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.
dr. bloor
I don’t know about Magical Sparkle Pony Mayhew Insurance Land, but around the rest of the country insurance companies LOVE marketing the big practices in their networks to potential policy holders, and they kill solo/small group practices with preferential referrals to big organizations and a blizzard of bullshit paperwork that reduces effective reimbursement to impractical levels (Remind me to tell you about the treatment authorization forms that my colleague routinely slips nursery rhymes into, because he knows no one is reading them).
BTW, practitioners are already subject to regulatory oversight–to a far greater degree than insurance companies, I’d bet. I can’t so much as get into a casual conversation about reimbursement rates on my professional online chat boards without putting myself at risk for discipline for price fixing.
Richard Mayhew
@dr. bloor: Oh, we market the access to big practices because that is where the providers and the prestige lie… however those are also our big cost drivers because they have us over the barrel.
The big problem in American healthcare is that on a per unit cost basis, we pay way too much for pretty much everything. A decent component of that problem is the provider market is much more consolidated than the payer side of the equation, and is getting more so due to PPACA plus pre-exisiting trend so market power which was already in favor of providers over payers is tilting more so to providers. Narrow networks are an attempt to get some system of NO and price control over high cost providers and narrow networks work with PPACA subsidy structure plus very cost conscious buyers, but it is not a panacea. This is an idea to tilt the field closer to flat.
dr. bloor
@Richard Mayhew: Bullshit. No one has you or any other Big Insurance over a barrel, and you know it. You might have to market them, but you don’t need to preferentially refer to them. The morons that run the show in my area routinely direct people to hospital-based practices that collect something like 20% over what I and a number of my colleagues get.
Any willing provider would also increase competition as well, but just try to get the bean counters at Big Insurance to go for that one.
You need to get out of your cubicle more, Richard. You’re starting to look and sound an awful lot like Jeremy from Yellow Submarine, no matter how hard you try to look hip and savvy by repeatedly referring to National Health Insurance in the context of “taking ‘shrooms.”
Xantar
@dr. bloor:
If you’re going to criticize Richard for trying to sound hip and savvy, you might not want to reference a film from 1968.
Kylroy
“Bullshit. No one has you or any other Big Insurance over a barrel, and you know it.”
So, since (according to you) all big insurance companies have pricing power in the healthcare market…they *like* paying out vastly more per unit of care than every other first world country?
Richard Mayhew
@dr. bloor:
What is your pricing model that consolidation does not lead to higher pricing all else being equal? How are you going to dispute the linked study? Furthermore, for common providers (acute care community hospitals, PCPs etc) any willing provider is probably a wash as those common specialties are effectively price-takers, but the specialists and higher levels of care facilities definately have price making power.
I know Mayhew Insurance has built networks and plan designs that we’ve had to pull because a few critical providers decided to pull their MOU based on pricing concerns (the MOU was Medicare +10%, they came back with Medicare+75 after they figured out that they were the critical constraint). We’ve built networks and plan designs that were approved by the state but can’t sell as critical providers pulled out or never joined the network so buyers look at the network, see a cheap price but no specialist within 15/20 miles so we get approved networks with 300 members ( a massive money loser on maitenance cost alone)
Providers, at least large groups of providers (most notably hospital aligned/hospital owned provider groups), have significant pricing power. That is something I look into at least daily. This is especially true in the market where Mayhew Insurance operates as there are several medium size operations with decent market share (commercial insurance, including Exchange HHI in the market is under 2500) whereas acute care hospital HHI is over 4,000 and some specialties have HHIs over 5,000.
So what is your evidence that consolidation on the provider side is not a contributor to pricing problems in the US medical system?
Redshift
@dr. bloor:
How do they do that? I’m genuinely interested; I’ve had nearly every major insurance company over the years, and as far as I can recall, none of them have offered referrals of any kind. But maybe I’m missing something.
hoodie
@Richard Mayhew: Seems like the doctor is misunderstanding your point. I would guess that the preferential referrals arise from the big group dominance of the networks, and that the blizzard of paperwork is representative of a war between large bureaucracies. You see a similar phenomenon in law practices, e.g., large law firms dominate corporate business because of reputation and network effects, and have big bureaucracies that create bills with myriad legitimate sounding, but ultimately questionable charges that add up to big money. The larger clients (e.g., insurance companies) fight back by creating layers of auditable paperwork in an effort to fight overbilling.
japa21
In the case of referrals by insurance companies, the only time I see that is when there is specialized case management involved. And generally, that referral is based upon two things: quality of care and cost of care. Most insurance companies, quality of care being equal, will refer to the less costly provider.
The specific point raised by Richard in terms of pushback by the government to consolidation is a valid one. Right now, in order to not approve a merger, the government has to prove sufficiently, that the merger is a negative.
I think the burden of proof needs to go in the other direction. The companies looking to consolidate should be required to prove that there is a distinct benefit for the community to the merger that would offset any negative consequences.
Kylroy
@hoodie: I don’t think he’s misunderstanding. I think that his practice has been jerked around so much by insurance companies that the idea of medical providers dictating terms to insurers – and on a large scale, such that it defines the market – is like being told that Walmart’s workers are bleeding the company dry with their high wages.
Except here, there’s empirical proof that it’s actually what’s happening.
Belafon
Semi OT: The top Newsmax headline: “Thank Cheney for Ebola Vaccine”.
jl
Thanks for informative post.
My only comment is that I am not sure this is new with ACA. Medicare part D legislation had provisions that many thought favored large drug manufacturers, wholesalers and PBMs.
Richard Mayhew
@Kylroy: i can see that interpretation as the individual doc is getting shat upon from multiple angles. The doc who works for a 3 or 5 or 10 person practice unless they are extremely unique is in a powerless situation against most insurers, but the doc who works for a 1,500 person provider group is in very different boat where the shit mostly flows down from only the management side.
Richard Mayhew
@jl: Agreed, it is not new, but it made the previous trend of provider consolidation and fragmenting the payer market worse.
NCSteve
Most states have a state anti-trust law that ought to apply to this kind of consolidation and an attorney general who is theoretically in charge of enforcing it. Of course, most states are also run by Republicans right now . . .
Kylroy
@Richard Mayhew: And the doc working for the 1,500 person provider group almost certainly isn’t part of the negotiations, and may not even deal with insurance companies.
So most of the doctors with firsthand experience with insurers are going to be in dr. bloor’s situation – largely powerless in the face of a giant bureaucracy.
MomSense
I have some observations from personal experience navigating as an uninsured person and now as an insured person with the same provider. When I started going to my doctor, I paid cash at full price. We have a big provider (doctor factory) that started offering Medicare supplemental insurance plans. Pretty soon they had most of the market. Then they bought the other big provider. Now there is just one mega provider. My doctor couldn’t compete because so many seniors had mega provider’s supplemental plan that they could only go to mega provider doctors. Now my doctor is part of the doctor factory and even with insurance, it costs me more for the same services.
I had to pay $55 for one lab draw. One vial, 10 seconds, $55 and that was just my share after the insurance company paid their share and with the negotiated price. The test itself cost me $35 after the insurance company paid their share and with the negotiated price.
There really aren’t any solo practitioners to go to now as they have all become one with the mega borg.
pseudonymous in nc
Uh huh.
In practice: BCMG will now bill outpatient hospital rates for whatever tests they can place under BCMG’s hospital operations, which screws over patients who are familiar with paying specialist rates when they see a specialist and now have to face deductible/coinsurance charges.
If there’s a role for regulators, it’s in making sure that medical monopoly-seekers don’t get to pull bullshit accountancy tricks like that.
KithKanan
@MomSense: O_o
Glad I can go direct to the local lab – their insurance negotiated rate for a draw is two bucks and change.
Nellie in NZ
Richard – if you can take a quick question, can an employer arbitrarily tell the insurance company to reduce the coverage of an out-of-network mental health provider by 35%? (By the way, my daughter is about to cancel all mental health treatment for stress – and she is way too far out over the cliff – because dealing with her insurance is increasing the stress so much that it is counter to all the treatment being given.)
Richard Mayhew
@Nellie in NZ: I don’t know — contact your state regulatory authority or attorney general to find out… I really don’t know.
Richard Mayhew
@pseudonymous in nc: Yep — and that is the next sentence (25% above trend reimbursement rate increases) as someone has to pay for more and better hookers.
Nellie in NZ
Thanks – will do. Just wondered if that was in ACA or in state regs.
mclaren
The most obvious policy options for increasing competitiveness in the provide market involve unleashing the hounds of federal DOJ antit-trust and anti-fraud hell on doctors and hospitals and medical device makers that jack up prices through scams, lies, thievery, and sweetheart contracts.
[1] Every hospital that signs a non-disclosure pricing agreement with a medical devicemaker or doctor should have its adminsitrator indicted by a U.S. attorney for fraud. The medical devicemaker’s CEO and board of directors should be indicted on federal fraud charges. A few dozen of these, and mysteriously, the practice will stop.
[2] Every medical device maker that changes its model merely in order to insert new firmware in, say, an insulin pump and jack the price to the consumer by another $15,000 without adding any meaningful new functionality should be indicted by a attorney for fraud. A few dozen of these, and medical devices like pacemakers and insulin pumps will magically become more affordable. Much more affordable.
[3] Every doctor who takes bribes from big pharma should be indicted on federal fraud charges. Ditto the big pharma executives. A few dozen such convictions, and drug prices will magically drop.
[4] Every outside-the-network surgeon who charges $117,000 for stitching up ten sutures in a patient in order to strip-mine profit from the medical system should be indicted on federal fraud charges. Send a few dozen of these surgeons to pound-me-in-the-ass prison where they can try extorting money from a 300-pound Aryan Brotherhood guy named “Bubba,” and this kind of scam will magically stop.