Last week, a major specialty practice in the east suburbs of my central city announced that they had agreed to be bought out by Big City Medical Group. BCMG will now control 85% of the orthopedists, 100% of the dermatologists, 90% of the nephrologists, 75% of the oral surgeons and 50% of the cardiologists who practice in three well populated counties east of the Big City. The press releases claim that BCMG will realize significant efficiencies and cost savings. The buy-out price only makes sense if BCMG either sees 30% efficiencies or 25% above trend reimbursement increases. The latter is far more likely than the former.
Aaron Carroll at the Incidental Economist passes along some further confirmatory research on the effects of provider consolidation on pricing in healthcare. As expected, consolidated providers get paid more:
The authors looked at more than 1050 counties in the US to see if changes in physician competition were associated with prices between 2003 and 2010. They used the HHI …
Variation existed in competition by counties. The 90th percentile HHIs were 3-4 times higher than in the 10th percentile. They also found that prices were $5.85 – $11.67 higher in the counties with the highest decile of HHI versus the lowest decile. Price indexes in the same deciles were 8%-16% higher as well. Over seven years of the study, prices went up more in areas of less competition than in areas of more competition.
One of the great weaknesses of PPACA is that it encouraged provider consolidation while fragmenting the insurance market. The power imbalance which had already led to very high pricing compared to other industrial countries was not corrected, nor improved upon but it was exacerbated. Provider consolidation has been encouraged by the significant push towards adapting electronic medical records which is a massive capital investment for two and three doc practices and the move towards population health management in the ACO model. ACOs require big populations and significant back-end administrative support to target the right patients with the right care. Small practices can’t do that well.
So far, pricing has been moderated primarily through the aggressive use of narrow networks that are excluding high cost providers, and some quality improvements through the Medicare re-admission reduction program among others. But these are marginal changes within a dysfunctional quasi-competitive market.
Assuming that a full National Health Service style take-over of all providers is off this table (and I’ve not had enough shrooms to keep that option on the table) what are the policy options to increase competiveness in the provider market?
The first major option is to have the Federal Trade Commission aggressively review any medical merger in highly concentrated markets with a bias towards denial of mergers. This is something that can be done administratively and in an ideal world where the Republican Party was pro-competition instead of pro-pre-exisiting businesses, this could actually be an area of policy agreement between Democrats and Republicans. In this world, I think the first time a merger is denied, we would see three thousand gross rating points from either AFP or the RNC about bureaucrats in Washington meddling with senior’s health care choices. But regulating consolidation with a bias towards denial would be a good first option that would require the least amount of heavy lifting from Congress.
The second option is, to me, far more intriguing.
The policy change would be to tie universal Medicare/Medicaid/CHIP reimbursement to a provider’s contribution to a set of regional HHI indexes. A three person PCP office has absolutely no market power so they would get full regular government reimbursment. A chain of hospitals that controls 30% of the regional hospital beds has some market power might see a 1.5% decrease in general govenrment reimbursement. Big City Medical Group which controls 70% of the high end specialists for an HHI contribution of 4,900 points might see a 5% reduction in high end specialty reimbursment for every government paid claim. BCMG which controls 12% of the primary care provider network would see regular reimbursement for primary care codes.
The goal is call the bluff that consolidation is about efficiency instead of capturing more consumer surplus and redistributing it to internal stakeholders and the local BMW dealership. If conslidation truly is an efficient option, a firm that is considering moving from regular reimbursement to a 1.75% penalty HHI index would be clearly demonstrating that they think there is a real efficiency gain to be had instead of monopolistic rent gains. Threshold firms would have an incentive to stay at their same size or slightly decrease, thus improving overall market competition on the provider side.
Why do I think this will work? There are two analogue programs which offer strong evidence that these types of thresholds can significantly change behavior.
Medicare is seeing significant improvmeents in the re-admission rate of Medicare patients after they’ve been discharged:
Medicare is fining a record number of hospitals – 2,610 – for having too many patients return within a month for additional treatments, federal records released Wednesday show. Even though the nation’s readmission rate is dropping, [my emphasis] Medicare’s average fines will be higher, with 39 hospitals receiving the largest penalty allowed…
they will receive lower payments for every Medicare patient stay — not just for those patients who are readmitted. Over the course of the year, the fines will total about $428 million…
496 hospitals will lose 1 percent or more of their Medicare payments
Half a billion dollars in fines have changed hospital behavior. Medicare is seeing significant costs avoided, quality improve and patients satifisfied by universal penalties on narrow metrics. Hospitals have gotten their asses in gear to reduce preventable admissions and more importantly from a systemic point of view, these practices that are reducing Medicare insured re-admissions are not only being applied to Medicare patients; they are being applied on a general basis so there is positive system bleed-off.
The other example is Dodd-Frank. Dodd-Frank is the financial re-regulation bill of 2009. It authorized the designation of Systemically Important Financial Institutions (SIFIs) that if they blew up, they could take out the world economy. Dodd-Frank requires SIFIs to have a living will, and hold significantly more capital. Paul Krugman wrote more on this:
As Mike Konczal of the Roosevelt Institute points out, if being labeled systemically important were actually corporate welfare, institutions would welcome the designation; in fact, they have fought it tooth and nail. And a new study from the Government Accountability Office shows that while large banks were able to borrow more cheaply than small banks before financial reform passed, that advantage has now essentially disappeared. To some extent this may reflect generally calmer markets, but the study nonetheless suggests that reform has done at least part of what it was supposed to do.
Did reform go far enough? No. In particular, while banks are being forced to hold more capital, a key force for stability, they really should be holding much more….
There is now a decent disincentive for a large but systemically unimportant firm from getting just a little bit bigger and becoming systemically important. The End the World put has been priced instead of being free.
Under my proposal, there would be a clear price on medical providers from becoming too consolidated, and a clear gain for smaller provider groups. There will be times when the returns to scale such as implementing an EMR significantly outweigh the new price on being a market moving/price setting player, but there would be numerous times where there is no net value from rent extraction in a merger or there is a significant value in one large group splitting into seperate groups. The gains from the less consolidated provider market would not just accrue to the government programs that are gaining from the lower reimbursement rates, but the more fragmented market would mean commercial insurers could get better rates which means lower premiums for privately and Exchange insured individuals as well.
How could implementation occur? I see two routes. The first is the Independent Payment Advisory Board has the authority to change provider payment structures if the growth of Medicare costs per capita exceed certain targets. This would be a massive change to provider payment structures that aligns long term incentives towards producing a more competitive market, so if you can squint correctly, this would be in the remit of IPAB. I am not a lawyer, nor do I play one on the internet, but I think this would be a high risk move as the cost savings would most likely not occur in the first year of recommendations — this is a glide path change, not a curve jumper.
The second is the Health Provider Reform Act of 2021 which would be a massive provider side reform that makes PPACA look like a light lift. For that to happen, states like Maryland and Massachusetts should experiment with their current Medicare and Medicaid waivers as well as Massachusett’s global budget approach with this cost control system. Several years of good data and learning what does not work in a few states could have national significance once Congress is capable of approaching a massive public policy issue concerning healthcare with either large Democratic majorities or a rump faction of the GOP willing to publicly count to eleven with their shoes on without fear of being primaried.