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The Laboratory of Democracy

Paul levy People from other states would be wise to watch the sequence of events happening here in Massachusetts with regard to health insurance rates. As I described below:

Things are playing out just as one might predict in the Massachusetts small business and individual insurance market. The Insurance Commissioner turned downproposed rate increases, the state’s insurers appealed to the courts, and now they can’t write policies.

Now, Rob Weisman at the Boston Globe reports on yesterday’s hearing in Suffolk Superior Court. The insurers argue that the action by the Insurance Commissioner is arbitrary and capricious, the traditional standard used to overturn a decision by a regulatory agency. The Division of Insurance argues, in part, that the insurers have not used up their administrative remedies before the agency, another traditional argument. A ruling is expected on Monday.Meanwhile, columnist Scott Lehigh offers thoughts on “The State’s great health care standoff,” noting that “Unease is in the saddle in the state’s health care sector, and chaos looms on the horizon.” He says,

Everyone is awaiting the next big political development. And here it is: Senate President Therese Murray will step into the breach when she speaks to the Greater Boston Chamber of Commerce Wednesday, unveiling a proposal she hopes will resolve the great health care standoff.

Senator Murray is a thoughtful and decisive person, and I, for one, look forward to her taking the reins here as many other elected and appointed official ignore the remarkable conclusions reached by the Attorney General. Just a few weeks ago, the AG issued a report, after months of study, in which she clearly explained that insurance price increases in the state were the result of two factors, the underlying increase in health care costs and a disparity of reimbursement rates that pay some providers substantially more than other providers. “Price variations are correlated to market leverage as measured by the relative market position of the hospital or provider group compared with other hospitals or provider groups within a geographic region or within a group of academic medical centers.”

She also noted that the movement by some insurers and providers to capitated contracts did not result in a different growth rate in underlying medical costs from the traditional fee-for-service payment method. “Variations in providers’ per member per month expenses are not correlated to the methodology used to pay for health care, with expenses sometimes higher for globally paid providers than for providers paid on a fee-for-service basis.”

In a comment below on one of my posts, astute observe Barry Carol offers the following thought. While he focuses on just one of the better paid hospital-doctor systems in his first paragraph, his second paragraph makes it clear that his approach could apply more broadly to others as well:

As I see it, the key problem from the insurers’ perspective is that employer customers felt it was absolutely essential to have Partners in their networks because that, presumably, is what the employees wanted. While narrow or limited network insurance products are quite well accepted in CA especially, it’s a different story in MA. Harvard Pilgrim, I believe, offered an insurance product that did not include Partners in the network but it didn’t gain much traction with customers.

This is why I keep coming back to disclosure of contract reimbursement rates and quality information to the extent that it’s measurable to help referring doctors steer their patients toward more cost-effective healthcare choices. I think that’s the best and most viable way to create countervailing power against Partners and other hospital systems with significant local or regional market power. Insurers could develop a mechanism to reward referring doctors who actually do this most effectively but they would need the price and quality information first. I think I know why insurers resist disclosure of contract rates but I don’t know why the regulators do.

To which I add one other thought in my comment on Scott’s article:

Let’s also look at the 10% of premiums used by the insurers for administrative costs, a percentage that has stayed remarkably steady over the years. As overall premiums have gone up, the number of dollars collected for non-medical costs has risen dramatically. Other financial services industries have been able to achieve improvements in their administrative and transaction-related expenses. Why has that not been possible in the health insurance field?

And just to make it clear that providers have a role, please review what I have said below about the potential for real quality improvement and cost savings to be achieved. An excerpt:

[I]t is possible for the participants in the health care system to accomplish major changes in the rate of medical cost inflation. Two articles have this theme. One is by Business Week’s Catherine Arnst. The other is by Lucien Leape, Don Berwick, and others in Quality and Safety in Health Care. Both are worth reading, and they overlap in recommending several areas — reducing infections and other preventable harm; empowering patients and families to participate in their care; and disclosing and apologizing for mistakes.

[T]here is a remarkable consensus on these items, and yet hospitals and doctors often fail to implement them. . . .

It is not unusual for industries facing structural change to be slow to move. Why? Because the leaders of those industries were promoted based on their success in the past financial, political, and social environment. They were hired for their ability to maintain the status quo, rather than for their ability to make change. Eventually, though, societal forces make themselves felt. If an industry does not adapt, the government will step in.

That is what we is happening right now in Massachusetts. Watch us closely, other 49! Do we go the route of short-term political expediency and bad regulatory policy, or do we show the wisdom and maturity to put in place directionally appropriate policies? There is an old legal expression: Hard cases make bad law. As things founder in the judicial and executive realms, brava to Senator Murray for having the courage to step in.

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Samiksha TondonBillPaul LevyPaolobev M.D. Recent comment authors
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Samiksha Tondon
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It’s a really good article for me, Must admit that you are one of the best bloggers I ever saw,keep up the nice work, and I will be a frequent visitor for a very long time.

Jd
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Jd

Paul, I expected you to answer that your contracts with insurers prevent you from disclosing prices by insurer, but I was surprised that you mentioned anti-trust law. Can you (or anyone else) explain?

Bill
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Bill

Great discussion here. My sense of this is that the situation calls for mandatory disclosure requirements for providers of price, volume, quality and outcomes data in a format which is understandable and actionable for patients.

Paul Levy
Guest

Peter,
On your question: “Just wondering Mr. Levy, if I called your hospital and asked what the hospital paid for a particular procedure to the insurance company(s), would I be told?” The answer is no. We are prohibited by contract and by the anti-trust laws.

bev M.D.
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bev M.D.

To Barry’s excellent analysis I would like to add high costs to the hospital for medical devices (15,000 for hip implant prosthesis, not sure of $$ but huge for CT and MRI scanners, several thousand per implantable defibrillator and coronary stent) and then of course pharmaceutical prices. I bet none of these cost the same in Europe. Anybody know?

Barry Carol
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Barry Carol

Margalit – On the non-hospital based physician side, I can point to at least three factors that would account for higher costs here. First, physician income expectations, particularly for specialists, are much higher in the U.S. Second, malpractice insurance premiums are far, far higher in the U.S. than anywhere else. Third, there is more administrative complexity here that probably requires more staff per doctor even if each individual staff member is paid comparably to their European or Canadian counterpart. Supposedly, administrative simplification is coming and the savings will accrue mainly to providers as jd notes. For hospitals, there is the… Read more »

Margalit Gur-Arie
Guest

Here is another thing I don’t understand. When comparing what Medicare pays for services, our fees here are much higher than Europe. Yet, physicians and hospitals insist that Medicare reimbursements are below cost, thus the infamous shifting to private payers.
So is Medicare really paying too little, or are the costs inflated by inefficiency and “unreasonable” expectations?

Paolo
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Paolo

Last year I spent time in a Swiss hospital visiting a patient. The service was quite good. I hope Barry does not need to see one, but if he does, I think he will be fine. Switzerland controls medical prices by regulating them. Prices are publicly available and are set via some sort of collective bargaining between all private insurers and private providers with the canton (state) supervising. The process is similar in other countries. The US is unique in having an extremely opaque and mysterious medical pricing system. Having more skin in the game may help lower utilization (specially… Read more »

Barry Carol
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Barry Carol

Nate – While that’s one contribution I hope I don’t make, I did buy good travel insurance just in case.:-)

jd
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jd

Margalit, I just want to point out that the price-signalling effect is likely to be highest for inpatient care. The consumer-directed theory tends to work reasonably well for the lower cost treatments of people who do not have a serious chronic disease, so they have an expectation of not using up the entire deductible. Of course, that is only around 10-20% of all medical costs. Most people will also be dealing with some co-insurance, so I don’t think there will be a rush to higher cost venues, but at the same time don’t expect a rush away from them. For… Read more »

Barry Carol
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Barry Carol

Margalit – While I think it’s pretty clear that utilization will decline overall as out-of-pocket costs, rise, I doubt that it’s the main reason why Switzerland spends only 11% of GDP on healthcare and we spend 17%. My guess is that the main reason why healthcare spending consumes a much lower percentage of GDP in other developed countries is their prices per procedure / episode are far lower. While I don’t have data, I believe other important reasons include the following: 1. Rationing – especially in the UK and Canada (both single payer systems). 2. Litigation environment – much more… Read more »

bev M.D.
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bev M.D.

Nate;
LOL!! You are getting positively readable!! ((:

Nate
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Nate

Barry for the sake of science can you incur some major and prolonged expenses while there to get the complete picture on healthcare and how it compares, couple hundred thousand should do it

Margalit Gur-Arie
Guest

Something doesn’t make sense here. Switzerland indeed has large out-of-pocket expenses and they spend less on health care than we do.
However other less privatized countries, like France Germany or The Netherlands, have much lower out-of-pocket amounts and they spend even less GDP on health care.
Are we sure that the “skin in the game” is the deciding factor? Or maybe there is something else in play here….

Barry Carol
Guest
Barry Carol

bev,
As it happens, my wife and I have booked a vacation to Switzerland for this August. It’s an organized tour so I expect to have an opportunity to learn a lot about the country including the healthcare system. I also wonder about their healthcare prices as well as the transparency issue. For everything else, it seems to be a very expensive country both to live in and to visit.