Provider Monopolies: Choking Off our
Ability to Improve the Competitiveness of the
Health Care Sector
Robert Murray
March 1, 2013
The American Enterprise Institute
RMurray@GlobalHealthPayment.Com
1
Topics to Cover
• Catalyst for Payment Reform – Background
• Framing the Problem
• Evidence finally catching up with reality – we have a significant
Provider-based Monopoly Problem in our Health Sector
• Recent trends mask underlying implications of consolidation and
the Accountable Care Act will exacerbate the Problem
• Profound economic and social implications for Americans
• Current tools to improve the Competitiveness of the Health Care
Market are being Choked off by Dominant Providers
• A case of “Dumb and Dumber”
• Possible Approaches
2
Paper Commissioned by Catalyst for Payment Reform (CPR)
Co-Author Suzanne Delbanco:
•
CPR formed in 2009
•
Independent non-profit led
by health care purchasers
•
Identifying & coordinating
workable solutions to
improve how we pay for
health care
•
Mission to accelerate
reforms to promote the
IOM’s 6 aims
•
Creating a national
framework for payment
reform along with tools that
catalyze change & align
public/private strategies
http://www.catalyzepaymentreform.org/uploads/Market_Power_Paper.pdf
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Framing the Problem
• Per capita health care spending has been twice that of most other
industrialized countries; 18% of GDP; unsustainable growth, yada yada
• Early 2000s – growing realization that Unit Prices were a major factor
differentiating the U.S. from other OECD countries
Health Affairs Journal
May/June 2003
Post Managed
Care Era
• Trend in Health Care charges and pricing correlated with
business strategies of hospitals and health systems to consolidate
• Increasing use of local and regional market power by providers to
extract larger prices increases from private insurer
• Exacerbated by employers distaste for narrow provider networks
4
Seen Evidence of this for a while:
Hospitals Charge Master Mark-ups
Hospitals nationally mark
up their charges
200% above cost
In 2009
Source: American Hospital Association statistics 1980 - 2009
5
It’s the Prices!
What Accounts for the Difference between U.S. and German Spending on Health Care
Our Unit Prices are Much Higher!
Offset each other
McKinsey Global Institute: Decomposition of spending Germany vs. U.S. (taken from Reinhardt U.E. 2012. Journal of Economics)
6
And it is Getting Worse
Growth in Prices Paid by Private Payer for Hospital Inpatient Care vs. Growth in the
Hospital Market Basket Index 1992-2010
Sommers AC, White, Ginsburg PB. Addressing hospital pricing leverage through regulation: state rate setting. NIHCR Policy Analysis No. 9, 2012.
7
Consolidation Trends 1990 - 2006
Consolidation Trends: change in HHIs 1990 vs. 2006. Taken from Gaynor M. 2011. Testimony before House Subcommittee on Health.
8
Trends in Charges and Pricing Coincide with Dramatic
increases in Provider Concentration (based on HHIs)
Taken from Capps and Dranove 2011. AHIP Presentation (Bates-White)
9
Industry Highly Concentrated in 2009
Taken from Capps and Dranove 2011. AHIP Presentation (Bates-White)
10
And Yet, Health Care Costs are Finally Under Control!
(really?)
• “Growth in U.S. health spending remains slow in 2010 at 3.9%”
• US health spending growth in 2009 - 2011 were the lowest in the
51-year history of tracking National Health Expenditures
Centers for Medicare and Medicaid Services, January 9, 2012
• “the tectonic plates underlying the health system are beginning
to shift in anticipation of new incentives under health reform”
Karen Davis, Commonwealth Fund, January 18, 2012
• The Wall Street Journal: The Myth of Runaway Health Spending
“The moderation has been driven by cumulative improvements in
medical care and by insurers, and by marketplace disciplines on the
demand for medical care. Consumers are finally getting more involved
in managing and paying for their own care.”
J.D. Klein, American Enterprise Institute, February 17, 2012
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Need a Longer-Term Perspective on Health Costs
• National Health Expenditures (NHE) = GDP +2% “excess cost growth”
• Trend line for NHE appears to be declining
But so is GDP Trend line
• We haven’t reduced “Excess cost growth” and prices are primary driver
Excess Cost
Growth still
Appears to be
1.5 to 2.5%
Source: CMS Office of the Actuary 2012 & U. Reinhardt Economix Blog - The New York Times
12
Sad History of Health Reform in One Chart
• Tempting to view more recent favorable trends as a sign we’ve
“broken the back of the health care cost monster”
• But we’ve seen this dynamic before “no approach our nation has
tried to control costs has had a lasting impact” – Drew Altman
1965 enactment
Medicare/Medicaid
“Voluntary”
Effort vs. Carter
All-Payer Proposal
Or Too soon to break
out the Champagne
and celebrate?
Medicare
IPPS
Managed
Care
Wage/Price
Controls
• Current efforts to control costs – largely voluntary
Broken
The Back
Of the Health
Care Inflation
Monster?
13
Facing up to Reality – We have a Significant Monopoly
Problem in our Health Care Sector
Evidence finally catching up with reality – we have a significant
Provider-based Monopoly Problem in our Health Sector:
The changing effects of competition on nonprofit and for-profit hospital pricing behavior (Melnick 1999)
It’s the prices stupid (Anderson 2003)
How has hospital consolidation affected the price and quality of hospital care? (Vogt and Town 2006)
Accounting for the cost of Health Care in the U.S. (McKinsey 2007)
High and rising health care costs: demystifying U.S. Health Care Spending (Ginsburg 2008)
The effects of multi-hospital systems on hospital prices (Melnick 2010)
Wide variation in hospital and physician payment rates evidence of provider market power (Ginsburg
2010 – CPR)
Massachusetts AG reports on provider pricing (2010, 2011)
More evidence of of the association between hospital market concentration and higher prices and
profits (Robinson 2011)
The Provider Monopoly Problem in Health Care (Havighurst & Richman 2011)
Growing power of providers to win steep payment increases from insurers suggests policy remedies may
be needed (Berenson 2012)
Overcoming the pricing power of hospitals (Kocher 2012)
Bitter Pill: Why medical bills are killing us (Time Magazine, Brill 2013)
14
Despite Slowing of Health Care Cost Growth – Prices are
still Primary Drivers
Massachusetts Spending Growth by CostDriver Category (2007-2008 and 2008-2009)
“prices to explain nearly all of the
increase in expenditures”
Schoenman, J.A., N. Chockley. 2012. Understanding
U.S. Health Care Spending. National Institute for
Health Care Management (NICHM) Webinar. February
2, 2012. Available from:
Factors Accounting for Growth in
Personal Health Care Spending, 19802009
Their analysis showed that “prices
accounted for more than 60% of the
increase in overall spending in 2010”
Martin A, Lassman D, Whittle L, Catlin A. Recession
contributes to slowest annual rate of increase in health
spending in five decades. Health Aff (Milbank) 2011;30(1): 1122.
15
Consolidation Drives Higher Prices and Distorted Pricing
• Importance of the Pricing Mechanism in Competitive Markets
• Means by which millions of decisions made each day between consumers and producers
to determine the proper allocation of resources
• Serves an important “signaling” function to express preferences
• Invisible hand by which markets remain dynamic and efficient
•
By contrast prices in the US Health Care Market characterized as a
“Byzantine mélange of different bases & different payment rates”
• Substantial recent evidence of this from CA, NJ, NH, and MA &
Time Magazine article discusses the “madness of MD Anderson”
• Private payers pay on the basis of these distorted Charge Masters
• Fragmented pricing system with no relationship to cost, sends the
wrong signals, does not encourage efficient/effective outcomes
• Not consistent with what one would view as a competitive result
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Hospitals Pursuing other Tactics to Lock Up the Market
• Also – more subtle factors that are firmly “tilting” the advantage in
negotiations toward providers (Berenson/Ginsburg 2012)
• “Must have” Hospitals/Specialized Services
•
Geographic Isolation
•
Ability to negotiate one contract for constituent facilities across a broad area
•
“Most Favored Nation” clauses (Michigan Blue Cross)
• Private payers acquiescing - wishing only to be “just better than their
competing health plans” but passing on double digit increases
• ACA may be providing increased “cover” for further integration (both
horizontal and vertical)
• “Consumer Risks Feared as Health Law Spurs Mergers” New York
Times 2010
• “Rising hospital employment of physicians: better quality, higher
cost?” (Urban Institute 2011)
17
Merger Activity appears to be Ticking Up
18
Hospitals Buying up Physician Practices
“Hospitals are trying to wrap themselves in a
physician employment blanket, but the
cost per square inch of that blanket is very high.
This is an effort to lock up the game before it
even starts (i.e., preclude PCMH and other
market-based approaches, incentivize docs
based on billings and increase negotiating
leverage with payers” Anonymous CEO Major
Hospital System
Taken from Gaynor, Statement before the Committee on Ways and Means, Health Subcommittee. Washington DC. September 9, 2011.
19
Massive Engine for Reallocating Income
•
Health Care Market is Uncompetitive
•
Fragmented Payer Sector and Provider Concentration creates a fundamental power
imbalance between buyers and sellers
•
We’ve created a “massive engine for the redistribution of resources from households,
tax payers and employers to the organizations who provide care” (Vladeck/Rice 2009)
$
$
$
$
$
$
$
$
$
$
$
Reinhardt, U. 2012. Divide Et Impera: Protecting the Growth of Health Care Incomes (costs). Health Economics. 21:41-54
20
Implications for the Health Sector
Prevailing Literature supports these conclusions:
• Substantial evidence consolidation drives up health care
expenditures (numerous studies)
• Little evidence that consolidation results in improved
provider efficiency (lower costs)
• Evidence that consolidation is either neutral or negative in
terms of health quality
• Little evidence that current consolidation is resulting in
improved clinical integration
• Consolidation is not for better care management it is to
enhance Market Power under a predominant FFS system
21
Implications for Wage Earners
• Employers believe they foot the bill for nearly 60% of individuals
enrolled in employer sponsored insurance plans (21% of spending)
• Tax deductibility of health insurance and other factors hide the fact
that employees and consumers foot the bill for increased spending on
health care – through near zero real wage growth, layoffs and increases
in product prices
• Providers counter that “the Health Sector has been an engine of
economic growth” in recent years
• Recent RAND study quantifies increase in “excess health spending”
results in job losses (121,00 for every 0.1% above GDP growth)
• From these data, calculated that for every job we add to the health
sector, we sacrifice 0.85 jobs in the rest of the economy
• At best a “wildly inefficient jobs program” (Baicker & Chandra NEJM)22
Implications for the Economy
• Spending 18%+ of GDP crowds out needed investment in infrastructure,
education and defense (hospital spending > defense spending now)
• “We don’t have an overall spending problem in the U.S. We have a
humongous health spending problem” (Blinder, Wall Street Journal 2011)
• “This collision [between increased spending and inability to raise taxes]
cannot be avoided by borrowing. Debt to GDP ratios of 80-90% raise the
risk of a viscous downward cycle” (Newhouse 2010)
• U.S. currently at 70-75% Debt to GDP
• Dollar as Reserve currency and other factors – U.S. can likely have Debt to
GDP ratio far in excess of these levels (we are on track to go much higher)
• Real concern is we have no more “economic space” to weather another
financial crisis (and we’ve had two in the past 12 years)
• Health care spending will be a significant drag on long-term economic
growth
23
Two-Tiered Health Care System?
140%
Payments as a Percentage of Hospital Cost
Private Payer
130%
120%
Middle
Class ?
110%
100%
Medicare
90%
Medicaid(1)
80%
Source: American Hospital Association Chart Book 2011
70%
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
• Real danger that current and planned Government spending cuts may
precipitate further consolidation and higher prices to the private sector
• May lead to a diminishment of access and increasing lack of affordability of
private insurance
• Will the <65 middle class increasingly be left out of the system?
24
Public-Private Divide (could this happen)?
Is it plausible that Medicare payments to hospitals can dip down to half those of private
health insurers by 2035 without creating enormous problems for hospitals and the
patients they serve? (CBO estimates 2012 – Incidental Economist blog, Austin Frakt)
25
Study looked at Three Categories of Potential Solutions
Market-Based
Approaches
Regulatory
Approaches
Coordinated
Public-Private
Approaches
26
Study looked at Three Categories of Potential Solutions
Market-Based
Promote Consumer- Directed
Health Plans
Utilize value-based insurance
design
Implement Reference and
Value Pricing
Regulatory/Policy
Improve the accuracy of the
Medicare Physician Fee
Schedule
Modify Medicare IPPS and
OPPS (Volume adjustments)
Coordinated Public/Private
Expand Transparency
Develop state or national Allpayer claims data bases
More vigorous Anti-Trust (post
merger) activity
Establish Tiered, Narrow and
high performance Networks
State Department of Insurance
efforts to oversee payerprovider contracting
Utilize Centers of Excellence
Baseball-style arbitration
Provide Oversight over ACOs
Establish limits on pricegouging: “Maximum Price
Obligations” for insurers
Promote development of more
effective payment structures
(Global Budget based
mechanisms)
Health Insurance Exchanges
pursuit of Active Purchasing
Strategies
Increased investment in
Primary Care and Primary Care
Work force
All Payer Rate Setting
Incentivize Primary Care
Physicians to be sensitive to
Hospital Prices (PCHM)
27
Reconsider benefits of Manage
Care and Managed
Competition Concept
Encourage entry of Low-cost
Competitors
Promote new technologies that
enhance competition
Eliminate Preferential Tax
treatment of health benefits
Align public and private
payment strategies and
purchasing power
Market Failures & Monopoly Power Choke off many
of these Alternatives
Expanded Transparency may help
Market-Based
Promote
Clear
LimitsConsumerto Cost-ShiftDirected
to
Health Plans
Consumers
& do we think patients
can be powerful shoppers?
Utilize value-based insurance
Dominant
design Providers have been
Successful in Choking off many of
Implement Reference and
These efforts: Preferred Networks,
Value Pricing
Efforts by payers to steer patients
(Just
look atTiered,
the Boston
Market)
Establish
Narrow
and
high “Direct”
performance
Networks
Going
is positive
(COE)
Regulatory/Policy
Improve the accuracy of the
Medicare Physician Fee
Schedule
Modify Medicare IPPS and
OPPS (Volume adjustments)
State Department of Insurance
efforts to oversee payerprovider contracting
But
very Centers
small impact
Utilize
of Excellence
Baseball-style arbitration
ACOs
are largely
hospital-driven
Provide
Oversight
over ACOs
And don’t prescribe an effective
Reconsider
benefits
of Manage
Non-FFS
internal
financing
system
Care and Managed
Low
Cost competitors
Competition
Conceptlike
“Steward” in New England a
Encourage
entry of Low-cost
positive
development
– but most
Competitors
just
“Shadow price” the big boys
Establish limits on pricegouging: “Maximum Price
Obligations” for insurers
Promote
new technologies
that
New
Technology
Development
enhance
Holds
somecompetition
promise but very slow
To develop (reg. barriers)
Health Insurance Exchanges
pursuit
ofrate
Active
Purchasing
All-Payer
setting
at the
Strategies
state level is to complex and
subject
Regulatory
All-payertoRate
Setting Capture
Eliminate Preferential Tax
treatment of health benefits
But patients need more than just
Coordinated
Public/Private
Posted
prices. We
need
legitimate comparisons/rankings
Expand
Transparency
and
assistance
from physicians in
making informed decisions
Develop state or national Allpayer claims
Anti-trust
lawsdata
are bases
not vigorous
enough – and the “cows are all
More vigorous Anti-Trust (post
out of the barn.” Impossible to
merger) activity
do retro-cases
Align public and private
payment strategies and
purchasing power
Promote development of more
effective payment structures
(Global Budget based
mechanisms)
Increased investment in
Primary Care and Primary Care
Work force
Incentivize Primary Care
Physicians to be sensitive to
Hospital Prices (PCHM)
28
5) Then
other MarketPrimary
Focus should be on Pushing Back on Existing Market Power,
Based activities will have
Rationalizing Public Payment Strategies and Empowering Physicians
More of a chance to succeed
Market-Based
Regulatory/Policy
Coordinated Public/Private
Promote Consumer- Directed
Health Plans
Implement Reference and
Value Pricing
Improve
the accuracy
of the
2)
Rationalize
RBRVS,
MedicareIPPS/OPPS
Physician Fee
Modify
(adopt a
Scheduleadjustment
volume
mechanism)
to shut
down
Modify Medicare
IPPS and
OPPS (Volume
adjustments)
providers’
incentive
to do
unnecessary
services
State Department
of Insurance
Establish Tiered, Narrow and
high performance Networks
efforts to oversee payerprovider contracting
Utilize Centers of Excellence
Baseball-style arbitration
Utilize value-based insurance
design
Provide Oversight over ACOs
Reconsider benefits of Manage
Care and Managed
Competition Concept
Encourage entry of Low-cost
Competitors
Promote new technologies that
enhance competition
1)
Establish
limits
on PriceEstablish
limits
on pricegouging: “Maximum
Price
Gouging:
“Maximum
Price
Obligations” for
Obligations
forinsurers
Insurers and
Self-responsible
patients
Health Insurance Exchanges
pursuit of Active Purchasing
Strategies
All Payer Rate Setting
Eliminate Preferential Tax
treatment of health benefits
Expand Transparency
Develop state or national Allpayer claims data bases
More vigorous Anti-Trust (post
merger) activity
Align public and private
payment strategies and
purchasing power
Promote development of more
4) Increase investments
effective payment structures
Substantially
in Primary
(Global Budget –based
Care
(workforce/support)
mechanisms)
Increased investment in
3)
Public/Private
effortsCare
Primary
Care and Primary
to
incentivize
physicians
Work
force
(PCPs) to be more sensitive
Incentivize Primary Care
to
hospital/specialist
prices
Physicians
to be sensitive
to
and
relative
efficiency
Hospital Prices (PCHM)
29
Maximum Price Obligation Concept
• Some strong evidence from MedPAC that Medicare Advantage
plans pay substantially lower rates to dominant providers
• Fallback Theory: Medicare paid fee schedule if they can’t negotiate
• This substantially reduces provider leverage in the negotiation
process
• One alternative is to focus on areas where Hospitals have complete
monopoly power (Emergency Services)
• MPO for ER services 125-150% of Medicare would apply to all
• Consistent with “Implied Contract” concept discussed by
Richman/Hall in NEJM 2012
• Uninsured & out-of-network patients completely price gouged;
payers completely emasculated if 15-20% of patients to through30ER
Maximum Price Obligation Concept (continued)
• In an ideal world, MPO concept should be applied to everyone
(both privately insured and self-responsible patients) for all
hospital services
• National legislation – not possible at the State level (political
capture)
• Leading States have been ineffective at cost control
(Massachusetts, Maryland and others)
• Dominant providers have significant political sway and are able to
hold off meaningful legislation and/or enter into arrangements
(Like ACOs) that buy them several years
• In the mean time – consolidation continues and as the economy
improves health care costs will rise once again in dramatic fashion
31
Government as a “Dumb Price Fixer”
• “Former Centers for Medicare and Medicaid Services (CMS) administrator Tom
Scully described Medicare as a “dumb price fixer.” Perhaps so.
• Yet, one would be hard put, to defend the current bizarre private-sector price
system that produces data such as those shown in the tables as any less dumb.
• “Dumber might be the more appropriate word”
Uwe Reinhardt: Health Affairs blog.
“A modest proposal” September 2009
• At least Medicare gets the “relatives” closer to being right and Medicare
payment levels do approximate the cost of efficient and effective hospital care
(Stensland et. al. Health Affairs 2009)
• Over the short-term: My suggestion - Empower the Private sector by establishing
a series of Max price ceilings to level the playing field in negotiations
• Empower PCPs (align their incentives with patients and payers)
• Rationalize and align Public payer payment methodologies (RVRBS/Volume
adjustments for IPPS/OPPS)
• Then strongly pursue activities designed to make the market more competitive
32
Thanks!
Discussion/Questions?
33
National Summit on Provider Market Power
June 11, 2013 Washington, DC
•
Catalyst for Payment Reform invites you to attend our National Summit on Provider Market Power
on June 11, 2013 in Washington, DC. Sponsored by Health Affairs, this day-long event will provide
the opportunity to delve into the double-edged issue of provider consolidation with the nation’s
top experts.
•
Speakers include HCCI's Marty Gaynor, The Urban Institute's Bob Berenson, MEDPAC's Mark Miller,
representatives from the FTC and DOJ, leaders from prominent provider systems, key employers
like Wal-Mart Stores, Inc and GE, and Thomas O'Brien, Massachusetts' Assistant Attorney General.
•
Topics include:
•
•
•
•
•
•
•
•
•
* Consolidation trends
* Impact on cost and quality
* How health care providers are thinking
* Market-based approaches to enhancing provider competition
* The role of price transparency
* The employer’s perspective
* Public policy and regulatory responses
* Creating a utility to monitor impact
* Balancing care fragmentation with too big to fail
34