Bad News = Good News = Bad News

Today’s Managing Health Care Costs Indicator is 200

That’s how many job cuts three hospital systems in Massachusetts have announced in the last few weeks. A fourth, Cambridge Health Alliance, has shed 450 jobs, almost 15% of its employees,  in the last 18 months.  The headline on page one of  Sunday's Boston Globe was  “ Health care, job engine for state, is pulling back. Sector sees layoffs, cuts”   Big Massachusetts health care employers including Partners (50,000 employees) are saying they will do no new net hiring this year.

Moody’s just announced a “ negative outlook” for the nonprofit hospital sector, predicting ”weaker financial performance ahead due to a sluggish economic recovery, growing levels of uncompensated care, and flat volume trend.”  Moody’s analyst notes that  “hospitals that can execute deeper levels of expense management through fundamental changes in their operations will be positioned better to navigate the next couple of years. 

Moody’s earlier noted that Medicare cuts would cost the nonprofit hospital industry  $440 million in the next year.  

This is certainly contrary to Christine Roemer’s statement 6 months ago that “health care will remain a large source of job growth in the labor market.” At the time, I worried that increased health care employment meant that we would not get a grip on health care inflation.

Bad news:  Many hospital workers are unemployed, at a time when the job outlook is dim. Further, for every job lost, there are multiple jobs that are not created.

Good news: This means we’re finally going to see a lower rate of medical inflation

Bad news:  Health care is an engine of economic growth, representing 12% of all employment in the country (15% in Massachusetts).   Getting health care costs under control will help increase our international competitiveness, and will free company resources to invest in innovation and growth.   However, much of the innovation and growth in the US has been in health care.  

Cutting the rate of health care cost increases is critical to our economic future, and health care costs increasing at a rate 2-4% higher than overall economic growth is not sustainable.  Cutting this cost growth is not going to be painless, though.

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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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Self Referral: Another Installment

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This month’s Archives of Surgery (Harvard Link)   has an impressive article showing that orthopedists who own their own ambulatory surgery centers are substantially more likely to recommend surgery compared to physicians who don’t have an ownership interest in the surgery center.

The author, Jean Mitchell, went through state filings and insurance company records and made phone calls to ascertain physician ownership of surgery centers. She then analyzed claims data from a large private insurer (representing about 40% of the Idaho market) and determined what percentage of patients with specific presenting complaints had a surgical procedure.  She reports on the differences in behavior between owners and nonowners.

Surgery rates were 33-100% higher for shoulder rotator cuff surgery, and 27-78% higher for arthroscopic surgery. The differences among surgeons increased dramatically around 2005, as more surgery centers were opened. (The exception is carpal tunnel surgery, where the orthopedists who owned centers did far more surgery, but the difference predated the surgery centers opening).

The increase in utilization when physicians financially gain from self-referral has been well documented for years.  See this post for a review of the literature as of a few years ago.  

In 1995, Idaho had 37 hospitals and 4 specialty hospitals owned by physicians.  By 2005, there were 42 ambulatory surgery centers, 39 of which are owned entirely by referring physicians.

There is no easy answer.  Regulations have not proven to be especially effective.  Physicians opened up “limited use” or single specialty hospitals because federal legislation prohibited referral physician ownership of general use ambulatory facilities. High margins are one of the problems – if surgery was not over-reimbursed, it’s not likely that capital would be available to set up such centers. We don’t see a self-referral problem for low margin procedures.  The AMA and physician specialty societies could take a stand against this self-dealing, but this self-referral increases the income of many leading specialists. It’s hard to take income away from physicians.

Speaking of conflict-of-interest, this study was funded by the American Hospital Association.  Hospitals have been the big losers as physicians have built competing ambulatory surgery centers, which drain the higher margin procedures from the hospital.  The Archives of Surgery fully discloses this potential conflict.  Not all the physicians who own surgical facilities disclose this potential conflict to their patients.

ADDENDUM: USA Today notes that health care reform will force physician-owners to disclose their ownership interest when they refer patients to their own imaging equipment, and offer nearby options.

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