Thursday, September 5, 2013

Fwd: qotd: Private insurers allow hospitals too much market power

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Subject: qotd: Private insurers allow hospitals too much market power
Date: Thu, 5 Sep 2013 12:23:28 -0700
From: Don McCanne <>
To: Quote-of-the-Day <>

Center for Studying Health System Change
HSC Research Brief No. 27
September 2013
High and Varying Prices for Privately Insured Patients Underscore
Hospital Market Power
By Chapin White, Amelia M. Bond, James D. Reschovsky

Across 13 selected U.S. metropolitan areas, hospital prices for
privately insured patients are much higher than Medicare payment rates
and vary widely across and within markets, according to a study by the
Center for Studying Health System Change (HSC) based on claims data for
about 590,000 active and retired nonelderly autoworkers and their
dependents. Across the 13 communities, average hospital prices for
privately insured patients are about one-and-a-half times Medicare rates
for inpatient care and two times what Medicare pays for outpatient care.
Within individual communities, prices vary widely, with the
highest-priced hospital typically paid 60 percent more for inpatient
services than the lowest-priced hospital. The price gap within markets
is even greater for hospital outpatient care, with the highest-priced
hospital typically paid nearly double the lowest-priced hospital. In
contrast to the wide variation in hospital prices for privately insured
patients across and within markets, prices for primary care physician
services generally are close to Medicare rates and vary little within
markets. Prices for specialist physician services, however, are higher
relative to Medicare and vary more across and within markets.

Making Sense of Price Variation Within Markets

Several factors can be ruled out as explanations for the wide price
variation within markets, including:

* the costs of doing business—labor costs within each market are about
the same;

* the complexity of the services being provided—differences in service
complexity are taken into account by benchmarking to Medicare prices,
which are adjusted for complexity; and

* the type of coverage—all enrollees are in private plans with similar

What, then, can explain the price variation? The hospital industry has
argued that higher-priced hospitals treat the most complex patients and
have higher costs because of their teaching programs and capital
investments. While this may explain some variation within a market as
riskier patients seek care at tertiary hospitals, benchmarking to
Medicare should mitigate this influence. Indeed, many analysts believe
that Medicare's additional payments to hospitals for medical education
exceed the additional costs.

The more likely culprit is variation among providers and private
insurers in negotiating leverage. Negotiating leverage depends on the
ability to walk away if an agreement cannot be reached. In terms of
negotiating leverage, primary care practices fall at the bottom of the
heap. Primary care physicians tend to practice solo or in smaller
groups, and they are more numerous than specialists and more
substitutable, making them the least able to dictate prices to health
plans. Primary care physicians are, in economics jargon, price-takers. A
private insurer does not need the participation of all primary care
physicians in a market. Instead, an insurer needs only enough primary
care physicians to provide access to enrollees, and no single primary
care practice is needed to reach that threshold. As a result, few, if
any, primary care practices can command prices that significantly exceed
their competitors'.

The specialty physician market is generally more concentrated, with
fewer specialist practices in each specialty than primary care
physicians. Moreover, specialty practices tend to be larger. Studies
have found that many specialty practices have become larger in recent
years to gain negotiating clout, among other reasons. Many of these
practices are large enough that insurers would be unable to offer
adequate local access to the specialty without them, giving them
substantial leverage with insurers.

Hospitals are in an even stronger negotiating position than specialist
physicians. Hospitals typically are large entities that provide a high
volume of patient care, giving a hospital or hospital system leverage
that physician practices rarely, if ever, have. At the top of the
negotiating heap are the must-have hospitals that offer some unique
combination of reputation, location and services. Private insurers
understand that employers will not continue to offer their products if
must-have hospitals are excluded from the provider network. Even in
metropolitan areas with many competing hospitals and hospital systems,
these must-have hospitals can command unusually high prices. Also,
hospitals increasingly have merged into systems, which may allow
affiliated hospitals in a market to negotiate collectively with
insurers. And, many hospitals are employing physicians and purchasing
physician practices and then including physicians in their negotiations
with insurers, which may result in more leverage for both the hospitals
and the physicians.

Potential Savings

Given the growing evidence of significant intramarket price variation,
especially for hospitals, purchasing strategies designed to guide
patients to high-value providers clearly offer potential savings.
Approaches such as reference pricing, where the payer sets a maximum
allowed amount for a specific procedure in a specific market, have
produced savings and put downward pressure on prices of outlier
providers in some markets. Other innovations in benefit design, when
accompanied by information to enrollees about differences in what they
will have to pay when using different providers, clearly have roles to
play in such approaches.

To get a very rough sense of the magnitude of potential savings from
such purchasing strategies, actual plan spending was compared with
hypothetical spending with a price ceiling equal to the 50th percentile
of the current price distribution in each market. The 50th percentile
price, or median, for a given market represents the price at which half
of the services in that market were provided by higher-priced providers
and half were provided by lower-priced providers. The second set of
hypothetical price ceilings are multiples of Medicare prices: 1.0 and 1.5.

The potential savings from capping prices at the 50th percentile
scenarios only represent 5.5 percent of physician and hospital spending
in the plans. To put the savings in perspective, the average annual
growth in per capita spending for employer-sponsored health insurance
has been between 7 percent and 8 percent per year. So, the savings from
rolling out an aggressive program of active purchasing might only slow
trend by less than a year. However, even small percentage gains can make
a significant difference given the enormous amount many large employers
spend on health care. Additionally, active purchasing may begin to give
large purchasers a more direct role in health care payment and delivery
decisions. Active purchasing strategies will face challenges, including
resistance to change from providers, insurers and enrollees.

More significant savings are possible if prices are limited to a level
below what is now considered normal. By far the biggest opportunity for
savings appears in the hospital outpatient setting, where setting a
ceiling on prices equal to Medicare would reduce spending by 48 percent
and a ceiling equal to 1.5 times Medicare would reduce spending by 26
percent. But, such a dramatic change might require governmental rate
setting and force hospitals and specialist physician practices to cope
with significantly constrained revenue.

Looking Ahead

Even though overall U.S. health spending has grown more slowly in recent
years, premiums for employer-sponsored health insurance have continued
to rise at an unsustainable rate. And, increases in provider prices
explain most if not all of the increase in premiums. If this trend
continues, employers will face increasing pressure to restrain spending
growth, either reducing benefits, shifting costs to employees, or using
some form of active purchasing to mitigate price increases. Insurers are
consolidating and becoming more adept and experienced in implementing
active purchasing. But, at the same time, consolidation continues apace
on the provider side, recently including the employment of many
physicians by hospitals. As a result, health plans may face only
stiffening resistance to attempts to rein in high prices.

Comment: This study confirms once again that health care prices for
privately insured patients vary widely across and within health care
markets. This study is particularly helpful because it shows where most
of the problem is.

It is not with the primary care physicians. They are "price-takers."
They have very little negotiating clout with the insurers. They are
forced to accept the insurers rates if they want to be in the insurers'
networks. Thus prices for primary care physicians tend to be uniformly low.

Specialists tend to be more concentrated and thus have greater clout
with the insurers. In the more concentrated markets, specialists can
command higher prices, resulting in regional variations in pricing
depending on their market power.

But the biggest problem is with the hospitals and their outpatient
services. They have an even stronger negotiating position than the
specialists. This is especially true of the "must-have" hospitals that
are in great demand. With increasing merger activity, ever more
hospitals are becoming must-have.

Suppose the insurers insisted that hospital prices were capped at the
50th percentile of current spending, bringing down the high prices
commanded by the must-have hospitals. This study shows that would still
not be enough to meet the average annual growth in per capita spending.

With the pressure to slow the increase in insurance premiums insurers
are likely to find other ways to shift more of the costs to patients
when costs are already intolerable.

What can we do? We can put the hospitals and their outpatient services
on global budgets, just as we do with our police and fire departments.
This is what a well designed single payer system would do. Fair rates
would be negotiated with physicians which would include correcting the
the primary care underpayments and specialist overpayments that result
from our current flawed approach of allowing market concentration to
artificially move rates away from optimum value.

Note that the reference standards for this study are the much lower
Medicare rates - rates that private insurers pay only for primary care
physicians. Instead of market power, we should be using people power
through our representative government by enacting a publicly-financed
and publicly-administered national health program - an improved Medicare
for everyone - ensuring payment of legitimate costs and fair margins for
the health care delivery system.

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