[s]ome $24 million of revenue enhancements have been achieved—mostly via managed care renegotiations [and] none of this could have been achieved by either Evanston or Highland Park alone. The “fighting unit” of our three hospitals and 1,600 physicians was instrumental in achieving these ends.You may not be accustomed to thinking of hospitals and doctors as “fighting units,” but the phrase accurately applies to the raw power struggle between large-scale purchasers and providers of health care in what passes for the health care “market” these days. Basically, the pattern is that hospitals charge the highest prices to those who have the least power, starting with uninsured patients, who are charged the highest prices of all. Meanwhile, the price that hospitals charge to treat any given privately insured patient depends on whatever deal the hospital has struck with that patient’s insurance company. And who gets the upper hand in these secret deals is basically just a matter of who is bigger than whom, with all parties trying to shift costs onto others rather than competing to provide patients with better care. Back in the 1990s, the balance of power tended to favor large-scale buyers of health care, as insurers and large employers set up “tight” managed care systems in the form of health maintenance organizations. HMOs forced providers to bid against one another for the privilege of being included in their networks. As a result, while American doctors, and particularly specialists, remained by far the highest paid in the world, they were forced to accept considerable reductions in income. In today’s dollars, the average incomes of specialists declined from $849,194 in 1990 to $610,469 in 2000. Cost savings from lower payments for services were the primary reason health care costs remained contained throughout 1990s. For a few brief “Goldilocks” years, health care costs grew more slowly than the wages of the average American and overall health care spending held constant as a share of GDP. Yet following this brief interval of sustainable health care spending came the “managed care backlash,” a largely physician-led media and lobbying campaign centering on charges that HMOs were preventing doctors from performing, and even discussing, necessary care. Armed with talking points supplied in part by lobbyists, patients’ rights advocates argued that HMOs were costing lives. This populist theme of corporate callousness (amplified by the hit movie As Good As it Gets) resonated among healthy consumers exasperated by sluggish gate keeping and unstable relationships with primary care physicians, as both physicians and employers cycled among HMOs in search of better deals. Today, researchers find no evidence that clinical outcomes deteriorated under managed care except in isolated occurrences. Indeed, in general, by cutting down on unnecessary surgery and other forms of overtreatment, managed care generally improved the quality of health care. Hospital stays did shorten and investments in costly technology waned, but not in ways that harmed patients. Meanwhile, nine out of ten dollars in cost reductions came from lower payments for services. But that result could not hold. The backlash against managed care weakened the bargaining position of insurance companies and other large purchasers of health care by discrediting the narrow networks and utilization reviews that insurers had used to bargain down prices and limit unnecessary volume. Even more significantly, providers resolved to fight back by bolstering their market power through mergers and acquisitions. And as they consolidated in more and more markets, they were more and more able to dictate to insurers and other purchasers of health care what its price would be. Today, the effects can be seen in the prices providers receive for the same procedures in markets with different degrees of concentration. For example, Berkeley health care economist James C. Robinson has studied the prices hospitals charge insurance companies (and, by extension, insured patients) for different procedures. In concentrated markets, the price for a pacemaker insertion averages $47,477, but in markets that remain comparatively competitive the cost of the procedure averages $30,399. Similarly, providers in concentrated markets make far larger profits on the procedures they perform. Thus, for example, in concentrated markets, the average hospital makes a return of $20,000 above its direct costs on every angioplasty it performs. But in more competitive markets, while the margin is still astoundingly high, at $10,900, it is nonetheless 90 percent less than in concentrated markets. More evidence of how consolidation is driving up health care costs comes from Massachusetts Attorney General Martha Coakley, who subpoenaed claims data (reflecting negotiated prices) and contracts from health plans and providers in her state. By examining the behavior of individual hospitals and physician practice groups, Coakley’s office was able to document a strong link between market concentration and price. Within markets, prices charged for the same services typically varied by 200 percent or more. This variation correlated almost exclusively with “leverage”—the relative market position of the provider. Prices did not correlate with quality, patient mix, or a hospital’s status as a research or teaching facility. The market power of some so-called “must have” hospitals is now virtually unchallengeable. These are hospitals that insurers must include in their networks in order to be able to sell policies in a given area because the hospital enjoys a local monopoly or a particularly strong brand or reputation. Such hospitals use their market power to win “anti-steering,” “anti-tiering,” “guaranteed inclusion,” or “product participation parity” clauses that forbid insurers and employers from using copayments to steer patients toward less costly providers. Thus, a hospital in Oakland might dictate to an insurer: You are forbidden to even tell your customers that they could receive lower-cost chemotherapy at that other hospital in Berkeley. Another widely used monopolistic practice is for multi-hospital systems to negotiate as a single entity. This allows hospital chains to parlay their dominance in one market into higher prices in others where they are less dominant. Even nonprofit university teaching hospitals play the game. Hospitals in the University of California system, for example, now negotiate as a group rather than as individual entities. If an insurance company wants a contract with, say, UCLA’s medical center, it will have to agree to the system’s price for treating patients at UC Davis’s hospital. As one hospital executive explains in a study published in Health Affairs, “Contracting as a full [University of California] system is frightening to the payers.… These are contracts with big leverage.” Beyond inducing more demand for health care, the Affordable Care Act has two features that could, without corrective action, make this kind of price gouging much worse than it already is. First, the ACA calls for dramatic reductions in the rate of increase in Medicare reimbursements. That’s great for saving the government money. But the Medicare Payment Advisory Commission and others have warned that hospitals could try to make up for their slower-growing Medicare reimbursements by using their increasing market power to raise prices still more on private insurers and their customers. Meanwhile, the ACA’s encouragement of accountable care organizations is already leading to still further rounds of hospital consolidation and monopolistic pricing. What is the solution? More rigorous antitrust action is a key part of the answer. The FTC, which takes the lead on mergers, devotes just twenty-two full-time professional staff (economists and attorneys) to monitoring an industry that this year will take in $3.1 trillion. Under this regime, consolidation has proceeded to the point that some analysts now predict that the national health system will eventually consolidate into just a handful of competitors, like the airlines. But remember that at the same time there are strong clinical and economic reasons why we should be moving toward larger, truly integrated health care systems. A broad consensus now exists among those who study quality and efficiency in health care that only integrated systems can overcome the massive problem of fragmented care—of specialists ordering up redundant tests and contraindicated drugs as they each treat one body part at a time, often with costly treatments of dubious effectiveness. If there is any larger cause of U.S. medical inflation than the monopolization of providers, it is continued fragmentation of care. So the question then becomes not how we can prevent bigness in health care but how we can encourage the growth of large-scale, integrated providers in a way that does not lead to their degenerating into abusive monopolies. One approach would be simply to set prices administratively. This is not as infeasible nor, dare we say, socialistic, as it may sound. Since the 1970s, Maryland, for example, has had a public process, akin to a public utility commission, for setting hospital prices for all payers, including Medicare. The cost of a Maryland hospital admission for commercially insured patients was 26 percent above the national average in 1976, but by 2011 had dropped to 4 percent below the national average. Yet Maryland has enjoyed very generous Medicare reimbursement rates that some argue are the only reason it has been able to hold down costs for commercially insured patients. And in any event, the example of Medicare itself shows how the process of setting rates administratively is subject to capture by providers. Today, for example, a committee of the American Medical Association effectively sets Medicare prices, and in ways that harm patients by overcompensating specialists and under-compensating primary care. (See Haley Sweetland Edwards, “Special Deal.”) Even if we fixed that problem, we’d still be left with—how else to say it—government bureaucrats setting prices in health care. That may fly in Maryland, but how about Texas? And might there not in fact be some real virtue in creating a pricing system that leaves a role for effective and well-regulated market competition in setting prices? For this approach to work, there must be a combination of better antitrust enforcement with what’s known as a “common carrier” regime. It’s an approach that Americans have used for generations in other realms in which there are both large, desirable economies of scale and the potential for monopolistic abuse. The term common carrier traces its roots to early English common law. Its main purpose is to prevent enterprises that control critical infrastructure from hindering competition among the users of that infrastructure. Thus, for example, in the 1890s, the United States used common carrier laws to prevent railroads from offering lower freight rates to other monopolistic enterprises, such as Standard Oil or U.S. Steel. Reforms required that railroads instead offer all shippers the same rates for the same service. That way, competition between producers wasn’t over who could leverage their market power, but over who could deliver the best product to the consumer. A more recent example is the Justice Department consent decree governing the Microsoft Windows operating system. Antitrust regulators did not break up Microsoft or dictate the prices it could charge, but did force the company to sell Windows bundled with Internet browsers built by other software companies. Similarly, pipeline owners must transport gas from other producers, and telephone monopolies must carry signals from other carriers—all at nondiscriminatory rates. The hot issue of “net neutrality” is a fight over whether common carrier status should apply to Internet service providers. There are realms where an economic case can be made for price discrimination. Aviation is one such realm. It may be irritating to discover that the guy sitting next to you on a plane paid $200 less for his ticket just because he bought it two weeks before you did. But at least that kind of price discrimination can fill seats that would otherwise go empty and thereby at least arguably reduces the average cost of flying for everyone. But there is no way such logic applies in health care. As Princeton’s Uwe Reinhardt and other health care economists have noted, in this realm charging different people radically different prices for the same procedures does not even in theory lead to greater efficiency or lower prices. Rather, it just wastes enormous resources as different parties scheme to shift costs onto one another through secret, special deals. It doesn’t, for example, cost a hospital more to run a patient through a CAT scan if the patient has insurance with one carrier verses another. Nor are there savings to the system even theoretically obtainable by offering discounted scans to some patients and their insurance companies but not others. Much less is there any clinical case for widespread price discrimination in health care. Either a patient needs a scan or does not; getting a “special deal” on a scan you don’t need just exposes you to unnecessary radiation. Applied to health care, a common carrier regime might work like this: A hospital over a certain threshold of market power—let’s say, one-third or more of a community’s beds—would be required to publish a full schedule of its prices for all its different services and procedures. It would also be required to charge all customers the same price, whether those customers were large or small insurance companies, employers, or individual patients. Hospitals already draw up such a schedule of prices, known in the business as a “charge master,” but hardly anyone except people without insurance are actually charged the prices on the charge master, and many hospitals won’t even give you a copy. Under a common carrier regime all commercial customers would pay the same published price. A common carrier hospital could also not discriminate between independent doctors and doctors employed by or otherwise affiliated with hospitals. All would have the same scheduling rights and pay the same overhead allocations for services such as operating rooms, CAT scans, and intensive care beds. A common carrier physician group, likewise, would have a single rate structure. From the consumer’s point of view, all common carriers would be effectively “in network,” in the sense that all customers would pay the same price. Meanwhile, nothing would prevent common carriers from integrating with an insurer to operate an ACO or HMO, so long as they did not use their pricing power to disadvantage competing health plans. Or to think of it another way, common carrier health care providers would effectively be part of a community’s basic infrastructure. They might be publicly or privately owned, or run by a nonprofit or for-profit organization. But equal access to this infrastructure would be a given rather than itself a subject of competitition. Who would want to live in a town where all the local businesses—restaurants, lawyers, copy centers, hardware stores—competed not over which produced the best product or service, but over which could use its market power to win the most concessions on the prices it paid for basic inputs like water, electricity, or the cost supporting the local road network? We should not think of health care infrastructure as being categorically different. With lower barriers to market entry, competition among health plans would no longer be primarily over who can use their pricing power to maximize market share. Rather, it would be over who can provide the most value to the consumer. The plans most likely to gain acceptance by price-sensitive consumers will be those that implement the most efficient clinical protocols—a balance that Intermountain calls “the best clinical result at the lowest necessary cost.” Providers that didn’t meet the threshold for being designated common carriers (in our example, those with one-third or less market share) would remain free to gain market share by underbidding the published prices of the giants. But if these providers grew too large, they, too, would become common carriers. Conversely, large institutions could divest their way out of common carrier status. This incentive structure limits the need for antitrust enforcement, while helping to ensure that the economic returns to bigness result from actual efficiencies rather than pricing power. But, of course, this set of incentives does not remove the need for more vigorous antitrust enforcement. A hospital or ACO with a 100 percent monopoly in its local market might well impose high costs and inefficiencies on all of its customers equally. In practice, there are certainly towns too small to support more than one hospital or ACO, but we need a Federal Trade Commission that is empowered to ensure that wherever possible there are at least two that are operating in true competition with one another. Conservatives might object that it is beyond government’s competence to perfectly calibrate the balance of concentration and competion in each local health care market. But as politicially and administratively difficult as this approach will be, it’s basically the only way to create the conditions under which markets in health care can operate efficiently even in theory. You will not find Adam Smith defending the notion that the hidden hand works in monopolized markets with secret prices. The only actual sustainable alternative is to have government directly set prices and thereby allocate resources in health care. Some liberal readers may well say, “Yes, let’s just do that.” But whatever the merits of that model, it is not going to happen anytime soon in America at the federal level. What will happen, though, on our current course, is unrelenting health care inflation that could easily, as we’ve seen, bring the equivalent of a new 28 percent payroll tax on middle-income families by 2030. If the Republicans manage to kill Obamacare, then they will take ownership of that reality. If Obamacare survives but the ongoing inflation in health care continues, then a majority of Americans will conclude that the Democrats are the ones to blame. Either way, it would seem that both parties have an enormous interest in taking on monopoly in medicine and in using true, all-American competition to stop the price gouging.
After ObamacareA frenzy of hospital mergers could leave the typical American family spending 50 percent of its income on health care within ten years—and blaming the Democrats. The solution requires banning price discrimination by monopolistic hospitals.
February 2, 2014 | by Phil LongmanRead on Washington Monthly
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