The Supremes Strike a Blow for Health Care Affordability

Today’s Managing Health Care Costs Indicator is $3000

All eyes are on the Supreme Court’s six hours of oral arguments on the Affordable Care Act this week – but we shouldn’t lose sight of a hugely important decision last week to limit the ability of biotechnology companies to patent “natural laws.”

The Supreme Court last week ruled that Prometheus Pharmaceuticals could not patent a test that suggests medication dose changes based on amount of metabolites in the patient’s blood.  Mayo Clinic had developed a similar test – with its own validated normal range, but Prometheus sued to stop Mayo from marketing its test.   Now there can be competition in this field, which is likely to lead to more innovation and lower price.  

This has led the Supreme Court to ask an appeals court to review its earlier finding that Myriad Pharmaceuticals and the University of Utah could continue to be the sole owners of a patent  for BRCA 1 and 2 – the genes that are associated with heightened risk of breast and ovarian cancer, especially among Ashkenazi Jews.  The  genetic test for these genes now costs $3000 – and many insurers are reluctant to provide coverage.

Advocates periodically assert that “personalized medicine” can improve quality and outcomes while lowering overall resource costs, and point to tests that can protect patients from drugs that would offer them no benefits, and help determine the best dose based on genes rather than trial and error.  There is no question that genetic testing is already saving and improving lives.   The current high expense of genetic tests makes it unlikely we can achieve the goal of cost savings  - and single source manufacturers would fight hard to maintain high “brand name” prices.  These Supreme Court decisions can inject competition in the biotechnology market,  offering the prospect of price relief in the all-important market of genetic tests and gene therapies.

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Harvard Pilgrim-Tufts Health Plan Merger

Today’s Managing Health Care Costs Indicator is 2

  

Yesterday the big news in Boston was that Tufts Health Plan and Harvard Pilgrim Health Care were exploring a merger.  These are among the two best health plans in the country; each has a long and proud pedigree – and each has very deep roots in the community here.  Together, they are still just 2/3 the size of Blue Cross Blue Shield of Massachusetts (see below).

The Boston Globe reports that the two CEOs and Board Chairs have already agreed to positions, so it’s likely that this merger will indeed go through.

What does this mean for health care costs?

Some immediately imagine that a decrease in health plan competition is bad – and will raise costs for consumers.  We need to evaluate how health plans price their services, and how the merger will affect the acquisition costs for health care services.  I believe that decreased health plan competition in a market is likely to lower overall health care costs – and here’s why.

Jim Roosevelt (CEO of Tufts HP) and Eric Schultz (CEO of Harvard Pilgrim)  and said today that there would be administrative savings – and that’s absolutely true.  The two health plans will only need one set of senior executives, and will be able to have a single set of IT systems – so there are a bunch of fixed costs of having two health plans that will diminish when they merge.  They’ll  diminish, of course, after a brief period of increased costs associated with harmonizing different systems.  These lower administrative costs, though, aren’t how this merger can add social value by lowering health care costs.

There’s a lot of talk about high executive pay and administrative waste – but if you could dramatically lower administrative cost –that would not be the way to make health care (much) more affordable.  Health plans spend 85% in general on payments to physicians, hospitals, ancillary providers and others.  The “medical loss ratio” is closer to 90% for these regional nonprofits.  

The only way the merger will lower costs will be if it lowers the price paid by these health plans for medical care.  It can do this through larger discounts or different payment methodology – but the larger the health plan is, the more leverage it has to pressure the provider community.

One of our local NPR affiliates WBUR  had a series of health care experts talking about the impact of this merger on competition –and a number of them raised fears that health plan consolidation would lead to provider consolidation, and thus could raise prices.  Regina Herzlinger quoted this National Bureau of Economic Research working paper , which  does indeed express this fear. However, provider consolidation is subject to antitrust rules, and the Attorney General and the FTC can prevent provider consolidation that would lead to increased prices.  No surprise that the Mass Hospital Association expressed concern about the proposed merger.

It's a paradox that sometimes more competition can lead to higher prices if the fragmented intermediaries have to pay for higher 'ingredient' costs due to their lack of leverage.

My take - Tufts Health Plan and Harvard Pilgrim will fit well together culturally, will overcome the inevitable IT and ops integration challenges, and will after some period of time be more effective at procuring health care for a lower overall cost.  They will lower their total administrative costs, too (which means many of my friends and colleagues will be looking for new positions).   The AG hearings on this proposed merger will give us an interesting window into both health plans, and their strategy to increase value through the merger.  

Click on image to enlarge

Correction 1-27-11. HCHP changed to HPHC in first line of post. Thanks to an alert reader for pointing out my error 

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Health Plan Demands Lowest Rates and This Raises Prices

Today’s Managing Health Care Costs Indicator is 70

The US Department of Justice and the Attorney General in Michigan announced on Tuesday a suit against Blue Cross Blue Shield of Michigan (BCBSM) for demanding the lowest prices of hospitals in the state.   BCBSM has in place a “most favored nation” contract with at least 70 of the 131 acute care hospitals in the state.

Here is the Justice Department statement:

The department’s lawsuit alleges that the intent and effect of Blue Cross Blue Shield of Michigan’s MFNs is to raise hospital costs for competing health plans and reduce competition for the sale of health insurance. As a result, consumers in Michigan are paying more for their healthcare services and health insurance

Here is the BCBSM VP for Corporate Communications: 

Through this lawsuit, the federal government seeks to deny millions of Michigan residents the lowest cost possible when they visit the hospital.

Who is right here?  Is it really bad for society for BCBSM to insist for its members on always getting the lowest rate?

It certainly is!  

Most favored nation clauses feel like a good deal (“I get the best price.”) But what they really do is make it tough for suppliers to lower their prices for anyone else. See a recent blog on the effect of most favored nation pricing on pharmaceuticals.   The BCBSM contracts are especially inflationary –because they don’t merely demand the lowest price, but they specify how much higher a price other insurers would have to pay.

This is especially damaging to competition in Michigan, where BCBSM has a 60% market share.    There is no way for other insurers to compete effectively in that market, since hospitals cannot sell extra capacity at marginal prices.   Hence, despite the BCBSM cries that they are simply getting a good deal for their customers, BCBSM is causing all consumers in the state (including their own customers) to pay higher prices for health care.

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Consolidation of Providers: Better Integration, or Threat to Competition

Today’s Managing Health Care Cost Indicator is 40%

The Washington Post  had an article last week about Carilion Health System, in Norfolk VA.  The hospital system credits a merger that created the system with allowing the creation of a true integrated delivery network. Not everyone agrees. 

The Wall Street Journal had an article in 2008 about this system. The US Justice Department opposed the merger that created Carilion, but lost in court.  The WSJ noted that over two decades southwestern Virginia health insurance rates went from the lowest in the state to the highest.

The Robert Wood Johnson Foundation  reported in 2006 that mergers of nearby hospitals are associated with cost increases of as much as 40%.   Of course, it’s easy to know what happens with hospital charges, and measuring what happens with actual payments is substantially more difficult.  Here’s a link the classic Uwe Reinhardt paper in the chaos of hospital pricing.   Harvard Link

The CEO of Carilion, Edward Murphy says “"We need to fundamentally get off a transaction system where you're paid for what you do to patients to being paid to care for them."  The real question is whether Carilion will accept a change from the fee for service system that has treated them very well.  The WSJ noted that colonoscopies at Carilion are billed at over $4700!

Many communities are facing the question of whether to support the development of accountable care organizations, or whether to promote more robust competition among providers.  It’s a tough choice – we all want better coordination, but on the other hand we worry that more bundling of payments will lead to diminished consumer choice.

Here are some questions I’d ask from a public policy perspective about the move toward greater provider integration:

1)     Is the integrated entity accepting accountability for the cost and the quality of care.   If the integrated entity insists that all payments continue to be fee for service, cost is likely to increase with more integration.

2)     Will the integrated entity commit to robust transparency, sharing process metrics, as well as outcome metrics.   These outcomes should be risk adjusted – but risk adjustment shouldn’t be an excuse to delay disclosure for an inordinate period of time.

3)     What is the integrated entity doing to lower the resource cost of care delivery within its own system?  The more it is doing, the better the chances that further integration will lower costs.  I’m seeing more hospital systems looking to move past fee for service. Integration can help providers have the depth and scale to lower costs.  But getting larger can also give providers the leverage to keep charges artificially high, and thus prevent cost savings. One cautionary note is that disruptive innovation is likely to help drive lower health care costs –but larger, more complex organizations are more likely to resist disruptive innovation.

4)     Will there still be competition after the merger?  In Carilion’s case, the answer seems to have been “no.”  Without competition, it’s hard to drive lower costs and force greater efficiency.  Since care delivery is local, competition has to be defined in a narrow geographic area.

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Domestic Medical Tourism - Why Competition Can Lower Price Even if No Volume Moves

Today’s Managing Health Care Cost Number is

0 

Today’s USA Today  (from Kaiser Health News) reports on domestic medical tourism.   Many have written about domestic and international medical tourism, and projected huge increases in this.  In fact, Deloitte breathlessly suggested in 2008 that 6 million Americans (1 in 50) would go abroad for treatment in 2010!  [I can’t find an active link to this report now –it’s apparently no longer online.)  Deloitte revised these trends substantially in fall, 2009, now estimating that by 2012 international medical tourism will reach 1.3 million in 2011.

Here’s why I’m focused on zero.  Hannaford Brothers, a large supermarket chain, initiated an international medical tourism program in 2007 for knee and hip replacements in Singapore.    The plan was widely reported, and widely commented upon.  Many suggested    Today’s USA Today article reveals that exactly no one took Hannaford up on the offer.

Does that mean Hannaford’s program was an utter failure? Au contraire!  The program was a real success.  The credible threat of competition led to a number of offers for less expensive orthopedic surgery in the US, and the local hospitals in Maine were willing to lower their prices.

So – a program that creates competition can lower prices even if it doesn’t actually move volume.  Not so good for the entrepreneurs in Singapore, but excellent for the patients and the shareholders of Hannaford.

  

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