The Case for Price Ceilings for Health Services

BY DAVID HANSENDavid hansen 09

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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49 replies »

  1. Completely agree. Private Health Insurance companies get so many indirect subsidies but wanna play “free market” when it comes to pricing. For the amount of policy manipulation in favor of health insurance, we should demand better standards. Obamacare is a good example. If you want to mandate everyone paying for health insurance, then you have to mandate that the health plan pays up on its liabilities. Medical coding is extremely fraudulent, and these companies are always chickenshitting their way out of compensation. We get the worst of both worlds.

  2. Cut the bs and politicing ! Get to the crux of the healthcare problem…….and the education, employment….. problems.
    “Time for all to pay and/or give their fair share for the basic necessities of life.” When the rich and the well off begin
    paying the same or similar percent of their gross income and wealth for the basic necessities, then change will begin.
    Enough said.
    Annual Medical Insurance Costs for a Family of Four
    Gross Income Annual Insurance
    BURP: Basic Universal Recovery Program
    “Costs of Basic Necessities of Life to be Based on A Fixed Percent of Your Gross Income, Adjusted for Wealth, Family Size &
    Ages, Catastrophic Illness.”
    Basic necessities include health care (insurance, medication, all medical costs), education(tuition, books, housing), public
    utilities, parking tickets, court fees & fines, driver’s registration & license, property tax and other public fees and
    fines. A basic ID card with secured protected financial information would simplify application of BURP.
    I present a just and fair solution that as adopted into to America and the world will begin to stop the financial, mental,
    physical and emotional exploitation and abuse by the rich and by corporations of most Americans and humans of the world.
    Broken Arm: Deductible Hospital/Medical Costs Not Covered by Insurance
    Gross Income_______*Hospital Cost
    Parking Ticket
    Gross Income Parking Ticket
    I’m an old fart of 68 that has experienced the lies and manipulations of the rich and politicians for too many decades. Yes
    we have one of the better governments of the
    world, but there is so much more that can be done to bring peace and fairness to all.
    Please excuse my lack of writing skills, but I believe that BURP is one of the best solutions to the basic problems of health
    care, education, employment and of life facing most Americans and people of the World. I would appreciate your assistance in
    bringing BURP to the attention of our government and to the people in the Bay Area and of the World.
    Please contact me. I’m basically computer ignorant, reclusive, have a dysfunctional memory and need help.
    I would like to meet and assist the individual that would prepare my article for publication.
    Trip to the moon: raffle, eligible submit proof of bond for 20% of gross income plus 10% of wealth!
    Very, very sincerely yours,
    John Basich

  3. I’d think seriously about “Health Care” when the bozos that impose it live by it. Why is it good enough for us but NOT good enough for our illustrious leaders? It’s just one more crock impossed on the Ameridan tax payer sucker.

  4. Mr. Hansen, good post. Ceilings are inevitable because of greed. I feel that all should pay their fair share for similar services. All medical care costs, insurance, plan, fees, ambulance, ecetera should be based on a fixed percent of a family’s gross income adjusted for family’s wealth, size, ages and castastrophic illnesses. Just the facts. Perhaps fair share could include parking tickets and other public taxes, fees and services. You gross $30k your parking ticket is $30. $60k=$60 $100k=$100 thanks.

  5. I was doing some research on health care and I came across you article. I just wanted to say that the information on health services was very informative and useful. Thanks.

  6. Margalit,
    There is no life-saving in early detection for most ailmants. Early detection will make it appear your treatment works better with better three year and five year survival numbers, but that is due to shifting the denominator.
    No one’s life is “saved”. It is a shame when the life you have is not lived. Worrying about healthcare is not contributing to anyone’s happiness. BAnkrupting the country is certainly not worthwhile for healthcare.

  7. Introducing a public health plan needs to be removed from the current legislative bill. Were in a recession and the government needs to realize they would be spending money on something that will hurt the economy and destroy an industry. There have been too many quick unthought out and irrational decisions made by our government lately and it makes me wonder, do they want our economy to ever recover? There are far more important things this money can be used for and Washington needs slow down and focus on smart healthcare reform and getting it right the first time.
    The insurance industry is already getting hit hard by the recession. Too much to quick will bankrupt the insurance companies and ultimately there will be bigger problems than there is now. The government needs to give insurance companies a chance under the new reform rules and each company should be required to prove themselves while getting used to all the new industry changes. A public option should be a last resort and done only if the health industry doesn’t improve. Give the companies a chance first.
    There also needs to be a sugar, alcohol and an increase in the tobacco tax. Think of how many less people there will be with diabetics, heart disease, rotten teeth, etc. if sugar became less affordable. It’s time for the people to take control of their own lives. It’s not fair for the person who chooses not to smoke, not to drink alcohol or not to drink a two liter of Coke each day to be responsible for paying as much as the person who chooses these unhealthy habits. The government is so quick to change the companies, but what are they doing to regulate what those who choose unhealthy lifestyles and drive up the health cost of health insurance premiums for us all?
    As for the Exchange, it’s not needed. The administrative cost of the Exchange will be more than what agents get paid now. Government employees are more expensive because of all the benefits they receive from the government. Most agents are self employed and responsible 100% for their own benefits and retirement plans. Most people prefer having an agent help them apply and answer questions to eliminate errors. Why change something that already works. Most people prefer and already know what to expect with how things work now. If trying to reach someone at the Exchange is anything like trying to get someone on the phone at the Social Security or Medicare offices, we all can expect to wait on hold for at least 20 minutes before we finally get to speak with a live person. That’s 20 minutes of your or mine that is wasted.
    Finally, the amount the government pays a doctor needs to be the same as what an insurance companies pay for the same service. It needs to be mandated that all companies and the government should all be on the same pay schedule, including Medicare. Let’s be fair.

  8. MD as HELL: “There is no saving in early detection of most ailments”
    Is there any life saving? If so, would it be OK to pay a little more for that?

  9. Peter Nesbitt,
    There is NO utilization at all until the patient walks through the door. Without change in the present risk environment, the costs per encounter will stay the same plus inflation. Change the risk environment and the costs can change. Standard of Care is determined in court, not in the exam room.
    Change the reasons for the patient to go to the doctor in the first place and you change the costs of care.
    More patients, more costs.
    There is no saving in early detection of most ailments, and there is neither prevention nor cost-savings in medical care for people who are already healthy.

  10. MG, thanks for the comments.
    “them” is the entire medical community. We negotiated fees with all providers needed in our system including large group practices.
    I agree that we are probably not there yet. We used a primative computer program to help our care coordinators evaluate care. Keep in mind that this was not a “gotcha” type of evaluation. We were more interested in patients getting appropriate care.
    In a single payer national health care system this would be vastly more complicated. But it also offers and opportunity to gather more data and help formulate best practices.
    As far as grading providers, we found it to be something like a teacher grading papers. When you are looking at 50 or 100 essays, the ringers pop out real quick.
    Your suggestion about targeting certain procedures is a good one. It could easily be built into the single payer model. It will work with a single payer model but not multiple payers as we have in the current system.
    Finally, your comment about areas with fewer doctors is well taken. I’m not sure how we could solve that one but there are smarter people than me out there.

  11. Barry, thanks for your comments.
    In the single payer model the single payer has control of the patients. If doctors in a multi-specialty group seek to control pricing unfairly, then the single payer would have to respond appropriately. Remember in this model, fees are fairly negotiated, unlike the HMO’s and Blue’s who seek to drive them down.
    Hospitals and outpatient surgical centers fall under the same general rules as physicians. Remember, all those hospital services are driven by physician prescriptions.
    We definitely need best practice, evidence based medicine to help define appropriate utilization. A single payer system is best placed to gather and disseminate that information. Regardless, in this model, the treating physician has the last word.
    The single payer model focuses on helping patients with medical decision making. This was one of the primary reasons we created the single payer model. We knew that patient bias and medical ignorance played a large role in health care costs. We stayed in contact with patients when necessary.
    I agree that incentives do matter. Could you incorporate your tier based system in the single payer model? In our system, the “stick” was ejection from the system. Building carrots into the program could enhance the physician desire to participate. We just thought that paying fairly and promptly without denial was a pretty powerful incentive. It worked for us.

  12. MD as HELL, it all starts with the physicians. Fees and over utilization. Get control of these and you have a chance to control medical costs. I would love to see some other suggestions but if we can’t ask physicians to control utilization, there isn’t much hope for health care reform.

  13. Peter Nesbitt,
    You forgot that you also had de facto control of the patient population. They were not a random population. What was their co-pay? What were their orientation to their benefit plan? They were not CMS beneficiaries. A population like yours is much easier to care for and be lean than the population I have in the ED right now.
    It all falls apart when they are very sick and given the keys to the treasury. It is not the doctor who must be lean; it is the government and the patient.

  14. Basically, there has been a dramatic arms race in terms of size by both insurers and hospitals over the past 10-15 years and in most MSAs there frankly isn’t any real prospects of seeing viable competition anymore.
    If politicians would stop attacking self funding you could have intense competition tomorrow. COBRA, HIPAA, and Medicare Secondary payor made it to risky for smaller employers to be self funded. The market for those under a couple hundred is a fraction of what it use to be. Some states even outlawed self funding for small groups or passed minimum specific level laws making it inpraticial.
    A group with 50+ employees can get a self funded quote from 50 different carriers in any state. Congress has decided they want everyone insured with a couple national carriers and have been passing laws to make it happen for 10 years now.
    All of the problems we face in our HC systems today are the results of failed or misguided regualtion. Congress has made HC unaffordable and only repealing their work will make it affordable again.

  15. MG,
    I don’t see consolidation among health insurers as a significant problem, but consolidation among hospital systems is a big problem which is exacerbated by the lack of price and quality transparency. Insurers, if anything, offer too many different products in each market often with different payment rates for the same service, test or procedure which adds to administrative complexity, unnecessarily, in my opinion. I think the insurers would serve both patients and providers better if they offered a good, better, best approach in terms of services covered as well as different deductible, co-pay and OOP maximums within each product. Provider reimbursement rates should be the same across the entire product line.
    Employers who self-fund are only buying administrative services, network access and, perhaps, disease management from insurers. Insurance premiums, as you well know, are driven mainly by both absolute medical costs and the growth rate in those costs. Returns on capital among for profit insurers are not especially high by U.S. corporate standards. At the end of the day, greater consolidation among insurers is a good thing because technology is becoming increasingly important and scale should mean both lower administrative costs and lower rates paid to providers, other things equal.
    Finally, in the retailing world, there are numerous categories where two strong competitors dominate the market, yet competition is vigorous. Think Wal-Mart vs. Target; CVS vs. Walgreen; Home Depot vs. Lowe’s. In the supermarket category, two or three conventional supermarkets may fight it out with a Wal-Mart supercenter. Of course, all of these retailers offer great price transparency. These markets probably wouldn’t work very well either if pricing were as opaque as it is in healthcare. At least in health insurance, you can get a precise premium quote before you commit to buy the policy.

  16. One thing I don’t understand in all of this reform talk is how the “private market” will solve the cost problem when the reality is that there has been such a consolidation among health insurers and hospitals at the MSA level that it makes realistic competition almost impossible.
    The GAO found that two years ago when they studied health insurer concentration at the MSA level that the largest insurer in a state has on average 43% of the market, up from 33% in 2002. In nine states the largest carrier has more than 50% of the market. AMA has reported very similar numbers recently that show some even further signs of consolidation and data from Interstudy publications supports these figures.
    The reality is that in most local MSA there is 1 large Blues plan and maybe 1-2 other plans of importance. How it is possible to have effective competition among health insurers if you have basically a monopoly or an oligopoly at the local MSA level?
    Same goes for providers though too. A 2006 study by the Commonwealth Fund found that 88% of the nation’s large MSAs were dominated by one or two major hospitals systems. Other data including some internal figures I have seen from the FTC also support the dramatic consolidation at the local MSA level among hospitals the last 10-15 years.
    The consolidation among individual physicians hasn’t been quite as dramatic but there still has been a notable and increasing trend of practices increasing in size or selling outright to hospitals.
    Basically, there has been a dramatic arms race in terms of size by both insurers and hospitals over the past 10-15 years and in most MSAs there frankly isn’t any real prospects of seeing viable competition anymore.

  17. Peter Nesbitt,
    “Second, have them voluntarily agree to practice lean medical care to control utilization. Any problem there?”
    When you are talking about “them” who exactly are you referring to? The medical group practice, the physician contracting organization, or something even larger?
    “Third, use software and medical review to ensure that providers are playing by the rules? Problem?
    Huge problems. Using ETGs via computer software to establish an efficiency metric is very timely consuming and costly. Not to mention problematic too because the claims data is often errand, lacking, or both. It all adds up to a problematic approach when trying to determine an “efficiency” rating for a provider using claims data.
    A better approach I have seen is when a few of the more costly approaches or high utilization procedures are targeted on a yearly basis and that continues for a few years at a time. Yeah, it ignores everything but it can be quite effective at hammering down costs. The problem is that for even this approach to work you need local physician leadership who is willing and able to sheppard this process forward and a commitment by payers to stay with this approach over a few years.
    “Fourth, if a provider slip slid on utilization, we discussed, we referred to our agreement, we tried to correct the behavior. If the doctor refused to cooperate, we threw him/her out of the system. No more patients, no more payments. Does that work? You bet. (Only one doctor ejected in 9 years.)” –
    It might work in practice although it would be met with fierce resistance but what about areas that already are having severe shortages and access capacity problems?

  18. Peter Nesbitt,
    I have several questions.
    First, could you provide an estimated average of range of your payments to both primary care doctors and specialists as a percentage of Medicare? I also wonder how your approach would work with very large multi-specialty group practices that may have a dominant market share in certain markets or regions.
    Second, you did not speak about hospitals. It’s the hospitals and their charges, even at contract rates, that are killing us financially. Even comparatively minor procedures can generate bills into the thousands of dollars, and I’m talking about outpatient episodes, not inpatient surgery and ICU care.
    Your model sounds like it will work very well with primary care doctors. However, how often should a cardiologist perform a standard stress test or a stress echo? Under what circumstances should the patient be referred for a cath? What should an annual checkup with an urologist consist of? How much ultrasound testing is appropriate and could it vary materially among patients depending on their individual issues?
    Third, how do patient demands and expectations figure into your model? What is the doctor supposed to do if the patient presenting with a headache insists on an MRI and threatens to sue if he doesn’t get one?
    That all said, at the end of the day, incentives matter. This is why I would like to see doctors grouped into tiers based on their quality, cost-effectiveness and general practice patterns. Patients who want to see doctors outside of the preferred tier should pay a higher co-pay for the privilege. Doctors, for their part, under the current system face no adverse consequences if they treat too aggressively, especially when patients express a preference for more care rather than less. Tiering has worked well in the prescription drug area as generic utilization surged to nearly 70% of all prescriptions, but still less than 20% of the dollars spent on drugs. I think it could help bend the cost curve if it were applied to doctors and hospitals as well.

  19. To everyone commenting on my single payer proposal –
    As probably the only person in this thread who actually ran a single payer system, I speak from experience, not conjecture. There seem to be a lot of problems with some of my suggestions. I think some of the difficulty is that you all are not seeing the implications of a single payer system. It’s really very simple.
    First, we built a network of providers and negotiated fair fees and paid them promptly. I never heard a single provider complaint. Does anyone have a problem with that? This explains how fees are controlled.
    Second, the providers agreed in writing to follow lean medical care guidelines to limit over utilization. Problem with that? The vast majority of doctors followed the guidelines.
    Third, we used software and personal intervention to evaluate and manage performance. The doctors actually took our calls. Problem? We had a non adversarial relationship that doctors appreciated.
    Fourth, if a provider slip slid on utilization, we discussed, we referred to our agreement, we tried to correct the behavior. If the doctor refused to cooperate, we threw him/her out of the system. No more patients, no more payments. Does that work? You bet. (Only one doctor ejected in 9 years.)
    Finally, we let patients choose any primary care provider in the system. I think most of them would like that, what do you think?
    There is a lot of mumbo-jumbo about the economics of medicine and complexity of health care. Rediculous. It’s really quite simple. Build a single payer system that respects providers, patients, and the insurers and, voila, it works.

  20. Bev MD, Nate, Peter, Barry, et al.
    As probably the only person in this commentology who actually operated a single payer medical system for large self insured and insured employers, I can speak from experience not pure conjecture. While I can’t state categorically that our system would translate perfectly well to a national health care system, I can say that it worked well at controlling both over-utilization and the size of medical fees.
    It’s really quite simple. Negotiate a reasonble fee structure with providers and pay them promptly. Does anyone have a problem with that?
    Second, have them voluntarily agree to practice lean medical care to control utilization. Any problem there?
    Third, use software and medical review to ensure that providers are playing by the rules? Problem?
    Fourth, don’t bug the doctors, let them practice medicine. What do you do when they slip slide into over utilization? Talk to them, remind them about the agreement, try to rescue them, if they persist, throw them out of the system. Let them try to practice medicine with no patients and no payments. Problem with that?
    Therein lies the benefits of the single payer system. Speak softly, be non adversarial, but drop the bomb if you have to. Amazing how well it worked. And the doctors loved it. So what’s the problem?

  21. Peter,
    The only way to decrease costs, without changing the present risk environment, is for the patient to not walk in the doctor’s office in the first place. As soon as the patient is in a doctor-patient relationship, all the forces in play today that are breaking the CMS back are going to determine the cost of the encounter. The physician is not an insurance company and will not be taking on more risk for the same or less money. That is clear
    Tort relief first. Then Medicare reality. Get the policies right on the government plans. Otherwise, as I have previously stated, this is nothing more than a money grab to delay the inevitable political reckoning all who hold office and power dread and will avoid by any and all means possible. That is clear.

  22. Peter seems to have a difficult time understanding economics. The practice of medicine is a matter of complex interaction of risks and benefits with transactions and their components in a state of flux and ambiguity. Government controls and fee ceilings have been in place for 3 decades. Do you smell the fart?

  23. John W. Byars wrote:
    “Post all the prices for a procedure by the the providers in an area, and the market will move pretty fast to correct the disparity.”
    Which market, the patient with insurance not paying the doctor or the uninsured? I guess John you advocate choice of doctor by price not by qualifications? I thought people wanted to choose their own doctor (the scare tactic of anti single-pay), not their own price.
    Peter Nesbitt wrote:
    “Fees are not the culprit, over utilization is the main cost driver in health care costs.”
    I think over utiluzation of fees is the problem. People are going to work as hard as they can to preserve/increase income. If you limit over utilization then they’ll find a way to keep/increase what they have. Clearly if we are to control/reduce costs then fees need to be controlled (negotiated) and utilization needs to be reduced – universal budgets and prevention. I have learned that people in charge of their own billings cheat someone.

  24. Great to be back from vacation. I just spent a week in LiberalLand. Tolls on roads, bridges and beaches. Comments from locals suggested the tolls have alarmingly been increased of late.
    I-95, a model of government efficiency was demonstrating why government is not in the efficiency business.
    An engineer enjoying lunch near ground zero comented on the runaway corruption in the rebuilding project. I was there last year, too. One year later, there is no evidence of a year’s worth of progress….but I digress.
    The feds have expressly forbade doctors from comparing prices. It is illegal for me to discuss fees with a colleague. Transparency is not there now because of Uncle Sugar. This is for the benefit of the CMS and the big insurers.
    I must negotiate a schedule of fees with each insurer. I must charge everyone the same, but I can accept less by contract (extortion) from each payor. The cash patient is at a decided disadvantage all the way around, courtesy of BHO and his predecessors.
    All this talk of coverage is not relevant to care itself. Increase the demand for my limited supply of service and the price goes up.
    Only changing the demand and changing the risk will change the cost structure of the system. There is certainly some profiteering in medicine; a lapse of ethics created by an adversarial environment not of our making or choosing.
    Tort reform and the pols facing the pain of reality will be the keys for sensible healthcare coverage and care. The private sector is not broken. The government sector is thoroughly bankrupt. The Congress can easily change the cost parameters in Medicare…Why don’t they? They are CHICKEN, and they don’t want to get plucked.

  25. Margalit if you send over your info we could have you partially self funded by 9/1 saving tens of thousands….
    if you wish to pass the savings on to your employees great. First step is to stop paying your insurance company for that $0 deductible plan.
    Last stat I saw 60% of those with employer insurance is through a self funded plan. We have self funded clients with stop loss as small as 25 employees.

  26. Thanks for a really informative post.
    I have two thoughts on the topic of price ceilings in health care reform. First, I would fear that setting a price ceiling would result in excess demand for medical services due to the reduced cost. Since some procedures would become significantly cheaper insurance companies may decide to cover procedures they had not covered in the past– driving up demand. Over time I would think that this would put upward pressure on prices for such procedures (assuming classical Economic theory holds here). One positive part of this is that it would increase access to medical procedures. Some would argue that this would be a good thing–and it would be for many procedures– but more medical care is not always better. I don’t think it’s efficient or desirable to subject patients to more medical care/treatment/testing just because it will be at a lower cost (but isn’t totally necessary). So I would hate to see the lower cost treatments get abused in this way and cause shortages.
    Second, as an example of a possible price ceiling David suggested, “A maximum permitted price can be set initially at, for example, 30% above Medicare rates.” I would think that this would act simply as a price for services, rather than just a maximum price. In reality who is going to charge less than their buyers maximum willingness to pay? If I’m considering buying your car and I tell you “I’ll pay you a maximum of $8,000 but I’d rather pay $6000” who is going to accept less than $8000? I know this oversimplifies the situation, but it illustrates my concern. Again, I think this effect would also push prices up over time.
    I think price ceiling may have a place in health care reform, but first we need to consider all of their implications–long term and short term. Price ceilings are a strong market intervention–so a cost-benefit analysis would have to be considered to make sure the benefits of decreased prices and perhaps increased access would outweigh the costs of excess demand (shortages for medical attention) and possible increase in prices over time due to the increased demand.

  27. Mr. Hanson has correctly identified one of the largest broken parts of the health care delivery model: Insanely wide disparities in price for the same procedures within a single area.
    The solution Mr. Hanson recommends is not the right one, however. Price Transparency is what is needed, not Price Ceilings. Post all the prices for a procedure by the the providers in an area, and the market will move pretty fast to correct the disparity. As Mr. Hanson notes, price and quality do not appear to be linked in these cases.
    These ten and twentyfold pricing differentials are rampant throughout the Health Care system – and Pharma is just as guilty. Invest an hour calling around to different drug stores in your area for prices on the SAME prescription drug. It is an eye opener.
    I question, as Mr. Hanson does, the morality of those Providers who charge such outrageously “over-market” rates for similar procedures, when they are willing to make dramatic discounts to payors with clout. Instead of forcing them to comply with mandated pricing that will not help the health care market to function more efficiently, let’s shed the light of day on these Providers, and force market pressure on them.
    Regarding the comments on B2B2B2C; cost shifting over the last several years has actually put the Individual/employee health consumer back in the position to make more intelligent buying choices based on the fact that their own out of pocket has grown so that they have skin in the game. They just need the right information to make these choices. Yes, there are still inefficiencies in some health plan designs, both self-funded & fully insured, that sometimes force consumers to use more expensive Providers – Transparency will help here also.
    And, yes, Health Care should not be exactly the same as other markets like the auto market. In the USA everyone gets an “auto” when they reach 65. It is called Medicare. They also get a very basic car to use if they are truly indigent. It is called Medicaid. These institutions are not bad in concept, and everyone should have a basic health care “auto” that does not bankrupt them if they have a serious need.
    Free Market Capitalism has taken a beating recently as the result of the egregious, uncontrolled, and in many cases, criminal behavior of certain individuals in the financial markets, which precipitated the meltdown of the US and International Financial Markets. Free does not mean Anarchy, and there are rules that should be followed and accountability for fraud or other unacceptable actions – and all parties in the Health Care Delivery system should be just as accountable as those financial managers should be.
    The Free Market is still the best method for managing large economic systems, and should be the primary method for managing the costs of having every American covered with a minimum safety net.
    How should the Free Market address another of the broken parts of the system: Over-utilization? That is a different issue from Mr. Hanson’s topic, with different solutions

  28. I doubt a cap on fees will have much impact, since as others noted in a fee for service world the providers will pick up the volume to make up for the lower income per service, or they will bias their services towards the ones that are more expensive when there is an option (hence, the explosion of sophisticated imaging when an x-ray would have sufficed).
    I partially agree with Nate that if we hit a tipping point, private insurers can turn on a dime (OK, 1-2 years) to keep costs in check. They did it once before during the managed care “revolution” in the mid 90s.
    I think the most likely scenario for a return to really hard-core pricing practices with private insurers would be if a public plan comes to fruition and pays Medicare rates. Private insurers will see it as life-or-death that they pay comparable rates, and I think you will see something like the Medicare plus 10% that Nate mentioned.
    Maybe they would even adopt universal rates and drop the network, though that would be quite a paradigm-shift for managed care companies like the one I work for. Since there would be no contract between insurer and provider (it is unilateral) I’m sure many state and/or Federal laws would have to be changed first.

  29. Peter Nesbitt says;
    “Fees are not the culprit, over utilization is the main cost driver in health care costs.”
    Recently I went to see an ob-gyn for a pap smear, the first visit in at least 15 years. This is because a) I am an M.D. and we never see doctors; b) I have a $10,000 deductible plan with my professional association. I was funneled to a nurse practitioner, for which I paid $182 minus a 20% “self-pay” discount (meaning they got their money in cash immediately). BUT, then they called later and said they forgot to charge me for the fecal occult blood test, which was not indicated in my case since I am already under the care of a gastroenterologist for colon polyps. The charge for this 2-second test for which the reagent probably costs $5.00: $50.00 – a significant percentage of the visit cost.
    The charge for the Pap smear from the pathologist: $70.00. I could have gotten it from Quest or LabCorp for probably about $35.00 or less.
    No, it’s not all overutilization. You yourself must not pay your own medical bills. I bet your insurer would not have paid the charges at these rates, either.
    Multiply my mark-ups by several million people and you have: high fees as part of the escalating costs of health care.

  30. “Anyone who believes that cost shifting exists in the industry must also accept the basic assumption underlying my argument.” – David Hansen
    No, they must not. The basic assumption underlying your argument is: “suppliers seem to have too much power over prices.” The existence of cost-shifting implies existence of _some_ pricing power, not “too much” pricing power.
    I’ll leave the rest of my rebuttal to Messrs. Tompkins, Altman, and Eilat [1]:
    “Over the past twenty-five years, the average ratio of hospital charges for services (gross revenues) to payments received (net revenues) has grown from 1.1 to 2.6. This reflects a transition from predominantly cost- and charge-based payment systems to regulated and negotiated fixed payments.”

    “We conclude that powerful payers have pushed many hospitals into the position of ‘price takers’ for a large proportion of all services, pressuring them into being aggressive ‘price setters’ for some of their other patients to maintain target revenues.”

    “It would seem dubious or questionable for government to restrict hospitals’ ability to seek additional revenue by limiting their ability to charge some payers higher prices while still expecting these institutions to provide care to all patients regardless of what they can pay.” [2]

    “Perhaps the government will recognize that its payment for services on behalf of its beneficiaries should be commensurate with the cost of care. But such an outcome seems highly unlikely now. Thus, we will either push this system beyond its limits — forcing hospitals to focus and specialize on the most profitable patients and provide fewer and less intensive services to those who pay less — or continue to require hospitals to be ‘tax collectors’ by charging more to those who can and will pay more, so that those who cannot or will not pay more receive care.”
    [1] Christopher P. Tompkins, Stuart H. Altman, and Efrat Eilat, “The Precarious Pricing System For Hospital Services,” Health Aff 25, no. 1 (January 1, 2006): 45-56.
    [2] This statement sure seems to stand as a stark pre-buttal to your price ceiling proposal.

  31. Margalit,
    It doesn’t matter if the employer is self-funded or fully insured. Savings from improvements in healthcare cost-effectiveness or other efficiencies are not likely to find their way to employees in the form of a rebate check and probably not in a reduced employee contribution toward the premium either. Why is that? It’s because the savings are unlikely to actually shrink the employer’s healthcare or health insurance costs but merely to slow the rate of cost growth. Depending on what happens to all of the other costs of doing business as well as whether revenue is growing or not and how much will determine the extent to which the employer can increase wages next year and/or add to or shrink employment.
    After a 35+ year career in the financial world, I can tell you that most markets are quite competitive with healthcare being an exception. I’ll give you one simple example. When the Tax Reform Act of 1986 was signed into law, the corporate tax rate on profits was reduced from 52% to 35%. Within two years, the average after tax return on total capital earned by our largest, most powerful and most sophisticated companies was no higher adjusted for where we were in the economic cycle than it was before taxes were reduced. In other words, the benefits from the sharp reduction in the corporate tax rate were competed away in the form of lower prices, higher wages and/or more service to customers than would have been provided if the tax rate hadn’t been cut.
    The bottom line is that if employers can mitigate health care and health insurance cost growth, it’s a good thing. Employees will see it in enhanced job security and better wage growth or slower growth in their contribution toward the cost of health insurance than they otherwise would have. You won’t see a rebate but you will benefit assuming the employer is smart enough to care about its competitive position including its ability to attract and hold good, productive employees.

  32. Last I looked, about 40% of employed people in this country are employed by small businesses with less than a couple hundred employees. I also presume that not all businesses with more than 200 employees are self insured, therefore about half the market is insured by the actual insurance company and those businesses are more than likely not going to see anything “trickle down” from the insurance folks if price ceilings are adopted.
    I also doubt very seriously that large, self insured employers, will pass any savings down to employees.

  33. “Most savings from lower prices will pass through to employers immediately, because most employers with over a couple hundred employees are self insured. “Health insurers” for much of the market are really payment intermediaries more than insurance companies. They earn a percentage margin above payments on behalf of each self-insured employer.”
    I wish more people understood this, but I think I understand where the confusion comes in. I work for a large employer with a self-funded health insurance plan. However, my insurance card reads Highmark Blue Cross, not the name of my employer. What’s really happening is that my employer established a large checking account which it constantly replenishes as needed to pay our claims. Highmark is the authorized signer on that account. It processes and pays our claims and sends out EOB’s. For these administrative services, it is paid a fee of roughly $15-$20 per member per month (PMPM). Disease management services are purchased as a stand alone product.
    Separately, I’ve said for some time that what is missing in the healthcare marketplace are robust, user friendly price and quality transparency tools that referring doctors and patients can use to identify the most cost-effective specialists and hospitals, imaging services, labs, drugs, etc. Since doctors’ decisions drive virtually all healthcare spending, we should be monitoring the utilization of services driven by each and use that as one of the factors to evaluate their performance. Ultimately, doctors and hospitals should be grouped into tiers based on cost-effectiveness and quality like we do with drug formularies now. If patients want to see a provider in the third tier, fine. Just expect to pay a higher co-pay for the privilege. The extra cost doesn’t have to be huge, but it should be enough to get the patient’s attention. Perhaps patients should also be exposed to a higher OOP maximum to access 2nd and 3rd tier providers vs. 1st (preferred) tier providers.

  34. Thanks for the many comments. B2B2B2C is one I’ll remember. I also note the comment that providers would accept prompt payments under a ceiling, and I see the merit in this position. Just a couple additional thoughts:
    * Cost shifting is mentioned by a couple. Please note that for cost shifting to be a reality, providers must be in a price setting position with regard to other payers than the government. If they aren’t able to unilaterally set up prices for these other parties, no change will occur regardless of what the government does in its corner of the market. Thus, anyone who believes that cost shifting exists in the industry must also accept the basic assumption underlying my argument.
    * Most savings from lower prices will pass through to employers immediately, because most employers with over a couple hundred employees are self insured. “Health insurers” for much of the market are really payment intermediaries more than insurance companies. They earn a percentage margin above payments on behalf of each self-insured employer.

  35. “Your model requires a single payer with the ability to negotiate fees nationally and control over utilization.”
    I disagree with this Peter. It is already being done by others and it is a discussion I have had with clients although none have yet gone this route. If the government continues to shift cost to private plans it is only a matter of a couple years till we push back on them big time and blow up the fable of sustainable public plans. We don’t need single payor or even a single piece of legislation passed.
    We simply go back to what worked.
    Effective 1/1/20?? Your healthplan no longer has a PPO, you are free to see any provider you like. Also effective this date your plan will limit reimbursement to 110% of Medicare.
    Thank you and have a nice day.
    We just saved 100s of millions in PPO access fees, simplified administration, and cut our claims cost by billions.
    This will of course bankrupt most providers, they can either work with us the employer to make the government start honoring its promises and reimburse fair amounts or they go under. Either way the cost shifting just died. And it was accomplished without any trillion dollar bills or politicians help.
    The private systems in America are sustainable and quit capable of competing, it’s the government cost shifting and burdensome regulation trying to destroy us that drives cost. Sooner or later employers are going to have enough and many political careers will die when it happens.

  36. Only in a “market” as messed up as in health care could someone argue this with a straight face. Price “freezes” and “ceilings” historically lead to shortages and black markets.
    What does Mr. Hansen consider a “supplier?” Based on this, it seems he is talking about hospitals and service providers (e.g. docs, nurses, etc.). Yet, providers and hospitals face a far different “market” than do device manufacturers and pharmaceutical companies. The truth to which he tangentially alludes is that providers and hospitals are price-takers with nearly no pricing power against a monopsony of government and large insurers.
    The absurd cost-shifting of providers and hospitals (e.g. $50 tylenol) has enabled them to maintain an average profitability of around 2.5-3.5%.[1][2] This doesn’t even come close to scratching the top 25 most profitable sectors of the US economy which start at 7% profit and go up. Industries where suppliers have substantial pricing power are typically associated with high-normal profits for those suppliers.
    Why do providers and hospitals generate such meager profits? By choice? This is what we must believe if we accept Mr. Hansen’s assertion that providers and hospitals hold too much power in setting prices. It’s a rather absurd argument.
    [1] Data cited from [money_cnn_com]
    [2] This cost-shifting reveals that Medicare and Medicaid are much more costly than they seem. The “savings” they claim (although they’re both facing insolvency) are passed along as added costs to small insurers, self-insured businesses, and the uninsured.

  37. Cars like Toyota and Honda are sold directly to consumers. Health care is basically a B2B service, thus immune to direct consumer influence. Health care insurance itself is not, by and large, a consumer product either. It is a B2B between insurers and employers, so what we really have here is a B2B2B2C. And the last 2C is not something the consumer controls – you take whatever plan the employer has. There is no individual choice in health care services.
    I always wonder why people expect consumers to exert any kind of control on health care costs since they are, mostly, thrice removed from the original service provider.
    I can see how imposing price ceilings will benefit the health insurance industry, but will those benefits translate into reduced premium prices for employers? If so, will those reductions be passed down to “consumer” pay check, or will employers pay a smaller percentage of the premiums?
    I don’t think the health care market bears any resemblance to the automotive market, or any other market. I really don’t really think that health care should be a market in the classic definition of a market. In my opinion health care should be a public service and regulated as such, but that’s a different can of worms altogether….

  38. re economist md
    He is correct and Peter does not understand economics nor has he reviewed EOBs from 1995 (or the Medicare fee schedule)
    To educate Peter, the only incentives to achieve $.5 million in income in the setting of fee freeze is to increase volume for the CPT code being supplied. The procedure carries a hospital fee which is often a factor of 20-50x the professional fee. Peter, do the math.
    Someone posted on this as a comment several blogs ago. That commenter understands. Peter needs education.

  39. economist md is correct. 35 years ago we discovered, as always, that putting in price controls is like screwing down the safety valve on the pressure cooker (or like stepping on the tube of toothpaste with the cap on).
    Still, fee schedules are and will be an important part of health-care payment. But they will be only destructive until they are combined with explicit ways to make compliance with regulatory burdens efficient.

  40. Price caps tied to what the most efficient providers (at an acceptable quality level) can deliver care at would accomplish the goal of imposing cost constraints on the US health care system.
    However, it would also create several other issues.
    The first of these is the financial distress caused to inefficient providers. If their capacity is lost, there is the potential for shortages if truly necessary productive capacity is not somehow transitioned to the more efficient providers. But this could eliminate the over utilization issues 🙂
    The second and more troublesome issue is the widespread unbundling of individual services from episodes of care across different provider entities. Someone, whether physicians, hospitals, or a new class of “health care dealer” entity, is needed to establish and operate as a procurement/service/financial intermediary between the patient and the various providers who collectively deliver the episode of care for the “efficient” price. Moving the US health care system in this direction would be a major paradigm shift for the industry.

  41. “They have been reduced such that for certain work that doctors perform, they are being paid at 30 cents on the 1995 dollar without inflation.”
    economist md, would you mean ALL doctors or just primary care? If just primary care then I doubt you’d find any support for further restricting their role through price controls. If you include specialists then please explain how 1/2 million dollars ++ per year represents 1995 dollars. And since medical costs have been rising 6% – 10% compounded yearly how does that show 1995 dollar without inflation?

  42. David,
    You have a pretty smile but you are uninformed about economics.
    There is already a wage freeze with fee limits.
    They have been reduced such that for certain work that doctors perform, they are being paid at 30 cents on the 1995 dollar without inflation.
    You miss the point. Wage freezes beget inflation. You appear too young to remember the 1970’s.

  43. Absolutely great post. Only quibble is that it misses the target. Fees are not the culprit, over utilization is the main cost driver in health care costs. Cut out the unnecessary treatment and fees become less of an issue. Nonetheless, you are correct, I believe, in that there should be a rational fee mechanism in place.
    David, you are right about price differences but if you could control the amount of health care services you could dramatically reduce costs overall while paying care providers fairly. Have you looked at this piece of the health care conundrum?
    Your fee ceilings would be accepted by the medical community if you pay them fairly and promptly. They won’t accept it in a system that continues to treat them adversarily as we see in HMO’s and insurer “managed care”.
    I also agree with your observation that neither patients nor health plans can make the necessary changes. Your model requires a single payer with the ability to negotiate fees nationally and control over utilization. It need not be governmental, it could be a private or semi private non profit run by the medical community.
    Anyway, excellent analysis, well done.

  44. Thanks, David Hansen, for the good case for price ceilings.
    I hate to break this news to those innovators who believe in more “breakthrough- miracle” medical technologies. But, alas, we may on that part of the bio-medical technology curve where yields are infrequent, small,not cost-effective,or downright dangerous.
    I realize that this statement is heresy in “can-do- technolgy solves all” America but I ask that you consider the merits of my case.
    One more bad piece of news for the technorati.Bio-medical technology can’t/won’t beat death.
    Dr. Rick Lippin