The Cost of Doing Nothing

(Click on image to enlarge graph)

Reed Abelson has an excellent essay in today’s New York Times –making the case that the alternative to health care reform is NOT what we’ve got right now, since what we have right now is getting too ruinously expensive with each passing month.  Abelson reproduces a Commonwealth Fund chart (above) showing estimates of how much less of our GDP we would have been spending on health care if only we had succeeded at reforming health care in the Clinton, Carter, or Nixon administrations.

This is the right way to frame the health care reform debate to break the “Nash Equilibrium” that leads to gridlock.  Obama has tried to do this too, pointing out that if we wanted an health care systemn where every 10 years the costs doubled and 15% of our population was uninsured and much more felt at risk, we should oppose health care reform.  This framing hasn’t stuck, though, and the public (at least in most polling) doesn’t have the sense of urgency that many health care economists and public policy wonks see.

The Washington Post notes that interest groups are gearing up for the fight on health care reform – and pretty much everyone besides for the AARP is hiring lobbyists, shooting commercials, and protecting their turf.   This suggests that stakeholders deeply believe health care reform can be defeated –so they’re not likely to be willing to accept substantial changes (yet).

 Michael Kinsley notes that both sides of the health care reform debate are missing an important point (also in today's TImes)

Neither side has really grappled with the cost issue. When Aunt Minnie back in the district has a hip replacement (her second) and gets a bill for $90,000, the challenge is not to find someone other than Aunt Minnie to pay. The challenge is to deliver hip replacements for less than $90,000, or tell Aunt Minnie she can’t have one. 

We really need to transform the delivery system – changes in health plan benefits, health plan administration, and payment methodologies alone will not get us to the health care system our patients deserve.

Read More

California Provider Leverage Drives Health Care Cost Increases

I blogged yesterday about health plan powerlessness to control cost per unit – the major driver of excess health care costs in the US compared to other developed OECD countries. 

As if on cue, Health Affairs published an article from the Center for Health System Change pointing out that this is exactly what has happened in California.  A combination of public demand for full provider choice and consolidation of hospitals and physicians has left health plans with little power to control overall costs.

A direct quote:

“Physician overlap in two prominent health plan networks was 97–98 percent. This reality weakens the position of health plans. If plans cannot exclude providers from their network because of customers’ demands for broad networks, they cannot credibly threaten network exclusion. That fact undermines their ability to resist providers’ demands for higher payment rates.

Although it doesn’t seem possible that prices could have increased even faster, it turns out that providers sometimes don’t wield all available leverage power in negotiations. In effect, they leave “money on the table” because

-          Hospitals and big physician groups worry that raising prices too high will chase business away from the local geography

-          Hospitals and big physician groups worry that raising prices for smaller health plans might increase health plan concentration

-          Kaiser Permanente in Northern California has large market presence and drives costs down in that market.

I am convinced that more integration of provider groups can lead to higher quality of care – and more cost-effectiveness, too.   This quote from a physician who had moved from Fresno, a non-integrated market, gives me pause:

“The good thing about the systems not being highly integrated and coordinated [in Fresno] is that premiums are lower. Why are those hospitals and physicians [integrating]? It wasn’t for increased coordination of care, disease management, blah, blah, blah—that was not the primary reason. They wanted more money and market share.”

Many observers have commented on the importance of vigorous enforcement of antitrust regulations.  However, this article points out that some characteristics that make a hospital a “must have,” high-leverage facility, such as reputation and provision of unique services, are not addressed by antitrust enforcement. 

The authors conclude that policy makers should consider price caps and all-payer rate setting.  Of course, all-payer rate setting would likely require Medicare and Medicaid to pay substantially higher rates.  Since Medicare is already woefully underfunded and the states are chafing at Medicaid costs, no one will be enthusiastic about an approach which increases Medicare and Medicaid liabilities.

The market helped control prices when hospitals and care delivery systems genuinely competed against each other. In the current environment, where health plans must have a contract with all providers, hospitals (and delivery networks) have become akin to utilities. Utilities are usually subject to price regulation.

Read More

Scapegoating the Health Plans

Angela Braly, CEO of Wellpoint, defended individual rate increases at Anthem of California before Congress today ,  She said that increased premiums in the individual and small group market were caused by increases in the cost of health care and healthier subscribers dropping their insurance.  When NPR ran the story, the highlight was that she recited her 2009 compensation.  For the record, she stated that her compensation included $1.1million salary, $70,000 performance bonus, and stock options valued at over $8 million.

Robert Reich, former Labor Secretary, has an op-ed in the New York Times decrying the health industry entitled “Bust the Health Care Trusts.”   He notes the concentration in the health insurance industry, where “90% of the insurance markets in 300 metropolitan areas are ‘highly concentrated.’” Reich reminds us that the five largest health insurers made profits of over $12 billion last year, and supports the repeal of the McCarren-Ferguson Act, which exempts insurers from federal antitrust scrutiny and makes them subject to state regulation.  The House voted to scrap McCarren-Ferguson earlier today.

It’s hard to be favor of 39% rate increases – and there certainly are instances where health plans with little competition have enriched themselves at the expense of public good.   But there is a lot of demagoguery going on here. 

·         The Wellpoint CEO’s salary and bonus are relatively small for a company of this size.  The stock grant makes total compensation appear large – but the stock grant dilutes the value of shareholders –and is not paid out of ‘health care dollars.”  Executive compensation is easy to despise, but this expense represents a tiny portion of all health care expenditures. The really costly issue is the “friction” in health insurance and provider payment.

·         The problem of the healthy dropping out of health insurance is real and worrisome.  This is called a ‘death spiral,’ where soaring costs make the healthier people drop out – causing sequential increases in premium expenses, fewer people insured, and higher illness burden of the insured population. Paul Krugman wrote about this on Friday.

·         Between 80-90% of all health care premium goes to pay those who deliver health care.  We often focus on the 10+% of administrative costs, since it’s easy to oppose administration and bureaucracy.   But most health care inflation comes from the health care delivery system (and in the US, the biggest issue is cost per unit, not utilization.)

·         We face both insurer consolidation AND provider consolidation. In an environment where health plans must have virtually all providers “in network,” many provider organizations have been able to get substantial contractual rate increases.   A market needs only a few viable health plans to have competition on the insurance side, and there are only a few markets where there are not multiple competing health plans The real challenge is how to promote meaningful competition on the provider side.  

The Anthem rate increases in California are painful and represent a failure of social policy.  We need structures to allow real pooling of risk among small groups and individuals.  But keeping the healthy people in the plan is critical – and no one has a better idea for this than an individual mandate.  And the public debate seems to omit the role increased provider payments play in increased insurance rates.  

Read More