim article, the answer is obvious. We should just have Medicare and Medicare pay way more each year, and then the providers would charge everyone else much less! I wonder why CMS didn’t think of that? After all, far be it from health insurers to have to actually try to do something about reducing their clients costs when the solution is so obvious that a slap-dash M&R report identifies it for us.

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11 replies »

  1. > Base services P*Q
    > where P is the regionally adjusted average market
    > price for care services, and Q is the quantity of
    > services listed in a guideline and observed as being
    > delivered by above average performing providers
    I am wondering how you address the following:
    > As a starting point, the current price of office
    > visits and any other care provided will be determined
    > using claims data.
    1) Which “market price”? What Medicare pays now? What the providers write on their bills? The prices negotiated with PPOs? What do you mean by “market price”? The weighted average of all of the above?
    2) If you mean “What the providers write on their bills”, this price is set in in an oligopolistic market. How much economic rent shall we permit to be extracted by medical licensees?
    The notion of “profits” is related to this second question. What do you mean by “profit”? Salary for the doc? Return on Employed Capital?
    > Over time, it is our expectation that providers will
    > establish their own internal cost-accounting
    > processes and will be able to negotiate ECRs with
    > a full understanding of what it actually costs them
    > to deliver the care including clinician time.
    Great, but what has cost got to do with price, and what counts as a cost anyway? Since everything is transparent, why would I ever accept less than the guy across town? In the old days with the understanding that quality was impossible for patients to assess, it was considered unethical to post prices lest docs begin competing on price. With this kind of system, it seems understandible quality data will be available, but prices will be posted and will prevent providers and manufacturers of all stripes from competing on price.
    What will be the basis of this “negotiation”? Will PROMETHEUS demand to:
    1) design cost accounting methods,
    2) mandate their use, and
    3) then audit the books
    the way the DOD does with Boeing when it wants a new airplane?

  2. Francois,
    Thanks for responding. I’m still not sold, though. Dividing up the risk does not mean 100% of the risk is accounted for. There will still be uncertainty, regardless of accountability. I don’t think we disagree there, though.
    My bigger concerns focus on who provides the evidence you speak of, and who decides what a good case rate is. In my mind, the market should, based only on the market landscape (ideally filled with information-armed consumers). Simply disclosing historical quality of providers and prices should be enough.
    As long as there exists a univeral baseline for providers in terms of a base ECR (even if it just covers costs or even if it does not cover cost), some risk is removed for providers (i.e., the risk of loss). Wouldn’t this be a safety for providers? Wouldn’t that risk then fall to the consumer or the payer?

  3. Thanks for the comments, Matt. The Prometheus payment will, in fact give pricing and quality information to consumers in a useable way: Case rates create “ex ante” pricing for consumers. The core concept is to establish Case Rates in a robust way that includes the bundle of services that should be given to patients according to what good evidence suggest. That’s very different than classic global fees, DRGs or capitation which are based on historical claims views, not on a science-based analysis. All performance is tied to a comprehensive scorecard and the risk that you talk about is appropriately apportioned: Providers are resopnsible for “technical risk” or the risk that relates to their practice of medicine; Payers are responsible for population health and probability risk, which they should be because that’s the function of insurance risk-pooling; and Consumers are responsible for “choice-utility” risk because their purchasing decision will be informed by the relative cost and quality information they will have on providers.

  4. Okay, I just read the Prometheus White Paper. I only read it once, but it seems to me to greatly be written for providers, not payers or patients…too many carrots and not enough sticks, if you ask me.
    It also establishes a new barrier to entry…couldn’t all of what that paper set out to do simply be accomplished by giving more (pricing and quality) information directly to the consumer? Prometheus seems all very suspicious to me. I don’t think any one entity should have control over what a the definition of good case rate for anything is…
    Although I am intrigued by the idea of negotiating a rate _range_ versus negotiating a rate, and getting reimbursed based on quality, efficiency, and severity.
    It looks like an interesting idea. So far, though, I’m not buying it. It seems to shift too much risk away from providers, and risk has to fall somewhere. I’m all for provider control…if consumers are empowered enough to make good choices.

  5. Francois,
    Your statement about providers not negotiating with Medicare is not 100% correct. There are private insurers that sell Medicare products with CMS permission, and therefore negotiate in place of CMS by proxy. The parameters of such negotiations are constrained, but these rate negotiations do indeed take place.
    But yes, a provider’s ability to negotiate with Medicare is not great. This is somewhat left, I imagine, to the lobbyists.
    As for Prometheus, reimbursement based on a merit-based-metric is a great thing.

  6. Francois may be right on the individual DRG level, but to say that hospitals have no bargaining power over what the government pays is a total joke. What happened after the BBAs in the late 1990s? — every provider organization and their dog descended on Congress to get as much of it changed as possible, and were quickly successful in certain categories (like outpatient rehab) and did pretty well over the longer term too in stabalizing payment rates, and ensured (at least on the physician side) thatnthey were able to make up on volume what they lost on price.
    What is the AMA doing RIGHT NOW? It’s working to make sure that the statutory cuts in their fees arent actually implemented. There is lots of bargaining alright, it just doesnt happen at CMS.
    And by the way there’s similar bargaining in single payer countries too! It’s just tougher for the system to extract more dollars/pounds/yen when the result needs to be a direct tax increase on the rest of the economy rather than the hidden one divided up between lots of payers here, with the rump of it dumped on those with the least market power (the uninsured).
    I’m not arguing that we shouldnt get to grips with the transparency of all this, and obviousl the B2E folks are way out in front of the rest, but until we get all buyers in the same basic pool (something I have yet to see any of the players named in the article support), then this type of tit-for-tat shifting of the pricing deck-chairs on the Titanic will continue.

  7. Is everyone in Congress asleep?
    Medicare is missing a Way to Save the Trust Fund Money
    The disparity over Medicare required transfer agreements between Ambulatory Surgery Centers, Hospitals and Nursing homes is costing the trust fund millions of dollars it can’t afford. Why doesn’t someone in Washington realize this and fix it?
    70% of surgeries performed in the US are outpatient. Only 1 in 5 is performed at Ambulatory Surgery Centers. (ASC)
    In a recent letter to Center for Medicare and Medicaid Services (CMS) Administrator Mark McClellan, MD, PhD, Iowa Senator Charles E. Grassley, Chairman of the Senate Finance Committee, wrote that procedures being done at the nation’s Ambulatory Surgical Centers (ASCs) “would greatly reduce overall Medicare spending.”
    However, ASCs are required to have a transfer agreement with a hospital. But a hospital does not have to cooperate with the ASC and a nursing home is only required to make a “good faith” effort to get a hospital transfer agreement. The disparity is robbing the Medicare system.
    Many believe that the Emergency Medical Treatment and Labor Act (EMTALA) makes these transfer agreements obsolete. This issue is dramatically impacting the ability of ASCs to do business across the country. The cost to Medicare is staggering.
    Last month, trustees for Medicare reported that the program will exhaust its funds just 12 years from now. Elimination of this unnecessary obligation for a transfer agreement or requiring additional collaboration from hospitals would have a financial impact on the trust fund.
    Here is the nursing home regulation:
    Medicare Regulation Section 483.75
    “(n) Transfer agreement (1) In accordance with section 1861(1) of the Act, the facility (other than a nursing facility located in a State on an Indian reservation) must have in effect a written transfer agreement with one or more hospitals approved for participation under the Medicare and Medicaid programs that………………..(2) The facility is considered to have a transfer agreement in effect if the facility has attempted in good faith to enter into an agreement with a hospital sufficiently close to the facility to make transfer feasible.”
    The simple addition of the statement “the facility is considered to have a transfer agreement in effect if the facility has attempted in good faith to enter into an agreement with a hospital” to the Medicare regulation for ASCs, would fix a significant problem these facilities across the nation are facing and have a significant impact on the financial stability of the Medicare trust fund.

  8. Matthew writes over in the “stub” article:
    > Tom…please stop getting the point correct before
    > I’ve had a chance to write it up! See my article
    > above…
    Well, if you would stop so damn thorough, and thoroughly entertaining it couldn’t happen!

  9. The last part of Holt’s quoted comment above is entirely incorrect. Hospitals do not have ANY bargaining power in negotiating rates with Medicare. When is the last time a hospital sat down with Dr. McClellan to negotiate a DRG rate? Never. Medicare sets its rates and hospitals have to take it. There is no bargaining. And by the way, that’s how single payers control costs in all single-payer countries.
    There is no question that some hospitals with specific missions (teaching, disproportionate share of Medicaid, high levels of uninsured admissions) compensate for the loss of revenue they get from the public sector by charging as much as they can to private sector insurers (and indirectly to all large self-insured employers). In fact, the Leapfrog Group and Bridges To Excellence published a Paper on mesuring provider efficiency that stipulates the need to create mission adjustments for these types of hospitals, recognizing that they have higher than average fixed and/or variable costs (for more information see posted papers at http://www.bridgestoexcellence.org/about_us/business_case.htm).
    This by no means that one party is right or wrong, but it’s important to understand that when a large public payer sets rates, the setting of those rates will impact all payers, either positively or negatively.
    Ultimately, part of the answer to this and other health care system dilemmas lie in reforming the payment of all providers. A small group of industry experts have started working through such a model that is referred to as Prometheus Payment (http://www.bridgestoexcellence.org/wp_prometheus.htm). Establishing such a model would force price transparency in a meaningful way and change some of the focus of the blame game to building concrete solutions to making the entire system work for all, not just for some.

  10. That is just incredible.
    I’d like to take this opportunity to point out a little-known fact that Mr. Holt illuminates rather clearly:
    “The truth is of course that providers will charge whomever they can whatever they can, and the balance of bargaining power providers hold over payers goes up and down (and in the last few years has been going up) with all payors across the board, while their ability to stick rate increases to different payers (public versus private) varies only slightly.”
    Right now, insurers are struggling to get the upper hand again. This has shown up in the private market in the form of transparency as a means to get to pay-for-performance, the ultimate goal being to turn provider price discrimination on its head, in a sense…